Two types of similar actions were filed against the Charles Schwab and other defendants. The first lawsuit filed in various state courts from 1993 to 1995 concerned allegations of “order flow.” The second lawsuit, filed in various federal courts in 1999, concerned allegations of “best execution” and was later consolidated in the U.S. District Court for the Northern District of California. The state court action filed in Louisiana against Schwab was removed to the federal U.S. District Court for the Eastern District of Louisiana in September 1999 for the purposes of expanding the claims and class definition to effect a settlement of all best execution claims against Schwab, including those contained in the actions pending in the Northern District of California. On November 9, 2000, the Eastern District of Louisiana entered a Final Order and Judgment approving the settlement and dismissing two payment for order flow and best execution class action lawsuits against Schwab. The plaintiffs in the Northern District of California who objected to the settlement of the Louisiana cases filed a notice of appeal which was later dismissed June 2001.
Between August 12, 1993 and November 17, 1995, Schwab was named as a defendant in eleven class action lawsuits in seven states. The class actions all purport to be brought on behalf of customers of Schwab who purchased or sold securities for which Schwab received "order flow" payments from the market maker, stock dealer or third party who executed the transaction. The complaints generally allege that Schwab failed to disclose and remit such payments to members of the class, and generally seek damages equal to the payments received by Schwab. Through December 1998, one of the actions was voluntarily dismissed and seven were resolved favorably to Schwab on the grounds that the claims asserted are preempted by federal law. The remaining three cases are pending in state courts in Texas and Louisiana. The Texas action and one of the two Louisiana actions are stayed and there has been no recent activity in the other Louisiana action. In September 1999, the action filed in the Civil District Court for the Parish of Orleans was transferred to the U.S. District Court for the Eastern District of Louisiana.
The federal class action lawsuit was first filed on February 22, 1999, in Federal Court in the U.S. Virgin Islands on behalf of all persons who placed market orders to purchase or sell shares of stock or other securities through accounts with Charles Schwab and Co., Inc. ("Schwab") between February 1, 1996 and the present and were damaged by the conduct alleged in the Complaint. The lawsuit charges defendants with violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder and applicable common law to benefit themselves at the expense and to the detriment of plaintiff and members of the Class. In essence, plaintiff alleges that while the defendants knew that Schwab could easily and inexpensively access a number of systems that frequently provide better prices for the execution of sell or buy orders, defendants knowingly and/or recklessly executed market orders on behalf of their customers, including plaintiff and members of the Class, at consistently disadvantageous prices. In September 1999, three cases filed in the Virgin Islands and one filed in Newark, New Jersey were transferred to and consolidated in the U.S. District Court for the Northern District of California in San Francisco, California.
As previously disclosed by The Charles Schwab Corporation’s FORM 10-K for the fiscal year ended December 31, 2000, on November 9, 2000, a federal district court in New Orleans, Louisiana entered a Final Order and Judgment dismissing two payment for order flow and best execution class action lawsuits against Schwab that have been pending since1995. The judgment precludes members of the class from asserting any other claims against Schwab on payment for order flow or best execution issues for the period 1985 through July 1999. The judgment of dismissal was entered into after the court approved a settlement of the two cases following a fairness hearing that was held in May 2000. The lawsuits, which were filed on behalf of a class consisting of all individuals nationwide who purchased or sold securities through Schwab from 1985 until July 1999, alleged that Schwab improperly retained monetary payments for routing orders to market makers and other third parties, and did not provide best execution to client orders. Prior to the settlement, Schwab vigorously contested the allegations. However, in the interests of avoiding the expense of further litigation, in June 1999 Schwab agreed to settle the cases for certain non-monetary relief. In addition, Schwab agreed, and the court approved, the payment of up to $900,000 in plaintiffs' attorneys' fees and costs. In response to the entry of judgment, four similar payment for order flow and best execution class action lawsuits against Schwab, which had been consolidated in federal court in the Northern District of California, were voluntarily dismissed. The plaintiffs' attorneys in those cases, who had objected to the settlement of the Louisiana cases, have filed a notice of appeal of the judgment of dismissal that was entered by the federal court in Louisiana on November 9, 2000.
According to The Charles Schwab Corporation’s FORM 10-Q for the quarterly period ended June 30, 2001, on June 11, 2001, the United States Court of Appeals for the Fifth Circuit dismissed the appeals challenging the earlier settlement of two Louisiana payment for order flow and best execution lawsuits against Schwab that had been pending since 1995. As a result, the settlements are now final.