District Court Dismisses Commodities Exchange Act Claim Because the Futures Contracts at Issue Were Not Traded in the U.S. and Were Not Traded on a U.S. Exchange

The World in U.S. Courts: Spring 2016 - Securities Law | February.25.2016

Choi v. Tower Research Capital LLC, U.S. District Court for the Southern District of New York, February 25, 2016

Plaintiffs are Korean citizens who bought and sold futures contracts relating to the KOSPI 200, an index for Korean stocks. They alleged that the defendants engaged in market manipulation allowing the defendants to benefit improperly from their own transactions, in violation of the Commodities Exchange Act ("CEA"). As a preliminary matter, the District Court in New York considered whether the defendants' motion to dismiss should be judged under heightened pleading standards applicable to claims of fraud, requiring that facts be alleged "with particularity." The Court held that the rule did not apply because the plaintiffs had alleged injury from a manipulation of the market and not the use of false statements or omissions of fact that would be the hallmark of a fraud claim.

The Court then considered whether the CEA applied to the transactions in question. Holding that the statute should not be applied extraterritorially, the Court applied the same two criteria used under other securities laws to determine whether a transaction should be considered "domestic," and thus properly the subject of suit. First, the Court rejected the plaintiffs' assertion that the transaction occurred on the Chicago Mercantile Exchange ("CME") Globex platform in Illinois, noting that no facts had been plead to support the assertion that "irrevocable liability" was incurred, or that title to the futures was transferred, within the U.S. Indeed, the Court stated that the complaint suggested that the transactions had occurred in Korea because they had been placed and settled on a Korean exchange. Second, the plaintiffs argued that the futures had been traded on a U.S. exchange because the CME is such an exchange. The Court disagreed, finding that CME Globex is merely an electronic trading platform utilized by numerous exchanges, but is not an exchange itself. Finding no basis to assert jurisdiction under the CEA, the Court dismissed the federal claims.

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