District Court finds no CEA Jurisdiction where Trades made on Korean Exchange were “Matched” on US Electronic Trading Platform

The World in U.S. Courts: Spring 2017 - Securities Law/Commodities Exchange Act (CEA)

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Choi v. Tower Research Capital LLC, US District Court for the Southern District of New York, February 8, 2017

The plaintiffs in this purported class action transacted in Korean futures contracts traded on a Korean securities exchange that in turn used the Chicago Mercantile Exchange (“CME”) Globex Platform as a trading platform. The complaint alleges that the defendants used fictitious trades and other deceptive practices to manipulate the prices of the futures contracts to the plaintiffs’ detriment in violation of the CEA.

The District Court in New York stated that the extraterritorial reach of the CEA was the same as that under the more general anti-fraud provisions of US securities law: The relevant transactions must have been made on a “registered US exchange” or have been “made” in the US. The Court concluded that the first requirement was not met because CME Globex was merely an electronic trading platform, without internal policies and practices that are hallmarks of registered exchanges. Notably, the use of a broad definition of “exchange” on the website of the US government agency that enforces the CEA was rejected as controlling in favor of the CME Globex not being included on the agency’s list of “registered exchanges.” The Court also specifically rejected as a basis for jurisdiction certain statutory prohibitions on manipulation occurring on either a registered exchange or a platform subject to the rules of a registered exchange. It concluded that the plaintiffs produced no evidence that CME Globex was subject to the rules of the registered CME exchange when, as in the case at bar, it was acting in connection with trades made on a Korean exchange and subject to that exchange’s rules.

The Court then considered and rejected the plaintiffs’ argument that their trades were made in the US because “irrevocable liability” for them was assumed when the trades were “matched” on the CME Globex. The Court noted that the rules of the CME indeed tied liability for a trade to its being matched on CME Globex, but observed that rule applied to trades subject to CME rules—not to rules of a Korean exchange, which governed the transactions in the case at bar. Indeed, the Korean exchange’s rules apparently provide that liability only attaches when trades are “settled” on the Korean exchange the day after having been “matched” on CME Globex.

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