Cruz v. FXDirectDealer, LLC
2013 U.S. App. LEXIS 12448
2d Cir.2013Background
- FXDirectDealer, LLC (FXDD) operates online forex trading; customers sign a New York‑governed Customer Agreement that requires orders be handled on a “best‑efforts” basis but disclaims liability for failure to execute due to market conditions.
- Plaintiff Hugo Cruz, a Virginia resident and former FXDD customer, lost ~$281,170 trading on FXDD and alleges classwide misconduct from 2005 onward.
- Cruz's amended complaint accuses FXDD of deceptive practices: routing profitable orders to slow servers, generating false errors, creating short price spikes to trigger stops, and manipulating quoted/exec prices (manually and via automation).
- Claims asserted: RICO (18 U.S.C. §1962(c)), New York Gen. Bus. Law §§ 349 & 350, breach of contract (failure to use “best efforts”), and breach of the implied covenant of good faith and fair dealing.
- District Court dismissed all claims for failure to state a claim; on appeal the Second Circuit affirmed dismissal of the RICO and implied‑covenant claims, but vacated dismissal of the GBL §§ 349/350 and breach‑of‑contract claims and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether complaint pleads a RICO enterprise distinct from the RICO "person" | Cruz alleges an "FXDD Fraud Enterprise" (FXDD, parent Tradition, officers, software vendors, brokers) that conducted racketeering activity | FXDD contends the enterprise is not distinct (corporation and its agents/officers cannot be both person and enterprise) | Dismissed: Complaint fails distinctness requirement; corporate person cannot corrupt itself, so RICO claim dismissed |
| Whether plaintiff has statutory standing under NY GBL §§ 349/350 | Cruz argues deceptive transactions with FXDD had sufficient ties to New York (payments, funds redemption, contract provisions, communications) | FXDD argued out‑of‑state plaintiff lacks standing because deception/transactions did not occur in NY | Vacated dismissal: Court adopts transaction‑based test and finds sufficient New York nexus at pleading stage; standing sustained |
| Whether FXDD breached "best efforts" contractual obligation | Cruz alleges best‑efforts obligation and that FXDD acted in bad faith to delay/deny profitable trades, enriching itself | FXDD points to Agreement disclaimers that it may be unable to execute orders and bears no liability for failures/delays due to market conditions | Vacated dismissal: Agreement’s disclaimers do not eliminate the implied duty that "best efforts" requires acting in good faith; complaint plausibly alleges breach |
| Whether breach of implied covenant is a standalone claim | Cruz alleges separate implied‑covenant breach based on same facts | FXDD argues implied‑covenant claim duplicates contract claim | Affirmed dismissal: New York law treats implied‑covenant breach as redundant when based on same facts as contract claim |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (establishes plausibility standard for pleadings)
- DeFalco v. Bernas, 244 F.3d 286 (2d Cir. 2001) (elements required to state a civil RICO claim)
- Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158 (enterprise/person distinctness under § 1962(c))
- Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339 (2d Cir. 1994) (corporation and its employees cannot constitute a distinct RICO enterprise)
- First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159 (2d Cir. 2004) (association‑in‑fact enterprise requires common purpose to engage in fraud)
- Goshen v. Mutual Life Ins. Co. of N.Y., 98 N.Y.2d 314 (N.Y. 2002) (territorial reach of N.Y. GBL §§ 349/350; transactional nexus analysis)