165 F. Supp. 3d 42
S.D.N.Y.2016Background
- Plaintiffs are individual traders who bought and sold KOSPI 200 futures on CME Globex during 2012 and seek to represent a class of all such traders that year.
- Plaintiffs allege Tower Research Capital and its CEO Mark Gorton placed large fictitious orders ("spoofing") on CME Globex to create false price/volume impressions, then canceled or filled those orders to profit (approx. $14.1 million alleged gain).
- Plaintiffs asserted claims under the Commodity Exchange Act (CEA) and state unjust enrichment; defendants moved to dismiss under Fed. R. Civ. P. 12(b)(6).
- The court assumed complaint facts as true for the motion and reviewed governing pleading standards and extraterritoriality principles derived from Morrison.
- The court concluded plaintiffs’ manipulation theory did not plead fraud-based misstatements, applied Rule 8(a), but found plaintiffs failed to plead that transactions were domestic under Morrison (neither made in U.S. nor listed on a domestic exchange distinct from the KRX), and dismissed CEA and unjust enrichment claims with leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Pleading standard: Does Rule 9(b) apply? | Plaintiffs characterize conduct as "fraudulent" and misleading, so 9(b) should apply. | Defendants argue no heightened pleading is required or contest specifics. | Court: Allegations are trading strategy (spoofing), not false statements; apply Rule 8(a). |
| Does the CEA apply extraterritorially? (Morrison test) | CME Globex is a U.S. platform and the "meeting of the minds" occurred in Illinois, so CEA applies. | Transactions occur on KRX (Korea); use of U.S. servers doesn't make them domestic. | Court: Plaintiffs failed to plead domestic transactions under either Morrison prong; CEA does not apply. |
| Were the purchases/sales made in the United States? | Plaintiffs: matching occurred on CME Globex in Illinois constituting domestic trades. | Defendants: Orders initiated and settled via KRX in Korea; mere use of U.S. servers immaterial. | Court: No factual allegations that irrevocable liability, title transfer, or settlement occurred in U.S.; plaintiffs failed to plead domestic transaction. |
| State-law unjust enrichment claim | Plaintiffs assert defendants were unjustly enriched at plaintiffs’ expense by manipulative trading. | Defendants contend plaintiffs lack a direct relationship and connection is too attenuated. | Court: Dismissed — plaintiffs failed to plead the necessary direct relationship; claim too attenuated. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for reviewing factual allegations on a motion to dismiss)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (legal conclusions not accepted as true on a motion to dismiss)
- Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) (extraterritoriality test for securities statutes applied to transactional nexus)
- Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) (domestic-transaction pleading requires facts showing irrevocable liability or title transfer in U.S.)
- Loginovskaya v. Batratchenko, 764 F.3d 266 (2d Cir. 2014) (applying Morrison transactional test to CEA claims)
- U.S. Commodity Futures Trading Commission v. Amaranth Advisors, L.L.C., 554 F. Supp. 2d 523 (S.D.N.Y. 2008) (discussing when manipulation-based claims sound in fraud vs. trading strategy)