232 F. Supp. 3d 337
S.D.N.Y.2017Background
- Plaintiffs (putative class) traded KOSPI 200 futures on the Korean Exchange (KRX) during the 2012 night market, when orders are matched on the CME Globex platform. Plaintiffs allege Tower Research and its CEO Mark Gorton used spoofing (fictitious large orders) on CME Globex to manipulate prices and earned about $14.1 million.
- Plaintiffs sued under the Commodity Exchange Act (CEA) and state unjust enrichment law; defendants moved to dismiss under Rule 12(b)(6). The Court previously dismissed the original complaint with leave to amend; Plaintiffs filed a First Amended Complaint (FAC).
- Central legal question: whether the CEA applies extraterritorially under Morrison — either because (1) trades occurred on a U.S. (registered) exchange or (2) the transactions were “made” in the United States (irrevocable liability or title transfer in U.S.).
- Plaintiffs argued CME Globex is a U.S. exchange or otherwise subject to CME/CFTC rules, and that matches on Globex create irrevocable liability in Illinois. They also alleged direct counterparty dealings sufficient to sustain unjust enrichment.
- Court determined CME Globex is not a CFTC-registered domestic contract market and Plaintiffs failed to show CME/CFTC rules govern the KRX night-market trades. The Court also found Plaintiffs did not plausibly allege that irrevocable liability attached in the U.S., nor a direct relationship necessary for unjust enrichment.
- Result: FAC dismissed with prejudice for failure to state a claim under Twombly/Iqbal; CEA and state-law claims dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CME Globex is a U.S. "exchange" for Morrison | Globex functions as an exchange and should be treated as such; CEA definitions and CFTC materials support coverage | Globex is an electronic platform, not a CFTC-registered domestic contract market; CME Globex lacks independent exchange rules/enforcement | Not an exchange for Morrison; Plaintiffs failed to show it is a registered U.S. exchange |
| Whether CME Globex trades are subject to CME/CFTC rules when used by a foreign exchange (KRX) | CME/CFTC authority and some no-action letters suggest U.S. regulation can apply to Globex activity | Use by a foreign exchange means KRX rules govern; no showing CME rules apply to foreign-exchange trades on Globex | Plaintiffs failed to show CME/CFTC rules govern these KRX night-market trades |
| Whether transactions were "made" in the U.S. (irrevocable liability attaches in Illinois upon match) | Under Absolute Activist, trades matched on Globex create irrevocable liability in U.S.; therefore CEA jurisdiction exists | Even if CME rule gives irrevocable liability on matching, KRX rules (not CME rules) govern and show liability attaches later in Korea | Irrevocable-liability test not satisfied; trades were not plausibly "made" in the U.S. |
| Whether unjust enrichment pleaded (direct relationship required) | High probability/mathematical certainty that plaintiffs directly dealt with defendants given trading volumes and Tower's market share | Alleged dealings are attenuated market contacts; no direct counterparty evidence under KRX rules | Unjust enrichment claim dismissed for failure to plead a direct relationship |
Key Cases Cited
- Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) (framework for extraterritorial application of U.S. securities/commodities laws)
- Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) (irrevocable liability test for where a transaction is "made")
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for pleadings)
- Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308 (2007) (standard for evaluating scienter allegations on a motion to dismiss)
- City of Pontiac Policemen & Firemen’s Retirement Sys. v. UBS AG, 752 F.3d 173 (2d Cir. 2014) (extraterritoriality considerations for foreign-listed securities)
- In re Amaranth Nat’l Gas Commodities Litig., 587 F. Supp. 2d 513 (S.D.N.Y. 2008) (dismissing unjust enrichment claims based on attenuated market relationships)
- Starshinova v. Batratchenko, 931 F. Supp. 2d 478 (S.D.N.Y. 2013) (application of Absolute Activist in CEA context)