890 F.3d 60
2d Cir.2018Background
- Plaintiffs are five Korean citizens who traded KOSPI 200 futures on the KRX "night market," which lists those trades on CME Globex (an electronic trading platform located in Aurora, Illinois) and clears/settles on the KRX in Busan the next day.
- Defendant Tower Research Capital (Tower), a U.S. high-frequency trading firm, is alleged to have executed roughly 53.8% of KRX night-market trades in 2012 and to have engaged in repeated "spoofing"—placing and canceling large orders to move prices and profit—earning alleged illicit profits.
- Plaintiffs traded more than 1,000 night-market trades in 2012 and allege it is statistically likely they transacted directly with Tower traders or were otherwise harmed by Tower’s market manipulation.
- Korean regulators (FSC) investigated and publicly identified the scheme in 2014; Plaintiffs then filed a class complaint in New York asserting violations of the Commodity Exchange Act (CEA) and New York unjust enrichment law.
- The district court dismissed, holding application of the CEA would be an impermissible extraterritorial reach under Morrison, and that unjust enrichment failed for lack of a direct relationship; the Second Circuit vacated and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the CEA applies to KRX night-market trades (extraterritoriality) | KRX night-market trades are "domestic transactions" because trades are matched on CME Globex in Illinois, where irrevocable liability is incurred | Trades are outside U.S. because orders are placed through KRX in Korea and finality/assumption of liability occurs at KRX clearing/settlement in Korea | Reversed dismissal: plaintiffs plausibly alleged irrevocable liability attached in the U.S. at matching on CME Globex, so CEA may apply at this stage |
| Whether Plaintiffs stated a New York unjust enrichment claim | Tower benefitted at plaintiffs’ expense because spoofing artificially moved market prices; direct counterparty status not required | Claim fails for lack of a direct relationship or proof plaintiffs were Tower’s counterparties | Reversed dismissal: direct relationship not required; plaintiffs alleged sufficient connection and injury to proceed |
Key Cases Cited
- Morrison v. Nat'l Austl. Bank Ltd., 561 U.S. 247 (Sup. Ct. 2010) (sets domestic-transaction test for extraterritorial reach of securities laws)
- Loginovskaya v. Batratchenko, 764 F.3d 266 (2d Cir. 2014) (applies Morrison framework to the CEA)
- Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) (defines "domestic transaction" where irrevocable liability attaches in U.S.)
- Kaye v. Grossman, 202 F.3d 611 (2d Cir. 2000) (articulates elements of New York unjust enrichment)
- Cox v. Microsoft Corp., 8 A.D.3d 39 (N.Y. App. Div. 2004) (holds unjust enrichment may be alleged by indirect purchasers; direct relationship not required)
- Simonds v. Simonds, 45 N.Y.2d 233 (N.Y. Ct. App. 1978) (equity and conscience standard for restitution)
- In re Amaranth Nat. Gas Commodities Litig., 730 F.3d 170 (2d Cir. 2013) (discusses intent requirement for CEA manipulation claims)