187 F. Supp. 3d 454
S.D.N.Y.2016Background
- Plaintiffs Eduardo and Gervasio Negrete (Mexican citizens) entered into ISDA master agreements with Citibank to transact FX trades over many years; they alleged thousands of trades and substantial volume.
- Plaintiffs alleged Citi (through Citicorp disclosures tied to an unrelated DOJ plea) employed undisclosed 1–3 pip markups, worked customer limit orders away from confirmed prices, partially filled or declined fills to earn markups, and miscalculated collateral leading to cancelled orders and margin calls.
- Plaintiffs asserted six claims: (I) common-law fraud (undisclosed markups), (II) breach of contract (undisclosed markups), (III) breach for cancelling a €5,000,000 order after an alleged erroneous margin call, (IV) negligence (same margin-call theory), (V) breach for numerous margin calls, and (VI) negligence for margin calls.
- Citibank moved to dismiss under Rules 8, 9(b), and 12(b)(6); Plaintiffs cross-moved for partial summary judgment on the breach-of-contract claim for markups. The Court heard the motions and dismissed the complaint without prejudice, denying Plaintiffs’ cross-motion.
- The court relied on pleading deficiencies: lack of particularized facts linking any specific trades to the alleged misconduct, failure to identify contract provisions breached, inability to plead reliance, scienter, loss causation, and that contract terms (no-reliance, limitations of liability, and dispute-resolution provisions) and doctrines (economic-loss, absence of independent tort duty) precluded the tort and some contract claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Sufficiency of fraud pleading under Rule 9(b) | Alleged recurring misstatements/omissions and reliance on Citicorp DOJ disclosure; impractical to plead each instance | Complaints are too generalized; no specific trades, times, speakers, or representative examples | Dismissed: fails Rule 9(b) particularity (no specific instances or speakers) |
| Scienter for fraud | Profit motive and DOJ disclosures support intent | General profit motive insufficient; no facts showing conscious misbehavior | Dismissed: scienter not adequately pleaded |
| Reliance and causation for fraud | Plaintiffs relied on Citi’s statements; lost profits from unexecuted trades | ISDA contains no-reliance clause; Plaintiffs sophisticated with market access; no pleaded out-of-pocket losses tied to misstatements | Dismissed: reasonable reliance and loss causation lacking; lost-profits improper for fraud damages |
| Breach of contract for undisclosed markups (Claim II) | DOJ disclosure proves wrongful markups and breach of ISDA | Plaintiffs failed to identify which contract provision was breached or any specific transaction | Dismissed: complaint does not plead essential contract terms or identify breached provisions |
| Breach/Negligence for margin calls and cancelled order (Claims III, V, IV, VI) | Margin calls were erroneous; cancelled €5M trade caused losses and lost profits | Limitation-of-liability in ISDA bars lost-profits; Plaintiffs failed to use ISDA dispute procedure; negligence claims duplicate contractual duties and are barred by economic-loss rule | Dismissed: damages barred and no independent tort duty; failed to exhaust contractual dispute process |
| Partial summary judgment on breach for markups | DOJ admission and disclosures are conclusive proof of breach | Those disclosures do not connect to Plaintiffs’ trades; pleading defects remain | Denied: summary judgment improper given the pleading deficiencies |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard: plausibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading standard and need for factual heft)
- Lerner v. Fleet Bank, N.A., 459 F.3d 273 (Rule 9(b) particularity requirements)
- McLaughlin v. Anderson, 962 F.2d 187 (specificity for fraud pleadings)
- Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189 (assessment of reasonable reliance by sophisticated parties)
- Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382 (tort liability requires duty independent of contract)
- Lehman Bros. Comm. Corp. v. Minmetals Int'l Non-Ferrous Metals Trading Co., 179 F. Supp. 2d 159 (rejecting markup-based fraud claims in FX context)
- Highland Capital Mgmt., L.P. v. Schneider, 533 F. Supp. 2d 345 (New York limits fraud damages to out-of-pocket losses; lost profits not recoverable)