CEA § 22(b) expressly provides that CEA private remedies are available only to private litigants who "engaged in any transaction on or subject to the rules" of such contract markets or licensed boards of trade. 7 U.S.C. § 25(b)(1)-(3). Thus, only a purchaser or seller on the contract market has a right of action. DGM Invs., 2002 WL 31356362, at *4; American Agric. Movement, Inc. v. Bd. of Trade of Chicago, 977 F.2d 1147, 1153 (7th Cir. 1992) ("By its terms, then, § 22(b) creates the exclusive remedies available to those injured by violations of the CEA, and makes those remedies available only to persons injured in the course of trading on a contract market. It therefore forecloses all other remedies, including any on behalf of non-traders.").
Plaintiffs, Triumph-Wef Venture LLC, DGM Trading Specialist Fund LLC, Triumph Futures Fund Ltd., Triumph Premier Traders Ltd., and Triumph-MM Venture Ltd., have standing to bring this action as they were funds, which "bought and sold P-Tech Futures Options contracts and traded on and pursuant to the rules" of NYFE. (Compl.¶¶ 4-9.) These Plaintiffs sufficiently plead losses sustained when having to meet uncalled for margin calls as a result of the artificial settlement prices. (Compl. ¶ 35; aff. of James Moore.)
However, there is no allegation that DGM bought or sold on the exchange. According to the Complaint, DGM "operated" a fund that traded P-Tech Futures and Options, and "[d]uring all times relevant to this Complaint, DGM was the General Partner and/or Managing Member" of the other Plaintiffs. (Compl.¶ 3.) As already held, the statute confers standing on the actual trader, the fund, not on the corporation that operates it. DGM Invs., 2002 WL 31356362, at *4.
Plaintiffs' Fraud Claim
Plaintiffs' fraud claim under CEA § 4b, 7 U.S.C. § 6b, is proper. Fraud claims under the CEA are not limited to broker/customer relationships. As the Supreme Court held, "The antifraud provision, § 4b, 7 U.S.C. § 6b, by its terms makes it unlawful for any person to deceive or defraud any other person in connection with any futures contract." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 389, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1981). The Court then concluded that "exchanges can be held accountable for breaching their statutory duties to enforce their own rules prohibiting price manipulation . . . by futures traders who can prove injury from these violations." Id. at 394, 102 S.Ct. 1825.
Furthermore, Plaintiffs have pled fraud with sufficient particularity against the NYBOT Defendants, as required by Fed. R.Civ.P. 9(b). Modern Settings, Inc. v. Prudential-Bache Sec., Inc., 602 F. Supp. 511, 513 (S.D.N.Y. 1984).
Plaintiffs have adequately alleged scienter, a necessary element of Plaintiffs' fraud-based § 4b claim. Karasyk v. Marc Commodities Corp., 770 F. Supp. 824, 829-31 (S.D.N.Y. 1991). The Second Circuit has held that plaintiff can establish scienter "either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Novak v. Kasaks, 216 F.3d 300, 307 (2d Cir. 2000). Plaintiffs' Complaint establishes both: (a) motive and opportunity to commit fraud (Compl.¶¶ 42, 62-65, 79-82), and (b) strong circumstantial evidence of conscious misbehavior or recklessness (Compl.¶¶ 27, 42-44, 60-61, 74-78). Plaintiffs allege that the NYBOT Defendants had a financial interest in covering up the manipulation, and although they had knowledge of the manipulation, they failed to enforce NYFE Rule 315 and take affirmative steps to cure the problem. The Complaint thus alleges "a sufficient factual basis to support an inference of scienter," and the factual allegations "give rise to a `strong inference' that the defendants possessed the requisite fraudulent intent." Grunwald v. Bornfreund, 668 F. Supp. 128, 130-31 (E.D.N.Y. 1987) (quoting Beck v. Mfrs. Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987)).
It is true that Complaint does not separately allege fraud with particularity as against each of the NYBOT Defendants. "In actions involving multiple defendants, Rule 9(b) requires the plaintiff to plead facts from which fraud may be reasonably inferred as to each defendant. However, pleading requirements may be relaxed when the information is exclusively within the defendant's knowledge as long as the factual basis for allegations based upon information and belief are adequately set forth." Grunwald, 668 F. Supp. at 131 (citations omitted). In this case, many of the specifics of the fraud which took place, such as time, place, and steps taken to cover the fraud, are within the sole knowledge of the NYBOT Defendants. Dismissal on the ground that facts within Defendants' knowledge have not yet been proven in the pleading stage is "particularly inappropriate." Sam Wong, 735 F.2d at 678.
Preemption of State Law Claims
As previously held, Plaintiffs' state law claims for gross negligence and bad faith and respondeat superior are preempted by the CEA. As explained, "state law claims alleged by plaintiff here would `directly affect trading on or the operation of a futures market. . . . These are matters for uniform federal regulation subject to review by the CFTC, not matters for review or adjudication by individual state courts.'" DGM Invs., 2002 WL 31356362, at *5 (quoting American Agric. Movement, 977 F.2d at 1156).
The motion to dismiss the Complaint is denied, but granted as to DGM's claims against the NYBOT Defendants.
It is so ordered.