United States District Court, E.D. New York
COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
INTERNATIONAL FOREIGN CURRENCY, INC., a New York Corporation, dba International Foreign Currency Exchange, dba I.F.C. Trading, Inc., THOMAS QUALLS, an individual and MICHAEL KOURMOLIS, an individual, Defendants.
The opinion of the court was delivered by: THOMAS PLATT, JR., Senior District Judge
MEMORANDUM AND ORDER
Before this Court are motions brought by International Foreign
Currency, Inc. ("IFC"), Thomas Qualls ("Qualls") and Michael
Kourmolis ("Kourmalis"), (collectively "Defendants"), to dismiss
pursuant to Fed.R. Civ. P. 12(b)(1) for lack of subject matter
jurisdiction, and 12(b)(6), for failure to state a claim, the
action commenced by the Commodities Futures Trading Commission
("CFTC" or "Plaintiff"). For the following reasons, Defendants' motions are DENIED.
A. Factual History
The CFTC brought suit against Defendants pursuant to the
Commodity Exchange Act ("CEA") as amended by the Commodity
Futures Modernization Act ("CFMA"). Defendant Qualls is the
President of IFC, and Kourmalis "has identified himself variously
as a `Senior Account Executive' and as `Vice President of
Accounts' for IFC." (Compl. at ¶¶ 9-10). The CFTC alleges that
from November 27, 2001 until at least July 11, 2003, Defendants
offered and sold foreign currency futures contracts over the
phone to the retail public out of the IFC office in Garden City,
New York. (Compl. at ¶ 11).
In the course of his solicitations, Defendant Kourmolis
allegedly explained to at least one customer, Mrs. Blakers, that
she would have an individual bank account with IFC and that Chase
Manhattan Bank would insure the account for up to twenty-five
million dollars. (Compl. at ¶ 13). Mrs. Blakers subsequently
wired approximately $10,000 to IFC and Kourmalis sent her a
written "Confirmation of Funds Transfer," stating that IFC had
opened a personal account in her name and would begin trading on
her behalf. (Compl. at ¶¶ 13-14); (Pl. Exh. 12).*fn1
According to the complaint and Plaintiff's accompanying
exhibits, however, Mrs. Blakers' money was neither deposited into
an individual bank account nor transferred to IG Index, a London
company, which Defendants allege executed the foreign currency
transactions for IFC. (Compl. at ¶ 18); (Qualls Aff. at 1-2).
Instead, Mrs. Blakers' funds were deposited into one account,
Qualls' personal account, and were apparently used to pay for his
personal expenses. (Id).*fn2 Her funds were also not
insured by Chase Manhattan Bank and when Mrs. Blakers later
attempted to close out her account, IFC ceased communication with
her, and to date, has not returned any of her funds. (Compl. at
CFTC filed suit on July 23, 2003, alleging violations of §
4(a), § 4(b)(a)(2)(i) § 4(b)(a)(2)(iii) of the CEA, in addition
to § 1.1(b) of the Commission Regulations. (Compl. at ¶¶ 3-5).
Defendants subsequently filed the instant motions and oral
argument was heard on March 19, 2004.
DISCUSSION A. Standard of Review
i. Fed.R. Civ. P. 12(b)(1)
When considering a motion to dismiss for lack of subject matter
jurisdiction, a court may look at materials other than the
pleadings to decide the jurisdictional question. Sharp v.
Bivona, 304 F. Supp. 2d 357, 362 (E.D.N.Y. 2004) (citing
Robinson v. Gov't of Malaysia, 269 F.3d 133, 141 n. 6 (2d Cir.
2001)). The Court must accept all facts alleged in the complaint
as true but the Court may not make inferences in favor of the
party asserting jurisdiction. Smith v. Barnhart,
293 F. Supp. 2d 252, 254 (E.D.N.Y. 2003). While the party invoking the
jurisdiction of the Court has the burden of proof, "dismissal is
inappropriate unless it appears beyond doubt that the plaintiff
can prove no set of facts which would entitle him or her to
relief." Fortress Bible Church v. Feiner, No. 03-4235, 2004
U.S. Dist. LEXIS 9614, at *3 (S.D.N.Y. March 29, 2004) (citing
Sec. Investor Prot. Corp. v. BDO Seidman, LLP, 222 F.3d 63, 68
(2d Cir. 2000)).
ii. Fed.R. Civ. P. 12(b)(6)
When considering a motion to dismiss for failure to state a
claim, the Court "must `accept all of the plaintiff's factual
allegations in the complaint as true and draw inferences from
those allegations in the light most favorable to the plaintiff."
Bivona, 304 F. Supp. 2d at 362 (quoting Desiderio v. Nat'l
Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 202 (2d Cir. 1999)). The
motion should be granted if "it appears beyond doubt that the
plaintiff can prove no set of facts in support of his claim which
would entitle him to relief." Formica v. Town of Huntington,
No. 96-7206, 1996 U.S. App. LEXIS 31031, at *4 (2d Cir. Sept. 19,
1996) (citation omitted).
B. The CEA as Amended by the CFMA
The purpose of the CFMA was to "clarify the jurisdiction of the
Futures Trading Commission on certain retail foreign exchange
transactions. . . ." CFMA, Pub. No. 106-554, 114 Stat 2763A-376
(2000). The CFMA added the following to § 2 of the CEA, which now
states in pertinent part:
(c) Agreements, contracts, and transactions in
foreign currency, government securities, and certain
(1) In general. Except as provided in paragraph (2),
nothing in this Act [7 USCS §§ 1 et seq.] . . .
governs or applies to an agreement, contract or
(A) foreign currency . . .
(2) Commission Jurisdiction
(A) Agreements, contracts and transactions traded on
an organized exchange. This Act [7 USCS §§ 1 et
seq.] applies to, and the Commission shall have
jurisdiction over, an agreement, contract or
transaction described in paragraph (1) that is
(i) a contract of sale of a commodity for future
delivery . . . that is executed or traded on an
organized exchange . . .
(B) Agreements contracts and transactions in retail
foreign currency. This Act [ 7 USCS §§ 1 et seq.]
applies to, and the Commission shall have jurisdiction over, an
agreement, contract, or transaction in foreign
(i) is a contract of a sale of a commodity for
future delivery . . . and . . .
(ii) is offered to, or entered into with, a person
that is not an eligible contract
participant,*fn3 unless the counterparty, or
the person offering to be the counterparty, of the
person is [an exempted counterparty] . . .*fn4
7 U.S.C. § 2(c) (2004) (emphasis added).
In addition, Congress also amended the CEA by deleting the
Treasury Amendment. See 7 U.S.C. § 2 (2004) (noting amendment
on Dec. 21, 2000, which deleted exemption for transactions in
foreign currency unless such transactions were for future
delivery and conducted on a board of trade).
C. Defendants' Motions to Dismiss Pursuant to Fed.R. Civ. P.
i. IFC's and Qualls' Arguments
Defendants IFC and Qualls allege the following arguments in
support of the instant motion: (a) Defendants created "spot"
foreign currency contracts with customers rather than the futures
contracts that are regulated by the CFTC pursuant to the CEA; (b) currency is not a commodity; (c)
Defendants are exempt from the CEA because they did not transact
in foreign currency on a "board of trade"; (d) Defendants are
exempt from CFTC jurisdiction pursuant to § 2(c)(2)(B)(ii) of the
CEA because the counterparty in this case, IG Index, is an
exempted financial institution; and (e) Defendants are not
subject to the jurisdiction of the Court because IFC did not
conduct transactions in the United States. (Defs. Mem. of Law at
2-6). The Court will address each of Defendants' arguments in
a. What Constitutes a Futures Contract?
In order to fall within the purview of the CEA, Defendants must
have transacted in contracts "for future delivery," ("futures
contracts"). See 7 U.S.C. § 2(c)(2)(B)(i). Futures contracts
are contracts that are bought or sold at a specified price and
fixed quantity for future delivery. Commodity Futures Trading
Comm'n v. Standard Forex, Inc., No. 93-0088, 1996 U.S. Dist.
LEXIS 14778, at *2 (E.D.N.Y Jul. 25, 1996), (hereinafter
"Standard Forex II"). Although there is no precise definition as to what constitutes a futures contract,
courts have distilled from case law and regulatory authorities
the following important elements: (i) "an obligation to make or
take delivery of a commodity in the future;" (ii) "an ability to
offset the putative obligation to make or take delivery and thus
realize a gain or loss on the intervening price fluctuation;"
(iii) a purpose to speculate on the intervening price changes
without actually having to acquire the underlying commodity;"
(iv) standardization of contract terms; and, (v) a margin system
of investing. Standard Forex II, 1996 U.S. Dist. LEXIS 14778,
at *30-1; Commodity Futures Trading Comm'n v. Int'l Fin. Serv.,
Inc., No. 02-5497, 2004 U.S. Dist. LEXIS 8263, at *28-*9
(S.D.N.Y. May 6, 2004), (hereinafter "Int'l Fin. Serv").
In Int'l Fin. Serv., a recent case in the Southern District
of New York, the court found that a purported foreign currency
trading firm transacted in foreign currency futures contracts.
Id. at *41. The similarities between that case and the instant
action are particularly illustrative, and the Court finds that
the contracts at issue meet most, if not all, of the important
elements of a futures contract.
First, as in Int'l. Fin. Serv., IFC's customers did not have
the intention to take delivery of the foreign currencies, rather,
IFC settled, (or at least purported to settle), the contracts by
entering into offsetting transactions. Id. at *30. Therefore, customers gained or lost money based on fluctuations
in the currencies' values. Id. Mrs. Blakers' monthly account
statements show that no currency was delivered, rather the
currency was sold, offsetting the original contract, and thus
establishing a gain or loss that depended on the change in value
of the underlying currency. (Pl. Exh. 14). In addition,
Defendants concede that there was never any physical delivery of
the currency and IFC's documents contain no provision which
anticipates customers taking delivery of the foreign currencies
they allegedly purchase. (Qualls Aff. at 3); (Compl. at ¶ 22).
Accordingly, these facts tend to establish the second and third
elements of a futures contract.
Second, IFC, like the firm in Int'l. Fin. Serv., created
contracts that called for the purchase or sale of standardized
amounts of foreign currencies. See 2004 U.S. Dist. LEXIS 8263,
at *30, *40. Here, as evidenced by the monthly account
statements, all transactions entered into on behalf of Mrs
Blakers were in the amount of $100,000. (Pl. Exh. 14). In
addition, IFC standardized the terms and conditions of the
contracts in the customer agreement forms. (Compl. at 23; Pl.
Exh. 9). Accordingly, the fourth element of a futures contract is
Lastly, as in Int'l. Fin. Serv., IFC allowed customers to
contract on margin. Id. at *30. Mrs. Blakers' monthly account
statements from IFC show multiple foreign currency transactions
of $100,000, but her actual investment with IFC was only for
$10,000. (Pl. Exh. Q, 14). Therefore, the foreign currency transactions purportedly conducted on her behalf were purchased
on margin, establishing the fifth element of a futures contract.
See Commodity Futures Trading Comm'n. v. Noble Wealth Data
Information Serv., Inc., 90 F. Supp. 2d 676, 682 (D. Md. 2000)
vacated in part on other grounds, 278 F.3d 319, 329 (4th. Cir.
2002) (Investors purchased contracts on margin when they made a
down payment of $1,000 for a contract to be traded in increments
Defendants argue, however, that they never traded in futures
contracts because all of their contracts were traded on the "spot
market," and there was no set delivery date made at the time of
the transaction. Both of these arguments fail.
First, in order to be a "spot contract," the contract must call
for settlement within two days. Bank Brussels Lambert, S.A. v.
Intermetals Corp., 779 F. Supp. 741, 742 (S.D.N.Y. 1991).
Defendants' contracts do not meet this requirement because there
was no delivery date specified and thus, the contracts could be
held indefinitely. (Qualls Aff. at 2). Although IFC argues that
the two day requirement is not a determinative element to the
"spot contract," all authority is to the contrary. See Bank
Brussels, 779 F. Supp. at 742; see also Standard Forex II,
1996 U.S. Dist. LEXIS 14778, at *32; Commodity Futures Trading
Comm'n v. Zelener, 373 F.3d 861, 869 (7th Cir. 2004); Int'l.
Fin. Serv., 2004 U.S. Dist. LEXIS 8263, at *31; Noble Wealth,
90 F. Supp. 2d at 689. Further, even if the contract was to be extended beyond a two day period via "roll
overs," a spot contract must still call for settlement every two
days. See Bank Brussels, 779 F. Supp at 743; Standard Forex
II, 1996 U.S. Dist. LEXIS 14778, at *36; Int'l. Fin. Serv.,
2004 U.S. Dist. LEXIS 8263, at *39.
Second, the fact that Defendants' contracts failed to have a
specified future delivery date is not determinative. "While
futures contracts generally have a specified future delivery date
. . . that date is not always specified thus allowing some
futures contracts to be of `indefinite duration.'" Standard
Forex II, 1996 U.S. Dist. LEXIS 14778, at *29 (quoting Chicago
Mercantile Exchange v. S.E.C., 883 F.2d 537, 546 (7th Cir.
1989)); Int'l Fin. Serv., 2004 U.S. Dist. LEXIS 8263, at *39.
Thus, viewing IFC's transactions "as a whole with a critical
eye toward [the] underlying purpose," the Court finds sufficient
evidence that the contracts at issue are futures contracts.
Standard Forex II, 1996 U.S. Dist. LEXIS 14778, at *30.
b. Is Foreign Currency a Commodity?
For purposes of jurisdiction under CEA § 2(c)(2)(B)(i), not
only do the contracts entered into or solicited by Defendants
need to be futures contracts, but each must involve the sale of a
"commodity." Id. The CEA defines the term commodity as "wheat, cotton, rice . . . and all other goods . . .
and all services, rights, and interests in which contracts
for future delivery are presently or in the future dealt in."
7 U.S.C. § 1a(4) (emphasis added). Defendants argue that because
Title 7 of the United States Code which contains the CEA is
entitled "agriculture," currency is not a commodity as defined
therein. (Defs. Mem. of Law at 1).
The Court, however, rejects Defendants' argument and finds that
consistent with current case law in this Circuit, currency is a
commodity as defined under the CEA. See Commodity Futures
Trading Comm'n v. Am. Bd of Trade, Inc., 473 F. Supp. 1177, 1182
(S.D.N.Y. 1979), aff'd, 803 F.2d 1242 (2d Cir. 1986); Standard
Forex II, 1996 U.S. Dist. LEXIS 14778, at *25; Int'l Fin.
Serv., 2004 U.S. Dist. LEXIS 8263. Accordingly, the currency
transactions that Defendants offered or entered into are
contracts "of a sale of a commodity for future delivery," and
fall within the purview of CEA § 2(c)(2)(B)(i). Id.
c. Were the Transactions Conducted on a "board of trade"
Defendants argue that the Treasury Amendment, as interpreted by
Dunn v. Commodity Futures Trading Comm'n, 519 U.S. 465, 469
(1997), exempted all transactions in foreign currency unless such
transactions were conducted on a "board of trade." Id; (Defs.
Mem. of Law at 3-5). Although Congress subsequently amended the
CEA by deleting the Treasury Amendment, Defendants argue that the foreign currency exemption found in Dunn is still in force, and
accordingly, exempts the transactions in the instant action.
Even assuming, arguendo, that the Treasury Amendment
maintains some vitality as interpreted in Dunn, the Court would
still have jurisdiction over the instant action because IFC
conducted transactions on "a board of trade." See Commodity
Futures Trading Comm'n Am. Bd. of Trade, Inc., 803 F.2d 1242,
1249 (2d Cir. 1986); Commodity Futures Trading Comm'n v.
Standard Forex, No. 93-0088, 1993 U.S. Dist. LEXIS 19909, at
*31-3 (E.D.N.Y. Aug. 9, 1993), (hereinafter "Standard Forex I").
Although Defendants rely on the holding in Commodity Futures
Trading Comm'n v. Frankwell Bullion Ltd., a Ninth Circuit
decision, for its argument that Defendants did not conduct
transactions on a "board of trade," this Court prefers instead to
adhere to precedent within this Circuit on the issue. To that
end, in Am. Bd. of Trade, the Second Circuit Court of Appeals
concluded that the legislative history of the Treasury Amendment
"belie[s] the notion that the [Treasury Amendment] was designed
to exclude from regulation foreign currency options transactions
such as those defendants engaged in with private individuals."
803 F.2d at 1249. The Court of Appeals went on to explain:
[the legislative] history discloses that the
exception was included in the [Act] at the behest of
the Treasury Department on the ground that the
protections of the Act were not needed for the
sophisticated financial institutions, already subject
to regulation, that participated in such transactions.
Standard Forex I, a subsequent case from the Eastern District
of New York, elaborated on the Am. Bd. of Trade decision,
holding that "the Treasury Amendment was intended to exempt only
interbank transactions that were already regulated by the banking
regulatory agencies." Other District Courts within this Circuit
have reached the same conclusion. See, e.g., Int'l Fin.
Serv., 2004 U.S. Dist. LEXIS 8263, at *23-4 ("the predominant
view . . . holds that when Congress enacted the Treasury
Amendment, limiting the CFTC's jurisdiction to currency
transactions `conducted on a board of trade,' it intended `to
exempt only interbank transactions that were already regulated by
the banking regulatory agencies"); Rosner v. Peregrine Fin.
Ltd, No. 95-10904, 1998 U.S. Dist. LEXIS 7170, at *15 ("the
Treasury Amendment was not intended to exempt all `off exchange'
transactions from the CEA but only `off exchange' interbank
transactions because those transactions were already subject to
government regulation"). Accordingly, as the transactions in the
instant action were not interbank transactions, the Court finds
that they were conducted on a "board of trade" and fall under the
jurisdiction of the CEA.
d. Is IG Index a Valid Counterparty Pursuant to CEA §
2(c)(2)(B)(ii)? Section 2(c)(2)(B)(ii) of the CEA does not confer jurisdiction
over a transaction if one party is a valid financial institution.
Id. Defendants argue that their transactions fall within this
exemption because IG Index is a counterparty exempt from
regulation under the CEA. (Tr. Oral Argument, March 19, 2004 at
Pgs. 5-6). Defendants, however, fail to provide a single shred of
evidence supporting IG Index's existence beyond gratuitous
references to the supposed financial institution in its
affidavits and memoranda of law. Plaintiff's exhibits, on the
other hand, tend to cast serious doubts on the existence of IG
Index. (Pl. Exh. 14, Q). According to IFC's (i.e. Qualls') bank
account records, after Mrs. Blakers wired money into the account,
there was never any subsequent transfer of her funds to the
phantom IG Index. (See Pl. Exh. Q). Instead, as explained
supra, it appears that Qualls used the money for various
personal purchases. Further, the account statements mailed by IFC
to Mrs. Blakers do not identify any counterparty to the trades;
the only firm named was IFC. (Pl. Exh. 14; Compl. at ¶ 16).
Therefore, IG Index may not be deemed a valid counterparty and
accordingly, IFC's transactions are not exempted.
e. Defendants' Contacts in the United States
Defendants argue that they are not subject to the jurisdiction
of the Court because they did not conduct their transactions in
the United States. Instead, Defendants contend that they conducted their transactions via IG
Index in England and thus, are subject to regulation by the
Securities Financial Authority in London. (Qualls Aff. at 1-2).
Defendants, again, simply offer no evidence to support this
assertion or the fact that IG Index actually exists. Indeed, as
explained supra, the evidence tends to show the opposite.
Solicitation of at least one customer (Blakers) certainly
occurred in the United States, from the IFC office in Garden
City, New York. (Pl. Exh. 12, 13, 14). Further, IFC is
incorporated in the State of New York and money was wired by
Blakers to IFC's bank account, located in Long Beach, New York.
(Compl. at ¶¶ 3-11; Pl. Exh. Q). Accordingly, Defendants are
subject to the jurisdiction of the Court.
In sum, the CFTC has met its jurisdictional burden by showing
that the foreign currency transactions in the instant action were
contracts "of a sale of a commodity for future delivery," as
contemplated by CEA § 2(c)(2)(B)(i). Further, the transactions
did not fall into any of the exemptions available under the CEA,
and there are sufficient contacts in the United States,
specifically, the Eastern District, to support the Court's
jurisdiction. Therefore, Defendants' motion to dismiss pursuant
to Fed.R. Civ. P 12(b)(1) for lack of subject matter
jurisdiction is denied. ii. Kourmolis' arguments
Kourmolis asserts that he is not subject to the Court's
jurisdiction because the complaint fails to set forth any
instances wherein he entered into any of the foreign currency
transactions discussed supra. In addition, Defendant Kourmalis
argues that the all the foreign currency transactions at issue
occurred after his termination with IFC. (Thorpe Affirmation at
Kourmolis, however, misinterprets the CEA to require entering
into a transaction as the only predicate for jurisdiction. To
the contrary, Section 2(c)(2)(B)(ii) of the CEA not only
contemplates the execution of a sale of a commodity but also the
solicitation of a sale. See id. The CEA states in relevant
part that "the Commission has jurisdiction over an agreement,
contract or transaction in foreign currency that . . . is
offered to, or entered into with, a person that is not an
eligible contract participant . . ." Id (emphasis added).
Defendant concedes that he solicited customers on behalf of IFC,
and accordingly, his conduct is sufficient to establish
jurisdiction pursuant to CEA § 2(c)(2)(B)(ii). (Thorpe Affirm. at
Further, Kourmolis was employed by IFC and solicited customers
from February 2002 to approximately September 2002. (Thorpe
Affirm. at ¶ 6). Although the purported transactions at issue
allegedly occurred after Kourmalis left, as explained supra, his solicitations are sufficient to
invoke jurisdiction under CEA § 2(c)(2)(B)(ii). Therefore,
Defendant's motion to dismiss pursuant to Fed.R. 12(b)(1) is
D. Defendants' Motions to Dismiss Pursuant to Fed.R. Civ. P.
Defendants' Rule 12(b)(6) motions are also denied because the
motions involve the same issues already decided in Defendants'
Rule 12(b)(1) motions. Further, when analyzing a Rule 12(b)(6)
motion, the Court must base its decision on the pleadings and
take all facts alleged in the complaint as true. Bivona,
304 F. Supp. 2d at 362 (quoting Desiderio v. National Ass'n of Sec.
Dealers, Inc., 191 F.3d 198, 202 (2d Cir. 1999)). Therefore, the
Court denies Defendants' Rule 12(b)(6) motions.
For the foregoing reasons, Defendants' Rule 12(b)(1) and Rule
12(b)(6) motions to dismiss are hereby DENIED.