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GONZALEZ v. AXESS TRADE CO.

June 9, 2005.

ALEJANDRO GONZALEZ, RACIEL HERNANDEZ, CARLOS ORTEGA, GERARDO ROJAS, JOSE SANTANA, JOSE RANULFO URRUTIA, and WORLD TRADE CAPITAL MARKET S.C., Plaintiffs,
v.
AXESS TRADE CO., INC. and SABY ABUAF, Defendants. U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. AXESS TRADE CO., INC., Defendant.



The opinion of the court was delivered by: RICHARD CASEY, District Judge

MEMORANDUM & ORDER

These two related cases involve Defendant Axess Trade Co.'s uncontestedly fraudulent activities in foreign currency exchange futures ("Forex") contracts. A group of six individual investors ("Individual Investors") and a trading firm named World Trade Capital Market S.C. ("WTCM") (together, "Private Plaintiffs") sued Axess Trade and its principal Saby Abuaf ("Private Action"). Apparently learning of Axess Trade's activities through the Private Action, the United States Commodity Futures Trading Commission ("CFTC") brought its own action against Axess Trade pursuant to 7 U.S.C. § 13a-1 ("CFTC Action"), which was assigned to this Court as a related case. Axess Trade has approximately $69,000 in assets in the United States, which are frozen as the result of a preliminary injunction that this Court issued. The Private Plaintiffs and the CFTC are contesting to whom those limited assets should be distributed. As explained below, the Court holds that the Private Plaintiffs are entitled to a preference in the distribution of funds but not to all of the funds. The Court modifies the preliminary injunction accordingly.

I. BACKGROUND

  WTCM is incorporated under the laws of Mexico, and the Individual Investors are Mexican citizens. WTCM learned of Axess Trade, a Panamanian corporation, during its search for a new clearing firm to handle its customers' foreign-currency trades. The Private Plaintiffs allege that Axess Trade, through Abuaf, fraudulently induced the Individual Investors to open Internet Forex trading accounts with Axess Trade and induced WTCM to act as an introducing broker for Axess Trade. When representatives of WTCM met with Abuaf in Manhattan and Mexico City to discuss Axess Trade's services, Abuaf claimed that Axess Trade was registered with the U.S. Commodity Futures Trading Commission ("CFTC") as a futures commission merchant and that Axess Trade had offices New York City. WTCM referred the Individual Investors to Axess Trade in exchange for commissions on the Individual Investors' trades. The Individual Investors set up Internet accounts and deposited funds in those accounts by wiring money to Axess Trade's bank account at JPMorgan Bank in New York City.

  The Private Plaintiffs allege that hundreds of profitable trades of U.S. dollars against Mexican pesos that the Individual Investors made in their accounts were retroactively "canceled" by Axess Trade, depriving them of the profits from those trades. Axess Trade also allegedly misappropriated $20,000 from the accounts of WTCM's clients.*fn1 And Axess Trade's New York offices turned out to be bogus. One address that was provided is, according to the Private Plaintiffs' counsel, a Mail Boxes Etc. store. The other office in the Empire State Building actually belongs to Capital Management Services LLC, the services of which Axess Trade allegedly used to clear the Individual Investors' trades and with which Axess Trade maintained its own account.

  The Private Plaintiffs brought suit under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et sq., and New York State law. The Individual Investors claim compensatory damages of $223,610.37 for lost profits plus an unspecified sum of misappropriated funds. WTCM claims to have lost $122,844.52 in commissions when Axess Trade retroactively canceled the Individual Investors' trades. The Private Plaintiffs also seek treble damages under RICO.

  On May 19, 2004, the Court issued an order of attachment on the motion of the Private Plaintiffs, resulting in the attachment of $69,022.27 held in two accounts by Axess Trade in New York. The Court confirmed that order of attachment, as is required under New York law, N.Y.C.P.L.R. 6211(b), on June 15, 2004. The Private Plaintiffs posted an undertaking of $10,000 to obtain the order of attachment.

  The CFTC Action commenced on June 7, 2004. The CFTC alleged that Axess Trade violated three provisions of the Commodity Exchange Act ("CEA"), 7 U.S.C. §§ 6(a), 6b(a)(i) and (iii), and CFTC regulations, 17 C.F.R. § 1.1(b)(1) and (3). Axess Trade allegedly engaged in illegal off-exchange futures contracts because the contracts were not made on or subject to the rules of a board of trade registered with or designated by the CFTC. Axess Trade also engaged in fraudulent misrepresentation, by among other things, falsely stating that it was registered with the CFTC. On September 24, 2004, the Court issued a consent order in the CFTC Action that preliminarily enjoined Axess Trade from, among other things, encumbering, transferring, and selling its assets located in the United States. The injunction also required Axess Trade to provide a full accounting to the CFTC of its clients and assets. The CFTC has endeavored to determine how many clients Axess Trade defrauded. Axess Trade provided the accounting, and the CFTC has learned that a second group of investors who were introduced by a broker called Interglobal Capital S.A. de C.V. ("Interglobal") were defrauded, all of whom, like the Private Plaintiffs, are foreign citizens.

  After that consent order was issued, the Private Plaintiffs, Axess Trade, and Abuaf (who is not a defendant in the CFTC Action), agreed to a settlement under which the frozen assets would be distributed as follows: Private Plaintiffs would receive $68,021.00, of which $1,000.00 would be paid as attorney's fees to the defendants' attorney. The parties submitted this agreement to the Court for approval because it conflicted with the injunction in the CFTC Action prohibiting the transfer of Axess Trade's assets held in the United States. The proposed settlement would exceed the Private Plaintiffs' total out-of-pocket losses — that is, the losses sustained from Axess Trade's misappropriation of the Individual Investors' investments.

  The CFTC objected to the proposed settlement because the effect would be to dissipate all of Axess Trade's known assets in the United States and therefore leave the Interglobal victims without compensation. Axess Trade and Abuaf, who have never contested their liability in these actions and are apparently out of business, favor the Private Plaintiffs' settlement because it would provide an expedient end to this litigation. Thus, the Court considers the current application as a joint motion to modify the preliminary injunction in the CFTC Action. Both Axess Trade as a defendant in the CFTC Action and the Private Plaintiffs ask the Court to modify the preliminary injunction thereby allowing the settlement in the Private Action. Ultimately, the question before the Court is how to most equitably distribute a limited fund. The CFTC argues for pro rata distribution, but the Private Plaintiffs maintain that they are exclusively entitled to the funds.

  II. DISCUSSION

  A. The CFTC Has Regulatory Jurisdiction Here

  As an initial matter, the Private Plaintiffs object to the CFTC's interference with the proposed settlement agreement because they claim that the CFTC lacks regulatory jurisdiction over Axess Trade's activities. That is so, the Private Plaintiffs say, because the transactions giving rise to both cases are specifically exempted from the CFTC's purview by the CEA. The Court disagrees.

  The CFTC is an independent regulatory agency with broad powers over futures trading and commodities exchanges. Fed. Trade Comm'n v. Ken Roberts Co., 276 F.3d 583, 588 (D.C. Cir. 2001). In 1997, the Supreme Court held that the CFTC's regulatory jurisdiction did not extend to off-exchange transactions in options to buy or sell foreign currency. See Dunn v. CFTC, 519 U.S. 465, 469-70 (1997). In 2000, Congress passed the Commodity Futures Modernization Act ("2000 Amendment"), giving the CFTC jurisdiction over futures in foreign currency. See CFTC v. Zelener, 373 F.3d 861, 862 (7th Cir. 2004). The 2000 Amendment provides jurisdiction to the CFTC over "an agreement, contract, or transaction in foreign currency . . . that is offered to, or entered into with, a person who is not an eligible contract participant." 7 U.S.C. § 2(c)(2)(b)(ii). The victims here are not "eligible contract participants," and the Private Plaintiffs do not argue that they are. See id. § 1a(12) (defining "eligible contract participant"). It is not contested that the transactions at issue here are agreements, contracts, or transactions in foreign currency within the meaning of the 2000 Amendment. Instead, the Private Plaintiffs argue that the transactions are exempt from CFTC regulatory jurisdiction because they are contracts made on or subject to the rules of a board of trade, exchange or market located outside the United States. The CEA does limit the CFTC's authority to require futures trading to be performed on a board of trade designated or registered by the CFTC if the contracts in question are "made on or subject to the rules of a board of trade, exchange, or market located outside the United States." Id. § 6(a). Both complaints allege, however, that ...


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