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Cruz v. Fxdirectdealer, LLC

United States Court of Appeals, Second Circuit

June 19, 2013

HUGO CRUZ, on behalf of himself and all others similarly situated, Plaintiff-Appellant,
v.
FXDIRECTDEALER, LLC (FXDD), Defendant-Appellee.

Submitted: October 2, 2012

Appeal from a judgment of the United States District Court for the Southern District of New York (Crotty, J.) dismissing plaintiff's complaint for failure to state a claim. We conclude that the District Court did not err in dismissing plaintiff's claim under the Racketeer Influenced and Corrupt Organizations Act or his claim for breach of the implied covenant of good faith and fair dealing. We also conclude, however, that plaintiff has statutory standing to sue under New York General Business Law §§ 349 and 350, and that he sufficiently alleged that FXDirectDealer breached the parties' contract by failing to use its "best efforts" to timely execute trade orders. AFFIRMED in part and VACATED and REMANDED in part.

Damien H. Prosser, Morgan & Morgan, P.A., Orlando, FL; Paul A. Batista, Paul A. Batista, P.C., New York, NY, for Plaintiff-Appellant.

Jeffrey R. Burke, Micol O. Sordina, Winston & Strawn LLP, New York, NY, for Defendant-Appellee.

Before: NEWMAN, LYNCH, and LOHIER, Circuit Judges.

LOHIER, Circuit Judge

Hugo Cruz appeals from a judgment of the United States District Court for the Southern District of New York (Paul A. Crotty, Judge), dismissing his amended complaint. On appeal, Cruz argues that the amended complaint's allegations that FXDirectDealer, LLC ("FXDD") engaged in dishonest and deceptive practices in managing its online foreign exchange trading platform are sufficient to state a claim for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c), and New York General Business Law §§ 349(h) and 350, and also for breach of contract and of the implied covenant of good faith and fair dealing. For the following reasons, we affirm the District Court's dismissal of Cruz's RICO claim and his claim for breach of the implied covenant of good faith and fair dealing, but we vacate the judgment of the District Court with respect to Cruz's New York General Business Law and breach of contract claims.

BACKGROUND

The amended complaint alleges the following facts, which we assume to be true and construe in the light most favorable to the plaintiff. See Ashcroft v. Iqbal, 556 U.S. 662, 678-80 (2009); Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 708, 715 (2d Cir. 2011).

Headquartered in New York City, FXDD provides online foreign currency exchange ("forex") trading and related services to its customers. The forex market operates outside of a regulated exchange and without a central marketplace. Retail brokers such as FXDD help provide individual investors with access to the market and often operate online. As market makers, they create their own market and set the prices they offer to their customers. In addition to facilitating trading by customers, FXDD buys and sells currency for its own account, and may act as a counterparty in customer transactions.

To open an account with FXDD and trade on its online forex platforms, customers must sign the FXDD Customer Agreement (the "Agreement"). The Agreement warns that, "due to market conditions or other circumstances, FXDD may be unable to execute [a customer's] Order at the Market or specified level and the Customer agrees that FXDD will bear no liability for failure to execute such orders." The Agreement also provides, however, that "all Market Orders and non-Market Orders . . . are accepted by FXDD and undertaken on a 'best-efforts basis, '" and when FXDD is unable to execute an order at the market or specified level, "orders will be executed on a 'best-efforts basis . . . .'" J.A. 67 (italics in original). In addition, the Agreement states, "FXDD makes no warranty expressed or implied; that Bid and Ask Prices shown represent prevailing bid and ask prices in the interbank market."

Several of FXDD's promotional, marketing, and advertising materials have represented FXDD's trading practices without disclosing the actual risks of participating in FXDD's forex market. For example, one 2005 advertisement on FXDD's website stated that FXDD "Does Not Trade Against Their Clients, but Facilitates Trade Via Transparent Real-Time Bid/Offer Pricing, " while a 2007 advertisement represented that "[m]arket orders are filled instantaneously at the rate you request, with no manual dealer intervention or slippage."

Contrary to the representations in these materials and the Agreement, FXDD engages in several undisclosed practices that the amended complaint characterizes as dishonest or deceptive, including: (1) rerouting profitable customer trading activity to a "slow server, " which delays trades and allows FXDD to "hijack" customer profits by buying and selling in the time between a customer's order and trade execution; (2) refusing to execute profitable customer trade orders by generating false error messages; (3) creating false short-term price spikes to trigger a customer's stop order for a given trade; and (4) manipulating prices so that the change in price between the time the price is quoted and a market order is placed generally favors FXDD over its customers. FXDD undertakes these practices both manually and through automated functions.

Cruz, a Virginia resident, is a former FXDD customer who signed the Agreement in 2006 and lost $281, 170.24 during two years of trading on the FXDD platform. Cruz seeks to represent a proposed class of persons in the United States who, from January 1, 2005 to the present, contracted with FXDD to trade on its trading ...


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