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U.S. Commodity Futures Trading Commission v. Byrnes

United States District Court, S.D. New York

September 30, 2014


For Plaintiff: Patryk J. Chudy, Patrick Daly, James G. Wheaton, David W. MacGregor, Division of Enforcement, U.S. Commodity Futures Trading Commission, New York, New York.

For The New York Mercantile Exchange, Inc., Defendant: Albert Hogan III, Patrick Fitzgerald, Jerrold Salzman, Gretchen Wolf, Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, Illinois; Mark Young, Skadden, Arps, Slate, Meagher & Flom LLP, Washington D.C.

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Vernon S. Broderick, United States District Judge.

Defendant The New York Mercantile Exchange, Inc. (" NYMEX" ) moves to dismiss Count II of the Amended Complaint (the " AC" ) filed by Plaintiff U.S. Commodity Futures Trading Commission (" Plaintiff" or the " CFTC" ). The allegations of the AC support a reasonable inference that Defendants William Byrnes and Christopher Curtin (collectively, " the Employees" ) acted within the scope of their employment when they allegedly disclosed material, nonpublic information for personal gain. Accordingly, the CFTC has stated a claim against NYMEX upon which relief can be granted, and, for the reasons that follow, I deny NYMEX's Motion to Dismiss.

I. Background

For the purposes of NYMEX's Motion to Dismiss, (Doc. 41), I accept as true the facts, but not the legal conclusions, set forth in the AC, (Doc. 19).

NYMEX is a commodity futures and options exchange. (AC ¶ 1.) It offers to customers an electronic platform called ClearPort that provides, among other things, clearing services for over-the-counter derivatives transactions.[1] ( Id. ¶ ¶ 1, 19.) All trades entered into using ClearPort are contained in a trade blotter that details the identities of the buyer and seller; the broker, if any, that entered the trade into the system; and the price, volume, and terms of the trade. ( Id. ¶ 21.)

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Most of the information contained in the trade blotter is confidential and is not available to the public. ( Id. ¶ 22.) Access to information about trades cleared through ClearPort is restricted to the parties to the trade, the broker, and the clearing member who clears the trade. ( Id.)

NYMEX employed Byrnes and Curtin to work on the ClearPort Facilitation Desk, where they were responsible for facilitating customer transactions reported for clearing through the ClearPort system. ( Id. ¶ 4.) As NYMEX employees, Byrnes and Curtin were bound by NYMEX's Employee Handbook and Code of Conduct, which identifies trade data of the type to which they had access as material, nonpublic, confidential information. ( Id. ¶ ¶ 25-26; see id. ¶ ¶ 27-28.) Both Employees signed a written acknowledgment stating that they read the Employee Handbook and understood their obligations and responsibilities as outlined therein. ( Id. ¶ 29.) The Employees also signed additional confidentiality agreements as part of their employment. ( Id. ¶ ¶ 30-31.)

Through their work with ClearPort, the Employees had access to nonpublic information about trades and customers in the ClearPort system. ( Id. ¶ ¶ 4, 33, 55.) The CFTC alleges that the Employees misappropriated nonpublic information from NYMEX and disclosed it to Defendant Ron Eibschutz, a commodities broker. ( Id. ¶ ¶ 3, 6, 34, 56.) In return, Eibschutz provided the Employees with meals, drinks, and entertainment on multiple occasions. ( Id. ¶ ¶ 46, 65.) The material, nonpublic information the Employees disclosed included, among other things, the identities of the buyer and seller in various trades, the number of contracts traded, the prices and structure of particular transactions, and the trading strategies of certain market participants. ( Id. ¶ ¶ 35, 57.) Eibschutz was not authorized to receive such information.[2] ( Id. ¶ ¶ 37, 59.)

In July 2009, a market participant complained to NYMEX that confidential information regarding trades cleared through ClearPort had been disclosed to a brokerage firm by a NYMEX employee named " Billy," who worked in a trade support capacity. ( Id. ¶ 47.) The managing director responsible for the ClearPort Facilitation Desk (the " Managing Director" ) investigated the complaint and identified Byrnes as " Billy." ( Id. ¶ ¶ 47-48.) NYMEX never questioned Byrnes about the complaint or took any measures to determine whether Byrnes had actually engaged in misconduct. ( Id. ¶ 48.) Byrnes continued to disclose material, nonpublic information to Eibschutz. ( Id.)

Shortly thereafter, NYMEX informed certain of its employees, including employees working on the ClearPort Facilitation Desk, that all business calls were to be conducted on desk phones--on which calls were recorded--and that staff were prohibited from using their mobile phones while at their desks. ( Id. ¶ 49.) Notwithstanding the mobile phone ban, ClearPort Facilitation Desk employees continued to openly use mobile phones while at their desks. ( Id. ¶ 50.) Indeed, Byrnes was observed regularly using his mobile phone at his desk, in some instances to avoid being recorded while disclosing nonpublic information to Eibschutz. ( See id.)

Despite having identified Byrnes as the subject of the complaint concerning the sharing of confidential information, in July 2010, NYMEX promoted Byrnes to a supervisory

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position on the ClearPort Facilitation Desk. ( Id. ¶ 51.) In this role, Byrnes's duties included training other employees on NYMEX's policies concerning confidential information. ( Id.).

In November 2010, NYMEX received another complaint from a market participant about improper disclosures of nonpublic information. ( Id. ¶ 52.) The Managing Director recognized the similarity between the July 2009 and November 2010 complaints, and in December 2010, NYMEX terminated Byrnes. ( Id. ¶ ¶ 52-53.) Curtin had voluntarily resigned from NYMEX in April 2009. ( Id. ¶ 66.)

The CFTC brings claims against the Employees under § 9(e)(1) of the Commodity Exchange Act (the " CEA" ), 7 U.S.C. § 13(e)(1), and under § 1.59(d) of the Commission Regulations (the " Regulations" ), 17 C.F.R. § 1.59(d). It alleges in Count II of the Amended Complaint that NYMEX is vicariously liable under § 2(a)(1)(B) of the CEA, 7 U.S.C. § 2(a)(1)(B), for its Employees' improper disclosures.[3] ( Id. ¶ ¶ 88-91.)

II. Procedural History

Plaintiff filed its initial Complaint on February 21, 2013. (Doc. 1.) The case was originally assigned to the docket of Judge George B. Daniels. On May 2, 2013, Plaintiff sought leave to amend its Complaint to add Eibschutz as a defendant. (Doc. 15.) All other parties consented to Plaintiff's filing an amended complaint. (Doc. 16 at 2.) Judge Daniels granted the motion to amend on May 8, 2013, (Doc. 18), and Plaintiff filed its AC on that same day, (Doc. 19). Defendant Byrnes filed his answer to the AC on January 29, 2014, (Doc. 38), and Defendant Curtin filed his answer to the AC on January 31, 2014, (Doc. 40). Defendant NYMEX filed its Motion to Dismiss the AC on ...

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