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Choi v. Tower Research Capital LLC

United States District Court, S.D. New York

February 8, 2017

MYUN-UK CHOI, JIN-HO JUNG, SUNG-HUN JUNG, SUNG-HEE LEE, and KYUNG SUB LEE, Individually and on Behalf of All Others Similarly Situated, Plaintiffs


          KIMBA M. WOOD, United States District Judge

         Plaintiffs are members of a putative class comprised of parties who transacted in certain Korean futures contracts on a Korean securities exchange (the "KRX") in 2012. Plaintiffs allege that Tower Research Capital LLC ("Tower") and its CEO, Mark Gorton (collectively, "Defendants"), used fictitious trades and other deceptive techniques to manipulate the prices at which these futures contracts traded on the Chicago Mercantile Exchange Globex Platform ("CME Globex"), a trading platform used by the Korean exchange. Plaintiffs assert that this conduct violates the Commodity Exchange Act ("CEA"), 7 U.S.C. §§ 1, et seq., as well as state law.

         Defendants first moved to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). On February 24, 2016, this Court granted Defendants' motion to dismiss, giving Plaintiffs leave to file an amended complaint within thirty days. ("Opinion [Doc. No. 41]). Plaintiffs filed their First Amended Complaint ("FAC") on March 28, 2016. (Doc. No. 43). Defendants have again moved to dismiss Plaintiffs' First Amended Complaint. (Doc. No. 48). For the reasons set forth below, the Court GRANTS Defendants' Motion. Plaintiffs' First Amended Complaint is dismissed with prejudice.

         I. BACKGROUND

         Plaintiffs first filed their class action complaint on December 16, 2014, asserting violations of the CEA §§ 6(c), 6(d), 9(a), and 22(a), 7 U.S.C. §§ 9, 12b, 13(a), and 25(a), as well as state law unjust enrichment claims. The following facts are taken from Plaintiffs Amended Complaint and are assumed to be true for the purposes of Defendant's Motion to Dismiss. See Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308, 322 (2007); see also Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir. 1998) ("When considering a motion to dismiss ... for failure to state a cause of action, a court must accept as true all material factual allegations in the complaint.").

         Plaintiffs allege that Defendants "manipulate[d] the price of KOSPI 200 futures contracts traded on the CME Globex for their own profit" by misleading other traders about the prevailing price and number of contracts available. (FAC ¶ 2). The KOSPI 200 is an index for Korean stocks, similar to the Dow Jones Industrial Average or the S&P 500. Id. ¶ 15. KOSPI 200 futures contracts are offered by the KRX, a derivatives securities exchange headquartered in Busan, South Korea. Id. While KOSPI 200 futures contracts are normally traded on the KRX itself, they are also listed and traded on the CME Globex-an electronic trading platform affiliated with the Chicago Mercantile Exchange ("CME")-during the night market when regular KRX systems are closed. Id. The KRX night market runs from 5:00 p.m. to 6:00 a.m. Seoul time (2:00 a.m. to 3:00 p.m. Chicago time). Id. ¶ 18. During the KRX night market, KOSPI 200 orders are matched on the CME Globex, at which point the parties enter into a binding agreement to trade a KOSPI 200 futures contract. Id. About 10 percent of KOSPI 200 futures contracts are traded on the CME Globex during the night market. (Pis. Opp' 3).

         Defendants allegedly manipulated the price of the futures contracts by entering large-volume orders either to buy or sell KOSPI 200 futures contracts without intending for these orders to be matched by other users. Id. ¶ 2, 29. Plaintiffs continue to allege that Defendants created "hundreds and hundreds" of these fictitious buy and sell orders, and, over the course of the year, earned approximately $14.1 million through the use of these "spoofing" tactics. Id. ¶¶ 2, 4.

         In order for the Defendants to be held liable for Plaintiffs' claims, their actions must have been subject to United States law. As noted in this Court's first Opinion and Order, Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), lays out a framework for assessing the extraterritorial applicability of the CEA. Plaintiffs establish CEA jurisdiction in United States courts under Morrison in one of two ways. The alleged illegal transactions must have either (1) taken place on a registered United States exchange, or (2) have been made in the United States. 561 U.S. 247 (2010). The Second Circuit elaborated on Morrison's second prong in Absolute Activist Value Master Fund Ltd. v. Ficeto, in which it found that a transaction is "made" in the United States when plaintiffs "allege facts indicating that irrevocable liability was incurred, or that title was transferred, within the United States." 677 F.3d 60, 62 (2d Cir. 2012); see also Starshinova v. Batratchenko, 931 F.Supp.2d 478, 486 (S.D.N.Y. 2013) (Wood, J) (applying this standard to a claim brought under the CEA). From the outset, the parties have disputed (1) whether the KOSPI 200 futures trades took place on a U.S. exchange or a Korean exchange, and (2) whether the alleged transactions took place in the United States or in South Korea.

         This Court granted Defendants' first motion to dismiss after finding that Plaintiffs could not satisfy either prong of Morrison. Plaintiffs could not prove either that the trades in question took place on an American exchange, or that the alleged transactions occurred within the United States. (Op. at 9). The Court also dismissed Plaintiffs' state law unjust enrichment claims after finding that Plaintiffs failed to show the direct relationship with Defendants necessary to support the claim. Id. at 11.


         Plaintiffs have now amended their complaint and ask the Court to reconsider their claims. Plaintiffs maintain that they have satisfied both prongs of the Morrison test, and that their Amended Complaint sufficiently pleads a state law unjust enrichment claim. The Court disagrees. With regard to their Commodities Exchange Act allegations, Plaintiffs have still failed to allege a sufficient nexus with a U.S. exchange or a U.S. financial transaction to justify a claim under Morrison. Plaintiffs have also not provided additional information that makes it any more plausible that they would succeed on their unjust enrichment claim. The Court finds that Plaintiffs' Amended Complaint once again fails to state a claim upon which relief can be granted. F.R.C.P. 12(b)(6).

         a. Plaintiffs have still failed to prove that the CME Globex is an American exchange under Morrison

         As this Court noted in its first Opinion and Order, the fact that the CME constitutes a legitimate, registered exchange does not in itself render the CME Globex a certified exchange. Nothing in Plaintiffs' Amended Complaint has mitigated this Court's view of the substantive differences between the CME, a certified exchange, and the CME Globex, an electronic trading platform. While the CME continues to possess the hallmarks of a traditional exchange as defined by the Commodity Futures Trading Commission (CFTC), the CME Globex does not. The CME Globex does not possess its own set of rules or a mechanism for enforcing them, nor is it structured in the same way as a traditional board of trade.

         Even so, Plaintiffs allege two separate basis for their claim that the CME Globex constitutes an exchange under Morrison. They first argue that the CME Globex comports with the general definition of "exchange" used by the CFTC and various financial publications. (FAC ¶ 18). They also maintain that the CEA itself defines "exchange" as to encompass the CME Globex. Id. The Court is not persuaded by either of these claims. First, the CFTC maintains a public list of organizations it considers registered exchanges, and does not include CME Globex on that list.[1]Second, according to the CEA, a "registered entity" is a domestic U.S. contract market registered with the CFTC. 7 U.S.C. ยง la(40). As previously noted, the CME Globex is not registered with the CFTC as a domestic contract market. The fact that the CME Globex might, in Plaintiffs' opinion, comport with a dictionary or CFTC website definition of ...

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