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Commodity Futures Trading Commission v. TFS-ICAP, LLC

United States District Court, S.D. New York

January 7, 2020

COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
TFS-ICAP, LLC, et al., Defendants.

          DECISION AND ORDER

          VICTOR MARRERO, UNITED STATES DISTRICT JUDGE

         Plaintiff Commodity Futures Trading Commission ("CFTC" or the "Commission") brings this action against defendants TFS-ICAP, LLC, TFS-ICAP Ltd. (together with TFS-ICAP, LLC, "TFS-ICAP" or the "Corporate Defendants"), Ian Dibb ("Dibb"), and Jeremy Woolfenden ("Woolfenden," and together with Dibb, the "Individual Defendants") (collectively, "Defendants"). The complaint alleges violations of the Commodity Exchange Act (the "Act") and associated Commission regulations. (See "Complaint," Dkt. No. 5, ¶¶ 151-85.)

         Before the Court are the pre-motion letters submitted by Dibb seeking leave to file a motion to dismiss Count III of the Complaint. The Court construes such letters as a motion by Dibb to dismiss Count III pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Rule 12(b)(6)") (the "Dibb Motion").[1] For the reasons set forth below, the Dibb Motion is DENIED.

         I. BACKGROUND[2]

         Consistent with the Court's Individual Practices, on February 11, 2019, counsel for Dibb wrote to the CFTC regarding an anticipated motion to dismiss the Complaint.[3]("February 11 Letter," Dkt. No. 37.) Dibb argues, first, that the Complaint fails to allege control person or supervisory liability of Dibb. He writes that the Complaint does not allege that the financial practice known as "flying prices" clearly violates the Commodity Exchange Act ("CEA" or the "Act"), and relatedly, that he had no knowledge of the practice of "printing trades," in part because the CEA does not cover his pre-2011 activities in London. (Id. at 1-2.) Second, Dibb argues that the Complaint fails to allege materiality because it does not indicate whether the flown prices and printed trades were important to investor decisions. (Id. at 3.) Third, Dibb argues that Count III of the Complaint fails to allege anti-competitive conduct, as required by Section 4c(a)(1)-(2) of the Act, 7 U.S.C. § 6c(a)(1)-(2) ("Section 4c(a)(1)-(2)" or "Section 4c"). Specifically, Dibb argues that a "fictitious sale," as prohibited by Section 4c (a) (1)- (2), requires the CFTC to allege "collusive, anti-competitive, or risk-negating behavior, or allegations of such intent." (February 11 Letter at 3.)

         By letter dated February 22, 2019, the CFTC responded to the February 11 Letter. (See "February 22 Letter," Dkt. No. 39.) The CFTC argues, first, that the Complaint sufficiently alleges that flying prices violates the Act. (Id. at 1.) Second, the CFTC argues that the Complaint sufficiently alleges that flying prices and printing trades constitute material misrepresentations. (Id. at 1-2.) Third, the CFTC contends that the Complaint sufficiently alleges Dibb's constructive knowledge of the violations or, at the very least, that Dibb was "willfully blind" to such conduct, thereby meeting the test for control-person liability, and alternatively the CFTC asserts that the Complaint alleges Dibb lacked good faith. (Id. at 2-3.) Fourth, the CFTC points to allegations in the Complaint that the flown prices and printed trades were material. (Id. at 3.) Finally, the CFTC states that the allegations in the Complaint fall squarely within the scope of Section 4c(a)(1)-(2) because that provision was designed to prohibit fictitious sales and any transaction that causes the recording of a non-bona-fide price and because the Complaint alleges that the prices reported by TFS-ICAP brokers to the market did not reflect the normal competitive forces of supply and demand. (Id.)

         By letter dated March 18, 2019, Dibb responded to the February 22 Letter. (See "March 18 Letter," Dkt. No. 42.) Dibb reiterated his belief that a motion to dismiss was warranted. The Court held a telephone conference with counsel for the Corporate Defendants and counsel for Dibb on April 4, 2019 (the "April 4 Telephone Conference"). (See Dkt. Minute Entry dated 4/4/2019.) During the April 4 Telephone Conference, the Court indicated to the parties its preliminary view that the Complaint alleges sufficient facts to survive a Rule 12(b)(6) motion to dismiss. However, the Court also indicated that it would entertain further argument regarding Count III of the Complaint, which alleges that TFS-ICAP entered into and confirmed fictitious sales and transactions used to cause the reporting of untrue and non-bona fide prices. The Court therefore afforded Dibb the opportunity to submit an additional three-page letter regarding his arguments for dismissal of Count III of the Complaint, and the Court also afforded the CFTC an opportunity to respond to Dibb's supplemental letter.[4]

         By letter dated November 27, 2019, Dibb set forth his arguments for why Count III of the Complaint should be dismissed. (See "November 27 Letter," Dkt. No. 55.) Dibb argues that the allegations in Count III are insufficient for three reasons. First, the Complaint fails to allege any "pre-arrangement or private, collusive, or anti-competitive activity on the part of TFS's brokers" because it alleges that TFS was acting "on its own" and "not in coordination with any competitor." (Id. at 2.) Second, Dibb argues that the flown prices and printed trades sparked market interest and fueled market activity, resulting in more competition, instead of "dampen[ing] the forces of supply and demand." (Id. at 3.) Third, Dibb contends that the Complaint fails to allege that TFS's brokers had the requisite intent to negate risk or price competition and avoid a bona fide market position. (Id.)

         By letter dated December 6, 2019, the CFTC responded to the November 27 Letter. (See "December 6 Letter," Dkt. No. 56.) The CFTC argues that Dibb's arguments depend on an artificially constrained interpretation of both the statutory text and the cases interpreting it. According to the CFTC, Section 4c of the CEA squarely covers the allegations in Count III of the Complaint. Section 4c(a)(1)-(2) makes it unlawful to enter into, offer to enter into, or confirm the execution of certain transactions, including a "fictitious sale" and any transaction "used to cause any price to be reported, registered, or recorded that is not a true and bona fide price." 7 U.S.C. § 6c(a). The CFTC disputes that the statute requires collusion between two parties as in, for example, a prearranged trade. (Id. at 1-2.) Furthermore, the CFTC argues that the case law does not clearly require it to show intent, but even if it did, that requirement is met here, given that the TFS brokers take no proprietary position and thus any flying prices and printing trades were, by definition, intended to avoid a market position. (Id. at 2-3.)

         Given this detailed and extensive letter exchange, the Court now construes the February 11 Letter, March 18 Letter, and November 27 Letter from Dibb as a motion to dismiss Count Ill. of the Complaint pursuant to Rule 12(b) (6) for failure to state a claim.

         II. LEGAL STANDARD

         "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, toAstate a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). This standard is met "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. A complaint should be dismissed if the plaintiff has not offered factual allegations sufficient to render the claims facially-plausible. See id. However, a court should not dismiss a complaint for failure to state a claim if the factual allegations sufficiently "raise a right to relief above the speculative level." Twombly, 550 U.S. at 555.

         In resolving a Rule 12(b) (6) motion, the Court's task is "to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." In re Initial Pub. Offering Sec. Litig., 383 F.Supp.2d 566, 573-74 (S.D.N.Y. 2005) (internal quotation marks omitted), aff'd sub nom. Tenney v. Credit Suisse First Boston Corp., No. 05 Civ. 3430, 2006 WL 1423785 (2d Cir. May 19, 2006); accord In re MF Glob. Holdings Ltd. Sec. Litig., 982 F.Supp.2d 277, 302 (S.D.N.Y. 2013). In this context, the Court must draw reasonable inferences in favor of the non-moving party. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). However, the requirement that a court accept the factual allegations in the claim as true does not extend to legal conclusions. See Iqbal, 556 U.S. at 678.

         III. ...


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