Friday, February 10, 2017

Korean futures trades were outside U.S. jurisdiction per Morrison

By Mark S. Nelson, J.D.

Korean futures contracts matched on a platform in the U.S. but made and settled on a Korean exchange were not subject to class action manipulation claims brought in the U.S. under the Commodity Exchange Act. The court applied the Supreme Court’s Morrison opinion and Second Circuit precedent in dismissing the plaintiffs’ first amended complaint with prejudice. The court also declined to entertain related control person liability claims, never reached other CEA merits claims, and dismissed a state law unjust enrichment claim (Choi v. Tower Research Capital LLC, February 8, 2017, Wood, K.).

Overnight trading on platform. According to the plaintiffs, Tower Research Capital LLC, along with the firm’s CEO, Mark Gorton, allegedly engaged in manipulative behaviors exemplified by the making of hundreds of trades the firm never intended to be matched to orders placed by other traders. Specifically, the trades involved the Korean KOSPI 200 futures contract, which tracks Korean stocks in a manner similar to well-known U.S. stock indices. Plaintiffs sought to trade the Korean-listed contract during “night market” hours when the Korean securities exchange (KRX) is closed and listed contracts trade instead on the CME Group’s Chicago Mercantile Exchange Globex Platform. CME is registered with the CFTC as a designated contract market, but CME Globex is not.

Applying Morrison. The court recited the Supreme Court’s Morrison presumption against extraterritorial application of U.S. laws absent Congressional intent to do so and then applied the now familiar two-pronged test: U.S. law applies if an allegedly illegal transaction (i) took place on a U.S.-registered exchange, or (ii) the transaction was made in the U.S.

Morrison’s first prong was not satisfied because CME Globex is a platform and not a registered exchange. The court likewise rejected the plaintiffs’ broader definitions of “exchange,” including a “website definition” from the CFTC’s online site, in favor of a more rigorous statutory definition.

Moreover, the plaintiffs fared no better regarding their argument that CME Globex falls under the CEA because it must abide by CME’s rules. This claim was grounded in the CEA’s anti-manipulation language. But the court said the complaint fell short of pleading a violation where a matching engine located in the U.S. resulted in trades made on, and subject to, the rules of a foreign exchange. Nor did the plaintiffs’ recitation of a series of CFTC no-action letters, including one on domestic KOSPI 200 transactions, support extraterritorial application of the CEA in this case.

The plaintiffs also failed to satisfy Morrison’s second prong. Judge Wood, who decided this latest case involving the CEA and Morrison, previously had ruled that Morrison’s second prong applied to the CEA (See, Starshinova (“Although no case law directly addresses whether the Morrison reasoning applies to the CEA, the Court finds that such application is warranted.”)). Second Circuit precedent, which binds judges in the U.S. District Court for the Southern District of New York, holds that a transaction is made in the U.S. if the transaction resulted in irrevocable liability or transfer of title within the U.S.

The plaintiffs had argued that the U.S.-based match resulted in a binding contract. But the court noted that KRX’s rules can be read to deny irrevocable liability to CME Globex matches because settlement of trades made on KRX would not occur until a day later when KRX re-opens for trading.

The case is No. 14-cv-9912.