Monday, March 23, 2020

Oil traders urge justices to reject Second Circuit’s CEA extraterritoriality decision

By Mark S. Nelson, J.D.

Oil traders who alleged that BP P.L.C. manipulated Brent crude futures and derivatives in violation of the Commodity Exchange Act (CEA) have asked the justices to clarify that the Second Circuit’s conduct and effects test was rejected by the Supreme Court in Morrison. The petition asserts a split between the Second and Ninth Circuits and posits that a decision upholding the Second Circuit’s view could preclude future CFTC and DOJ enforcement actions against international manipulations under the CEA. The Supreme Court recently denied certiorari in a Ninth Circuit case that declined to apply the relevant Second Circuit precedent and the latest petition for certiorari on this issue relies heavily on another Ninth Circuit case that also declined to follow the Second Circuit (Atlantic Trading USA, LLC v. BP P.L.C., March 13, 2020).

Alleged oil price manipulation. The plaintiff futures and derivatives traders alleged that BP manipulated the underlying Brent crude markets in violation of the CEA and that the effects of those manipulations were reported to multiple entities that inform the benchmark index for Brent crude on the Intercontinental Exchange Futures Europe and the New York Mercantile Exchange.

The Second Circuit applied a two-step test to determine whether the plaintiffs’ claims were impermissibly extraterritorial under the CEA: (1) does the relevant statue clearly allow extraterritorial application? and (2) was the domestic activity alleged the "focus of Congressional concern?" The court augmented the second part of this test by explaining that its Parkcentral opinion had held that a domestic transaction was necessary but not sufficient because a plaintiff also must allege a substantive statutory violation.

Based on this analytical framework, the court held that the traders’ suit was impermissibly extraterritorial. First, the traders had waived any argument regarding the one CEA provision added by the Dodd-Frank Act that does make a clear expression about extraterritoriality. Second, the traders’ allegations under CEA Section 22 were insufficient because the "ripple effect" theory urged was too attenuated to show domestic conduct in violation of the CEA. Moreover, the Second Circuit found allegations under CEA Sections 6(c)(1) and 9(a)(2) likewise involved conduct that occurred overseas.

The Second Circuit, in affirming dismissal of the case, summed up its opinion thus: "We do not lightly dismiss Plaintiffs’ troubling allegations against Defendants, which include serious claims premised on manipulation, fraud, and deceit. Nonetheless, ‘the sole function of the courts is to enforce [the CEA] according to its terms,’ not to reinvent it" (citation omitted).

Petition says Second Circuit view wrong. The petition filed on behalf of the oil traders noted the split between the Second and Ninth Circuits over Parkcentral. According to the oil traders, the Supreme Court’s Morrison opinion, which interpreted the extraterritorial application of Exchange Act Section 10(b), rejected the conduct and effects test, which the traders argue the Second Circuit tried to resurrect via Parkcentral.

Specifically, the petition explained that Morrison found that the focus of Exchange Act Section 10(b) was to protect U.S. exchanges and transactions. As a result, the location of the manipulated transaction was key, not the manipulation itself. The petition further posited that much of the Second Circuit’s analysis was correct. For example, the Second Circuit referred to Absolute Activist’s test of where a transaction occurs (irrevocable liability or transfer of title) and to Loginovskaya’s conclusion that the focus of the CEA, like Exchange Act Section 10(b), is transactional and, thus, Morrison applies to the CEA.

The petition, however, said the Second Circuit departs from other courts when it applies its Parkcentral precedent, which looks to whether a transaction is predominantly foreign. The petition observed that the CFTC had argued as amicus in the Second Circuit that the oil traders’ claims were within the territorial reach of the CEA. The petition explained that the CFTC had argued that it would be odd if the manipulation of a U.S. trading facility was beyond the CEA’s reach merely because the manipulation occurred offshore. The petition also noted that the government in the Ninth‘s Toshiba case had urged denial of certiorari in that case because the Ninth Circuit had correctly applied Morrison.

The case is No. 19-1141.