Choi v. Tower Research Capital LLC

Background

Plaintiffs Myun-Uk Choi, Jin-Ho Jung, Sung-Hun Jung, Sung-Hee Lee, and Kyung Sub Lee sued Tower Research Capital LLC and Mark Gorton individually and on behalf of a proposed class. The proposed class consisted of people who transacted in certain Korea Exchange KOSPI 200 futures contracts during overnight trading sessions in 2012.

Plaintiffs alleged that Tower traders used fictitious trades and other deceptive techniques, including large orders that were quickly canceled or arranged so that Tower traders became the counterparties. Plaintiffs alleged that this created a false impression of supply and demand, moved prices up or down, and allowed Tower traders to profit. They asserted claims under the Commodity Exchange Act (CEA), a federal commodities-trading statute, and New York’s prohibition on unjust enrichment.

The overnight trades were submitted on the Korea Exchange and matched through Globex, an electronic trading platform associated with the Chicago Mercantile Exchange (CME). The parties agreed that the KOSPI 200 futures were not traded on a registered entity during the overnight sessions. The disputed question was whether the contracts were nevertheless traded “subject to the rules” of the CME, which is a registered entity under the CEA.

Procedural History

Defendants moved for judgment on the pleadings or, alternatively, summary judgment on the CEA claims. Because the magistrate judge considered evidence outside the pleadings, the court treated the motion as one for summary judgment. Magistrate Judge Gabriel Gorenstein recommended granting the motion. Plaintiffs objected to that recommendation.

The court reviewed the portions of the recommendation to which Plaintiffs objected without deference and reviewed the remaining portions for clear error. It adopted the recommendation and addressed Plaintiffs’ objections.

Legal Standard

Summary judgment is appropriate when the evidence shows no genuine dispute about a fact that could affect the result and the moving party is entitled to judgment under the law. When the claimant would have to prove an essential element at trial, the defendant is entitled to summary judgment if the claimant lacks enough evidence to create a genuine factual dispute about that element.

The CEA’s anti-manipulation provisions apply to certain commodity transactions occurring “on or subject to the rules of any registered entity.” The court treated the “subject to” requirement as the controlling issue for the CEA claims.

Court’s Analysis

CME Rulebook

The court rejected Plaintiffs’ argument that the CME Rulebook showed that the overnight KOSPI 200 futures trades were subject to CME rules. The Rulebook governed “Exchange futures,” defined as futures of the Chicago Mercantile Exchange, and did not mention KOSPI 200 futures or the Korea Exchange. The court concluded that the Rulebook showed CME regulation of CME contracts, not Korea Exchange contracts traded using Globex.

The court also declined to consider some specific rules that Plaintiffs raised for the first time in their objections. For the other rules, the court found no clear error in the magistrate judge’s conclusion that there was no evidence that the CME or CME Group intended the CME Rulebook to govern KOSPI 200 futures trading.

Globex Reference Guide

The court found that the Globex Reference Guide did not establish that the trades were subject to CME rules. The guide was produced by CME Group, which the court said was not a registered entity under the CEA. The guide referred users to the applicable rulebooks of the CME, the Chicago Board of Trade, or the New York Mercantile Exchange for actual rules and interpretations. The court understood that reference as directing users to the rulebook of the applicable exchange, not as making every Globex transaction subject to one of those exchanges’ rules.

Sniegowski Declaration

Plaintiffs argued that a declaration by Robert Sniegowski, CME Group’s Executive Director for Rules and Outreach in its Market Regulation Department, did not clearly exclude CME regulation. The declaration stated that CME provided the technology and support for overnight trading, while the Korea Exchange Rulebook governed the trading and the Korea Exchange performed the regulatory functions. It also stated that CME had never provided those regulatory functions for Korea Exchange products traded on Globex.

The court declined to treat the declaration’s lack of “perfect clarity” as an admission that CME rules applied. It understood the declaration to mean that the Korea Exchange regulated the KOSPI 200 futures to the exclusion of CME regulation.

CFTC Materials and CME Group Email

The court found that a 1989 memorandum from the Commodity Futures Trading Commission did not support Plaintiffs’ position. The memorandum approved Globex in a context concerning CME contracts and expressly stated that the rules before the Commission related solely to CME contracts.

The court likewise found that a 2008 CFTC no-action letter did not resolve whether Globex trading was subject to the rules of a registered entity. The letter allowed U.S. futures commission merchants to accept orders for KOSPI 200 futures from U.S. customers under specified regulatory conditions, but it did not mention Globex or address the issue presented in this case.

The court also found irrelevant a 2012 email from a CME Group official. The email concerned CME Group’s role as a vendor of Korea Exchange market data and its monitoring for licensing compliance, not CME’s regulation of futures trading.

Earlier Second Circuit Decision

The court held that its decision did not overrule the Second Circuit’s earlier decision in this case. The Second Circuit had addressed whether applying the CEA to Defendants’ conduct would be an impermissibly foreign application of the statute. It had not decided whether the KOSPI 200 futures transactions were “on or subject to” the rules of a registered entity, which was the issue before Judge Wood.

Policy Arguments and Expert Report

The court rejected Plaintiffs’ policy argument that excluding these trades from the CEA would weaken investor protection. The court stated that Congress limited the CEA to contracts traded on or subject to the rules of a registered entity and that policy concerns could not replace the statutory requirement.

The court also upheld the decision not to consider Professor Michael Greenberger’s expert report. The court agreed that the report either lacked personal knowledge of the relevant facts or offered legal opinions, and it stated that such legal conclusions were not proper expert testimony. The court further found that the report added little because it largely repeated Plaintiffs’ arguments and conceded that exchanges outside the CME Group were not specifically described as governed by the CME Rulebook.

Disposition

The court adopted the Report and Recommendation and granted Defendants’ motion for summary judgment with respect to Plaintiffs’ CEA claims. The Clerk of Court was directed to terminate the pending motion. The opinion’s conclusion does not state a disposition of Plaintiffs’ New York unjust-enrichment claim.