IN RE MERRILL, BOFA, AND MORGAN STANLEY SPOOFING LITIGATION

Background

The plaintiffs were companies, partnerships, and individuals who traded precious-metals futures contracts and options on the New York Mercantile Exchange and the Commodity Exchange. They sued Merrill Lynch Commodities, Inc., Bank of America Corporation, Morgan Stanley & Co. LLC, two individual traders, and unidentified defendants.

The amended complaint alleged that the defendants manipulated prices of gold, silver, platinum, and palladium futures from January 1, 2007, through December 31, 2014. The alleged method was “spoofing”: placing orders that were intended to be canceled before execution in order to send false signals about supply or demand. The plaintiffs asserted claims under the Commodity Exchange Act and a claim for unjust enrichment under New York law.

The defendants moved to dismiss under Federal Rules of Civil Procedure 9(b) and 12(b)(6). The court considered whether the Commodity Exchange Act claims were timely, whether the plaintiffs adequately alleged actual damages, and whether the unjust-enrichment claim was adequately pleaded.

Statute of Limitations

The Commodity Exchange Act generally requires a claim to be filed within two years after the cause of action arises. The court explained that the period begins when a plaintiff has actual knowledge of the injury or constructive knowledge—also called inquiry notice—meaning circumstances would lead a reasonable investor to investigate the possibility of harm.

The court held that the plaintiffs had at least inquiry notice by December 2016. Earlier lawsuits, regulatory investigations, criminal proceedings, and news coverage had publicly described alleged manipulation in the same precious-metals markets and overlapping time periods. Some earlier proceedings also identified Bank of America and Merrill Lynch or discussed spoofing.

The court rejected the plaintiffs’ argument that the limitations period did not begin until they learned the identity of each specific defendant or learned the details of the alleged spoofing. The relevant knowledge was knowledge of the Commodity Exchange Act injury, not knowledge of every defendant or every element of the claim. The plaintiffs also did not allege that they investigated the publicly reported conduct during the limitations period. The court therefore imputed knowledge to them when their duty to investigate arose.

The court also rejected the plaintiffs’ fraudulent-concealment argument. That doctrine can extend the filing period when a defendant concealed the existence of the claim, the plaintiff remained unaware during the limitations period, and the plaintiff acted with due diligence. The court concluded that the plaintiffs knew of the alleged harm but did not know the identity of all alleged wrongdoers. It also found that the plaintiffs had not alleged specific investigative efforts showing due diligence. General corporate statements about compliance were insufficient to establish fraudulent concealment.

Actual Damages

The court held that a private Commodity Exchange Act claim requires a plausible allegation of actual damages resulting from the violation. A plaintiff must allege facts supporting the inference that the defendant’s conduct affected the plaintiff’s position negatively—for example, by causing the plaintiff to buy at an artificially high price or sell at an artificially low price.

The plaintiffs identified dates on which defendants allegedly spoofed the markets and alleged that at least one plaintiff traded on 14 of those dates. The court found those allegations insufficient because the plaintiffs did not allege that they traded after, or close enough in time to, the spoofing. The court also noted that no plaintiff allegedly traded on the other 16 identified spoofing dates. Trading on the same day, without more, did not plausibly show that the plaintiffs were harmed rather than helped by the alleged conduct.

The court likewise rejected the argument that the defendants’ alleged thousands of spoof trades supported an inference of injury. Given the length of the class period, the number of contracts and markets involved, and the potentially brief effects of individual spoof orders, the court found that inferring harm to these plaintiffs would be speculation.

Unjust Enrichment

The court granted the motion to dismiss the unjust-enrichment claim. Although New York law does not always require a direct transaction between the parties, the court read the cited precedent as requiring the plaintiffs to allege facts making it statistically likely that they traded directly with the defendants. The plaintiffs conceded that they had not alleged direct transactions and did not make that statistical showing.

Issues Not Reached and Disposition

The defendants argued that the Commodity Exchange Act provides no private right of action for spoofing and that the complaint did not state a market-manipulation claim. The court did not reach those issues because it dismissed the claims as time-barred and because the plaintiffs failed to plead actual damages.

The court granted the defendants’ motion to dismiss. Because the statute of limitations had run and the plaintiffs had not shown a reason to extend it, the court dismissed the amended complaint with prejudice and directed the clerk to close the case.