Commodity Futures Trading Commission v. Gorman

Background

The Commodity Futures Trading Commission (CFTC) sued John Patrick Gorman III under the Commodity Exchange Act and CFTC regulations. The CFTC alleged that Gorman, while working as a swaps trader for a global investment bank in Tokyo, manipulated the price of Ten-Year Swap Spreads during the pricing of a Japanese bond issuance and related interest-rate swap. According to the complaint, Gorman traded through a United States-based broker to move the price displayed on a trading screen, quoted the lowered price during the pricing call, and helped the Bank obtain a lower price for the Issuer Swap.

The CFTC asserted claims involving fraudulent or deceptive devices, misleading statements or omissions, and price manipulation under 7 U.S.C. §§ 9(1) and 9(3), and 17 C.F.R. §§ 180.1(a)(1), 180.1(a)(2), 180.1(a)(3), and 180.2. Gorman renewed his motion to dismiss Counts One and Two under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a claim.

Court’s analysis

The court reaffirmed its earlier conclusion that the CFTC adequately alleged manipulation under Rules 180.1(a)(1), 180.1(a)(3), and 180.2. It explained that a general fraud-based claim under Rule 180.1 does not always require an intent to create an artificial price. But when the alleged fraudulent device is itself price manipulation, the CFTC must allege the traditional elements: the defendant’s ability to influence prices, an artificial price, the defendant’s causing that price, and a specific intent to create it.

The court rejected Gorman’s argument that a trading strategy cannot be manipulation if it has a legitimate economic purpose, such as hedging. The court reasoned that a generally legitimate strategy becomes unlawful if the specific trades were intended to create a price that did not reflect genuine supply and demand. Accepting the complaint’s allegations as true at the motion-to-dismiss stage, the court found that the alleged timing and pattern of Gorman’s trades sufficiently described an intent to send a false price signal.

The court reached a different conclusion on the CFTC’s Rule 180.1(a)(2) misleading-statements claims. It held that Gorman’s statements were made in Japan to Japanese participants in a Japanese transaction and that the complaint did not show that the statements reached or misled United States entities. The reference to prices displayed on a United States-based screen was not enough to establish a direct and significant connection with United States commerce or a proper domestic application of the Commodity Exchange Act. The court therefore did not reach Gorman’s separate argument concerning the pricing-call script.

The court also rejected the CFTC’s theory that Gorman had a duty to disclose his trading to other market participants. It concluded that open-market manipulation alone does not establish such a duty, and the complaint did not allege the fiduciary or other relationship, or a prior statement on the subject, that could require disclosure.

Disposition

The court ordered that Gorman’s motion to dismiss Counts One and Two be denied, in part, and granted, in part. It denied the motion as to Count One claims under 7 U.S.C. § 9(1) and 17 C.F.R. §§ 180.1(a)(1) and 180.1(a)(3). It granted the motion, without prejudice, as to the Count One claims under 7 U.S.C. § 9(1) and 17 C.F.R. § 180.1(a)(2). It denied the motion to dismiss the CFTC’s claims in Count Two. Separately, the court dismissed the CFTC’s Rule 180.1(a)(2) theory concerning alleged duties owed to other market participants.

The caption identifies the defendant as John Patrick Gorman III, while the concluding order refers to him once as James Patrick Gorman III. The summary follows the captioned name.