Second Circuit Limits CEA Private Actions Based On Morrison
In Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) the Supreme Court delimited the reach of Exchange Act Section 10(b), concluding that the Section has no extraterritorial reach. Rather, the Section is confined to the United States – securities transactions that are on an exchange in this country or which occur here. The Court reached that conclusion by applying a presumption against extraterritorial reach and by considering the focus of the statute which is the purchase and sale of a security.
Now the Second Circuit has applied the teachings of Morrison to the Commodities Exchange Act private remedies. Ludmila Loginovskaya v. Oleg Batratchenko, Docket No. 13-1624-cv (2nd Cir. Decided September 4, 2014). Plaintiff is a Russian citizen resident in that country. The defendants include Oleg Batratchenko, a U.S. citizen resident in Moscow, and various Thor Group entities, including Thor United which is a New York corporation. Several of the group entities are registered participants in the commodities markets as commodity pool operators or commodity trading advisors.
In early 2006 Plaintiff was solicited by Mr. Batratchenko to invest in the Thor programs. Russian language materials were furnished to plaintiff in connection with the solicitation. Ms. Loginovskaya agreed, transferring $720,000 to Thor’s bank in New York. Under the contracts with Thor United which were executed in Russia, Ms. Loginovskaya invested directly in that company. Thor in turn placed the funds in the Thor program. In part the money was put in U.S. real estate investments which suffered significan losses.
Ms. Loginovskaya brought suit under CEA Sections 4o and 22. The district court dismissed the claim under Morrison. The Second Circuit affirmed.
Section 4o is an antifraud provisions which is similar to Exchange Act Section 10(b). Section 22 provides for a private right of action where the claim results from: 1) receiving trading advise for a fee; 2) making a contract of sale or deposit in connection with any order to make such a contract; 3) the purchase, sale, or order for a commodity interest; and market manipulation in connection with a swap or contract of sale.
In rejecting the Second Circuit’s “effects or conducts” test regarding extraterritorial reach, the Morrison Court began with the presumption against extraterritoriality. Under that presumption, a statute is presumed not to have such reach absent clear Congressional intent to the contrary. The CEA as a whole is silent as to extraterritorial reach. Likewise Sections 4o and 22 do not evidence Congressional intent that would contradict the presumption.
Following the approach of the Morrison Court, the Second Circuit then turned to what it called the “focus of congressional concern.” In making this inquiry the Court considered Section 22 since it grants a private right of action rather than Section 4o, a general antifraud provision. Section 22 essentially limits clams to those of a plaintiff who actually traded in the commodity market. Accordingly, suits under the Section must be based on transactions “occurring in the territory of the United States.” Therefore under Morrison a “private right of action exists only when a plaintiff shows that one of the four transactions listed in Section 22 occurred within the United States.” This draws a distinction between private actions and government enforcement cases which are not limited by Section 22.
Here plaintiff’s claim arises, according to the complaint, from the purchase, sale or placing of an order for the purchase or sale of an interest or participation in a commodity pool. To bring this claim within the limits of Section 22, plaintiff is required to “demonstrate that the transfer of title or the point of irrevocable liability for such an interest occurred in the United States.” In view of this requirement the claim fails because the agreement was entered into in Russia, not the United States. In reaching this conclusion the Court expressly declined to reach the question of how the presumption would impact Section 4o.
Judge Lohier dissented noting: “Ludmila Loginavoskaya in a sense never had a change. Enticed by the array of investment opportunities in the vaunted commodities markets of the United States, she was the victim of an old-fashioned fraud that a more perceptive investor, or a United States regulator, might have identified from a mile away.” The main perpetrator is a U.S. citizen registered as a principal of commodity pool operators and commodity trading advisors under the CES. He is a member of the National Futures Association. Most of the Thor corporate defendants are based in the US and several are registered under the CEA. One of the defendants is a registered commodity pool.
According to Judge Lohier, “my colleagues in the majority will not dispute that the defendants’ allegedly fraudulent acts were sufficiently domestic to fall within the scope of CEA Section 4o . . .” yet plaintiff has no cause of action. This results largely from applying the presumption to Section 22 which does not regulate conduct or impose liability but only defines the category of persons that can seek a remedy. The central question here should have been whether Section 4o reaches the conduct alleged in the complaint. Applying Morrison to that Section is quite different. It prohibits fraud without any requirement that it be in connection with any particular transaction or event. Under this Section plaintiff would have had a cause of action since at least part of the conduct occurred in this country. Such a result would be consistent with the purpose of the CEA.