Troyer v. Heneghan et al
OPINION AND ORDER: GRANTING 34 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM by Defendant National Futures Association. Troyer is afforded up to and including 8/2/2017, to file a second amended complaint against the NFA in an attempt to state a claim upon which relief can be granted. Signed by Magistrate Judge Susan L Collins on 7/12/2017. (lhc)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
FORT WAYNE DIVISION
NATIONAL FUTURES ASSOCIATION,
OPINION AND ORDER
Before the Court is a motion to dismiss and a supporting memorandum filed by
Defendant National Futures Association (“the NFA”) seeking to dismiss Plaintiff Dennis
Troyer’s amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). (DE 34; DE
37). Troyer has filed a response in opposition (DE 38), and the NFA has filed a reply brief (DE
40). This motion is now ripe for ruling.1
For the reasons set forth below, the NFA’s motion to dismiss will be GRANTED.
I. LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(6) provides for the dismissal of a complaint, or any
portion of a complaint, for failure to state a claim upon which relief can be granted. “To survive
a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state
a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007)); see also Ray v. City of
Chicago, 629 F.3d 660, 662-63 (7th Cir. 2011) (“While the federal pleading standard is quite
Federal question jurisdiction exists under 28 U.S.C. § 1331. Jurisdiction of the undersigned
Magistrate Judge is based on 28 U.S.C. § 636(c), all parties consenting. (DE 41).
forgiving, . . . the complaint must contain sufficient factual matter, accepted as true, to state a
claim to relief that is plausible on its face.” (citation and internal quotation marks omitted)). A
plaintiff is required to include allegations in the complaint that “plausibly suggest that the
plaintiff has a right to relief, raising that possibility above a ‘speculative level’; if they do not,
the plaintiff pleads [himself] out of court.” EEOC v. Concentra Health Servs., Inc., 496 F.3d
773, 776 (7th Cir. 2007) (quoting Bell Atlantic Corp., 550 U.S. at 554). Thus, “a plaintiff must
do better than putting a few words on paper that, in the hands of an imaginative reader, might
suggest that something has happened to [him] that might be redressed by the law.” Swanson v.
Citibank, N.A., 614 F.3d 400, 403 (7th Cir. 2010) (citation omitted).
II. FACTUAL AND PROCEDURAL BACKGROUND
In this suit, Troyer seeks to hold the NFA, a self-regulatory organization (“SRO”) for the
futures industry, liable for an allegedly fraudulent scheme perpetuated by Thomas Heneghan, a
broker and an associate member of the NFA. Troyer alleges that from December 2009 to April
2015, all while Heneghan was an associate member of the NFA, Heneghan solicited and
accepted funds from Troyer for the purpose of purchasing commodities futures. (DE 30 ¶¶ 1017, 26-31, 40-51). Troyer alleges that he has never received any of the more than $500,000 in
assets purportedly held in his account with Heneghan; nor has he been able to recover any of the
$206,126 that he invested through Heneghan. (DE 30 ¶¶ 10-17, 26-31, 40-51, 63). More
particularly, Troyer alleges the following facts in his amended complaint:
In 2009, Heneghan was registered as an associated person (“AP”) of Statewide FX Inc.
(“Statewide”), an introducing broker registered with the NFA that functioned as an introducing
broker for Vision Financial Markets LLC (“Vision”). (DE 30 ¶¶ 6, 7). At Heneghan’s request,
Troyer opened a commodities trading account with Vision, and in December 2009, Troyer
purchased futures contracts by issuing a check to Vision. (DE 30 ¶¶ 7, 8). In March 2010,
Heneghan’s registration with Statewide was terminated. (DE 30 ¶ 9). Heneghan, however,
instructed Troyer to work with another AP of Statewide, Oliver Livolsi, and to continue
purchasing commodities futures contracts through Statewide in his account at Vision. (DE 30 ¶
10). Troyer did so, issuing seven more checks to Vision for the purpose of purchasing
commodities futures contracts. (DE 30 ¶¶ 11-17). Throughout this time, Troyer received
monthly statements from Vision showing that he held futures contracts in currencies and
commodities; additionally, Heneghan repeatedly assured Troyer that the value of his account
was increasing. (DE 30 ¶ 18).
In March 2010, Heneghan applied for registration with Atlantis Trading Corp.
(“Atlantis”), an introducing broker registered with the NFA. (DE 30 ¶ 23). The NFA approved
Heneghan’s registration as an AP and principal. (DE 30 ¶ 23).
Later that same month, Troyer, at Heneghan’s request, opened an account with Peregrine
Financial Group Inc., d/b/a PFG Best (“PFG”), an introducing broker registered with the NFA.
(DE 30 ¶ 24). Although Heneghan had been registered with PFG from January 1999 to July
2001, he was not registered with PFG during the time period relevant to this suit. (DE 30 ¶ 25).
From March to October 2010, Troyer issued six checks to PFG for the purpose of purchasing
futures contracts, mailing the checks to Heneghan’s attention at PFG’s address. (DE 30 ¶¶ 2631). Throughout this time, Troyer received monthly statements from PFG showing that he held
futures contracts in currencies and commodities; additionally, Heneghan assured Troyer that the
value of his account was increasing. (DE 30 ¶ 32).
In December 2010, unbeknownst to Troyer, the NFA issued a complaint charging
Statewide and several of its principals with making deceptive and misleading sales solicitations,
alleging that the NFA’s audit found that approximately 95% of Statewide’s customers lost
money trading with Statewide. (DE 30 ¶ 19). In July 2011, unbeknownst to Troyer, the NFA
terminated Statewide’s registration and ordered it to never reapply for NFA membership or to act
as a principal of an NFA member. (DE 30 ¶ 20).
In May 2012, Heneghan’s registrations with Atlantis were terminated. (DE 30 ¶ 33).
In July 2012, unbeknownst to Troyer, the Commodities Futures Trading Commission
(“the CFTC”) filed a complaint against PFG and its owner, Russell Wasendorf, alleging fraud,
misappropriation of customer funds, violation of customer fund segregation laws, and making
false statements. (DE 30 ¶ 34). The following month, unbeknownst to Troyer, Wasendorf was
indicted on 31 counts of lying to regulators. (DE 30 ¶ 35).
In October 2012, Heneghan applied for registration as an AP with Portfolio Managers,
Inc. (“PMI”), an introducing broker registered with the NFA. (DE 30 ¶¶ 5, 37). NFA approved
Heneghan’s registration. (DE 30 ¶ 37). By this time, Heneghan had been registered with 13
different NFA-member firms over a 27-year period. (DE 30 ¶ 38). With the exception of PFG,
none of the firms with which Heneghan had previously been registered were still in business, and
many of those firms had been accused of serious violations. (DE 30 ¶ 39).
In February 2013, unbeknownst to Troyer, the CFTC issued an order permanently barring
PFG and Wasendorf from the industry. (DE 30 ¶ 36).
At some point in early 2013, Heneghan encouraged Troyer to participate in a new
commodities trading program. (DE 30 ¶ 40). Heneghan told Troyer that the program was set up
under Heneghan’s trading account in order to avoid account maintenance fees and additional
commissions. (DE 30 ¶ 40). Heneghan then instructed Troyer to issue checks directly to
Heneghan so that he could deposit them into the program. (DE 30 ¶ 40). Heneghan assured
Troyer that his funds would be segregated into a separate sub-account. (DE 30 ¶ 4). From April
2013 to April 2015, Troyer issued 11 checks payable to Heneghan for the purpose of purchasing
commodities futures contracts through this program. (DE 30 ¶¶ 41-51). Throughout this time,
Heneghan repeatedly assured Troyer that his futures contracts were performing well and that the
value of his account was increasing. (DE 30 ¶ 52).
In September 2013, unbeknownst to Troyer, the NFA filed a complaint against Vision
alleging that it had facilitated a commodity trading advisor in misappropriating customer funds
to trade allocations. (DE 30 ¶ 21). In June 2014, unbeknownst to Troyer, Vision was ordered to
withdraw from NFA membership and to pay a $1.5 million fine and $2.053 million in restitution
to its customers. (DE 30 ¶ 22).
At some point in 2015, Heneghan informed Troyer that the value of his account exceeded
$500,000. (DE 30 ¶ 52). Troyer instructed Heneghan to close his account and wire the funds to
him. (DE 30 ¶ 53). Heneghan, however, repeatedly made excuses as to why he could not
transfer the funds to Troyer. (DE 30 ¶ 54). Eventually, Troyer filed a complaint against
Heneghan with the CFTC. (DE 30 ¶ 55). Troyer’s counsel also contacted Amanda Murphy,
president and chief executive officer of PMI, to notify PMI that its AP, Heneghan, was refusing
to return funds contained in Troyer’s trading account. (DE 30 ¶ 56). At PMI’s request, Troyer’s
counsel provided PMI with copies of the cancelled checks issued to Heneghan while he was
registered with PMI. (DE 30 ¶ 57). PMI, however, refused to acknowledge Troyer’s claims and
instead alleged that his payments to Heneghan were intended for wagers on sporting events. (DE
30 ¶ 58).
In December 2015, the NFA filed a complaint against PMI, Heneghan, Murphy, and two
additional APs who worked with Heneghan at PMI’s Los Angeles branch. (DE 30 ¶ 59). In the
complaint, the NFA noted, among other things: (1) that its review of the branch’s customer
trading activity revealed facts indicative of abusive trading practices and that 97% of the
branch’s customers had net losses; (2) that 98% of Heneghan’s customers had net losses and, on
average, lost 94% of their investment; (3) that Heneghan routinely made misleading and
deceptive sales solicitations, exaggerated profit potential, minimized risk of loss, and failed to
disclose that 97% of the branch’s customers lost money trading with PMI; (4) that Murphy failed
to adequately supervise the branch to ensure that it complied with the NFA’s sales practice rules;
and (5) that Murphy failed to apply heightened supervision to Heneghan, given that he had
previously worked at several firms, including Statewide, that were the subject of prior
disciplinary actions for sales practice fraud. (DE 30 ¶ 62).
As stated earlier, Troyer has never received any of the more than $500,000 in assets
allegedly held in his account with Heneghan, nor has he been able to recover any of the
$206,125 that he invested through Heneghan. (DE 30 ¶ 63). On May 8, 2016, Troyer filed the
instant case against Heneghan, Livolsi, PMI, and the NFA, alleging various violations under the
Commodities Exchange Act (“the CEA”), 7 U.S.C. §§ 1 et seq. (DE 1). On January 30, 2017,
Troyer filed an amended complaint, dismissing Heneghan and Livolsi and advancing four claims
against PMI and the NFA. (DE 30). In Counts 1 and 2 of his amended complaint, Troyer
alleges that PMI and the NFA are vicariously liable for Heneghan’s purported violations of §§
6b(a) and 6b(e) of the CEA and its related regulations. (DE 30 ¶¶ 64-89). In Count 3, Troyer
advances a claim against the NFA pursuant to § 25(b)(2) of the CEA, alleging that NFA failed to
enforce a rule or bylaw that it was statutorily required to enforce. (DE 30 ¶¶ 91-101). In Count
4, Troyer advances a state law fraud claim against the NFA under Indiana Code § 35-43-53(a)(2), Indiana’s criminal deception statute, and § 34-24-3-1, Indiana’s Crime Victims’
Compensation Act. (DE 30 ¶¶ 102-108). On May 7, 2017, Troyer voluntarily dismissed PMI
from this suit (DE 44), leaving the NFA as the sole Defendant.
A. An Overview of Commodities Futures Contracts, the CEA, the NFA, and the CFTC
It is helpful to begin with a brief overview of commodities futures contracts, the CEA,
the NFA, and the CFTC:
“A commodity futures contract is a contract to buy (or sell) a standard quantity of a
particular commodity at a specified price and time in the future.” Commodity Futures Trading
Comm’n v. Risk Capital Trading Grp., Inc., 452 F. Supp. 2d 1229, 1235 (N.D. Ga. 2006). “The
owner of a futures contract is exposed to risk beyond the purchase price of the futures contract.”
Id. “If he still owns the contract at maturity, he would be forced to purchase (or sell) the specific
commodity at the price set in the contract or to meet his obligation through alternative means.”
Id. “Two types of investors purchase commodity futures contracts: hedgers and speculators.
Hedgers buy futures contracts to minimize (or transfer) risk and to lock in a price certain for the
underlying commodity; speculators buy futures contracts to take on risk in the hopes of realizing
capital gains on their investments.” Id. at 1235 n.6. “[S]peculators (especially retail investors . .
. ) typically do not hold commodity futures contracts to maturity; speculators purchase futures
contracts to make a profit, not to take actual delivery of a large quantity of commodities.” Id.
“The CEA governs the trading of commodity futures contracts, and grants to the [CFTC]
the authority, in large measure, to implement the regulatory regime established therein.” Am.
Agric. Movement, Inc. v. Bd. of Trade of Chi., 977 F.2d 1147, 1150 (7th Cir. 1992), abrogated
on other grounds by Time Warner Cable v. Doyle, 66 F.3d 867 (1995). “The CEA has been
described as a ‘comprehensive regulatory structure to oversee the volatile and esoteric futures
trading complex.’” Vitanza v. Bd. of Trade of N.Y., No. 00 CV 7393(RCC), 2002 WL 424699, at
*3 (S.D.N.Y. Mar. 28, 2002) (quoting Sam Wong & Son, Inc. v. N.Y. Mercantile Exch., 735 F.2d
653, 661 (2d Cir. 1984)). “Section 22 of the CEA expressly provides for a private right of
action, explicitly enumerating the exclusive circumstances under which a private litigant may
assert a right of action for violations of the CEA or CFTC regulations.” Id. (citing 7 U.S.C. §
25(b)(5)); see Klein & Co. Futures, Inc. v. Bd. of Trade of New York, 464 F.3d 255, 259 (2d Cir.
2006) (“CEA § 22 enumerates the only circumstances under which a private litigant may assert a
private right of action for violations of the CEA.”). “Section 22(a) relates to claims against
persons other than registered entities and registered futures associations.” Klein & Co. Futures,
Inc., 464 F.3d at 259 (citing 7 U.S.C. § 25(a)). “Section 22(b) deals with claims against
[registered] entities and their officers[,] directors, governors, committee members and
employees.” Id.; see 7 U.S.C. § 25(b).
“[The] NFA is a Registered Futures Association which, pursuant to the [CEA] § 17, 7
U.S.C. § 21, functions as the futures industry’s self-regulatory organization[,]” that is, an SRO.
Nicholas v. Saul Stone & Co., LLC, 224 F.3d 179, 181 n.6 (3d Cir. 2000); see also Commodity
Futures Trading Comm’n v. R.J. Fitzgerald & Co., 310 F.3d 1321, 1326 n.3 (11th Cir. 2002)
(“[The NFA] is a congressionally authorized futures industry [SRO].”). The NFA operates under
the oversight of the CFTC, the federal government’s regulator for the futures industry. See U.S.
Commodity Futures Trading Comm’n v. Altamount Glob. Partners, LLC, No. 6:12-cv-1095-Orl31TBS, 2014 WL 644693, at *3 (M.D. Fla. Feb. 19, 2014). “The purpose of the NFA is to
assure high standards of business conduct by its [m]embers and to protect the public interest.”
R.J. Fitzgerald & Co., 310 F.3d at 1326 n.3. “[The NFA] performs screening to determine
fitness to become and remain a member of the NFA, establishes and enforces certain rules and
standards, audits and investigates members, and conducts arbitration in futures disputes.”
Nicholas, 224 F.3d at 181 n.6. “Membership in the NFA is mandatory for all entities conducting
business on U.S. futures exchanges.” Commodity Futures Trading Comm’n v. Levy, 541 F.3d
1102, 1104 n.4 (11th Cir. 2008); see also Nicholas, 224 F.3d at 182.
To further its goal of creating and implementing a comprehensive program for selfregulation of the commodity futures industry, “[the] NFA is required to adopt rules governing
the conduct of its membership.” MBH Commodity Advisors, Inc. v. Commodity Futures Trading
Comm’n, 250 F.3d 1052, 1056 (7th Cir. 2001). “Pursuant to its statutory mandate, the NFA has
adopted numerous rules governing member conduct.” Id. (citation omitted). “These rules are
subject to [the CFTC’s] approval and must provide standards governing the sales practices of
NFA members.” Id. (citing 7 U.S.C. § 21(p)(3); 17 C.F.R. § 170.5). “In addition, these rules
must be ‘designed to prevent fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, in general, to protect the public interest, and to remove
impediments to and perfect the mechanism of free and open futures trading.’” Id. (quoting 7
U.S.C. § 21(b)(7)).
B. Counts 1 and 2 Alleging That the NFA Is Vicariously Liable for Heneghan’s
Actions Fail to State a Plausible Claim Under § 2(a)(1)(B) of the CEA
In Counts 1 and 2 of his amended complaint, Troyer seeks to hold the NFA vicariously
liable for the purportedly fraudulent actions committed by Heneghan, a broker and an associate
member of the NFA. In its motion to dismiss, the NFA argues that Counts 1 and 2 must be
dismissed because: (1) Heneghan’s status as an associate member of the NFA, without more,
does not make him an agent of the NFA; and (2) none of the provisions of the CEA that Troyer
cites in his amended complaint create a private right of action against the NFA.
Section 2(a)(1)(B), the CEA’s vicarious liability provision, states:
The act, omission, or failure of any official, agent, or other person
acting for any individual, association, partnership, corporation, or
trust within the scope of his employment or office shall be deemed
the act, omission, or failure of such individual, association,
partnership, corporation, or trust, as well as of such official, agent,
or other person.
7 U.S.C. § 2(a)(1)(B). Section 2(a)(1)(B) “enacts a variant of the common law principle of
respondeat superior.” Rosenthal & Co. v. Commodity Futures Trading Comm’n, 802 F.2d 963,
965 (7th Cir. 1986). “The common law principle makes an employer strictly liable—that is to
say, regardless of the presence or absence of fault on the employer’s part—for torts committed
by his employees in the furtherance of his business[.]” Id. (citation omitted); see also Bosco v.
Serhant, 836 F.2d 271, 280 (7th Cir. 1987) (“Section 2(a)(1) of the [CEA] . . . imputes liability
for an agent’s violations of the Act to the agent’s principal . . . , consistently with usual notions
of respondeat superior.” (citation omitted)); U.S. Commodity Futures Trading Comm’n v.
Byrnes, 58 F. Supp. 3d 319, 324 (S.D.N.Y. 2014) (collecting cases). This provision “varies from
the common law only to the extent that it may be interpreted as a quasi-criminal statute and that
it applies to torts committed by agents that are not necessarily employees of the princip[al].”
Shroff v. Rosenthal Collins Grp., LLC, No. 08 C 929, 2009 WL 2704582, at *4 (N.D. Ill. Aug.
25, 2009) (citations omitted); see, e.g., Commodity Futures Trading Comm’n v. Commodities
Fluctuations Sys., Inc., 583 F. Supp. 1382, 1383-85 (S.D.N.Y. 1984) (imputing violations of the
CEA salespersons not only to their employer, but also to the clearing firm with whom the
salespersons were registered as associated persons).
“The language of § 2(a) is broad, and extends vicarious liability to ‘any individual,
association, partnership, corporation, or trust.’” U.S. Commodity Futures Trading Comm’n v.
Yumin Li, No. 15 C 5839, 2016 WL 8256392, at *8 (N.D. Ill. Dec. 9, 2016) (quoting 7 U.S.C. §
2(a)(1)(B)). “Principals are strictly liable for their agents’ acts—even if the agents are not
employees—if the principals authorize or ratify the acts or even just create an appearance that
the acts are authorized.2 Rosenthal & Co., 802 F.2d at 966; see Commodity Futures Trading
Comm’n v. Gibraltar Monetary Corp., 575 F.3d 1180, 1182 (11th Cir. 2009) (Under §
2(a)(1)(B), “the test for vicarious liability is common law agency.”). “This is so even though in
a case of ratification or apparent authority the principal does not himself direct the act and may
indeed know nothing about it when it occurs . . . .” Rosenthal & Co., 802 F.2d at 966. A court
To elaborate, “[a]n agent’s authority may be actual or apparent; if it is actual, it may be express
or implied.” Moriarty v. Glueckert Funeral Home, Ltd., 155 F.3d 859, 865-66 (7th Cir. 1998) (citing
Restatement (Second) of Agency §§ 7-8 and § 7 cmt. c). “Implied authority is that authority which is
inherent in an agent’s position and is, simply, actual authority proved through circumstantial evidence.”
Id. “Actual authority ‘to do an act can be created by written or spoken words or other conduct of the
principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act
on the principal’s account.’” Id. (quoting Restatement (Second) of Agency § 26). “In contrast, ‘apparent
authority to do an act is created as to a third person by written or spoken words or any other conduct of
the principal which, reasonably interpreted, causes the third person to believe that the principal consents
to have the act done on his behalf by the person purported to act for him.’” Id. (quoting Restatement
(Second) of Agency § 26). Here, Troyer alleges that Heneghan’s authority was apparent, not actual. (DE
30 ¶¶ 74, 89).
makes an “overall assessment of the totality of the circumstances” to determine whether an
agency relationship exists. Shroff, 2009 WL 2704582, at *4 (quoting Stotler & Co. v.
Commodity Futures Trading Comm’n, 855 F.2d 1288, 1292 (7th Cir. 1988)); see also Gibraltar
Monetary Corp., Inc., 575 F.3d at 1187 (discussing the legal standards for vicarious liability
under the CEA); Yumin Li, 2016 WL 8256392, at *7 (same).
Troyer argues that he has adequately pled an agency relationship between Heneghan and
the NFA under § 2(a)(1)(B). In support, Troyer points to the following allegations in his
Pursuant to 7 U.S.C. § 2(a)(1)(B), the act, omission, or
failure of an agent or person acting for any association or
corporation within the scope of his employment or office
shall be deemed the act, omission, or failure of such
association or corporation.
Pursuant to 17 CFR § 3.2(a), the CFTC assigned the
registration of commodities futures traders to NFA. As a
result, membership in NFA is required for anyone acting as
a commodities trader under the Commodities Futures Act
(“CEA”), which meant Heneghan could only legally solicit
commodities futures trades from Troyer if he was an NFA
At all times relevant to this complaint, Heneghan was
registered as an “NFA Associate Member” and was,
therefore, acting within the scope of that office and as
NFA’s apparent agent when he perpetrated these illegal and
fraudulent acts on Troyer. Therefore, NFA is liable for
Heneghan’s actions as his principal.
(DE 30 ¶¶ 72-74; see also DE 30 ¶¶ 86-89).
Additionally, in his response brief, Troyer points to the following language posted on the
Investor confidence is crucial to the success of the derivatives
markets, and the best way to gain investor confidence is to demand
the highest levels of integrity of all market participants and
Membership in NFA is mandatory, assuring that everyone
conducting business with the public on U.S. futures exchanges and
in the retail forex marketplace must adhere to the same high
standards of professional conduct.
(DE 38 at 16 (quoting https://www.nfa.futures.org/NFA-about-nfa/index.HTML)). Troyer
argues that by posting this language on its website, the NFA “encouraged the public to rely upon
its diligence in selecting and regulating its Members to have confidence when investing in
commodities futures.” (DE 30 at 16).
Here, even if Troyer could sue the NFA under a vicarious liability theory,3 Troyer fails to
plead a plausible agency relationship between Heneghan and the NFA because Troyer’s
allegations rest solely on Heneghan’s status as an associate member of the NFA. Heneghan’s
status as an associate member of the NFA, without more, does not make him an agent of the
NFA for purposes of vicarious liability under the CEA. Troyer is conflating Heneghan’s
registration as an NFA associate member (apparently, the NFA has 55,000 associate members
(DE 40 at 7)), with permission to act on the NFA’s behalf. As the NFA persuasively asserts,
merely issuing a license or registration to an individual does not constitute an approval by the
registering agency for the licensee to act on the registering entity’s behalf. Expanding agency
law in this manner would reach an absurd result where any licensing agency, for example, the
Indiana Professional Licensing Agency, would become vicariously liable for the acts of all of its
Because Troyer fails to plausibly plead that Heneghan has an agency relationship with the NFA,
Troyer’s claims based on vicarious liability in Counts 1 and 2 fail to state a claim and will be dismissed.
Consequently, the Court need not reach the NFA’s second argument—that no private right of action
exists under the CEA for a vicarious liability claim against a registered futures association.
licensees, merely by the fact that it issued a license to the professionals.
There are no allegations in the amended complaint that the NFA ever employed
Heneghan, directed his activities, or authorized him to act on the NFA’s behalf. See Gibraltar
Monetary Corp., 575 F.3d at 1187-89 (discussing the legal test for vicarious liability under the
CEA); Leon v. Caterpillar Indus., Inc., 69 F.3d 1326, 1334 (7th Cir. 1995) (“[T]he Indiana
courts have held that the mere existence of a formal licensing or dealership agreement will not
create an agency relationship in the absence of evidence that the principal is exercising control
over the details of the purported agent’s work.” (citation omitted)); Gallant Ins. Co. v. Isaac, 751
N.E.2d 672, 675 (Ind. 2001) (“[A]pparent authority refers to a third party’s reasonable belief that
the principal has authorized the acts of its agent; it arises from the principal’s indirect or direct
manifestations to a third party and not from the representations or acts of the agent.” (citations
omitted)). Nor is Troyer’s assertion that the language on the NFA’s website offering assurances
of high standards of professional conduct by the NFA’s members sufficient to create a
reasonable belief that Heneghan was authorized to act on the NFA’s behalf. Notably, Troyer has
not cited any case in which a broker and associate member has been viewed as an agent of the
NFA. See Asa-Brandt, Inc. v. ADM Inv’r Servs., Inc., 344 F.3d 738, 749 (8th Cir. 2003)
(acknowledging that a party’s “mere status” as an introducing broker, without more, was
insufficient to plausibly plead an apparent agency relationship with a futures commissions
merchant); Lacovara v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 551 F. Supp. 601 (E.D. Pa.
1982) (dismissing plaintiff’s claim that sought to recover losses in transactions involving
commodity futures on the grounds that a commodity contract market licensed by the CFTC
pursuant to the CEA failed to properly supervise its members); see generally Jerry W. Markham,
Commodities Regulation: Fraud, Manipulation & Other Claims, 13 Commodities Reg. § 4:1
(2017); Jerry W. Markham, Judicial Decisions on Respondeat Superior Under the Commodity
Exchange Act, 13 Commodities Reg. § 4:14 (2017); Deborah Sprenger, J.D., Who Is “Agent,” so
as to Subject Principal to Liability, Under § 2(a)(1)(a) of Commodity Exchange Act (7 U.S.C.A §
4), 98 A.L.R. Fed 588 (1990).
In short, no reasonable person could interpret Heneghan’s status as an associate member
of the NFA—without more—as the NFA’s consent to have Heneghan act on the NFA’s behalf in
soliciting futures commodities. See Stotler & Co., 855 F.2d at 1292 (“The real question is
whether Allen was acting as Stotler’s agent for soliciting customers to trade commodity futures
accounts.”). As such, Troyer fails to state a plausible claim of vicarious liability against the
NFA under § 2(a)(1)(B) of the CEA, and therefore, Counts 1 and 2 of his amended complaint
will be dismissed.
C. Count 3 Alleging that the NFA Failed to Enforce a Bylaw or Rule
Does Not State a Plausible Claim Under § 25(b)(2) of the CEA
In Count 3, Troyer advances a claim against the NFA under 7 U.S.C. § 25(b)(2), alleging
that it violated the CEA by failing to enforce a bylaw or rule required by 7 U.S.C. § 21. The
NFA seeks to dismiss Count 3, asserting that Troyer fails to identify a bylaw or regulation that it
allegedly violated, and even if he did, Troyer does not plausibly allege that the NFA acted in
“bad faith” as required by § 25(b)(2). (DE 37 at 7).
Section 25(b)(2) states:
A registered futures association that fails to enforce any bylaw or
rule that is required under section 21 of this title or in enforcing
any such bylaw or rule violates this chapter or any Commission
rule, regulation, or order shall be liable for actual damages
sustained by a person that engaged in any transaction specified in
subsection (a) of this section to the extent of such person’s actual
losses that resulted from such transaction and were caused by such
failure to enforce or enforcement of such bylaw or rule.
7 U.S.C. 25(b)(2). Additionally, § 25(b)(4) requires: “A person seeking to enforce liability
under this section must establish that the . . . registered futures association . . . acted in bad faith
in failing to take action or in taking such action as was taken, and that such failure or action
caused the loss.” 7 U.S.C. § 25(b)(4).
Troyer cites two sections of § 21 in support of his allegations against the NFA. First, he
cites § 21(b)(3)(D), which provides that the association’s rules must provide that, except with the
approval of the CFTC, “no person shall be admitted to or continued in membership . . . if such
person . . . has associated with him any person who is known, or in the exercise of reasonable
care should have known, to him to be a person who would be ineligible for admission to or
continuance in membership . . . .” 7 U.S.C. § 21(b)(3)(D). Troyer also cites § 21(b)(7), which
more generally states that “the rules of the association are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable principles of trade, in general, to
protect the public interest, and to remove impediments to and perfect the mechanism of free
trade and open futures trading.” 7 U.S.C. § 21(b)(7).
In the context of these provisions, Troyer makes the following allegations:
NFA had actual knowledge Heneghan had been associated
with several individuals and firms that had been barred
from its membership for committing fraudulent acts.
Despite that knowledge, as well of knowledge 7 U.S.C. §
21(b)(3)(D) prohibited it from maintaining Heneghan’s
registration under those circumstances without the CFTC’s
approval, NFA permitted Heneghan to continue to solicit
commodities futures trades from the public as an NFA
NFA had actual knowledge Heneghan had participated in
the manipulative trading scheme Statewide FX had
perpetrated on its clients.
Despite that knowledge and knowledge of Heneghan’s past
association with other NFA member firms that had either
been barred or sanctioned for engaging in fraudulent and/or
manipulative trading practices, as well as having
knowledge 7 U.S.C. § 21(b)(7) required its rules must be
designed to prevent fraudulent and manipulative acts and
practices, NFA had no requirements in place to apply
stricter oversight to Heneghan’s activities given his past
associations with such disreputable firms and manipulative
As a result of NFA’s failure to enforce the rules imposed
on it under 7 U.S.C. § 21, Troyer suffered financial and
(DE 30 ¶¶ 93-96, 100).
The NFA argues that Troyer’s allegations fail to state a claim under § 25(b)(2) because
although he cites certain statutory provisions, he does not identify any rule or bylaw that the
NFA purportedly violated, which is a necessary element of a § 25(b)(2) claim. The NFA
emphasizes that § 21 “only prescribes the type of rules that must be enacted by the NFA, it is not
a NFA regulation itself.” (DE 37 at 8). The NFA contends that Troyer does not, and presumably
cannot, include any reference to an actual NFA bylaw or rule that was violated because “no such
bylaw or rule prohibits registration of individuals such as Heneghan based on the facts alleged in
the Amended Complaint.” (DE 37 at 8).
In response, Troyer contends that the NFA misinterprets the language of § 25(b)(2) by
interpreting it to require that the NFA fail to enforce one or more of its own bylaws or rules.
Troyer asserts, rather, that § 25(b)(2) permits the NFA to be held liable for losses when it fails to
enforce “any bylaw or rule that is required under section 21 of this title.” 7 U.S.C. § 25(b)(2)
(emphasis added). Troyer clarifies that his claim is that the NFA violated § 25(b)(2) by failing to
adopt the necessary rules and bylaws which § 21 mandates that a registered futures association
must adopt. Specifically, Troyer contends that the NFA violated § 25(b)(2) by failing to adopt
“a rule requiring a person found to have been associated with an expelled firm to appeal to the
CFTC in order to maintain that person’s continued membership in NFA.” (DE 38 at 6). Thus, as
Troyer frames his claim, the question is not whether the NFA violated one of its own bylaws or
rules, but rather, whether the NFA caused harm by failing to adopt and enforce the rules that
Congress mandated it to adopt under § 21.
Succinctly stated, Troyer’s claim rests on his personal view of what rules the NFA should
adopt, rather than what § 21 actually requires. Section § 25(b)(2) creates a private right of action
only for a failure to enforce “any bylaw or rule that is required under section 21.” 7 U.S.C. §
25(b)(2) (emphasis added). Accordingly, where a bylaw or rule is not required by § 21, there is
no private right of action under § 25(b)(2). See Nicholas v. Saul Stone & Co., LLC, No. Civ. 97860(AET), 1998 WL 34111036, at *18 (D.N.J. June 30, 1998) (concluding that Bylaw 1101 of
the NFA was not required by the CEA, and thus, that “no private cause of action can be enforced
for its non-enforcement”). Neither § 21(b)(3), nor any other subsection of § 21, requires the
NFA to adopt a rule providing that when a firm is expelled, any person ever associated with the
firm must appeal to the CFTC in order to maintain his or her continued membership in the NFA.
Moreover, even if the NFA were to adopt such a rule, Troyer would not have a private right of
action under § 25(b)(2) because it is not a rule that is required by § 21 of the CEA. See id. Nor
is Troyer’s citation of § 21(b)(7)—which generally requires that the association’s rules be
designed to prevent fraudulent practices, to promote just and equitable principles of trade, and to
protect the public interest—adequate to remedy his deficient pleading.
Furthermore, Troyer does not allege that the NFA acted in “bad faith” by failing to take
the action that he endorses—that is, by failing to adopt a rule requiring that when a firm is
expelled, any person ever associated with the firm must appeal to the CFTC in order to maintain
his or her continued membership in the NFA. 7 U.S.C. § 25(b)(4); cf. Bishop v. Commodity
Exch., Inc., 564 F. Supp. 1557, 1559 (S.D.N.Y. June 13, 1983) (“The complaint is of rulemaking
in bad faith[.]”). In that regard, all of the NFA’s rules are subject to the CFTC’s approval. See 7
U.S.C. § 21(j); MBH Commodity Advisors, Inc., 250 F.3d at 1056. Under § 21(a), part of the
registration process for a futures association is that it must submit its bylaws and rules to the
CFTC for “review and approval.” 7 U.S.C. § 21(a)(2). Likewise, § 21(j) requires that a
registered futures association submit any changes to its rules to the CFTC for approval. 7 U.S.C.
§ 21(j); MBH Commodity Advisors, Inc., 250 F.3d at 1068 (citations omitted). The CFTC “shall
approve such rules if such rules are determined by the Commission to be consistent with the
requirements of [§ 21(j)].” 7 U.S.C. § 21(j). In that same vein, the CFTC is authorized to
abrogate any rule of a registered futures association if it appears to the CFTC that such
abrogation is necessary or appropriate to assure fair dealing by the members of the association.
7 U.S.C. § 21(k)(1).
As explained earlier, the CFTC is the federal government’s regulator for the futures
industry. As such, the CFTC is charged with protecting the public interest, and the “CFTC
granted NFA registration as a registered futures association in 1981.” Weinberg v. Commodity
Futures Trading Comm’n, 699 F. Supp. 808, 812 (C.D. Ca. 1988). It is “inherent in the grant as
a registered futures association” that the CFTC found that the NFA’s rules satisfied the
requirements of § 21. Weinberg, 699 F. Supp. at 812. “If this was not done expressly at least the
[CFTC] gave tacit approval by its acceptance of [the] NFA as a registered futures association.”
Id. (citation omitted). That Troyer believes different rules should be required pursuant to § 21
does not state a claim under § 25(b)(2), much less state a claim that the NFA acted in bad faith
by failing to adopt the rules that he endorses.
As an additional matter, toward the end of Count 3, Troyer tacks on the following
allegations concerning the NFA’s auditing practices, seemingly intending to create another cause
One reason Wasendorf was able to avoid detection for over
20 years was that NFA employed young, inexperienced
individuals to audit its Member firms.
NFA knew, or reasonably should have known, these
inexperienced auditors would be ill-equipped to protect the
investing public from fraudulent enterprises such as PFG.
However, PFG continued to use inexperienced auditors
because it either: (1) wanted to ensure there were sufficient
funds in its budget to pay exorbitant compensation to its
executive staff; or (2) did not take its legal obligation to
protect the public from such frauds seriously. Either way,
NFA’s use of poorly trained, inexperienced auditors
constituted a bad faith violation of its duties under 7 U.S.C.
(DE ¶¶ 98-99). But these allegations by Troyer of improper motive, that is, bad faith, on the part
of the NFA are “speculative allegations.” W. Capital Design, LLC v. N.Y. Mercantile Exch., 180
F. Supp. 2d 438, 441 (S.D.N.Y. 2001), aff’d, 25 F. App’x 63 (2d Cir. 2002). No specific facts
have been pled to support the claim that the NFA hired auditors so that it could “pay exorbitant
compensation to its executive staff” or because the NFA does “not take its legal obligation to
protect the public . . . seriously.” (DE ¶ 99). As such, Troyer’s allegations regarding
inexperienced auditors fail to state a plausible claim. See id. (“The allegation is pure
speculation, insufficient to satisfy the rule of pleading bad faith by specific facts.” (citation
omitted)); see also Holladay v. CME Grp., No. 11-cv-8226, 2012 WL 3096698, at *4-5 (N.D. Ill.
July 30, 2012) (finding that plaintiffs failed to adequately plead a case of bad faith under §
25(b)(4)); Vitanza, 2002 WL 424699, at *7 (same).
In sum, Troyer’s claim against the NFA under Count 3—which fails to cite any NFA rule
or bylaw that the NFA purportedly violated which was required by ¶ 21—fails to state a
plausible claim under § 25(b)(2). See Bell Atlantic Corp., 550 U.S. at 1960. Accordingly, Count
3 will also be dismissed.
D. Count 4 Alleging a State Law Fraud Claim Is Preempted by the CEA
In Count 4, Troyer advances a state law fraud claim against the NFA under Indiana Code
§ 35-43-5-3(a)(2), Indiana’s criminal deception statute, and Indiana Code § 34-24-3-1, Indiana’s
Crime Victims’ Compensation Act. In this claim, Troyer alleges that the NFA fraudulently
represented on its website that it “thoroughly screens all firms and individuals wishing to register
with the CFTC and become Members of NFA,” and that the NFA did so to induce the public to
invest through its members. (DE 30 ¶¶ 102, 105). The NFA seeks to dismiss this state law
claim, arguing that the claim is preempted by the CEA, and furthermore, that the NFA has
absolute immunity when performing regulatory, adjudicatory, or prosecutorial functions.
As to the NFA’s preemption argument, “Congress, in the 1974 amendments to the CEA,
established the CFTC and vested it with exclusive jurisdiction over ‘accounts, agreements . . .
and transactions’ involving commodity futures markets.” Am. Grain Ass’n v. Canfield, Burch &
Mancuso, 530 F. Supp. 1339, 1346 (W.D. La. 1982) (citing 7 U.S.C. § 2). “Congress’ intent to
bring the markets under a uniform set of regulations followed from a fear that states might
attempt to regulate futures markets themselves and thus subject the national futures trading
apparatus to conflicting regulatory demands.” DGM Invs., Inc. v. N.Y. Futures Exch., Inc., No.
01 CIV. 11602(RWS), 2002 WL 31356362, at *4 (S.D.N.Y. Oct. 17, 2002) (citation and internal
quotation marks omitted).
In American Agriculture Movement, Inc. v. Board of Trade of Chicago, the Seventh
Circuit examined the scope of state law preemption under the CEA. 977 F.2d 1147 (7th Cir.
1992). The Court concluded that “Congress intended to preempt some, but not all, state laws
that bear upon the various aspects of commodity futures trading.” Id. at 1155. More
specifically, the Court opined:
In sum, the structure and history of the CEA indicate that the
propriety of conflict preemption depends upon the particular
context in which a plaintiff seeks to bring a state law action. When
application of state law would directly affect trading on or the
operation of a futures market, it would stand as an obstacle to the
accomplishment and execution of the full purposes and objectives
of Congress, and hence is preempted. When, in contrast, the
application of state law would affect only the relationship between
brokers and investors or other individuals involved in the market,
preemption is not mandated.
Id. at 1156-57 (citations and internal quotation marks omitted). Thus, “the crucial inquiry . . . is
the context in which a law is applied.” Id. at 1157. “State laws specifically directed towards the
futures markets naturally operate in an arena preempted by the CEA.” Id. “Laws of general
application of course operate in a variety of arenas, and are preempted only when plaintiffs
attempt to use them in a manner that would, in effect, regulate the futures markets.” Id. More
succinctly stated, “[w]hen application of state law would directly affect trading on or the
operation of a futures market, it . . . is preempted.” DGM Invs., Inc., 2002 WL 31356362, at *5
The NFA argues that Troyer’s state law claim is preempted because he advances it
against the NFA, and as such, it does not “affect only the relationship between brokers and
investors or other individuals involved in the market.” Am. Agric. Movement, Inc., 977 F.2d at
1157 (citation omitted). Troyer, in response, fails to even acknowledge the binding authority of
American Agriculture Movement, Inc., much less try to distinguish it. (See DE 38 at 3-5).
Rather, Troyer generally argues that “numerous courts have held the CEA does not preempt state
common law fraud claims,” and he cites a string of cases in support of that premise. (DE 38 at 4
(collecting cases)). While Troyer’s contention is not inaccurate, it is asserted out of context; the
cases Troyer cites involve state law fraud claims against brokers and other professionals, not
claims against an SRO. (DE 38 at 4-5). As such, these cases are not persuasive authority with
respect to a state law fraud claim against the NFA, a not-for-profit industry SRO that has been
designated by the CFTC to discharge certain regulatory functions. See 7 U.S.C. § 21; U.S.
Commodity Futures Trading Comm’n v. Yorkshire Grp., Inc., No. 13-CV-5323 (AMD) (ST),
2016 WL 8256380, at *5 n.5 (E.D.N.Y. Aug. 19, 2016) (explaining that the NFA is a “not-forprofit membership corporation and self-regulatory organization”).
Moreover, in his state law claim, Troyer directly challenges the NFA’s performance of its
regulatory functions, contending that “[the] NFA has no ‘rigorous registration screening’ process
as promised on its website.” (DE 30 ¶ 105). The Court views the NFA’s statement on its
website to be incidental to its regulatory and general oversight functions, and as such, the claim
is preempted by the CEA.4 See DGM Invs., 2012 WL 31356362, at *3 (finding that state law
claims of gross negligence, bad faith, and respondeat superior against the New York Futures
Exchange, its parent company, its corporate affiliate, and a committee of the exchange and its
members were preempted by the CEA because the claims were based on allegations that the
defendants “failed to fulfill their obligation to regulate the market”); W. Capital Design, LLC,
180 F. Supp. 2d at 443 (“A claim that lies not on separate and distinct duties established under
common law, but rather in an Exchange’s representations about its federal statutory duties, is not
a separate and distinct claim.”). Accordingly, Count 4 alleging a state law claim for fraudulent
misrepresentation will also be dismissed.5
E. Troyer Will Be Afforded Leave to Replead
“Whether to permit a plaintiff to amend its pleadings is a matter committed to the Court’s
‘sound discretion.’” In re Amaranth Nat. Gas Commodities Litig., 587 F. Supp. 2d 513, 547-48
(S.D.N.Y. 2008) (quoting Fed. R. Civ. P. 15(a)). Federal Rule of Civil Procedure 15(a) states
that the court “should freely give leave when justice so requires.” Fed. R. Civ. P. 15(a); see, e.g.,
Troyer attempts to analogize Weissman v. National Association of Securities Dealers, Inc., 468
F.3d 1306 (11th Cir. 2006), to the instant circumstances. In Weissman, the Eleventh Circuit Court of
Appeals concluded that the defendants, two SROs created under the Securities Exchange Act, did not
have absolute immunity where plaintiff alleged that the defendants’ advertising activities “fraudulently
touted WorldCom’s stock in order to profit from resulting increases in trading volume.” Id. at 1312. In
doing so, the Court viewed plaintiff’s allegations as relating exclusively to the defendants’ for-profit
commercial activity, not their delegated disciplinary or regulatory authority. Id. at 1311-12. Here, in
contrast, the NFA is a not-for-profit organization; the challenged statement is an entry on the NFA’s
website, rather than a $74 million print and television advertising campaign as in Weissman; the statement
does not mention, much less tout, specific futures commodities contracts; and Troyer’s amended
complaint challenges the NFA’s regulatory activity. Therefore, the Court does not view Weissman as
Having concluded that Troyer’s state law fraud claim against the NFA is preempted by the
CEA, the Court need not reach the NFA’s additional argument for dismissing Count 4—that the NFA is
entitled to absolute immunity when performing regulatory, adjudicatory, or prosecutorial functions.
Standard v. Nygren, 658 F.3d 792, 800-01 (7th Cir. 2011). “[I]t is the usual practice upon
granting a motion to dismiss to allow leave to replead.” In re Amaranth Nat. Gas Commodities
Litig., 587 F. Supp. 2d at 548; see Bianchi v. McQueen, 917 F. Supp. 2d 822, 835 (N.D. Ill.
2013) (“Plaintiffs who meet resistance to their complaint through a successful Rule 12(b)(6)
motion generally are allowed at least one opportunity to replead . . . .”).
Troyer has already amended his complaint once in response to the NFA’s first motion to
dismiss. (DE 26; DE 30). Nevertheless, to afford him every reasonable opportunity, Troyer will
be granted one additional opportunity to amend his complaint in an attempt to state a claim upon
which relief can be granted. See Holladay, 2012 WL 3096698, at *5. In doing so, Troyer is
advised not to needlessly consume the Court’s time and resources in causing it to review claims
initially asserted against other defendants, where such claims are simply not plausible against the
NFA, the sole remaining Defendant.
For the foregoing reasons, the NFA’s motion to dismiss (DE 34) is GRANTED. Troyer
is afforded up to and including August 2, 2017, to file a second amended complaint against the
NFA in an attempt to state a claim upon which relief can be granted.
Entered this 12th day of July 2017.
/s/ Susan Collins
United States Magistrate Judge
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