Loginovskaya v. Batratchenko et al
Filing
44
MEMORANDUM AND ORDER granting 31 Motion to Dismiss. For the foregoing reasons, Defendants' motion to dismiss is GRANTED. The Clerk of the Court is directed to close the motion at Docket Entry Number 31 and to close this case. (Signed by Judge J. Paul Oetken on 3/29/2013) (tro)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
LUDMILA LOGINOVSKAYA,
:
Plaintiff,
:
:
-v:
:
OLEG BATRATCHENKO et al.,
:
Defendants. :
:
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12 Civ. 336 (JPO)
MEMORANDUM AND
ORDER
J. PAUL OETKEN, District Judge:
Plaintiff Ludmila Loginovskaya (“Loginovskaya” or “Plaintiff”) brings this action
pursuant to §§ 4ο and 22 of the Commodity Exchange Act (the “CEA”), 7 U.S.C. §§ 6ο, 25,
against Defendants Oleg Batratchenko (“Batratchenko”), Tatiana Smirnova (“Smirnova”), John
Does 1-20, and Thor United Corp., Thor United Corp. (Nevis), Thor Real Estate Master Fund,
Ltd., Thor Asset Management, Inc. (“TAM”), Thor Real Estate Management LLC, Thor Capital
LLC, Thor Futures LLC, and Thor Realty LLC (collectively “Thor Defendants” or “Thor
Entities”). Plaintiff also brings several state law claims sounding in contract law, fraud, and
breach of fiduciary duty. Batratchenko and the Thor Defendants have moved to dismiss the
Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). For the
reasons that follow, Defendants’ motion is granted.
1
I.
Background
A.
Factual Background 1
1.
The Parties
The so-called “Thor Group” is an international financial services organization based in
New York. Each of the Thor Entities is a member of the Thor Group. (Amended Complaint,
Dkt. No. 24 (“Compl.”), at ¶ 24.) Thor United is the parent corporation for the Thor Group,
which provides “service, logistics, and marketing functions within the Thor Group, administers
funds invested in the Thor Programs . . . and invests these funds on behalf of the investors of the
Thor Programs.” (Id. at ¶ 29.) Thor United Corp. (Nevis) is an international holding company
for the Thor Group. (Id. at ¶ 25.) Among the Thor Entities are commodity futures and real
estate based investment programs, or the “Thor Programs,” which were “touted” to potential
investors as “western-style” funds based out of the Thor Entities’ New York office. (Id. at ¶¶ 31,
33.) Of these programs, Thor Guarant is a fund that invests in real estate property and
development, Thor Optima invests in options, futures, securities, and financial instruments, and
Thor Opti-Max combines real estate and financial instrument assets through both Thor Optima
and Thor Guarant. (Id. ¶ 33.) Thor United administered the three Thor Programs; TAM, Thor
Opti-Max LLC, and Thor Real Estate Management LLC managed the Thor Programs; and Thor
Futures LLC and Thor Capital LLC acted as brokers for the Thor Programs. (Id. at ¶ 33.)
During the relevant time, Defendant TAM was registered with the National Futures
Association as both a “Commodity Trading Advisor” and “Commodity Pool Operator.” (Id. at ¶
101.) Defendant Thor Opti-Max LLC is or was an Exempt Commodity Pool Operator,
1
The facts are taken from the Amended Complaint, and, for purposes of the motion to dismiss,
are presumed true.
2
Defendant Thor United has been registered as a Commodity Pool Operator, Thor Opti-Max
Fund, Ltd. is a commodity pool, and Batratchenko was registered with the National Futures
Association as a “Principal Approved” of TAM and Thor United. (Id. at ¶¶ 102-105.)
Defendant Batratchenko is a United States citizen who now resides in Moscow, and
operates as CEO of the Thor Group, and co-founder, principal, officer, director, agent, owner, or
employee of the other Thor Entities. (Id. at ¶ 11.) Smirnova is a director of the Thor Opti-Max
Program and Thor Guarant Program, and has served in various managerial capacities for the
Thor Entities. (Id. at ¶ 12.) Plaintiff alleges that during the relevant period, the Thor Defendants
acted as Commodity Pool Operators and Advisors, while Batrachenko and Smirnova operated as
associated persons or principals of said Operators and Advisors. (Id. at ¶¶ 106-07.) Plaintiff is a
citizen of the Russian Federation who resides in Surgut, Russia. (Id. at ¶ 10.)
2.
The Investments
Plaintiff first met Batratchenko in January 2006. (Id. at ¶ 40.) Batratchenko solicited
Plaintiff to invest in the Thor Entities, providing Plaintiff with brochures and other materials in
Russian, which described the Thor Entities’ assets. (Id.) These assets included options, futures,
real estate, securities with guaranteed income, United States Treasury bonds, and money market
accounts. (Id.) Plaintiff alleges that Defendants, namely Batretchenko through his agents,
falsely represented to her that: (1) “she would have the ability as an investor to withdraw both
principal and investment returns at any time upon a set period of notice, as short as 12 to 15
business days and up to 40 business days after the quarter in which she requested withdrawal;”
(2) funds in Thor Optima and Thor Opti-Max Programs would be placed in financial
instruments, including commodities futures, and “traded on a short-term, low-risk basis using
‘market neutral’ algorithms and strategies, and would be placed in risk-free U.S. money market
3
accounts when not engaged in such trading;” (3) “investments in the Thor Guarant Program
would achieve a controlled level of investment risk;” (4) “investments would be managed by
Peter Kambolin and Alexei Cheklov,” both of whom are experienced, futures trading and
investment experts; (5) “investments would be valued regularly and even on a daily basis;” and
(6) the three Thor Programs would receive audits by “reputable international audit firms.” (Id. at
¶ 41.)
Based on these representations, Plaintiff entered into two investment contracts with
Batratchenko and Thor United in 2006 and 2007. (Id. at ¶ 50.) These contracts expressly
incorporated the terms of several investment memoranda, which outline the terms and conditions
of Plaintiff’s various investments. (Id. at ¶¶ 51-60.) Plaintiff first transferred approximately
$400,000 to Thor United’s JP Morgan Chase Bank account in New York on March 13, 2006.
(Id. at ¶ 52.) Later, in 2007, after another meeting with Batratchenko, Plaintiff invested another
$320,000 in the Thor Entities—again through an account administered by Thor United. (Id. at ¶¶
53-54.) Prior to this second investment, Defendants redeemed an initial redemption request, and
Plaintiff received, as a result, around $50,000 of her investment. (Id. at ¶ 56.) Between 2008
and 2009, Plaintiff made four withdrawals of approximately $20,000 each, leaving a remaining
principal in the Thor Programs of $590,000. (Id.)
3.
The Representations
Over the course of several years, Defendants sent Plaintiff account statements, which
generally showed positive returns. (See id. at ¶ 61 (statement for March 8, 2009 showed 48.19%
gain on Plaintiff’s investment; May 17, 2009 statement showed 48.60% total gain on invested
capital).) Around May 2009, Plaintiff sought to withdraw the funds from her account, but
Defendants did not return the requested funds. For the next seven months, Plaintiff received no
4
account statements from Defendants, eventually obtaining one in November 2009 for Account
Number 7724. (Id. at ¶¶ 62-65.) This November 2009 statement reported that Plaintiff’s
investment had lost more than 50% of its value since May 2009, decreasing from over $520,000
to approximately $250,000. Similarly, for her second account, Account Number 11631, a March
2009 statement represented a 24.03% gain, whereas a November 2009 statement reported a
massive loss. (Id. at ¶ 65.) Plaintiff also requested a return of this account’s funds, again to no
avail. (Id.)
Plaintiff additionally alleges that “[w]hile reporting enormous returns from 2007 through
the first half of 2009, Defendants made numerous other representations falsely assuring Plaintiff
and other investors of the safety of their funds.” (Id. at ¶ 66.) Citing 2008 letters, which
accompanied account statements, Plaintiffs allege that Defendants “insisted that Thor Opti-Max
provided liquidity, safety of investments, and stable high returns.” (Id.) Moreover, “Defendants
asserted that the New York residential property market would need to experience a threefold
decline from then-current levels for Thor Guarant’s investment in the Williamsburg Terrace
project located in Brooklyn, New York to break even.” (Id.) In March 2010, Plaintiff again
applied to terminate her account and withdraw her funds from the Thor Guarant Program.
Defendants, however, never returned her principal.
Plaintiff also cites several other specific communications with Batrachenko, which
include:
•
•
Communications and meetings in late 2009 with Batratchenko in which he
reassured Plaintiff that the “Thor Programs were merely experiencing a temporary
dip in liquidity, as opposed to value, and that her funds would soon be returned.”
(Id. at ¶ 69.)
A response to a November 6, 2009 letter from Plaintiff requesting a full
accounting of her assets and investments in the Thor Programs, in which
5
•
•
“Batratchenko replied on behalf of the Thor Programs, reassuring investors that
the long-term potential of their investments was strong.” (Id. at ¶ 70.)
An in-person meeting on January 21, 2010, between Plaintiff, other investors, and
Batratchenko, during which Batratchenko made “further assurances regarding the
Thor Programs and the safety of their investments,” and “agreed to provide
detailed financial statements, investment information, and redemption schedules
for return of the funds by April 1, 2010.” (Id. at ¶ 71.)
An April 16, 2010 letter from Batratchenko asserting that “due to onerous new
regulations in the United States, investors could not withdraw their funds from the
investment accounts without providing [certain] official confirmations and
documents.” Such confirmations included, inter alia, “(i) an officially confirmed
net worth of at least $1 million, and a total annual family income of at least
$200,000; (ii) official confirmation that the investor is the sole owner of the
funds; and (iii) official confirmation of the source of investments and proper
payment of all taxes due thereon.” (Id. at ¶ 73 (emphasis in original).)
4.
The Unraveling
During the three-year period from 2006 to 2009, under Batratchenko’s direction, Thor
Guarant, via Thor Real Estate Master Fund, Ltd., invested $40 million worth of investors’ funds,
which included Plaintiff’s funds, as unsecured loans to an undercapitalized entity known as
Atlant Capital Holdings LLC (“Atlant”). (Id. at ¶ 75.) Atlant is not an affiliate of the Thor
Programs, but rather, constitutes an “entity that made equity investments in commercial and
residential property developments in New York using funds loaned by Thor Real Estate Master
Fund, Ltd.” (Id. at ¶ 76.) Several of the Atlant loans were signed after the credit markets had
ceased functioning properly due to the financial crisis in late 2008 and early 2009. Batretchenko
executed each of the loan agreements for Thor Real Estate Master Fund, Ltd., which were in turn
paid out to Atlant. (Id. at ¶ 81.)
Atlant invested these loan proceeds in commercial and residential real estate ventures in
New York. As these loans were unsecured, and Atlant itself undercapitalized, the Thor
Programs investors assumed the risk of these transaction. Plaintiff alleges that, by June 2009,
nearly half of the original $40 million loaned to Atlant was “irretrievably lost,” with the real
6
estate ventures having failed and remaining subject to secured commercial mortgages at that
time. (Id. at ¶ 85.) For example, Peter Kambolin (“Kambolin”) of Atlant, wrote in a letter to
Batratchenko in June 2009 that, with respect to certain real estate investments, the “total invested
amount of $15,425,000 therefor[sic] would be lost and Borrower [i.e., Atlant] may not be able to
repay such amounts to Lender [i.e., Thor Guarant].” (Id.) By the end of 2009, “commercial
loans guaranteed by Atlant and personally by Batratchenko, and secured by liens on
Williamsburg Terrace, entered into default.” (Id. at ¶ 86.) This property was Atlant’s largest
real estate project, and Plaintiff alleges that Atlant had invested approximately $23 million of the
$40 million in unsecured loans from the Thor Guarant Progam in said Williamsburg Terrace
property. (Id.)
On November 8, 2009, Atlant, Kambolin, and Batratchenko signed an assignment and
release with MB Financial Bank, N.A., the commercial lender which had assumed a predecessor
bank’s right and interest in the commercial loan for Williamsburg Terrace. This agreement
required that in exchange for a full release from liability for any outstanding debt for the
commercial loans associated with Batratchenko’s personal guarantees, Batratchenko agreed that
neither he nor his affiliates would receive any consideration from the sale of the Williamsburg
property or would acquire any direct or indirect ownership or interest in said property. (Id. at ¶¶
87-88.) Plaintiff alleges that Defendants failed to disclose to Plaintiff that Batratchenko had
personal financial interests in Atlant’s investments, along with the fact that the Thor Entities may
not obtain any future recovery from the sale of Williamsburg Terrace. (Id. ¶ 91.) To date,
Atlant’s real estate investments have lost their value, and $35 million of the $39 million owed to
Thor Guarant remains unpaid, “with no prospect of recovery.” (Id.)
7
5.
Procedural Background
Loginovskaya filed the Amended Complaint in this action on June 21, 2012. (See
Compl.) Batratchenko and the Thor Entities promptly moved to dismiss on July 5, 2012;
Plaintiff opposed the motion on September 14, 2012; and Defendants replied on October 26,
2012. (See Dkt. Nos. 31, 36, 37.) The Court held oral argument on March 8, 2013. 2
II.
Standard of Review
When deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6),
a court is obliged to “accept as true all of the factual allegations contained in the complaint,” Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 572 (2007) (quotations and citation omitted), drawing
“all inferences in the light most favorable to the non-moving party’s favor.” In re NYSE
Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007). Courts deciding motions to dismiss are
“not limited to the face of the complaint,” and “may [also] consider any written instrument
attached to the complaint, statements or documents incorporated into the complaint by reference,
legally required public disclosure documents filed with the SEC, and documents possessed by or
known to the plaintiff and upon which it relied in bringing the suit.” In re Scottish Re Group
Sec. Litig., 524 F. Supp. 2d 370, 382 (S.D.N.Y. 2007) (quotations and footnote omitted).
Although Federal Rule of Civil Procedure 8(a) requires only a “short and plain statement
of the claim showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), it is well
2
A similar action, alleging analogous breaches of contract and fiduciary duties claims, was filed
against Batratchenko and the Thor Entities in March 2011. That case, which is before Judge
Paul G. Gardephe in this District, settled in January 2012. However, it has since been reinstated
to the court’s docket, as the settlement has not been consummated. See Matveev v.
Batratchenko, No. 11 Civ. 1593, Order, Dkt. No. 66, November 21, 2012. Furthermore,
additional plaintiffs brought a similar action against Batratchenko and the Thor Defendants in
December 2011, and Defendants also moved to dismiss the Complaint in that action. See
Starshinova v. Batratchenko, No. 11 Civ. 9498, Motion to Dismiss Amended Complaint, Dkt.
No. 55, June 11, 2012. Judge Wood granted that motion on March 15, 2013.
8
settled that the complaint must do more than plead facts that suggest “the mere possibility of
misconduct.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). In other words, in order to properly
state a claim and avoid dismissal, a plaintiff must state “the grounds upon which his claim rests
through factual allegations sufficient ‘to raise a right to relief above the speculative level.’” ATSI
Comm., Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Twombly, 550 U.S. at
556) (footnote omitted). At bottom, to survive a motion to dismiss, a plaintiff’s facts must give
rise to a plausible narrative supporting the claim. See Twombly, 550 U.S. at 570 (“Here, in
contrast, we do not require heightened fact pleading of specifics, but only enough facts to state a
claim to relief that is plausible on its face. Because the plaintiffs here have not nudged their
claims across the line from conceivable to plausible, their complaint must be dismissed.”).
A claim for fraud must also comply with Federal Rule of Procedure 9(b), which mandates
that plaintiffs, “[i]n alleging fraud or mistake, . . . must state with particularity the circumstances
constituting fraud or mistake.” Fed. R. Civ. P. 9(b). However, “[m]alice, intent, knowledge and
other conditions of a person’s mind may be averred generally.” Id. More specifically, this rule
requires that a plaintiff “(1) specify the statements that the plaintiff contends were fraudulent, (2)
identify the speaker, (3) state where and when the statements were made, and (4) explain why the
statements were fraudulent.” Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (quotations
and citation omitted).
III.
Legal Standard
A.
The CEA
1.
Section 4o’s Antifraud Provision
“The CEA ‘is a remedial statute that serves the crucial purpose of protecting the innocent
individual investor—who may know little about the intricacies and complexities of the
9
commodities market—from being misled or deceived.’” Commodity Futures Trading Comm’n
v. Heffernan, 245 F. Supp. 2d 1276, 1290 (S.D. Ga. 2003) (quoting CFTC v. R.J. Fitzgerald &
Co., Inc., 310 F.3d 1321, 1329 (11th Cir. 2002)). “The purpose of the CEA is served through
several antifraud provisions, including 7 U.S.C.A. § 6o(1).” Id. Section 4o of the CEA, provides
in pertinent part:
(1) It shall be unlawful for any commodity trading advisor,
associated person of a commodity trading advisor, commodity pool
operator, or associated person of a commodity pool operator, by
use of the mails or any means or instrumentality of interstate
commerce, directly or indirectly—
(A) to employ any device, scheme, or artifice to defraud any client
or participant or prospective client or participant; or
(B) to engage in any transaction, practice, or course of business
which operates as a fraud or deceit upon any client or participant or
prospective client or participant.
7 U.S.C. § 6o(1)(A)-(B).
“Sections 4b and 4o of the CEA are derived from the common law action for fraud.”
Alvin S. Schwartz, M.S., P.A. Employer/Employee Profit Sharing Plan v. O’Grady, No. 86 Civ.
4243, 1990 WL 156274, at *9 (S.D.N.Y. Oct. 12, 1990) (footnote omitted). And here,
[i]n New York, an action for common law fraud requires (1) a
misrepresentation (2) of a material fact, (3) which was false (4) and
known to be false by the defendant, (5) that was made for the
purpose of inducing plaintiff to rely on it, and (6) that the plaintiff
rightfully did so rely (7) in ignorance of its falsity (8) to his injury.
Id. However, the Commodity Futures Trading Commission (“CFTC”) has interpreted § 4o(1)(B)
so as not to require scienter, as is mandated for both violations of Rule 10b-5 of the Exchange
Act of 1934, and violations of § 4(b) of the CEA. See In the Matter of Winell, Comm. Fut. L.
Rep. (CCH) ¶ 31,949 (C.F.T.C. 2011); accord In re Slusser, Comm. Fut. L. Rep. (CCH) ¶ 27,701
(C.F.T.C. 1999); 13 Commodities Reg. § 3:8 (“In In re Kolter, [In re Kolter, Comm. Fut. L. Rep.
10
(CCH) ¶ 26, 262 (C.F.T.C. 1994)] the CFTC stated that, while scienter is necessary to establish
violations of Section 4b and for Section 4o(1)(A) of the Commodity Exchange Act, it is not
necessary to establish a violation of Section 4o(1)(B).” (internal footnote omitted)). Instead, in
order to establish a violation of § 4o(1)(B), a plaintiff need only show that the conduct had the
“effect” of defrauding a customer. 3 Heffernan, 245 F. Supp. 2d at 1290; accord First Nat.
Monetary Corp. v. Weinberger, 819 F.2d 1334, 1342 (6th Cir. 1987) (“We therefore conclude
that § 4o does not contain the same scienter requirement as § 4b. To succeed in a reparation
proceeding before the CFTC under § 4o, the complainant need prove only that the commodity
3
In discussing scienter within the context of the CEA’s antifraud provisions, one commentator
has remarked:
As to other parts of CEA which do not mention scienter, the
Supreme Court’s reasoning in Aaron v. Securities and Exchange
Commission, 446 U.S. 680, 100 S. Ct. 1945, 64 L. Ed. 2d 611, Fed.
Sec. L. Rep. (CCH) ¶97511 (1980), 556 BNA Sec Reg & L Rep H1 (June 2, 1980) [discussed in § 12:77 above] seems applicable in
several respects. First, whatever the scienter standard is for a
particular statutory provision, it is the same whether the plaintiff is
a government agency seeking injunction or a private person
seeking damages. Second, the language of the general antifraud
CEA § 4b(A), 7 U.S.C.A. § 6b(A) (“unlawful . . . to cheat or
defraud”) shows a Congressional intent to prohibit only knowing
or intentional misconduct, and thus to require a scienter greater
than negligence. Third, the CTA-CPO antifraud CEA § 4o(1)(A),
7 U.S.C.A. § 6o(1)(A) (“unlawfully . . . to employ any device,
scheme, or artifice to defraud”) shows the same intent. Fourth, the
other CTA-CPO antifraud provision, CEA § 4o(1)(B), 7 U.S.C.A.
§ 6o(1)(B) (“unlawful . . . to engage in any transaction, practice or
course of business which operates as a fraud or deceit . . .”) focuses
on effect rather than culpability, and thus does not require scienter.
This is true even though CEA § 4o(1)(B) lacks the additional
phrase “or would operate” as a fraud, which is in SA § 17(a)(3)
and which figured in the Court’s interpretation.
6 Bromberg & Lowenfels on Securities Fraud § 12:169 (2d ed.)
11
trading advisor intentionally made the statements complained of, and not that the advisor acted
with the intent to defraud.”).
2.
Section 22’s Private right of Action
Section 22(a) of the CEA establishes a private right of action for individual litigants in
four, limited circumstances. 7 U.S.C. § 25(a)(1)(A)-(D). 4 The applicable section, titled, “Actual
damages; actionable transactions; exclusive remedy,” provides that:
4
The text of § 22(a)(1)(A)-(D) reads as follows:
(1) Any person (other than a registered entity or registered futures
association) who violates this chapter or who willfully aids, abets,
counsels, induces, or procures the commission of a violation of this
chapter shall be liable for actual damages resulting from one or
more of the transactions referred to in subparagraphs (A) through
(D) of this paragraph and caused by such violation to any other
person—
(A) who received trading advice from such person for a fee;
(B) who made through such person any contract of sale of any
commodity for future delivery (or option on such contract or any
commodity) or any swap; or who deposited with or paid to such
person money, securities, or property (or incurred debt in lieu
thereof) in connection with any order to make such contract or any
swap;
(C) who purchased from or sold to such person or placed through
such person an order for the purchase or sale of—
(i) an option subject to section 6c of this title (other than an option
purchased or sold on a registered entity or other board of trade);
(ii) a contract subject to section 23 of this title; or
(iii) an interest or participation in a commodity pool; or
(iv) a swap; or
(D) who purchased or sold a contract referred to in subparagraph
(B) hereof or swap if the violation constitutes—
(i) the use or employment of, or an attempt to use or employ, in
connection with a swap, or a contract of sale of a commodity, in
interstate commerce, or for future delivery on or subject to the
rules of any registered entity, any manipulative device or
contrivance in contravention of such rules and regulations as the
Commission shall promulgate by not later than 1 year after July 21,
2010; or
12
To have standing under Section 22, a private plaintiff must fall into
one of four categories: a plaintiff must either have (A) received
trading advice from Defendants for a fee; (B) traded through
Defendants or deposited money with Defendants in connection
with a commodities trade; (C) purchased from or sold to
Defendants or placed an order for purchase or sale of a commodity
through them; or (D) engaged in certain market manipulation
activities in connection with the purchase or sale of a commodity
contract.
Starshinova v. Batratchenko, No. 11 Civ. 9498, 2013 WL 1104288, at *8 (S.D.N.Y. Mar. 15,
2013) (citing 7 U.S.C. § 25(a)(1)(A)-(D)); accord Klein & Co. Futures, Inc. v. Bd. of Trade of
City of New York, 464 F.3d 255, 260 (2d Cir. 2006) (“The common thread of these four
subdivisions is that they limit claims to those of a plaintiff who actually traded in the
commodities market.”). The four subdivisions of § 22(a)(1) are conduct-based and explicitly
transactional in nature: (A) the receipt of “trading advice . . . for a fee;” (B) the making of a
“contract of sale of any commodity for future delivery” or the deposit or payment of “money,
securities, or property . . . in connection with any order to make such contract or swap;” (C) the
purchase or sale or placing of an order for purchase or sale of a commodity; or (D) market
manipulation “in connection with a swap, or a contract of sale of a commodity.” 7 U.S.C.
25(a)(1)(A)-(D) (emphasis added).
B.
Morrison v. National Australia Bank5
The Supreme Court’s decision in Morrison v. Nat’l Australia Bank, 130 S. Ct. 2869
(2010), held that the antifraud protections of § 10(b) of the ’34 Act apply only to “transactions in
(ii) a manipulation of the price of any such contract or swap or the
price of the commodity underlying such contract or swap.
5
130 S. Ct. 2869 (2010).
13
securities listed on domestic exchanges, and domestic transactions in other securities, to which §
10(b) of the Securities Exchange Act applies.” Id. at 2884.
1.
Presumption against Extraterritoriality
Morrison emphasized and clarified a “‘longstanding principle of American law that
legislation of Congress, unless a contrary intent appears, is meant to apply only within the
territorial jurisdiction of the United States.’” 130 S. Ct. at 2877 (quoting EEOC v. Arabian
American Oil Co.[Aramco], 449 U.S. 244, 248 (1991) (internal quotations and citation omitted)).
This so-called canon of construction stems from the understanding that “Congress ordinarily
legislates with respect to domestic, not foreign matters.” Id. Thus, where a statute, on its face,
“contains nothing to suggest it applies abroad,” id. at 2881, even potential interpretations that
suggest its foreign reach will fail to “override the presumption against extraterritoriality.” Id. at
2882; accord Aramco, 449 U.S. at 253.
Although the presumption against extraterritoriality is appropriately applied in all cases,
not just those involving the ’34 Act, Morrison, 130 S. Ct. at 2881, the presumption alone “is not
self-evidently dispositive,” but rather, “requires further analysis.” Id. at 2884. Accordingly, in
order for the CEA’s protections to apply to a given set of investors—or prospective investors—
asserting a private right of action for violations of § 4o, the fraud itself must be domestic in
nature. Therefore, here, in order for the CEA to be applicable, the implicated fraud prohibited by
the statute must be domestic. In a post-Morrison universe, however, determining whether
actionable conduct falling within a given statute is domestic in nature presents complications for
provisions whose language departs from that of § 10(b).
14
2.
Transaction Test
Prior to Morrison, the Second Circuit utilized the so-called “conduct” or “effects” test to
determine the appropriateness of extraterritorial application of § 10(b). Under that test,
whenever wrongful conduct affected the United States or United States citizens, or, alternatively,
wherever such conduct occurred in the United States, the application of § 10(b) was considered
appropriate. See Morrison, 130 S. Ct. at 2879 (“The Second Circuit had thus established that
application of § 10(b) could be premised upon either some effect on American securities markets
or investors (Schoenbaum) 6 or significant conduct in the United States (Leasco). 7 It later
formalized these two applications into (1) an ‘effects test,’ ‘whether the wrongful conduct had a
substantial effect in the United States or upon United States citizens,’ and (2) a ‘conduct test,’
‘whether the wrongful conduct occurred in the United States.’” (quoting SEC v. Berger, 322 F.3d
187, 192-93 (2d Cir. 2003) (footnotes added). Morrison replaced this “conduct” or “effects” test,
interpreting the statutory presumption against extraterritoriality as rebutted only in instances
where the securities involved are either (1) listed on domestic exchanges or (2) involved in a
domestic transaction. Morrison, 130 S. Ct. at 2885.
In Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), the
Second Circuit held that in the context of the purchase or sale of a security, the transaction
occurs at the point “at which the parties obligated themselves to perform what they had agreed to
perform even if the formal performance of their agreement is to be after a lapse of time.” Id. at
68 (quotation and citation omitted). Thus, by extension, “the point of irrevocable liability can be
used to determine the locus of a securities purchase or sale.” Id. According to the Absolute
6
Referring to Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968).
7
Referring to Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326 (2d Cir. 1972).
15
Activist Court, a plaintiff may sufficiently allege the existence of a domestic transaction by
pleading facts that lead “to the plausible inference that the parties incurred irrevocable liability
within the United States: that is, that the purchaser incurred irrevocable liability within the
United States to take and pay for a security, or that the seller incurred irrevocable liability within
the United States to deliver a security.” Id. at 68. In sum, the Court held that in the wake of
Morrison, “a plaintiff must allege facts suggesting that irrevocable liability was incurred or title
was transferred within the United States.” Id. The Court also underscored that “mere
assertion[s] that transactions ‘took place in the United States’ [are] insufficient to adequately
plead the existence of domestic transactions.” Id. at 70. Instead, a complaint must include facts
concerning elements such as “the formation of the contracts, the placement of purchase orders,
the passing of title, or the exchange of money.” Id. In Absolute Activist, the Court held that the
“fact that two of the defendants resided in California,” along with the allegation that the nonparty investors “subscribed to the Funds by wiring money to a bank located in New York,” were
insufficient to bring the relevant conduct—namely, the plaintiff-Funds’ purchases and sales of
U.S. Penny Stocks—within Morrison’s transaction test. Id.
C.
The CEA in Light of Morrison
1.
The CEA and the ’34 Act
Prior to Morrison, courts deciding commodities cases applied the same conduct or effects
test as was used in the securities context. See, e.g., Rohrer, 981 F. Supp. at 276-77 (“When faced
with transactions that are ‘predominantly foreign,’ courts must ask ‘whether Congress would
have wished the precious resources of the United States courts’ to be devoted to such
transactions.” (quoting Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 985 (2d Cir. 1975)
(Friendly, J.))); accord Societe Nationale d’Exploitation Industrielle des Tabacs et Allumettes v.
16
Salomon Bros. Intern. Ltd., 928 F. Supp. 398, 403-04, Comm. Fut. L. Rep. (CCH) P 26741
(S.D.N.Y. 1996) (dismissing “f-cubed” claim despite some involvement of American office);
Mormels v. Girofinance, S.A., 544 F. Supp. 815, 817-18, Fed. Sec. L. Rep. (CCH) P 98775
(S.D.N.Y. 1982) (same, where plaintiffs, defendants, and funds were all located in Costa Rica
and the fraudulent conduct primarily occurred there). While courts indeed previously applied the
conduct or effects test to CEA claims, in the wake of Morrison, only one court appears to have
yet addressed the extraterritorial reach of the CEA. See generally Starshinova, 2013 WL
1104288 (concluding that Morrison’s transaction test applies to CEA claims); accord 6 Bus. &
Com. Litig. Fed. Cts. § 71:4 (3d ed.) (“Although as of this writing no court had applied Morrison
to similarly limit the CEA, lower courts have read the case expansively, and its application to
private claims brought under the CEA is quite possible. Morrison will likely alter the doctrinal
basis for extraterritorial jurisdiction under the CEA. Courts previously evaluated a plaintiff’s
ability to sue under the CEA’s antifraud rules using the same tests that defined the extraterritorial
extent of the Securities Exchange Act before Morrison.” (footnotes omitted)). Given this
historic approach to CEA claims, together with the fact that the CEA case law addressing
extraterritoriality has seemingly been abrogated by Morrison, it follows that Morrison’s
presumption against extraterritoriality, together with its requirement that the interests protected
by the pertinent statute―here, the CEA―be domestic in nature, apply to the CEA claims in this
case. The applicability of Morrison’s transactional test to CEA claims under § 4o, however, is
less clear, given both the language of § 4o and the Second Circuit’s interpretation of the meaning
of domestic “transaction” in the ’34 Act context.
Section 4ο operates differently from § 10(b) of the ’34 Act. Unlike § 10(b), which is
transaction focused, § 4o is status-based, in that it prohibits commodity trading advisors, or
17
associated persons or entities, from “employ[ing] any device, scheme, or artifice to defraud any
client or participant or prospective client or participant,” or from “engaging in any transaction,
practice, or course of business which operates as a fraud or deceit upon any client or participant
or prospective client or participant.” 7 U.S.C. § 6ο(1)(A)-(B). In other words, there is no
language limiting § 4o to actions performed “in connection with the purchase or sale of” 8 a
commodity. Compare 7 U.S.C § 6o, with, 7 U.S.C. § 6b(a) (“It shall be unlawful—(1) for any
person, in or in connection with any order to make, or the making of, any contract of sale of any
commodity in interstate commerce or for future delivery that is made, or to be made, on or
subject to the rules of a designated contract market, for or on behalf of any other person . . . to
cheat or defraud or attempt to cheat or defraud the other person . . . .” (emphasis added)). In
some sense, an application of Morrison’s transaction test to § 4ο nevertheless requires an
analogous inquiry to that which is required under § 10(b): specifically, whether the interests
bought or sold here—Plaintiff’s interests and participation in Defendants’ commodity pools—
were purchased or sold domestically.
2.
The Transaction Test and § 4o
From one vantage point, it seems logical to maintain the conduct or effects test in the
context of CEA claims, given that Morrison explicitly abrogated that test with respect to
securities, but not commodities claims. Be that as it may, the more powerful inference is, in fact,
that the plain language of § 4o militates against finding that the transaction test is automatically
appropriate in a § 4o, as well as a securities, context. In support of this position is the fact that
the language of § 4ο plainly contemplates fraud that extends beyond any initial transaction in
which an interest in commodities was purchased. Moreover, § 4ο’s protection of prospective, as
8
Rule 10b-5, 15 U.S.C.A. § 78j.
18
well as actual, investors creates a difficulty with respect to the application of Absolute Activist’s
transactional definition: specifically, it is not clear how a “prospective” investor could ever incur
“irrevocable liability,” because such an individual, by definition, need not purchase an interest in
commodities in order to fall within the plain language of § 4ο. At the same time, the reality is
that the conduct or effects test governed the extraterritoriality of the CEA prior to Morrison, and
that Morrison abrogated that test. Thus, it is arguably illogical to maintain the abrogated test in
the commodities context―particularly given that commodities and securities were treated
analogously with respect to extraterritoriality prior to Morrison. Moreover, Morrison itself has
since been applied to statutes other than the ’34 Act, which would seem to broadly support its
extension to CEA claims pursuant to § 4ο. See Norex Petroleum Ltd. v. Access Indus., Inc., 631
F.3d 29, 32-33 (2d Cir. 2010) (holding that Morrison’s presumption of extraterritoriality applies
to the RICO statute).
Nevertheless, the appropriateness of extending Morrison’s transaction test to CEA claims
under § 4ο is not immediately clear. See Pope Investments II, LLC v. Deheng Law Firm, 2012
WL 3526621, at *8 (S.D.N.Y. Aug. 15, 2012) (holding that since the Complaint did not specify
where the “commitment” or “meeting of the minds” occurred, there was no “plausible inference
that title was transferred in the United States,” as required by Absolute Activist); Basis Yield
Alpha Fund (Master) v. Goldman Sachs Group, Inc., 798 F. Supp. 2d 533, 537 (S.D.N.Y. 2011)
(“Plaintiff fails to provide sufficient facts that allow the Court to draw the reasonable inference
that the purchase or sale was made in the United States.”). And to hold that Morrison’s
presumption against extraterritoriality applies to all statutes is quite different from grafting its
transaction test onto a statutory provision whose plain language appears to resist such an
interpretation.
19
Although Morrison explicitly held that the presumption against extraterritoriality applies
to all laws that are silent on extraterritorial application, 130 S. Ct. at 2881 (“Rather than guess
anew in each case, we apply the presumption in all cases, preserving a stable background against
which Congress can legislate with predictable effects.”), the applicability of the transaction test
outside of § 10(b) is not self evident. Id. at 2884 (“Applying the same mode of analysis here, we
think that the focus of the Exchange Act is not upon the place where the deception originated,
but upon purchases and sales of securities in the United States. . . . Those purchase-and-sale
transactions are the objects of the statute’s solicitude. It is those transactions that the statute
seeks to ‘regulate[.]’ . . .” (citations omitted)). In fact, courts in this district have suggested that
the transactional aspect of Morrison’s holding does not automatically extend beyond § 10(b).
See, e.g., S.E.C. v. Gruss, 859 F. Supp. 2d 653, 661 (S.D.N.Y. 2012) (“The Supreme Court
framed the issue before it narrowly . . . . Despite Gruss’ attempts to draw parallels between
Morrison and the instant case, the facts of this action fall outside the narrowly framed issue
before the Court.” (citation omitted)).
The terms of § 4o are broader than the “purchase or sale” language of § 10(b).
Accordingly, Morrison’s transaction test is not immediately applicable to § 4o. This particular
antifraud provision, however, cannot be read in isolation from the rest of the CEA. Rather, § 4o
must be read in pari materia with the other provisions of the statute, including, most importantly,
that which confers a private right of action, § 22. 9 See Mosle v. Bidwell, 130 F. 334, 335 (2d Cir.
1904) (“In doubtful cases a court should compare all parts of a statute and different statutes in
pari materia to ascertain the intent of the Legislature.”); accord Ingenito v. Bermec Corp., 376 F.
Supp. 1154, 1177 (S.D.N.Y. 1974) (“In view of the familiar canon of statutory construction that
9
Section 22 of the CEA is codified at 7 U.S.C. § 25.
20
parts of a statute are to be read together, in pari materia, Congress can hardly have intended to
create a strictly limited cause of action for rescission, whose timely prosecution is essential to its
survival and also to permit a § 10(b) fraud claim for failure to call investors’ attention to the
existence of the right. Such a construction would read § 13 out of the statute, since every
rescission action would (or could) thereby be converted into a fraud claim with a six-year
limitations period.” (internal citation omitted)).
3.
The Transaction-Based Language of § 22(a)
Unlike the broad language of § 4o, which extends beyond the transactions contemplated
in Morrison and Absolute Activist, the four subdivisions of § 22(a) are explicitly transactional in
nature: (A) the receipt of “trading advice . . . for a fee;” (B) the making of a “contract of sale of
any commodity for future delivery” or the deposit or payment of “money, securities, or property
. . . in connection with any order to make such contract or swap”; (C) the purchase or sale or
placing of an order for purchase or sale of a commodity; or (D) market manipulation “in
connection with a swap, or a contract of sale of a commodity.” 7 U.S.C. 25(a)(1)(A)-(D)
(emphasis added). Accordingly, though Morrison’s transactional focus, and Absolute Activist’s
subsequent clarification, seem inapposite to the breadth of prohibited conduct in § 4o, the CEA’s
antifraud provisions must be read in pari materia with the statutory text creating its private right
of action, which must be interpreted with reference to Morrison’s analysis of extraterritoriality
and transactions.
Morrison emphasized that “Section 10(b) does not punish deceptive conduct, but only
deceptive conduct ‘in connection with the purchase or sale of any security registered on a
national securities exchange or any security not so registered.’” 130 S. Ct. at 2884 (quoting 15
U.S.C. § 78j(b)). Put another way, the “in connection with the purchase or sale” language of the
21
’34 Act provision makes the transaction test particularly appropriate, as the actionable conduct is
explicitly limited to a particular context. Id. (“Those purchase-and-sale transactions are the
objects of the statute’s solicitude. It is those transactions that the statute seeks to ‘regulate’; it is
parties or prospective parties to those transactions that the statute seeks to ‘protec[t]’ . . . .”
(citations omitted)). To carry the analogy forward, § 4o of the CEA does not punish all conduct
that “operates as a fraud or deceit upon any client or participant or prospective client or
participant.” 7 U.S.C. § 6o(1)(B). Insofar as private litigants are concerned, § 4o necessarily
reaches only conduct that is enumerated in § 22. To understand § 4o as separate from the
transactional limitations of § 22 would be to read the requirements of the CEA’s enumerated
private right of action out of the statute. Given the presumption against extraterritoriality, it
follows that in order for a private litigant to assert a viable claim pursuant to § 4o, one or more of
the transactions enumerated in § 22 must be domestic in nature.
Courts recognize, of course, that “the question whether a statute confers a private right of
action [and] the question whether the statute’s substantive prohibition reaches a particular form
of conduct . . . are analytically distinct.” Gomez-Perez v. Potter, 553 U.S. 474, 483 (2008). To
conflate the two questions is both confusing and “lead[s] to exceedingly strange results.” Id.
Additionally, Morrison itself distinguishes between the conduct prohibited by § 10(b) and the
implied private right of action associated with the relevant provision, noting: “It is doubtless true
that, because the implied private cause of action under § 10(b) and Rule 10b-5 is a thing of our
own creation, we have also defined its contours. But when it comes to ‘the scope of [the]
conduct prohibited by [Rule 10b-5 and] § 10(b), the text of the statute controls our decision.’”
Morrison, 130 S. Ct. at 2890 n.3 (quoting Central Bank of Denver, N.A. v. First Interstate Bank
of Denver, N. A., 511 U.S. 164, 173 (1994) (internal citation omitted)). Neither Gomez-Perez,
22
nor Morrison, however, controls the analysis in this case. Unlike the rights of action at issue in
those cases, § 22 is an explicit, statutory right of action framed in terms of prohibited conduct.
Accordingly, the Court’s reading of the CEA is permissible in light of both Gomez-Perez and
Morrison, as (1) § 22 is an explicit, statutory right of action, rather than an implied one, and even
outside the context of Morrison it accordingly delimits prohibitions described in other areas of
the CEA; and (2) § 22 is written in terms of actionable conduct, and therefore it is not merely a
provision concerning who may sue, but rather, by its own terms, affects the content of the CEA’s
prohibitions. Put another way, as a creature of statute subject to the presumption of
extraterritoriality announced in Morrison, this statutory right of action does not stand on the
same footing as rights of action implied through federal common law. Because Congress chose
to limit the CEA in this manner, the text it used to impose those limits must be given full effect.
Further, unlike express or implied rights of action that merely concern who may sue, § 22 is
written in terms of actionable conduct. Thus, by its own terms, § 22 affects the content of the
CEA’s prohibitions. For that reason, the interpretation of which conduct § 22 actually covers is
appropriately undertaken with guidance from Morrison, which set forth binding law on the
analysis of transactional conduct in an analogous context. 10 In fact, § 22(a)―titled “Actual
10
Morrison indeed distinguished between the implied private right of action applicable to
§ 10(b), and the text of the statutory prohibition, noting that the territorial scope of the latter was
key to the inquiry, rather than the scope of the cause of action itself. The Morrison Court,
however, was not faced with an explicit, private right of action that delimited the scope of the
prohibition to certain, actionable transactions. Similarly, nothing in Gomez-Perez prevents this
interpretation of the CEA. In Gomez-Perez, the Supreme Court held that the First Circuit was
wrong to infer from the existence of a private right of action, a subsequent limitation on the
prohibitory conduct enumerated in § 633a(a) of the Age Discrimination in Employment Act (the
“ADEA”). 553 U.S. at 483. Put another way, the Court determined, by analogizing to Title IX
and sex discrimination, that the prohibition of discrimination outlined in § 633a(a) either “[did]
or [did] not reach retaliation, and the presence or absence of another statutory provision
expressly creating a private right of action cannot alter [the prohibition’s scope].” Id. The
23
damages; actionable transactions; exclusive remedy, 7 U.S.C. § 25(a) (emphasis added)―limits
actionable fraud to its particular, enumerated categories. 11 This limitation reflects an explicit
judgment by Congress to articulate the scope of the CEA’s antifraud provisions within the realm
of private rights of action. 12
D.
Summary of Relevant Law
To summarize: The Court in Morrison held that a presumption against extraterritoriality
applies in all cases as a canon of statutory construction. The presumption against
extraterritoriality does not end the matter, however, as courts must determine whether the
conduct covered by the statute at issue is “domestic” in relevant respects. Morrison held that, in
the context of § 10(b), the appropriate test is transactional in nature, particularly in light of the
“purchase or sale” language of the relevant provisions of the ’34 Act. The Second Circuit later
Gomez-Perez Court also noted that to limit the scope of the ADEA’s prohibitions due to the mere
presence of a private right of action would yield an absurd result: “[I]t would be perverse if the
enactment of a provision explicitly creating a private right of action—a provision that, if
anything, would tend to suggest that Congress perceived a need for a strong remedy—were taken
as a justification for narrowing the scope of the underlying prohibition.” Id.
11
Under Gomez-Perez, it would be impermissible for the Court to infer from the provision of a
private right of action the existence of a limitation on the statute’s prohibitory scope. But here,
applying Morrison’s transaction test to the relevant cause of action is simply giving effect to
Congress’s explicit intent to limit actionable conduct in a certain way. Indeed, the cause of
action at issue in Gomez-Perez constituted a far broader provision than the highly specific
language of the CEA’s § 22. See 29 U.S.C. § 633a(c) (“Any person aggrieved may bring a civil
action in any Federal district court of competent jurisdiction for such legal or equitable relief as
will effectuate the purposes of this chapter.”).
12
It is worth noting that the CFTC has no such limitation on its own ability to bring suit,
meaning that the applicable test to determine whether the prohibited conduct at issue was
domestic in nature will necessarily vary depending on whether a private litigant sues pursuant to
§ 22, or whether the CFTC asserts its own cause of action (transactional when a private litigant
asserts a claim and more broadly based when the CFTC brings a claim). Nevertheless, this result
does not depart from Congressional intent, given the unequivocal delimitating effect of the
private right of action that Congress chose to create.
24
clarified the transactional language of Morrison, noting that the location of a given securities
transaction is the place where either (1) title passes or (2) the parties incur irrevocable liability, in
the sense that they become bound and committed to perform their respective obligations. The
CEA is silent as to its extraterritorial reach; accordingly, the Morrison presumption against
extraterritoriality applies in full force. Neither that presumption nor Morrison’s analysis of
transactions, however, modifies preexisting doctrine on the meaning of § 4o, since the language
of that provision is broader than the “purchase or sale” terminology of § 10(b). However, for
reasons stated above, Morrison does govern analysis of the transactional conduct included in the
private rights of action spelled out in § 22(a), which specifically delimits actionable conduct to
four, specific types of transactions. Accordingly, the transactional analysis of Morrison is
appropriate in this context.
IV.
Application to Plaintiff’s Allegations
Defendants move to dismiss Plaintiff’s CEA claims on the following grounds: (1) that the
CEA does not apply to extraterritorial transactions such as those that occurred between Plaintiff
and Defendants; (2) that Plaintiff lacks standing under the CEA; (3) that the alleged
misstatements are non-actionable due to lack of materiality, specificity, reliance, and scienter;
and (4) that Plaintiff has failed to allege facts sufficient to pierce the corporate veil among the
Thor Entities. The Court addresses the first argument, which is dispositive.
A.
Application of Presumption Against Extraterritoriality
The CEA, like § 10(b) of the ’34 Act, contains nothing on its face that suggests
extraterritorial application. See Rohrer v. FSI Futures, 981 F. Supp. 270, 276-77 (S.D.N.Y.
1997) (“Federal commodities and securities laws, regarded as analogous on the point, are silent
regarding the issue of extraterritorial jurisdiction over cases of alleged fraud.”). In fact, § 4(b) of
25
the CEA limits the jurisdiction of the CFTC to individuals “located in the United States,” adding
that “[n]o rule or regulation may be adopted” under § 4(b), that would require the CFTC to
regulate rules or contracts proposed by a foreign commodities board, or which “governs in any
way” any rule or contract for such a foreign board. 7 U.S.C. § 6(b)(2)(C)(i)-(ii); accord
Starshinova, 2013 WL 1104288, at *7. Although § 4o indeed refers to fraud or
misrepresentation effectuated by use of the mails or interstate commerce, Morrison specifically
rejected the contention that a statutory reference to “interstate commerce” includes commerce
between foreign countries and the United States. See Starshinova, 2013 WL 1104288, at * 7
(“Consequently, the reference to ‘interstate commerce’ in Section 4o does not indicate Section
4o was intended to apply abroad.”) Accordingly, Morrison’s presumption against
extraterritoriality applies with full force to Plaintiff’s claims under the CEA.
B.
Application of the Transaction Test
Plaintiff brings this suit pursuant to § 22(a) of the CEA, which is titled “Actual damages;
actionable transactions; exclusive remedy,” and, as discussed, establishes a private right of action
in four, limited circumstances. 7 U.S.C. § 25.
Here, Plaintiff asserts that she is “among those whom Section 22(a) authorizes to bring
such an action.” (Pl.’s Opp. at 16.) In support of this contention, Plaintiff alleges that she has
pleaded sufficient facts under §§ 22(a)(1)(A) and (C). (Id.) With respect to § 22(a)(1)(A),
Plaintiff claims that she paid Defendants fees in exchange for their trading advice. (Id.)
Specifically, Plaintiff claims that Thor United and its investment managers collected fees from
Plaintiff, including fixed fees, procedural fees, and administrative fees (Compl. at ¶ 39), and
“[i]n total, Batratchenko-controlled entities, including TAM and Thor United, collected a
minimum of $59,900.00 in fees from Plaintiff’s investments out of her total investment of
26
approximately $720,000.00.” (Id. at ¶ 60; see also id. at ¶ 112 (“Defendants, including but not
limited to Thor United and TAM, received substantial fees in exchange for providing investment
management services, including trading advice.”).) These allegations, even if sufficient under
the plain language of § 22(a)(1)(A), fail to allege the requisite domestic transaction mandated by
Morrison. There is no indication from the pleadings as to where the fees were paid or what the
fees were in exchange for. Moreover, while Plaintiff alleges that she wired money to the Thor
Entities New York office after signing the relevant contract, there is no indication that this wire
transfer was in exchange for trading advice. In fact, the only trading advice that Plaintiff
tangentially alleges—Batratchenko’s original solicitation of Plaintiff—occurred in Russia. (Id.
at ¶ 40.) Accordingly, Plaintiff’s assertion of a private right of action based on an alleged
payment of fees in exchange for trading advice fails under Morrison, as there is no indication
from the pleadings that such a transaction was domestic in nature. Moreover, Plaintiff’s
argument that the status of the Thor Programs as American entities or the domestic nature of the
eventual real estate fraud is unavailing where the relevant transaction is non-domestic in nature.
See, e.g., Pope, 2012 WL 3526621, at *8 (“Therefore, plaintiffs’ argument that section 10(b)
applies here because the underlying fraud originated in the United States asks the court to use the
now-defunct ‘conduct’ test, and thus fails in light of Morrison.” (citing Cornwell v. Credit Suisse
Grp., 729 F. Supp. 2d 620, 624 (S.D.N.Y. 2010) (“[T]o carve out of the new rule a purchase or
sale of securities on a foreign exchange because some acts that ultimately result in the execution
of the transaction abroad take place in the United States amounts to nothing more than the
reinstatement of the conduct test[.]”)).
Alternatively, Plaintiff contends that she has satisfied § 22(a)(1)(C)(iii) by alleging that
she “purchased from . . . or placed through [Defendants] an order for the purchase or sale of an
27
interest or participation in a commodity pool,” 7 U.S.C. § 25(a)(1)(C)(iii), as she purchased an
interest in the “Thor Programs, which are commodity pools, and specifically ‘in’ Thor United,
which is a commodity pool operator.” (Pl.’s Opp. at 16.) As discussed, the language of §
22(a)(1)(C)(iii) explicitly refers to the purchase or sale of an “interest or participation in a
commodity pool.” Accordingly, to determine the location of the purchase or sale of such
“interest or participation,” and whether the transaction involved was domestic in nature or not,
Morrison’s transactional analysis, as further defined by Absolute Activist, is the appropriate test.
Thus, the “location” of Plaintiff’s alleged purchase of the relevant commodities interest
constitutes the locus of the incurring of irrevocable liability. Plaintiff argues that even under the
transaction test, irrevocable liability was incurred in the United States, because (1) Plaintiff
wired money to New York in exchange for the purchase of the commodities interest in Thor
United; and (2) the investment memoranda that governed Plaintiff’s purchase provided for a 15day revocability provision, meaning “Plaintiff became bound only after the safe harbor period
lapsed.” (Dkt. No. 43.) This Court disagrees.
Though the terms of the Contract only became fully effective after the lapse of the safe
harbor period, Plaintiff did not incur irrevocable liability in the United States within the
reasoning of Absolute Activist. The contracts were negotiated in Russia, signed in Russia, and
the meeting of the minds occurred in Russia. Though, by operation of the contract, Plaintiff
could no longer remove her money from the pools in which she invested as of 15 days after the
money had been wired to New York, under Absolute Activist, the “exchange of money” is a
relevant, though not dispositive factor. 677 F.3d at 70. For example, the Absolute Activist
court, analogizing to a prior decision, describes the timing of the purchase and sale of a security
as “the point at which, in the classic contractual sense, there was a meeting of the minds of the
28
parties; it marks the point at which the parties obligated themselves to perform what they had
agreed to perform even if the formal performance of their agreement is to be after a lapse of
time.” Id. at 68 (quotations omitted) (quoting Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d
876, 891 (2d Cir. 1972)). In fact, Absolute Activist expressly rejected a suggested test that would
have located a securities transaction based on the location of a given broker-dealer, noting that
while “broker[s] carr[y] out tasks that irrevocably bind the parties to buy or sell securities, the
location of the broker alone does not necessarily demonstrate where a contract was executed.”
Id. (emphasis added).
It is the contract that gives rise to Plaintiff’s irrevocable liability, and the contract at issue
here was not domestic in nature, given the location of both the negotiations and the meeting of
the minds. It is her signature that bound Plaintiff, not the wiring of money. While the exchange
of consideration is relevant, as discussed, it cannot be the sine qua non of irrevocable liability.
But see Gruss, 859 F. Supp. 2d. at 665-66 (“Examples of factual allegations that would be
sufficient include ‘facts concerning the formation of the contracts, the placements of purchase
orders, the passing of title, or the exchange of money [.]’ . . . . Therefore, all of the alleged
exchanges of money took place in the U.S., and not in the Cayman Islands.” (internal citations
omitted) (emphasis added)). Additionally, because Plaintiff’s irrevocable liability stems from
the terms of the contract—the entering into which occurred abroad—it would be an embrace of
form over substance to suggest that the safe harbor provision has the capacity to convert an
otherwise foreign contract into a domestic one. See In re Vivendi Universal, S.A. Sec. Litig., 284
F.R.D. 144, 152 (S.D.N.Y. 2012) (declining to “extend[] the Exchange Act to reach those
shareholders” who purchased shares as part of a merger agreement where agreement was
executed abroad, even though shares were transferred domestically, because “irrevocable
29
liability occurs when (and where) there is a binding contract for the purchase or a sale of a
security” (footnote omitted)). Additionally, according to Plaintiffs, irrevocable liability did not
attach until 15 days after the money was received; and yet, the transaction giving rise to that
liability was a foreign one as well, namely: Plaintiff’s inactivity in Russia, as she failed to
exercise her right to rescind. Similarly, Defendants were irrevocably liable in one sense from the
moment Plaintiff signed the agreement (in Russia), as they were bound to invest her money as
provided for in the investment memoranda, so long as she complied with her side of the
contractual terms.
And finally, while Plaintiff did receive accounting statements created in the United
States, and the alleged real estate fraud occurred domestically as well, these domestic activities
occurred long after she had become bound by the terms of the investment memoranda. Cf.
Starshinova, 2013 WL 1104288, at *6 (“Plaintiffs contend that they have pled facts from which
it can plausibly be inferred that Defendants incurred irrevocable liability to sell ownership
interests in Thor United in the United States because ‘the investor applications to the Thor
Programs were approved and accepted in the New York office of Thor United, and investor
policies were issued in New York.’ However, the Amended Complaint pleads no facts to
support Plaintiffs’ contention that the agreements were “approved and accepted in New York.”
(internal citation omitted)).
In sum, Loginovskaya was irrevocably bound by the terms of the contract she signed.
That relevant transaction—namely, the alleged purchase of an interest in a commodities pool,
along with the negotiations that led up to it―occurred in Russia. Although conduct that came
later, and the potential fraudulent effects of that conduct, occurred domestically, through a series
of domestic investments, those placements did not involve Plaintiff other than indirectly through
30
the use of her funds, as she was already bound by the parties’ agreements. And under
Morrison’s transaction test, the conduct or effects subsequent to the transaction at the core of a
particular claim are irrelevant to the determination of extraterritorial application. Accordingly,
Plaintiff fails to state a claim under the CEA.
C.
Plaintiff’s Other Claims
Plaintiff also asserts claims for breach of contract, common law fraud, breach of fiduciary
duties, unjust enrichment, accounting, and declaratory judgment that the corporate defendants are
alter egos of Batratchenko and Smirnova. (Compl. at ¶¶ 115-147.) As Plaintiff’s only federal
claim has been dismissed, the Court declines to exercise supplemental jurisdiction over
Plaintiff’s remaining, state law causes of action.
V.
Conclusion
For the foregoing reasons, Defendants’ motion to dismiss is GRANTED.
The Clerk of the Court is directed to close the motion at Docket Entry Number 31 and to
close this case.
SO ORDERED.
Dated: New York, New York
March 29, 2013
31
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