Chris Lazarini Reviews Anti-Manipulation Provision of the Commodity Exchange Act

May 26, 2020
Securities Online Litigation Alert

Bass, Berry & Sims attorney Chris Lazarini reviewed a case in which a putative class of individuals that transacted certain Korean futures contracts on the Korea Exchange through the Chicago Mercantile Exchange’s Globex Platform alleged Defendants fraudulently manipulated the prices at which the futures contracts traded in violation of the Commodity Exchange Act. The court rejected this argument, holding that the Commodity Exchange Act’s anti-manipulation provision applies to the trading of futures contracts that occur “on or subject to the rules of any registered entity” and the trades at issue did not meet that standard.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.

Choi vs. Tower Research Capital, LLC, No. 14-CV-9912 (S.D. N.Y., 3/30/20)

The Commodity Exchange Act’s anti-manipulation provision applies to the trading of futures contracts that occur only “on or subject to the rules of any registered entity.”

Plaintiffs are members of a putative class of persons who transacted certain Korean futures contracts on the Korea Exchange during overnight trading sessions using the Chicago Mercantile Exchange’s (“CME”) Globex Platform (“Globex”). They alleged Defendants used their high-frequency technology and other deceptive techniques to manipulate the prices at which the futures contracts traded, in violation of the Commodity Exchange Act (“CEA”). Defendants moved for summary judgment and the Magistrate Judge recommended the motion be granted. Plaintiffs timely objected.

Conducting a de novo review, the Court grants the motion. The Court first notes the parties agreed the CEA’s anti-manipulation provision applies only to trading of future contracts “on or subject to the rules of any registered entity” and agreed the overnight trading of Korean futures contracts, which settled in Korea, were not made on a registered entity. The sole question, the Court states, is whether the futures contracts were traded subject to the rules of the CME. The Court then rejects each of Plaintiffs’ subject to arguments.

The Court finds no evidence suggesting the CME Rulebook applies to the Korean futures contracts because those contracts were not listed among the hundreds of products identified in the Rulebook as being subject to the Rules. Plaintiffs fare no better relying on the Globex Reference Guide and a 1989 CFTC memorandum in which the CFTC approved the CME’s request to operate Globex as a futures trading matching platform. Both documents, the Court concludes, confirm that CME contracts traded using Globex are subject to the CME Rules, which, again, do not cover the Korean futures contracts. The Court similarly rejects Plaintiff’s reliance on a 2008 CFTC No-Action letter, which approved trading the Korean futures contracts using Globex, because the letter confirms the futures contracts are traded on the Korea Exchange and regulated by Korean authorities and does not address whether trading using Globex is subject to the rules of any registered entity.

The Court deems irrelevant emails from the CME Group (a holding company that owns the CME) to Defendants, cautioning them that the Group was monitoring their activities because the CME Group was speaking as vendor for the Korea Exchange and not as a regulator. The Court also rejects Plaintiffs’ policy argument that the CEA’s regulatory scheme would be compromised by an adverse ruling. The Court states Plaintiffs and other futures traders are protected by the rules of the Korea Exchange and the laws of South Korea. Finally, the Court rejects Plaintiffs’ expert report because the “testimony” offered excludable legal conclusions.

(C. Lazarini) (EIC: See SOLA Ref. Nos. 2016-14-03, 2017-15-07, 2018-17-05, and 2019-46-05 for earlier decision summaries in this case.)