Commodity Futures v. International Foreign Curren., CV-03-3577 (TCP)(ARL).

• Decision Date: 03 September 2004
• Docket Number: No. CV-03-3577 (TCP)(ARL).,CV-03-3577 (TCP)(ARL).
• Citation: 334 F.Supp.2d 305
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. INTERNATIONAL FOREIGN CURRENCY, INC., a New York Corporation, dba International Foreign Currency Exchange, dba I.F.C. Trading, Inc., Thomas Qualls, an individual and Michael Kourmolis, an individual, Defendants.
• Court: U.S. District Court — Eastern District of New York

334 F.Supp.2d 305

COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. INTERNATIONAL FOREIGN CURRENCY, INC., a New York Corporation, dba International Foreign Currency Exchange, dba I.F.C. Trading, Inc., Thomas Qualls, an individual and Michael Kourmolis, an individual, Defendants.

No. CV-03-3577 (TCP)(ARL).

United States District Court, E.D. New York.

September 3, 2004.

COPYRIGHT MATERIAL OMITTED

Erin E. Powell, James H. Holl, III, Washington, DC, for Plaintiff.

Bruce Smirti, Garden City, Paul W. Thorpe, Jr., Rebore, Thorpe & Pisarello, P.C., Farmingdale, NY, for Defendant.

MEMORANDUM AND ORDER

PLATT, District Judge.

Before this Court are motions brought by International Foreign Currency, Inc. ("IFC"), Thomas Qualls ("Qualls") and Michael Kourmolis ("Kourmalis"), (collectively "Defendants"), to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction, and 12(b)(6), for failure to state a claim, the action commenced by the Commodities Futures Trading Commission ("CFTC" or "Plaintiff").

For the following reasons, Defendants' motions are DENIED.

BACKGROUND

A. Factual History

The CFTC brought suit against Defendants pursuant to the Commodity Exchange Act ("CEA") as amended by the Commodity Futures Modernization Act ("CFMA"). Defendant Qualls is the President of IFC, and Kourmalis "has identified himself variously as a `Senior Account Executive' and as `Vice President of Accounts' for IFC." (Compl. at ¶¶ 9-10). The CFTC alleges that from November 27, 2001 until at least July 11, 2003, Defendants offered and sold foreign currency futures contracts over the phone to the retail public out of the IFC office in Garden City, New York. (Compl. at ¶ 11).

In the course of his solicitations, Defendant Kourmolis allegedly explained to at least one customer, Mrs. Blakers, that she would have an individual bank account with IFC and that Chase Manhattan Bank would insure the account for up to twenty-five million dollars. (Compl. at ¶ 13). Mrs. Blakers subsequently wired approximately $10,000 to IFC and Kourmalis sent her a written "Confirmation of Funds Transfer," stating that IFC had opened a personal account in her name and would begin trading on her behalf. (Compl. at ¶¶ 13-14); (Pl.Exh.12).¹

According to the complaint and Plaintiff's accompanying exhibits, however, Mrs. Blakers' money was neither deposited into an individual bank account nor transferred to IG Index, a London company, which Defendants allege executed the foreign currency transactions for IFC. (Compl. at ¶ 18); (Qualls Aff. at 1-2). Instead, Mrs. Blakers' funds were deposited into one account, Qualls' personal account, and were apparently used to pay for his personal expenses. (Id.).² Her funds were also not insured by Chase Manhattan Bank and when Mrs. Blakers later attempted to close out her account, IFC ceased communication with her, and to date, has not returned any of her funds. (Compl. at ¶¶ 13-18).

CFTC filed suit on July 23, 2003, alleging violations of § 4(a), § 4(b)(a)(2)(i) § 4(b)(a)(2)(iii) of the CEA, in addition to § 1.1(b) of the Commission Regulations. (Compl. at ¶¶ 3-5). Defendants subsequently filed the instant motions and oral argument was heard on March 19, 2004.

DISCUSSION

A. Standard of Review

i. Fed.R.Civ.P. 12(b)(1)

When considering a motion to dismiss for lack of subject matter jurisdiction, a court may look at materials other than the pleadings to decide the jurisdictional question. Sharp v. Bivona, 304 F.Supp.2d 357, 362 (E.D.N.Y.2004)(citing Robinson v. Gov't of Malaysia, 269 F.3d 133, 141 n. 6 (2d Cir.2001)). The Court must accept all facts alleged in the complaint as true but the Court may not make inferences in favor of the party asserting jurisdiction. Smith v. Barnhart, 293 F.Supp.2d 252, 254 (E.D.N.Y.2003). While the party invoking the jurisdiction of the Court has the burden of proof, "dismissal is inappropriate unless it appears beyond doubt that the plaintiff can prove no set of facts which would entitle him or her to relief." Fortress Bible Church v. Feiner, No. 03-4235, 2004 WL 1179307, at ^*1, 2004 U.S. Dist. LEXIS 9614, at ^*3 (S.D.N.Y. March 29, 2004)(citing Sec. Investor Prot. Corp. v. BDO Seidman, LLP, 222 F.3d 63, 68 (2d Cir.2000)).

ii. Fed.R.Civ.P. 12(b)(6)

When considering a motion to dismiss for failure to state a claim, the Court "must `accept all of the plaintiff's factual allegations in the complaint as true and draw inferences from those allegations in the light most favorable to the plaintiff." Bivona, 304 F.Supp.2d at 362 (quoting Desiderio v. Nat'l Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 202 (2d Cir.1999)). The motion should be granted if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Formica v. Town of Huntington, 104 F.3d 350, 1996 WL 688451, at ^*1 (2d Cir.1996) (citation omitted).

B. The CEA as Amended by the CFMA

The purpose of the CFMA was to "clarify the jurisdiction of the Futures Trading Commission on certain retail foreign exchange transactions...." CFMA, Pub. No. 106-554, 114 Stat 2763A-376 (2000). The CFMA added the following to § 2 of the CEA, which now states in pertinent part:

(c) Agreements, contracts, and transactions in foreign currency, government securities, and certain other commodities.

(1) In general. Except as provided in paragraph (2), nothing in this Act [7 USCS §§ 1 et seq.] ... governs or applies to an agreement, contract or transaction in —

(A) foreign currency ...

(2) Commission Jurisdiction

(A) Agreements, contracts and transactions traded on an organized exchange. This Act [7 USCS §§ 1 et seq.] applies to, and the Commission shall have jurisdiction over, an agreement, contract or transaction described in paragraph (1) that is —

(i) a contract of sale of a commodity for future delivery ... that is executed or traded on an organized exchange ...

(B) Agreements contracts and transactions in retail foreign currency. This Act [7 USCS §§ 1 et seq.] applies to, and the Commission shall have jurisdiction over, an agreement, contract, or transaction in foreign currency that-

(i) is a contract of a sale of a commodity for future delivery ... and ...

(ii) is offered to, or entered into with, a person that is not an eligible contract participant,³ unless the counterparty, or the person offering to be the counterparty, of the person is [an exempted counterparty] ...⁴

7 U.S.C. § 2(c) (2004) (emphasis added).

In addition, Congress also amended the CEA by deleting the Treasury Amendment. See 7 U.S.C. § 2 (2004) (noting amendment on Dec. 21, 2000, which deleted exemption for transactions in foreign currency unless such transactions were for future delivery and conducted on a board of trade).

C. Defendants' Motions to Dismiss Pursuant to Fed.R.Civ.P. 12(b)(1)

i. IFC's and Qualls' Arguments

Defendants IFC and Qualls allege the following arguments in support of the instant motion: (a) Defendants created "spot" foreign currency contracts with customers rather than the futures contracts that are regulated by the CFTC pursuant to the CEA; (b) currency is not a commodity; (c) Defendants are exempt from the CEA because they did not transact in foreign currency on a "board of trade"; (d) Defendants are exempt from CFTC jurisdiction pursuant to § 2(c)(2)(B)(ii) of the CEA because the counterparty in this case, IG Index, is an exempted financial institution; and (e) Defendants are not subject to the jurisdiction of the Court because IFC did not conduct transactions in the United States. (Defs. Mem. of Law at 2-6). The Court will address each of Defendants' arguments in turn.⁵

a. What Constitutes a Futures Contract?

In order to fall within the purview of the CEA, Defendants must have transacted in contracts "for future delivery," ("futures contracts"). See 7 U.S.C. § 2(c)(2)(B)(i). Futures contracts are contracts that are bought or sold at a specified price and fixed quantity for future delivery. Commodity Futures Trading Comm'n v. Standard Forex, Inc., No. 93-0088, 1996 WL 435440, at ^*1, 1996 U.S. Dist. LEXIS 14778, at ^*2 (E.D.N.Y July 25, 1996), (hereinafter "Standard Forex II"). Although there is no precise definition as to what constitutes a futures contract, courts have distilled from case law and regulatory authorities the following important elements: (i) "an obligation to make or take delivery of a commodity in the future;" (ii) "an ability to offset the putative obligation to make or take delivery and thus realize a gain or loss on the intervening price fluctuation;" (iii) a purpose to speculate on the intervening price changes without actually having to acquire the underlying commodity;" (iv) standardization of contract terms; and, (v) a margin system of investing. Standard Forex II, 1996 WL 435440, at ^*10, 1996 U.S. Dist. LEXIS 14778, at ^*30-1; Commodity Futures Trading Comm'n v. Int'l Fin. Serv., Inc., 323 F.Supp.2d 482, 494 (S.D.N.Y.2004), (hereinafter "Int'l Fin. Serv").

In Int'l Fin. Serv., a recent case in the Southern District of New York, the court found that a purported foreign currency trading firm transacted in foreign currency futures contracts. Id. at 498. The similarities between that case and the instant action are particularly illustrative, and the Court finds that the contracts at issue meet most, if not all, of the important elements of a futures contract.

First, as in Int'l. Fin. Serv., IFC's customers did not have the intention to take delivery of the foreign currencies, rather, IFC settled, (or at least purported to settle), the contracts by entering into offsetting transactions. Id. at 494. Therefore, customers gained or lost money based on fluctuations in the currencies' values. Id. Mrs. Blakers' monthly account statements show that no currency was delivered, rather the currency was sold, offsetting the original contract, and thus establishing a gain or loss that depended on the change in value of the underlying currency....