Choi v. Tower Research Capital LLC

• Decision Date: 22 June 2021
• Docket Number: August Term, 2020,No. 20-1648-cv,20-1648-cv
• Citation: 2 F.4th 10
• Parties: Myun-Uk CHOI, Jin-Ho Jung, Sung-Hun Jung, Sung-Hee Lee, and Kyung-Sub Lee, individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. TOWER RESEARCH CAPITAL LLC, Mark Gorton, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

2 F.4th 10

Myun-Uk CHOI, Jin-Ho Jung, Sung-Hun Jung, Sung-Hee Lee, and Kyung-Sub Lee, individually and on behalf of all others similarly situated, Plaintiffs-Appellants,

v.TOWER RESEARCH CAPITAL LLC, Mark Gorton, Defendants-Appellees.^*

No. 20-1648-cv

August Term, 2020

United States Court of Appeals, Second Circuit.

Argued: May 18, 2021

Decided: June 22, 2021

Michael B. Eisenkraft (Richard A. Speirs, Jessica (Ji Eun) Kim, on the brief), Cohen Milstein Sellers & Toll PLLC, New York, New York; Dan S. Sommers, on the brief, Cohen Milstein Sellers & Toll PLLC, Washington, District of Columbia; for Plaintiffs-Appellants Myun-Uk Choi, et al.

Noah A. Levine, Wilmer Cutler Pickering Hale and Dorr LLP, New York, New York; Matthew T. Martens, Matthew Beville, Albinas J. Prizgintas, on the brief, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, District of Columbia; Adam Cambier, on the brief, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts; for Defendants-Appellees Tower Research Capital LLC and Mark Gorton.

Before: Walker, Park, and Nardini, Circuit Judges.

John M. Walker, Jr., Circuit Judge:

Plaintiffs, five South Korean citizens, traded a derivative financial product called KOSPI 200 futures on an overnight market of the Korea Exchange (KRX). They brought this action against defendants Tower Research Capital LLC (Tower) and its CEO, Mark Gorton, alleging that, in 2012, Tower's trading of KOSPI 200 futures violated the anti-manipulation provisions of the Commodity Exchange Act (CEA). Following an initial appeal in which we rejected Tower's extraterritoriality defense, the district court (Kimba Wood, J. ) entered summary judgment on plaintiffs’ CEA claims, finding that Tower's overnight trading of KOSPI 200 futures was not "subject to the rules of [a] registered entity" as required by Section 9 of the CEA.

Plaintiffs appeal the judgment of the district court, arguing that: (1) there is a genuine factual dispute as to whether Tower's trading was subject to the rules of the Chicago Mercantile Exchange (CME), a "registered entity" under the CEA; (2) the district court abused its discretion by excluding the report of their expert; (3) the judgment contradicts our prior opinion denying Tower's extraterritoriality defense, and therefore violates the law of the case; and (4) the judgment will undermine public policy by placing trading of foreign futures in the United States beyond the reach of the CEA. For the reasons that follow, we find plaintiffs’ contentions without merit and therefore AFFIRM the judgment of the district court.

BACKGROUND

We draw our discussion of the facts from plaintiffs’ second amended complaint¹ as well as exhibits and other evidence submitted in connection with defendants’ motion for summary judgment. Unless otherwise noted, the facts are undisputed and construed in the light most favorable to plaintiffs.

The KOSPI 200 is an index of two hundred Korean stocks traded on the KRX, a securities and derivatives exchange headquartered in Busan, South Korea. To allow investors to take positions on future values of the KOSPI 200 index, the KRX created a derivative financial product called KOSPI 200 futures contracts.² During daytime hours, orders for KOSPI 200 futures are placed and matched on the KRX in South Korea. During overnight hours, orders for KOSPI 200 futures are placed on the KRX in South Korea but matched with a counterparty through an electronic platform called CME Globex in Aurora, Illinois.³ Following matching, all trades—including those placed overnight—are settled on the KRX.

Unlike the KRX, CME Globex is not an exchange. Rather, it is an electronic platform that provides a trade-matching engine used by a number of exchanges—both foreign and domestic. Notably, CME Globex is owned by CME Group Inc. (CME Group), a holding company that also owns several domestic exchanges, including the CME, the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMEX), and the Commodity Exchange (COMEX). Like the KRX, all four of these exchanges use CME Globex to match trades of their own exchange's futures contracts.

In 2012, defendant Tower, a high-frequency trading firm in New York, executed nearly 4,000,000 trades for KOSPI 200 futures during the KRX's overnight hours—representing approximately 53.8% of all overnight KOSPI 200 futures trades for the entire calendar year. Plaintiffs, who also traded KOSPI 200 futures, allege that many of these trades were manipulative. Specifically, plaintiffs allege that Tower's traders placed large volume buy or sell orders on the KRX overnight market and then used Tower's algorithmic and high-speed trading technology to immediately cancel their orders or to fill their own orders before they could be matched by other traders. Tower employed these tactics because its intent was not to execute the trades with a counterparty, but rather to create a false impression of supply and demand and, in turn, artificially drive the market price up or down.⁴ Plaintiffs allege that, once the market price moved in the desired direction, Tower sold futures contracts at the artificially inflated price or bought futures contracts at the artificially deflated price, earning more than $14,000,000 in illicit profits.

In May 2014, South Korean regulators announced that they had uncovered potentially unlawful trading in the overnight market for KOSPI 200 futures and that they had referred Tower to South Korean prosecutors. Several months later, plaintiffs initiated the instant litigation, filing a class-action complaint on behalf of themselves and others who were allegedly harmed by Tower's manipulative scheme. The complaint asserted causes of action for violations of the CEA and New York common law.

In March 2015, defendants moved to dismiss the complaint on the basis that Tower's alleged conduct occurred in South Korea and so was not within the territorial reach of the CEA. The district court granted the motion in February 2016, holding that applying the CEA to Tower's conduct would be impermissibly extraterritorial under Morrison v. National Australia Bank Ltd.⁵ The district court granted plaintiffs leave to amend their complaint, but later dismissed their amended complaint on the same basis in February 2017.⁶ According to the district court, the amended complaint still failed to allege either that CME Globex was a domestic exchange or that Tower's trades were domestic transactions, at least one of which was required to establish domestic application under Morrison .⁷

In March 2018, we vacated the dismissal and remanded for further proceedings.⁸ Applying Morrison and more recent circuit precedent, we held that plaintiffs’ allegations made it plausible that parties who trade KOSPI 200 futures on the KRX overnight market incur irrevocable liability in the United States, where their orders are matched through CME Globex.⁹ At the pleadings stage, those allegations were sufficient to show that Tower's trades were plausibly "domestic transactions" under Morrison such that applying the CEA to Tower's conduct would not constitute an extraterritorial application of the Act.¹⁰ Because our irrevocable liability analysis was a sufficient basis to resolve the extraterritoriality question, we declined to address whether the CEA could reach Tower's conduct on the basis that CME Globex is a "domestic exchange."¹¹

In July 2018, following remand to the district court, defendants again moved to dismiss plaintiffs’ CEA claims, this time raising a factual defense: Even if the CEA could apply to Tower's trading without running afoul of Morrison , its trading of KOSPI 200 futures was not "subject to the rules of any registered entity" as required by the CEA itself.¹² The district court referred the motion to a magistrate judge, who granted plaintiffs leave to amend their complaint in response to the motion. In May 2019, plaintiffs filed a second amended complaint alleging that Tower's trading of KOSPI 200 futures was subject to the rules of the CME, one of four registered entities owned by CME Group.

After the close of fact discovery, defendants moved for judgment on the pleadings or, in the alternative, for summary judgment, maintaining that Tower's trading of KOSPI 200 futures was not "subject to the rules of any registered entity." In December 2019, the magistrate judge issued a report and recommendation concluding that the motion for summary judgment should be granted.¹³ On March 30, 2020, the district court adopted the recommendation in full and dismissed plaintiffs’ CEA claims.¹⁴ On May 11, the district court entered final judgment on plaintiffs’ CEA claims pursuant to Rule 54(b)¹⁵ so that plaintiffs could file this appeal.¹⁶

DISCUSSION

We review a decision granting summary judgment de novo,¹⁷ mindful that summary judgment is appropriate only "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."¹⁸ "An issue of fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. A fact is material if it might affect the outcome of the suit under the governing law."¹⁹ In evaluating a motion for summary judgment, we resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought.²⁰

Plaintiffs argue that the district court erred in granting summary judgment for four reasons. First, they contend that there is a genuine factual dispute as to whether Tower's trading of KOSPI 200 futures was subject to the rules of the CME, a registered entity under the CEA. Second, they contend that the district court abused its discretion by excluding the report of their expert, Professor Michael Greenberger. Third, they contend that the district court's judgment contradicts our prior opinion denying Tower's extraterritoriality defense, and therefore violates the law of the case. Fourth, they contend that the...