Commodity Futures Trading v. Uforex Consulting

• Decision Date: 31 March 2008
• Docket Number: Civil Action No. 07-0046.
• Citation: 551 F.Supp.2d 513
• Parties: COMMODITY FUTURES TRADING COMMISSION v. UFOREX CONSULTING, LLC, et al.
• Court: U.S. District Court — Western District of Louisiana

551 F.Supp.2d 513

COMMODITY FUTURES TRADING COMMISSION v. UFOREX CONSULTING, LLC, et al.

Civil Action No. 07-0046.

United States District Court, W.D. Louisiana, Lafayette Division.

March 31, 2008.

Susan J. Gradman, Rosemary Hollinger, Scott R. Williamson, U.S., Commodity Futures Trading Comm., Chicago, IL, Albert G. Alec Alexander, III, U.S. Attorneys Office, Lafayette, LA, for Commodity Futures Trading Commission.

Allan M. Lerner, Fort Lauderdale, LA, for UForex Consulting LLC, Paulo R. Correa.

Mario Garcia, Miami, FL, pro se.

MEMORANDUM RULING

DOHERTY, District Judge.

Pending before this Court is a motion to convert a previously filed motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) (lack of subject matter jurisdiction), into a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) (failure to state a claim upon which relief can be granted), or alternatively, to convert the 12(b)(1) motion into a motion for summary judgment.¹ The motion was filed by defendants UForex Consulting, LLC ("UForex") and Paulo R. Correa.²

I. Introduction

Plaintiff, the Commodity Futures Trading Commission ("CFTC" or "the agency"), brought this action under the Commodity Exchange Act ("CEA" or "the Act"), 7 U.S.C. § 1 et seq., alleging defendants solicited investments in and operated a fraudulent scheme for the purported purpose of trading over-the-counter foreign currency futures contracts.³ As a jurisdictional prerequisite, the CFTC asserts (as it must) that the alleged scheme involved the buying and selling of "contracts of sale of a commodity for future delivery" (commonly referred to as "futures contracts" or "futures"), and futures contracts are regulated by the CEA.⁴ Specifically, the CFTC argues defendants, in the course of conducting their futures trading scheme, violated the CEA by: (1) committing "fraud by misrepresentation and misappropriation"; and (2) "making false reports." [Rec. Doc. 1, pp. 18, 20]

Defendants take the position that "[because the transactions entered into by the customers of Uforex are not contracts in foreign currency for future delivery and therefore not futures contracts, the CFTC acted outside of its jurisdictional bounds under the Act." [Doc. 21, p. 1 (emphasis in original)] In other words, defendants argue the CEA does not cover the type of transactions defendants engaged in which, according to defendants, are off-exchange spot transactions⁵, and therefore the CFTC is without jurisdiction over this matter, as its jurisdiction extends only to futures contracts. Consequently, defendants argue, this matter must be dismissed for failure to state a claim upon which relief can be granted.

Thus, as a threshold matter to jurisdiction, this Court must determine whether or not the transactions at issue are "contracts of sale of a commodity for future delivery" — a term which the statute does not define. If the transactions indeed are "futures contracts," they are subject to CFTC jurisdiction; if the transactions are not "futures contracts," they are beyond the scope of the CFTC's jurisdiction and regulatory authority, and this matter must be dismissed. 7 U.S.C. § 2(a)(1)(A).

II. Procedural History

The CFTC filed its complaint against UForex Consulting, LLC, Paulo R. Correa and Mario Garcia on January 9, 2007. In addition to the complaint, the agency also filed a Motion for an Ex Parte Statutory Restraining Order pursuant to 7 U.S.C. § 13a-1, a Motion for Preliminary Injunction and a Motion for Expedited Discovery. [Rec. Docs. 3, 4 and 5] In support of its motion for an ex parte statutory restraining order, the agency filed excerpts from the deposition testimony of defendant Mario Garcia, taken on July 6, 2005, the declarations of nine UForex customers, and the declaration of Judith McCorkle, "Senior Futures Trading Investigator with the Commission's Division of Enforcement." The following day, an ex parte hearing was held, and the Court granted plaintiffs ex parte motion for a statutory restraining order. [Rec. Doc. 10] The order froze the assets of all defendants, and ordered defendants to preserve and provide the CFTC access to all relevant records, documents, etc.⁶ The Court deferred ruling on the motion for preliminary injunction and the motion for expedited discovery at that time.

On January 12, 2007, a telephone conference was held with counsel for the CFTC, counsel for UForex and Paulo Correa, and defendant Mario Garcia, who appeared pro se. At the conference, counsel for UForex and Mr. Correa advised the Court he was of the opinion the CFTC might lack jurisdiction over this matter, but he had not yet had enough time to review the file materials. Counsel indicated he would file a motion to dismiss if he found his initial opinion to be correct. The parties agreed to extend the statutory restraining order, with some alterations, for thirty days.⁷ At the close of the conference, the Court ordered the CFTC to submit a revised restraining order, it set a briefing scheduling for defendant to challenge jurisdiction, and it denied the motion for expedited discovery as premature. On January 22, 2007 another telephone conference was held in response to an inquiry as to the scope of the Court's restraining order. The Court clarified its order granted the CFTC access to and inspection of defendants' books and records, but did not allow for other types of discovery not listed in the order (specifically, depositions). [Rec. Doc. 22] The following day, January 23, 2007, plaintiff submitted an amended statutory restraining order which the Court granted. [Rec. Doc. 19]

On January 29, 2007, .UForex and Paulo Correa, filed a motion to dismiss the complaint pursuant to Fed. R. Civ. Pro. 12(b)(1), arguing the CFTC "acted outside of its jurisdictional bounds under the act," and therefore this matter must be dismissed.⁸ [Rec. Doc. 21] On January 31, 2007, defendant Mario Garcia filed an answer to the CFTC's complaint. [Rec. Doc. 24] On February 13, 2007, plaintiff filed a memorandum in opposition to the motion to dismiss. On April 13, 2007, a telephone status conference was held with all counsel.⁹ [Rec. Doc. 29] At the conference, the Court advised the parties of its preliminary ruling on the motion to dismiss. Specifically, the Court advised the parties it was of the opinion the "UForex Foreign Exchange Master Agreement: Customer Agreement" (referred to as "the contract" or "the Customer Agreement"), upon which the CFTC bases its jurisdiction, indicates the transactions in question were "spot transactions," not "futures contracts," and therefore the Court intended to grant defendant's motion to dismiss this matter. However, the Court informed counsel that due to its docket at that time, a written ruling would take some time to issue, and the Court was concerned about the hardship imposed upon defendants by the freezing of their assets, particularly when the Court had preliminarily determined this matter must be dismissed. [Rec. Doc. 29]

On April 18, 2007, another telephone status conference was held with all counsel and Mario Garcia. At that conference, the Court instructed the parties that "in light of its preliminary ruling ..., should defendants choose to do so, the Court will entertain a motion to dissolve the statutory restraining order previously entered in this matter." [Rec. Doc. 31] On April 23, 2007, UForex and Correa filed such a motion, and that motion was granted on May 4, 2007.

On July 12, 2007, the Court held another telephone conference to discuss the pending motion to dismiss. At that conference, the Court advised the parties that upon further research and reflection, it was still of the opinion the CFTC lacked jurisdiction to regulate the transactions at issue in this matter, but the Court had found the motion to be procedurally defective. Specifically, the Court stated it was of the opinion subject matter jurisdiction does exist in this matter pursuant to 28 U.S.C. § 1345 ("United States as plaintiff) and 28 U.S.C. § 1331 (federal question jurisdiction). Rather, the Court advised it was of the opinion the relief which defendants sought was more appropriately brought pursuant to a 12(b)(6) motion (failure to state a claim upon which relief can be granted), as plaintiff has no regulatory authority over spot transactions or forward contracts. The Court declined to sua sponte convert the motion to dismiss pursuant to 12(b)(1) into a motion to dismiss pursuant to 12(b)(6), and thus advised the parties the motion would be denied. [Rec. Doc. 41]¹⁰ On August 11, 2007, a memorandum ruling and order issued in conformity with the discussion at the July 12, 2007 telephone conference. [Rec. Docs. 42 and 43]

On August 21, 2007, UForex and Paulo Correa filed the motion now pending before this Court — the motion to convert the 12(b)(1) motion into a 12(b)(6) motion, or alternatively, into a motion for summary judgment. [Rec. Doc. 44] On October 5, 2007, pro se defendant Mario Garcia filed a document which appears to be his attempt to adopt the motion to convert filed by the other defendants. [Rec. Doc. 52] All briefing has now been completed, and the motion has been taken under advisement by the Court.

A. Motion to Convert

In the present motion, defendants move to convert their previously filed motion to dismiss pursuant to Rule 12(b)(1), into a motion to dismiss pursuant to Rule 12(b)(6), or alternatively, a motion for summary judgment pursuant to Rule 56. In response, plaintiff argues under either standard the motion should be denied, but ultimately argues summary judgment is the appropriate procedural vehicle in this matter. [Rec. Doc. 46, p. 3] Plaintiff then paraphrases the sections of the CEA which grant the CFTC jurisdiction over certain commodity futures contracts, and concludes as follows:

Given that the Defendants actually misappropriated customer funds rather than invest them in legitimate trading activity, the focus of the jurisdictional analysis is on what types of contracts...