Cruz v. Fxdirectdealer, LLC

• Citation: 720 F.3d 115
• Decision Date: 19 June 2013
• Docket Number: Docket No. 12–1252–cv.
• Parties: Hugo CRUZ, on behalf of himself and all others similarly situated, Plaintiff–Appellant, v. FXDIRECTDEALER, LLC (FXDD), Defendant–Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

720 F.3d 115

Hugo CRUZ, on behalf of himself and all others similarly situated, Plaintiff–Appellant,

v.FXDIRECTDEALER, LLC (FXDD), Defendant–Appellee.

Docket No. 12–1252–cv.

United States Court of Appeals,Second Circuit.

Submitted: Oct. 2, 2012.

Decided: June 19, 2013.

Damien H. Prosser, Morgan & Morgan, P.A., Orlando, FL; Paul A. Batista, Paul A. Batista, P.C., New York, NY, for Plaintiff–Appellant.

Jeffrey R. Burke, Micol O. Sordina, Winston & Strawn LLP, New York, NY, for Defendant–Appellee.

Before: NEWMAN, LYNCH, and LOHIER, Circuit Judges.

LOHIER, Circuit Judge:

Hugo Cruz appeals from a judgment of the United States District Court for the Southern District of New York (Paul A. Crotty, Judge ), dismissing his amended complaint. On appeal, Cruz argues that the amended complaint's allegations that FXDirectDealer, LLC (“FXDD”) engaged in dishonest and deceptive practices in managing its online foreign exchange trading platform are sufficient to state a claim for violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962(c), and New York General Business Law §§ 349(h) and 350, and also for breach of contract and of the implied covenant of good faith and fair dealing. For the following reasons, we affirm the District Court's dismissal of Cruz's RICO claim and his claim for breach of the implied covenant of good faith and fair dealing, but we vacate the judgment of the District Court with respect to Cruz's New York General Business Law and breach of contract claims.

BACKGROUND

The amended complaint alleges the following facts, which we assume to be true and construe in the light most favorable to the plaintiff. See Ashcroft v. Iqbal, 556 U.S. 662, 678–80, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 708, 715 (2d Cir.2011).

Headquartered in New York City, FXDD provides online foreign currency exchange (“forex”) trading and related services to its customers. The forex market operates outside of a regulated exchange and without a central marketplace. Retail brokers such as FXDD help provide individual investors with access to the market and often operate online. As market makers, they create their own market and set the prices they offer to their customers. In addition to facilitating trading by customers, FXDD buys and sells currency for its own account, and may act as a counterparty in customer transactions.

To open an account with FXDD and trade on its online forex platforms, customers must sign the FXDD Customer Agreement (the “Agreement”). The Agreement warns that, “due to market conditions or other circumstances, FXDD may be unable to execute [a customer's] Order at the Market or specified level and the Customer agrees that FXDD will bear no liability for failure to execute such orders.” The Agreement also provides, however, that “all Market Orders and non-Market Orders ... are accepted by FXDD and undertaken on a ‘ best-efforts basis,’ ” and when FXDD is unable to execute an order at the market or specified level, “orders will be executed on a ‘best-efforts basis....' ” J.A. 67 (italics in original). In addition, the Agreement states, “FXDD makes no warranty expressed or implied; that Bid and Ask Prices shown represent prevailing bid and ask prices in the interbank market.”

Several of FXDD's promotional, marketing, and advertising materials have represented FXDD's trading practices without disclosing the actual risks of participating in FXDD's forex market. For example, one 2005 advertisement on FXDD's website stated that FXDD “Does Not Trade Against Their Clients, but Facilitates Trade Via Transparent Real–Time Bid/Offer Pricing,” while a 2007 advertisement represented that “[m]arket orders are filled instantaneously at the rate you request, with no manual dealer intervention or slippage.”

Contrary to the representations in these materials and the Agreement, FXDD engages in several undisclosed practices that the amended complaint characterizes as dishonest or deceptive, including: (1) rerouting profitable customer trading activity to a “slow server,” which delays trades and allows FXDD to “hijack” customer profits by buying and selling in the time between a customer's order and trade execution; (2) refusing to execute profitable customer trade orders by generating false error messages; (3) creating false short-term price spikes to trigger a customer's stop order for a given trade; and (4) manipulating prices so that the change in price between the time the price is quoted and a market order is placed generally favors FXDD over its customers. FXDD undertakes these practices both manually and through automated functions.

Cruz, a Virginia resident, is a former FXDD customer who signed the Agreement in 2006 and lost $281,170.24 during two years of trading on the FXDD platform. Cruz seeks to represent a proposed class of persons in the United States who, from January 1, 2005 to the present, contracted with FXDD to trade on its trading platforms and whose accounts were subject to FXDD's allegedly dishonest trade practices.

The District Court granted FXDD's motion to dismiss the amended complaint in toto. With respect to the RICO count, the court concluded that the amended complaint failed to allege predicate acts of mail and wire fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure because it did not explain why the Agreement and marketing materials were misleading. The District Court also determined that the complaint failed to allege a RICO enterprise distinct from both the alleged pattern of racketeering activity and the RICO “person” who engaged in deceptive conduct. As for the New York General Business Law claims, the court found that Cruz lacked statutory standing because he lived in Virginia and had not alleged that FXDD's dishonest practices occurred, or that his trades were executed, in New York. Separately, the District Court dismissed Cruz's breach of contract claim on the grounds that the Agreement disclosed all the relevant risks of using FXDD's platform and that FXDD had qualified its obligation to use “best-efforts” to execute orders by warning that it might be unable to do so. Finally, the District Court dismissed the remaining breach of the implied covenant of good faith and fair dealing claim as largely redundant of the breach of contract claim.

DISCUSSION

“We review a district court's dismissal of a complaint pursuant to Rule 12(b)(6)de novo.” Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir.2010). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quotation marks omitted).

A. Civil RICO Claim

“To establish a RICO claim, a plaintiff must show: (1) a violation of the RICO statute, 18 U.S.C. § 1962; (2) an injury to business or property; and (3) that the injury was caused by the violation of Section 1962.” ¹DeFalco v. Bernas, 244 F.3d 286, 305 (2d Cir.2001) (quotation marks omitted). To establish a violation of § 1962(c), in turn, a plaintiff must show that a person engaged in “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Id. at 306 (quotation marks omitted).

“[U]nder the so-called ‘distinctness' requirement, ... a plaintiff must ‘allege ... the existence of two distinct entities: (1) a “person”; and (2) an “enterprise” that is not simply the same “person” referred to by a different name.’ ” City of New York v. Smokes–Spirits.com, Inc., 541 F.3d 425, 438 n. 15 (2d Cir.2008) (quoting Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161, 121 S.Ct. 2087, 150 L.Ed.2d 198 (2001)), rev'd on other grounds sub nom. Hemi Grp., LLC v. City of New York, N.Y., 559 U.S. 1, 130 S.Ct. 983, 175 L.Ed.2d 943 (2010). As we have long recognized, the plain language and purpose of the statute contemplate that a person violates the statute by conducting an enterprise through a pattern of criminality. It thus follows that a corporate person cannot violate the statute by corrupting itself. See Bennett v. U.S. Trust Co. of New York, 770 F.2d 308, 315 (2d Cir.1985). “A ‘person’ is defined as ‘any individual or entity capable of holding a legal or beneficial interest in property,’ ” id. at 447 (quoting 18 U.S.C. § 1961(3)), while an “ ‘enterprise’ is defined as ‘any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity,’ ” id. (quoting 18 U.S.C. § 1961(4)). “[F]or an association of individuals to constitute an enterprise, the individuals must share a common purpose to engage in a particular fraudulent course of conduct and work together to achieve such purposes.” First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 174 (2d Cir.2004) (quotation marks omitted).

We agree with the District Court that Cruz's RICO claim fails because the amended complaint does not allege a continuing RICO enterprise distinct from the RICO “person.” Accordingly, we do not address whether the amended complaint pleaded mail and wire fraud as predicate acts of racketeering activity with sufficient particularity ² or pleaded a RICO enterprise distinct from the alleged pattern of racketeering activity.

The amended complaint alleges that FXDD is a RICO “person” that conducts the deceptive practices of an association of individuals dubbed the “FXDD Fraud Enterprise.” The FXDD Fraud Enterprise is alleged to consist of the following: FXDD itself; Tradition (North America) Inc. (“Tradition”), FXDD's parent company; Advanced Technologies Group, Ltd. (“ATG”), a former equity stakeholder in FXDD; FXDD's chief operating officer; FXDD's managing director and corporate counsel; software companies that develop and sell FXDD's software; software companies and programmers who...