Myun-Uk Choi v. Tower Research Capital LLC

• Decision Date: 24 February 2016
• Docket Number: 14-CV-9912 (KMW)
• Citation: 165 F.Supp.3d 42
• 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, v. Tower Research Capital LLC and Mark Gorton, Defendants.
• Court: U.S. District Court — Southern District of New York

165 F.Supp.3d 42

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,

v.Tower Research Capital LLC and Mark Gorton, Defendants.

14-CV-9912 (KMW)

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

Signed February 24, 2016

Filed February 25, 2016

Daniel Stephen Sommers, Times Wang, Cohen Milstein Sellers & Toll PLLC, Washington, DC, John Douglas Richards, Michael Benjamin Eisenkraft, Richard A. Speirs, Cohen Milstein Sellers & Toll P.L.L.C., New York, NY, Youngki Rhee, DeRyook International Law Firm, Queens, NY, for Plaintiffs.

Matthew Beville, Wilmer Hale, Matthew Theodore Martens, Wilmer Cutler Pickering Hale & Dorr L.L.P., Washington, DC, Robert Walter Trenchard, Gibson, Dunn & Crutcher, LLP, New York, NY, for Defendants.

OPINION AND ORDER

KIMBA M. WOOD, United States District Judge

Plaintiffs are members of a putative class comprised of parties who transacted in certain futures contracts during 2012. Plaintiffs allege that Tower Research Capital LLC (“Tower”) and its CEO, Mark Gorton (collectively, “Defendants”), used fictitious trades and other deceptive techniques to manipulate the prices at which these futures contracts traded on the Chicago Mercantile Exchange Globex platform (“CME Globex”). Plaintiffs assert that this conduct violates the Commodity Exchange Act (“CEA”), 7 U.S.C. §§ 1, et seq., as well as state law.

Defendants have moved to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, the Court GRANTS Defendants' Motion to Dismiss, but with leave for Plaintiffs to amend.

I. BACKGROUND

The following facts are taken from Plaintiffs' Complaint and are assumed to be true for purposes of Defendants' Motion to Dismiss. See Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) ; see also Shipping Fin. Servs. Corp. v. Drakos , 140 F.3d 129, 131 (2d Cir.1998) (“When considering a motion to dismiss ... for failure to state a cause of action, a court must accept as true all material factual allegations in the complaint.”).

The KOSPI 200 is an index for Korean stocks, similar to the Dow Jones Industrial Average or the S&P 500. (Compl. ¶ 15 [Doc. No. 1] ). Since 2007, KOSPI 200 futures contracts have been listed and traded on the CME Globex—an electronic trading platform located in Aurora, Illinois—during the night market, which runs from 5:00 p.m. to 6:00 a.m. Seoul time (2:00 a.m. to 3:00 p.m. Chicago time). Id. ¶ 18. Parties who wish to trade in KOSPI 200 futures contracts do so by submitting orders either to buy or to sell through the KRX, a Korean exchange. Id. ¶ 21. During the KRX night market, those orders are matched on the CME Globex, at which point the parties enter into a binding agreement to trade a KOSPI 200 futures contract. Id.

Plaintiffs Myun-Uk Choi, Jin-Ho Jung, Sung-Hun Jung, Sung-Hee Lee, and Kyung-Sub Lee (collectively, “Plaintiffs”) are individuals who bought and sold KOSPI 200 futures contracts on the CME Globex during 2012. Id. ¶¶ 8-12. Plaintiffs assert claims on behalf of all persons and entities who bought and sold KOSPI 200 futures contracts on the CME Globex between January 1, 2012, and December 31, 2012. Id. ¶ 1. Defendant Tower Research Capital is a high frequency trading firm founded in 1998 by Defendant Mark Gorton, and located in New York, New York. Id. ¶¶ 13-14, 24.

Plaintiffs allege that, during the relevant period, Defendants “manipulate[d] the price of KOSPI 200 futures contracts traded on the CME [Globex] for their own profit” by misleading other traders about the prevailing price and number of contracts available. Id. ¶ 2. Defendants allegedly did so by entering hundreds of large-volume orders either to buy or to sell KOSPI 200 futures contracts without intending these orders to be matched by others users. Id. ¶¶ 2, 29. Instead, Defendants took advantage of flash-trading technology to respond to their own orders within a fraction of a second by either (1) cancelling the orders before they could be matched, or (2) fulfilling the orders themselves. Id. ¶¶ 2, 29. The purpose of this trading strategy—sometimes known as “spoofing”—was to create a “false impression regarding the number of contracts available in the market, along with illusory price and volume information” and thereby manipulate the price of KOSPI 200 futures contracts in Tower's favor. Id. ¶¶ 2, 29, 31. This false information was intended to trick other traders into believing that the prevailing price was either higher or lower than it actually was. Id. ¶ 31. Tower was then able to “purchase [KOSPI 200 futures] contracts at prices lower, or sell contracts at prices higher, than were available in the market before Tower entered its fictitious large-volume buy or sell orders.” Id. ¶ 29.

The Complaint alleges that Defendants created “hundreds and hundreds” of these fictitious buy and sell orders, and, over the course of the year, earned approximately $14.1 million through the use of these “spoofing” tactics. Id. ¶¶ 4, 29.

Plaintiffs filed their class action complaint on December 16, 2014, asserting violations of the CEA §§ 6(c), 6(d), 9(a), and 22(a), 7 U.S.C. §§ 9, 13b, 13(a), and 25(a), as well as state law. (Compl.). Defendants subsequently moved to dismiss the complaint with prejudice on March 4, 2015. (Defs.' Mem. of Law in Supp. Mot. to Dismiss (“Mot. to Dismiss”) [Doc. No. 19] ).

II. LEGAL STANDARD

To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must plead facts sufficient “to state a claim to relief that is plausible on its face.” Bell Atl. Corp v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is facially plausible when the supporting factual allegations “allow[ ] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Where a plaintiff has failed to “nudge” a claim “across the line from conceivable to plausible,” a district court must dismiss the complaint. Twombly , 550 U.S. at 570, 127 S.Ct. 1955.

The Court must accept as true all well-pleaded factual allegations in a complaint and “draw[ ] all inferences in the plaintiff's favor.” Allaire Corp. v. Okumus , 433 F.3d 248, 249–50 (2d Cir.2006) (internal quotations omitted). But a court is “not bound to accept as true a legal conclusion couched as a factual allegation.” Twombly , 550 U.S. at 555, 127 S.Ct. 1955.

III. DISCUSSION

A. Pleading Standard—Rule 8(a) vs. Rule 9(b)

As an initial matter, the parties disagree as to whether the heightened pleading standard of Federal Rule of Civil Procedure 9(b) or the more relaxed standard of Rule 8(a) applies in this case. See (Mot. to Dismiss, 10); (Pls.' Mem. of Law in Opp'n (“Pls.' Opp'n”), 2-3 [Doc. No. 30] ).¹

Following the majority of courts in this Circuit, this Court adopts the case-by-case approach to determining whether Rule 9(b) applies, namely “[i]f a particular manipulation claim sounds in fraud, it must comply with Rule 9(b) ; if it does not sound in fraud, it need not comply with Rule 9(b).” U.S. Commodity Futures Trading Com'n v. Amaranth Advisors, L.L.C. , 554 F.Supp.2d 523, 531 (S.D.N.Y.2008) (Chin, J.). In general, if the theory of manipulation alleged in the complaint is based on false or misleading statements or omissions, it sounds in fraud and Rule 9(b) applies. See In re Crude Oil Commodity Litig. , No. 06–CV–6677, 2007 WL 1946553, at *5 (S.D.N.Y. June 28, 2007) (Buchwald, J.). If, however, the complaint merely alleges a scheme based on a manipulative trading strategy or abuse of market power, “courts have found Rule 8(a) is more appropriate.” In re Term Commodities Cotton Futures Litig. , No. 12–CV–5126, 2013 WL 9815198, at *10 (S.D.N.Y. Dec. 20, 2013) (Carter, J.); U.S. Commodity Futures Trading Com'n v. Wilson , 27 F.Supp.3d 517, 532 (S.D.N.Y.2014) (Torres, J.).² Whether or not the word “fraud” appears in the complaint is not dispositive in determining whether Rule 9(b) applies. In re Crude Oil Commodity Litig. , 2007 WL 1946553, at *5.

The Complaint in this action alleges that Tower created a “false impression” and “illusory price and volume information” through the use of “fictitious large-volume buy or sell orders” that moved the price of KOSPI 200 futures contracts in a direction favorable to the Defendants. (Compl. ¶¶ 2, 29). The Complaint also describes these orders as “fraudulent and misleading.” Id. ¶¶ 3, 31. Although Plaintiffs have used language that is indicative of fraud (“fictitious”, “fraudulent”, “misleading”, “illusory”), the gravamen of the allegations is that Tower employed a strategy of submitting high-volume above– or below-market bids in order to manipulate market prices. (Compl. ¶¶ 2-3, 29, 31).

This closely resembles the scheme alleged in Wilson, where the defendants repeatedly submitted above-market bids and then withdrew them “without the intent to consummate an exchange” in order to manipulate the prevailing price in their favor. 27 F.Supp.3d at 526. The Wilson court decided that, because the attempted manipulation was effectuated through “a particular trading strategy” and did not involve “misleading statements or omissions,” the complaint did not sound in fraud and therefore should be evaluated under the “flexible pleading standard[ ] of Rule 8(a)” rather than the more stringent standard of Rule 9(b). Id. at 532. The Court finds Wilson's reasoning persuasive.

Here, despite Plaintiffs' description of Tower's conduct as “fraudulent,” the Complaint does not allege that Tower made any false or misleading statements of fact or material omissions as part of its alleged manipulation. The submission of an above– or below-market bid—even if the party intends to withdraw the bid before it can ever be matched—does not constitute a false or misleading statement that would trigger the application of Rule 9(b). See 27 F.Supp.3d at 532.

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