Federal Courts Wrestle With Opening Doors To US Courthouse to KOSPI Class Action

[D]efendants "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.

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. 

Defendants argue that United States law does not apply to the alleged misconduct. See (Mot. to Dismiss, 5-10). In Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), the United States Supreme Court held that the Securities Exchange Act (SEA) does not apply to conduct that occurs abroad, but rather applies only to the purchase or sale of a security that (1) is made in the United States, or (2) is listed on a domestic exchange. Id. at 269-70.4 Both the Second Circuit and this Court have held that Morrison's transactional test applies to the CEA as well . . .. See Loginovskaya v. Batratchenko, 936 F. Supp. 2d 357, 372 (S.D.N.Y. 2013) (Oetken, J.) aff'd, 764 F.3d 266 (2d Cir. 2014); Starshinova v. Batratchenko, 931 F. Supp. 2d 478, 487 (S.D.N.Y. 2013) (Wood, J.). 

Although the parties agree that Morrison's transactional test governs the analysis under the CEA, they dispute (1) whether the alleged transactions took place in the United States or in South Korea, and (2) whether they took place on a U.S. exchange or a Korean exchange. See (Mot. to Dismiss, 6); (Pls.' Opp'n, 5). Plaintiffs contend that the CME Globex trading platform itself qualifies as a domestic exchange, (Pls.' Opp'n, 5), and that, for all transactions taking place on the CME Globex, the "meeting of the minds required for the trade takes place on the CME Globex in Illinois." (Compl. ¶ 21). By contrast, Defendants contend that all transactions in KOSPI 200 futures contracts occur on the KRX, a South Korean exchange, and that the "use of CME Globex computers in Chicago" to effectuate these transactions during the night market "does not alter that fact." (Mot. to Dismiss, 7). Defendants contend that "[u]nder Morrison, what matters is the exchange's location, not where the technology is located." Id. 

For the reasons discussed below, the Court concludes that the alleged transactions fail to qualify as domestic under either prong of Morrison's test

The district court dismissed the action principally on the ground that the CEA does not apply extraterritorially as would be required for it to reach Defendants' alleged conduct.  Because we conclude Plaintiffs' allegations make it plausible that the trades at issue were "domestic transactions" under our precedent, we do not agree that application of the CEA to Defendants' alleged conduct would be an impermissible extraterritorial application of the act. We also disagree with the district court's conclusion that Plaintiffs failed to state a claim for unjust enrichment. Accordingly, we VACATE and REMAND for further proceedings

[T]he Supreme Court set out to define the territorial  reach of § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b).  After discussing the presumption against extraterritoriality, 561 U.S. at 255, the Court concluded that, given its text, § 10(b) (and Rule 10b‐5, promulgated thereunder) has only a domestic reach, and therefore applies only to one of two types of transactions: (i) "transactions in securities listed on domestic exchanges;" and (ii) "domestic transactions in other securities," id. at 267.

Consequently, plausible allegations that parties to a transaction subject to the CEA incurred irrevocable liability in the United States suffice to overcome a motion to dismiss CEA claims on territoriality grounds. We believe in this case that Plaintiffs' allegations make it plausible that parties trading on the KRX night market incur irrevocable liability in the United States. This being a sufficient basis to resolve the extraterritoriality question at this stage, there is no need for us to address whether the CEA has a territorial reach on the basis that the CME Globex is a "domestic exchange."

[P]laintiffs' amended complaint alleges not only that KRX night market trades bind the parties on matching, it also alleges that  the express view of CME Group is that "matches [on CME Globex] are essentially binding contracts" and "[m]embers are required to honor all bids or offers which have not been withdrawn from the market." AC ¶¶ 21-22. Nothing in the amended complaint or elsewhere suggests that a trading party may unilaterally revoke acceptance following matching on CME Globex. It follows from these allegations that, in the "classic contractual sense," Absolute Activist, 677 F.3d at 68, parties incur irrevocable liability on KRX night market trades at the moment of matching

Plaintiffs' allegations easily establish a connection sufficient for the unjust enrichment claim to proceed. Plaintiffs alleged it to be a near statistical certainty that they directly traded with Defendants on the KRX night market during the relevant period, in which Defendants continually manipulated the market on which the trades 11 occurred. AC ¶ 31 n.13. Moreover, even if none of Plaintiffs' trades were executed directly with Defendants, that would not necessarily defeat Plaintiffs' claim at this stage because Plaintiffs plausibly allege that Defendants' spoofing strategy artificially moved market prices in a way that directly harmed Plaintiffs while benefitting Defendants. . .

• KOSPI
• SDNY
• 2Cir
• KRX
• CME Globex
• CEA
• Morrisson
• Extraterritoriality
• Spoofing
• Unjust Enrichment
• BrokeAndBroker
• Bill Singer