Myun-Uk Choi v. Tower Research Capital LLC, 890 F.3d 60 (2d Cir. 2018) [click for opinion]

Plaintiffs were five Korean citizens who had transacted for futures contracts on the "night market" of the Korea Exchange (the "KRX"). Plaintiffs alleged that Defendants, Tower Research Capital LLC and its founder Mark Gorton, manipulated transactions in violation of the Commodity Exchange Act, 7 U.S.C. §§ 1 et seq. (the "CEA"), and were unjustly enriched under New York law.

The KRX night market operates by using an electronic trading platform ("CME Globex") to match orders when the KRX is closed for business. Upon opening in the morning, the matches would be executed as trades and cleared on the KRX. The CME Globex trading platform was located in Aurora, Illinois, and was heavily utilized by Defendants, a high-frequency trading firm based in New York. Defendants would use algorithms to execute trades at great speeds, and accounted for 53.8% of all KRX night market trades in 2012. Plaintiffs alleged that Defendants abused this power by creating hundreds of fictitious buys and sells, which they could then cancel or quickly become a counterparty to, due to their high-frequency technology. Ultimately, Plaintiffs alleged that this created a false impression of supply and demand, and gave Defendants control over the pricing on the night market.

Defendants moved to dismiss, arguing that the CEA does not apply extraterritorially, and that Plaintiffs failed to establish the existence of a direct relationship sufficient to state a claim for unjust enrichment. The district court granted the motion and dismissed the case. On appeal, the court vacated the district court's judgement and remanded the case for further proceedings.

In vacating the district court's judgment, the court focused on the extraterritoriality doctrine set out in the Supreme Court's 2010 decision in Morrison v. National Australia Bank Ltd. Under Morrison, securities transactions only fall within the reach of U.S. courts if the securities were (i) purchased or sold in the U.S. or (ii) listed on a domestic exchange. Here, Defendants argued that the trades were executed on the KRX in Korea, and that Plaintiffs failed to properly plead that the CME Globex was a domestic exchange. However, the court noted that the extraterritoriality analysis must assess "the particular statutory provision" at issue. In Morrison, the court evaluated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), which deals with the purchase or sale of any security "registered on a national securities exchange." The CEA contains no such restriction. Moreover, even if the "domestic exchange" prong were applicable, the Morrison prongs must be considered in the disjunctive, and Second Circuit precedent establishes that securities transactions will constitute a purchase or sale made in the U.S. if irrevocable liability is incurred within the U.S.

The court went on to hold that the matching process on CME Globex created a contractual obligation that may have included irrevocable liability. The owners of the CME Globex stated that matches were essentially binding contracts, and that parties were required to honor all bids and offers without the ability for unilateral withdrawal. Furthermore, the KRX's rules provide that after a trade is verified, the exchange assumes the liability between the parties. In other words, the rules acknowledge a pre-existing liability between trading counterparties. The court found that it was plausible that irrevocable liability was assumed during the matching process on the CME Globex in Aurora, Illinois, which was all that was necessary to survive a motion to dismiss.