The US Court of Appeals for the Second Circuit in Loginovskaya v. Batratchenko, 13-1624-CV (2d Cir. N.Y. Sept. 4, 2014), upheld a lower-court's decision to dismiss a private civil action brought under the anti-fraud provisions of the U.S. Commodities Exchange Act ("CEA"), 7 U.S.C. § 1, et seq., by an investor against an international financial services organization, based in New York, that managed investment programs focused on commodity futures and real estate, several of its affiliates who were registered participants in the U.S. commodities markets, and two of its principals. The plaintiff, Ludmila Loginovskaya, a Russian citizen residing in Russia, alleged that she invested in the investment programs based upon a series of representations concerning the management of the fund and the use of investment proceeds. All of the dealings between Loginovskaya and the defendants occurred in Russia, except that Loginovskaya consummated her investment by transferring funds to a bank account used by the defendant in New York. The Second Circuit held that Loginovskaya cannot pursue her cause of action in federal court because (1) the presumption against a statute having extraterritorial effect articulated in Morrison v. National Australia Bank, 561 U.S. 247 (2010), applies to the provision of the CEA, Section 22 (7 U.S.C. § 25(a)(1)), which authorizes a private right of action under the commodities laws; (2) CEA Section 22 requires a commodities transaction within the United States; and (3) Loginovskaya has not alleged a domestic commodities transaction. In this opinion, the Second Circuit limited the remedies available to a defrauded commodities investor by requiring that a plaintiff seeking to bring a private civil action for commodities fraud allege a domestic commodities transaction.
In 2006, Loginovskaya was solicited in Russia by Defendant Oleg Batratchenko, a U.S. citizen resident in Moscow, to invest in the investment program. Batratchenko, the chief executive officer of the defendant financial services organization, provided Loginovskaya with brochures, investment memoranda, and other materials, written in Russian, describing the opportunity. Batratchenko and his agents represented to her that she could withdraw her principal and returns at any time upon a set period of notice, that risk would be controlled, that the funds were managed by experienced experts in futures trading and investment, and that the programs would be audited regularly by reputable firms.
Based upon these representations, Loginovskaya invested a total of $720,000, by transferring the funds to the group's bank account in New York. During the ensuing years, account statements provided to Loginovskaya generally showed positive returns. In or about 2009, Loginovskaya sought to realize her gains and withdraw her funds. No money was forthcoming; instead, it was reported that the account had lost a significant amount of value. In later communications, the defendants sought to explain the failure to repay the funds by falsely claiming, among other things, that "onerous new regulations" in the United States were holding up fund returns. Eventually, plaintiff learned that, contrary to the initial representations to investors, the defendants had used investor funds to make unsecured loans to an unrelated real estate investment firm, in which the individual defendants had a personal interest.
Loginovskaya brought an action in in federal court in New York, alleging violations of the antifraud provisions of the US federal commodities laws and common law fraud. The district court granted defendants' motion to dismiss the CEA claim on the ground that the CEA claim failed Morrison's domestic transaction test. SeeLoginovskaya v. Batratchenko, 936 F.Supp.2d 357, 367–75 (S.D.N.Y.2013).
The Court of Appeals began its analysis by considering the two main provisions of the CEA at issue that provide a private right of action for defrauded investors. Section 4o of the CEA (7 U.S.C. § 6o(1)), the general anti-fraud provision, provides in relevant part that,
(1) It shall be unlawful for a commodity trading advisor, associated person of a commodity trading advisor, commodity pool operator, or associated person of a commodity pool operator, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly—
(A) to employ any device, scheme, or artifice to defraud any client or participant or prospective client or participant; or
(B) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant.
Section 22 of the CEA provides a private right of action, which the Second Circuit observed was limited to four circumstances that each were "transactional in nature." (Opinion at 9-10). These included circumstances where the plaintiff had (1) received trading advice for a fee; (2) made a contract of sale of any commodity for future delivery or paid money to make such a contract; (3) placed an order for purchase or sale of a commodity; or (4) purchased or sold a swap or contract for sale of a commodity where there was manipulation of the price of the swap or contract or underlying commodity. (Id. (citing 7 U.S.C. § 25(a)(1))).
Following Morrison, the court first considered whether there was evidence from the text of the CEA – especially Sections 4o and 22 – that Congress intended the act to apply extraterritorially. (Id. at 11-13). Finding no evidence of such intent, the court proceeded to consider the second prong of the Morrison test, namely, how the presumption against extraterritorial effect affects the statute in view of the "focus of congressional concern." (Id. at 13).
The court found that Loginovskaya's suit must first satisfy the threshold requirements of Section 22 of the CEA before reaching the merits of her Section 4o fraud claim. The court found that the "focus of congressional concern" in Section 22 "is clearly transactional" because it allowed a private right of action only where the plaintiff "actually traded" in the commodities markets. (Id. at 14-15). The court concluded that since CEA Section 22 limited the private right of action to suits over transactions, the suits must be based on transactions occurring in the United States. (Id.)
The court next considered whether plaintiff had alleged a domestic transaction. Plaintiff alleged that her claim arose from the purchase, sale, or placing the order for the purchase or sale of an interest or participation in a commodity pool. The court held that in order to demonstrate a domestic transaction, plaintiff must demonstrate that the transfer of title or the point of irrevocable liability for such an interest occurred in the United States. (Id. at 18-19 (citing Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 68 (2d Cir.2012))). Since the plaintiff's negotiations with Batratchenko all occurred in Russia, and she executed the investment contracts in Russia, the court concluded that Russia (not the United States) was where Loginovskaya and the defendants reached a "meeting of the minds." (Id. at 21). The circumstance that Loginovskaya had wired the funds to a New York bank account did not render the transaction domestic because, the court found, the transfers were actions needed to carry out the transactions, and were not the transactions themselves. (Id.)
Circuit Judge Raymond J. Lohier dissented. Judge Lohier argued that the presumption against extraterritoriality should not apply to statutes that do not regulate conduct. Because CEA Section 22 does not regulate conduct or impose substantive liability, but rather limits the categories of persons who can seek remedies under the statute, Judge Lohier concluded that Morrison's presumption should not apply to Section 22. With respect to Section 4o, Judge Lohier observed that Morrison's transaction test does not apply to Section 4o and that Loginovskaya's allegations stated a claim under that provision. Judge Lohier concluded that the deceptive scheme was executed in part in the United States because the defendants issued investment memoranda and correspondence from New York, the plaintiff wired funds to New York bank accounts, account statements were generated in New York, and unauthorized investments occurred in the United States.
Limitation on Extraterritorial Application of The CEA
The Second Circuit's decision in Loginovskaya represents an application of Morrison to commodities fraud claims and significantly limits the ability of a foreign resident plaintiff to bring a claim under the CEA in U.S. federal courts. Under the rule announced in Loginovskaya, private victims of commodities fraud will be required to allege a separate domestic commodities transaction even if they adequately plead a violation of § 4o, which does not require such a transaction. Thus, even in a case where the defendants had substantial ties to the United States and took actions in the United States to carry out the fraudulent scheme, and where the victim wired funds into the United States, the plaintiff was unable to file suit in the U.S. courts because the solicitation and negotiations took place abroad. This case is another example of the recent trend in U.S. courts to limit securities and commodities fraud lawsuits arising from foreign transactions.