United States: Second Circuit Holds That Commodities Exchange Act Antifraud And Private Right Of Action Provisions Do Not Apply Extraterritorially

Last Updated: September 5 2019
Article by Shearman & Sterling LLP

On August 29, 2019, the United States Court of Appeals for the Second Circuit affirmed the dismissal of an action under the Commodities Exchange Act ("CEA") alleging that defendants manipulated the foreign benchmark for the price of Brent crude oil by using fraudulent bids, offers and transactions. Prime International Trading Ltd, et al., v. BP PLC, et al., No. 17-2233 (2d Cir. Aug. 29, 2019). The Court held that the CEA provisions at issue did not apply extraterritorially because they lacked a "clear statement of extraterritorial effect" and the alleged misconduct was predominantly foreign.

Plaintiffs alleged violations of two antifraud provisions of the CEA, Sections 6(c)(1) and 9(a)(2), and sought to enforce these provisions through the CEA's private right of action, Section 22. In analyzing whether these provisions applied extraterritorially, the Court applied a two-step framework under the Supreme Court's decisions in RJR Nabisco, Inc. v. European Cmty, 136 S. Ct. 2090 (2016), and Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247 (2010): First, courts look to the text of the statute to discern whether there is a "clear indication of extraterritoriality" and, second, if there is no such indication, courts also consider whether the domestic activity pleaded is the "focus of congressional concern." Slip Op. at 13. As to the first step, the Second Circuit noted that it had previously held that Section 22 of the CEA "is silent as to extraterritorial reach." Id. at 14 (citing Loginovskaya v. Batratchenko, 764 F.3d 266, 271, 272 (2d Cir. 2014)). Turning to Sections 6(c)(1) and 9(a)(2), the Court reached the same conclusion—that they lacked a "clear statement of extraterritorial effect." Id. at 15.

The Second Circuit then addressed the second step of the analysis. The Court noted that it had previously determined that the focus of congressional concern in Section 22 "is clearly transactional, given its emphasis on domestic conduct and domestic transactions," and therefore actions under Section 22 "must be based on transactions occurring in the territory of the United States." Id. at 18-19 (citing Loginovskaya, 764 F.3d at 272). However, the Court explained that it was not required to decide whether the at-issue transactions were domestic because, "while a domestic transaction is necessary to invoke Section 22, it is not sufficient, for a plaintiff must also allege a domestic violation of one of the CEA's substantive provisions." Id. at 20 (citing Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE, 763 F.3d 198, 216 (2d Cir. 2014)). The Court found the facts "remarkably similar" to those in Parkcentral, in which the Second Circuit found that transactions in Germany allegedly affecting the price of Volkswagen stock on European stock exchanges were "so predominantly foreign as to be impermissibly extraterritorial." Id. at 23. In fact, the Court determined that the focus of plaintiffs' allegations involving the manipulation of a benchmark for Brent crude traded in Northern Europe was even more predominantly foreign than in Parkcentral, as plaintiffs relied on attenuated "ripple effects" to connect transactions in Europe to futures prices on exchanges around the world, whereas Parkcentral concerned equity swaps traded in the United States that were directly tied to the price of shares on foreign exchanges. Id. at 24.

The Court further held that plaintiffs did not sufficiently allege a territorial application of Sections 6(c)(1) or 9(a)(2). The Court rejected plaintiffs' argument that Section 6(c)(1) was analogous to Section 10(b) of the Securities Exchange Act, which the Supreme Court in Morrison held was focused on purchases and sales of securities in the United States. The Court distinguished the language in the two statutes, as Section 10(b) refers to the purchase or sale of "any security registered on a national securities exchange or any security not so registered," whereas Section 6(c)(1) of the CEA does not reference any national exchange. Id. at 26. The Court further determined that the focus of both Sections 6(c)(1) and 9(a)(2) centered on manipulation in commodities markets, and all of the alleged misconduct in this case related to that subject occurred abroad. Id. at 27.

The Court emphasized that it did not "lightly dismiss" plaintiffs' allegations, but was compelled to enforce the CEA according to its terms and to apply the presumption against extraterritoriality. Dismissal was thus required because the conduct relevant to plaintiffs' allegations of manipulation occurred entirely abroad, and plaintiffs could not plead a domestic application of the CEA "by mere dint of the fact that—after a winding chain of foreign, intervening events—they purchased Brent Futures on exchanges." Id. at 28. Were it to hold otherwise, the Court warned, "the CEA would indeed 'rule the world.'" Id


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