Client Advisory

Within two weeks in March, Carter Ledyard & Milburn LLP, representing a family of hedge funds and their advisors, won dismissal of two cases before two different federal judges in the Southern District of New York, with decisions that redefine the applicability of federal commodities law to international financial transactions. These two decisions – Starshinova v. Batratchenko, -- F. Supp. 2d --, 2013 WL 1104288 (S.D.N.Y., Mar. 15, 2013) (Judge Kimba M. Wood) and Loginovskaya v. Batratchenko, 12-cv-0336, 2013 WL 1285421 (S.D.N.Y., Mar. 29, 2013) (Judge J. Paul Oetken) – establish, for the first time, that a private plaintiff does not have a claim under §§ 4o and 22(a) of the Commodity Exchange Act if the "transaction" the plaintiff complains of is not "domestic" in nature, even if the defendant is a regulated entity located in the United States and there are other significant U.S. contacts. 

In 2010, the U.S. Supreme Court in Morrison v. Nat'l Austl. Bank, Ltd., 130 S.Ct. 2869 (2010), reaffirmed the "longstanding principle of American law that legislation of Congress, unless contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States." Morrison, 130 S.Ct. at 2877. Morrison involved a putative class action by foreign investors against an Australian banking corporation. Plaintiffs brought claims under § 10(b) of the Securities Exchange Act based on allegations that the fraud originated – and to a large extent was effectuated – in the United States. In overturning the traditional "conduct or effect" test to determine the Securities Exchange Act's jurisdictional reach, the Supreme Court held that to be actionable the relevant security must either (1) be listed on a domestic exchange, or (2) be the subject of a "domestic" purchase and sale. Id. 2884-85. Later, in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), the Second Circuit clarified that for the purpose of determining whether the purchase and sale was "domestic" the only relevant consideration is whether the parties became "bound to effectuate [the] transaction" in the United States. 677 F.3d 68-69. Under this "transactional" approach, the location of the broker, the identity of the parties, and the nature of the securities are irrelevant. 

Both Starshinova and Loginvoskaya involved claims by foreign plaintiffs – citizens of Russia and the Commonwealth of Independent States (i.e., the former Soviet Union) – against a hedge fund located in Nevis (as well as its principal, and associated companies) based on investments made in the run up to the financial crisis of 2008. The defendants sought dismissal of the Securities Exchange Act and Commodity Exchange Act claims, arguing that the purchase of the ownership interests in the funds was not "domestic" within the meaning of Morrison and Absolute Activist. Although the reasoning of Morrison and Absolute Activist was previously extended to bar claims under the Securities Act of 1933 and the Racketeer Influenced and Corrupt Organizations (RICO) Act,[i] Starshinova and Loginovskaya are the first cases to extend their reach to the Commodity Exchange Act. 

In Starshinova, Judge Wood held – after an extensive analysis of the statute – that the reasoning of Morrison regarding the territorial reach of the Securities Exchange Act "applie[d] with equal force" to claims under the Commodity Exchange Act. Id. at *10-12.  The decision recognized that while the "status" of a defendant as "registered commodities operator" is important for liability under § 4o, the private right of action in §22(a) restricted suits to only those plaintiffs "who purchased or sold a commodities interest," making the transactional approach of Absolute Activist applicable (and defendants' status as registered entities irrelevant). Id. *12-13. Similarly, plaintiffs' other "conduct" based allegations were insufficient to allege a domestic transaction. Id. at *10, 13. 

Loginvoskaya, decided two weeks later, extended the reasoning in a thirty-one page opinion devoted solely to an examination of the extraterritorial reach of §§ 4o and 22(a) of the Commodity Exchange Act. Agreeing that the Morrison approach was now a "canon of statutory construction" that applies "in all cases," and finding that the "transactional" approach of Absolute Activist applies to §22 of the Commodities Exchange Act, Judge Oetken held that "in order for a private litigant to assert a viable claim pursuant to § 4o, one or more of the transactions enumerated in § 22 must be domestic in nature." Id. at * 17-20, 22-24.[ii]  Because Judge Oetken explicitly applied the transactional test to § 22 (the private cause of action), and not § 4o (the anti-fraud provision), defendants' status as regulated entities was, again, immaterial. In addition, the reasoning is not limited to claims under § 4o. As a result of this approach, a private plaintiff must now show that (1) he or she is complaining of conduct in connection with one of the transactions enumerated in the Commodity Exchange Act's narrow private cause of action, and (2) that those transactions are domestic in nature, before the court will even examine whether he or she stated a claim under the statute's substantive provisions.

Litigation Counsel Judith M. Wallace, Associate Alexander G. Malyshev, and Partner Gary D. Sesser represented the defendants in both cases. 

[i]See In re Vivendi Universal, S.A., Sec. Litig., 842 F. Supp. 2d 522, 529 (S.D.N.Y. 2012) (collecting cases dismissing §§ 11, 12, 15 and 17(a) Securities Act claims under Morrison); Norex Petroleum Ltd. v. Access Indus., Inc. 631 F.3d 29, 32-33 (2d Cir. 2010) (Applying Morrison to the RICO statute, 18 U.S.C. §§ 1961 et. seq.).

[ii] To bring these claims, a plaintiff must allege that he or she: (A) received trading advice from defendants for a fee; (B) traded through defendants or deposited money with defendants in connection with a commodities trade; (C) purchased from or sold to defendants or placed an order for purchase or sale of a commodity through them; or (D) engaged in certain market manipulation activities in connection with the purchase or sale of a commodity contract. 13.

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