Securities Regulation Daily CEA fraud claims properly dismissed as extraterritorial
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Thursday, August 29, 2019

CEA fraud claims properly dismissed as extraterritorial

By Amy Leisinger, J.D.

The transactions at issue took place entirely outside the U.S., and the sections of the Act at issue do not contain any statements suggesting that Congress intended the statute to extend to foreign conduct.

A Second Circuit panel affirmed dismissal of a fraud class action against a number of foreign crude oil producers and traders by U.S. futures and derivative traders. According to the panel, the district court correctly found that the claims under the Commodity Exchange Act must fail as the application of the CEA to the facts alleged exceeded the territorial limitations of the statute. A statute is presumed not to have an extraterritorial reach unless Congress intended for it to do so, the panel stated, and the provisions at issue do not contain any language suggesting this intention. Further, the panel noted that the relevant conduct occurred in other countries and found that the plaintiffs failed to plead a proper domestic application of the CEA (Prime International Trading, Ltd. v. BP PLC, August 29, 2019, Sullivan, R.).

Alleged misconduct. Brent crude oil is extracted from the North Sea, and cargoes of the oil are bought and sold through private, over-the-counter transactions between producers, refiners, and traders. Price-reporting agencies (such as London-based Platts) collect information about these transactions from market participants and analyze the data to compute and publish benchmark prices. Platts provides the primary pricing benchmark for Brent crude—the "Dated Brent Assessment."

The plaintiffs filed a complaint alleging that certain producers, refiners, and traders engaged in artificial trades and made misleading reports to Platts regarding Brent crude oil transactions conducted outside the United States, which affected the price of Brent futures and derivative contracts traded on the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) in violation of the Commodity Exchange Act and other laws. The plaintiffs argued that the manipulated Dated Brent Assessment caused Brent Futures on the exchanges to trade and settle at artificial prices, causing economic loss.

The district court dismissed the action, finding that crux of the plaintiffs’ allegations did not touch the United States and that their claims were impermissibly extraterritorial.

No extraterritorial intent in the CEA. The panel noted that courts interpret federal statutes in light of the presumption against extraterritoriality and then engage in a two-step framework when considering extraterritorial application: whether Congress "clearly expressed" extraterritorial effect in the text of the statute, and, if not, whether a claim properly states a "domestic application" of the statute with a domestic activity implicated that is the "focus" of the statute. The panel found that the provisions of the CEA at issue are "silent as to extraterritorial reach" with no affirmative indication that they apply to conduct abroad. Further, the panel opined, other sections of the CEA have explicit extraterritorial effect, which reinforces the conclusion that the lack of comparable language in the antifraud provisions bars their extraterritorial application.

No domestic application. The panel went on to consider whether the plaintiffs’ claims involve a domestic application of the CEA in connection with the "focus" of Congress in enacting the statute. In precedent, the Second Circuit has found that the focus of CEA Section 22’s private right of action is "clearly transactional," in light of its focus "domestic" conduct and transactions. The plaintiffs’ trades on NYMEX and ICE arguably constituted "domestic transactions" under Section 22, the panel noted, but a domestic transaction is necessary but not sufficient to state a claim. To state a proper claim, the plaintiffs must also allege domestic conduct that is violative of a substantive provision of the CEA. Noting that the alleged manipulative conduct transpired in Europe and was then used to price futures contracts around the world, the panel found that the plaintiffs failed to plead a domestic application of Section 22.

Further noting that the plaintiffs did not allege manipulative conduct or statements made in the U.S. to demonstrate a domestic application of the CEA’s antifraud provisions, the panel affirmed the district court’s dismissal of the claims.

"Were we to hold otherwise, the CEA would indeed ‘rule the world,’" the court concluded.

The case is No. 17-2233.

Attorneys: David E. Kovel (Kirby McInerney LLP) for Prime International Trading, Ltd., White Oaks Fund LP, Port 22, LLC and Atlantic Trading USA, LLC. Richard C. Pepperman (Sullivan & Cromwell LLP) for BP P.L.C. William Anthony Burck (Quinn Emanuel Urquhart & Sullivan, LLP) for Trafigura Beheer B.V., Trafigura AG and Phibro Trading L.L.C. Shepard Goldfein (Skadden, Arps, Slate, Meagher & Flom LLP) for Vitol S.A. John Roberti (Allen & Overy LLP) for Mercuria Energy Trading S.A. Melvin Arnold Brosterman (Stroock & Stroock & Lavan LLP) for Hess Energy Trading Co., LLC. Perry Lange (Wilmer Cutler Pickering Hale and Dorr LLP) for Statoil US Holdings Inc.

Companies: Prime International Trading, Ltd.; White Oaks Fund LP; Port 22, LLC; Atlantic Trading USA, LLC; BP P.L.C.; Trafigura Beheer B.V.; Trafigura AG; Phibro Trading L.L.C.; Vitol S.A.; Mercuria Energy Trading S.A.; Hess Energy Trading Co., LLC; Statoil US Holdings Inc.

MainStory: TopStory CommodityFutures Derivatives FraudManipulation InternationalNews Swaps ConnecticutNews NewYorkNews VermontNews

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