Securities Regulation Daily High court lets stand Second Circuit decision on application of Morrison to CEA claim
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Monday, June 15, 2020

High court lets stand Second Circuit decision on application of Morrison to CEA claim

By Rodney F. Tonkovic, J.D.

The petition asked whether Morrison's domestic transaction test is sufficient or merely necessary.

The Supreme Court has declined to hear a petition asserting that the Second Circuit resurrected the "conducts and effects" test rejected in Morrison. The petition took issue with the Second Circuit's insertion of another factor into Morrison's two-step test for determining whether a claim is impermissibly extraterritorial and asserted that the result was a direct split between the Second and Ninth Circuits (Atlantic Trading USA, LLC v. BP P.L.C., June 15, 2020).

The case was brought by oil traders alleging that certain producers, refiners, and traders manipulated Brent crude futures and derivatives in violation of the antifraud provisions of the Commodity Exchange Act (CEA). Specifically, these parties engaged in artificial trades and made misleading reports to (among others) a London-based reporting agency concerning transactions made outside of the U.S.; the reports in turn affected the price of Brent futures and derivatives contracts traded in New York and London. The district court dismissed the action, finding that the claims were impermissibly extraterritorial, and the Second Circuit affirmed.

Second Circuit finds no domestic application of CEA. The Second Circuit applied the two-step test set forth in Morrison when considering whether the claims were impermissibly extraterritorial under the CEA: (1) whether Congress "clearly expressed" an intent to give a statute extraterritorial effect, and (2) whether the domestic activity alleged was the "focus of congressional concern." The panel, however, added another part to the second step, explaining that its Parkcentral opinion had held that a domestic transaction was necessary but not sufficient because a plaintiff also must allege a substantive statutory violation.

As to the first question, the panel concluded that the CEA provisions at issue (unlike other provisions in the securities laws) lacked any affirmative statement that they were intended to apply to conduct abroad. The panel then found that the claims did not involve a domestic application of the CEA. Here, the traders’ allegations under CEA Section 22 were insufficient because the "ripple effect" theory urged was too attenuated to show domestic conduct in violation of the CEA. Moreover, the Second Circuit found allegations under CEA Sections 6(c)(1) and 9(a)(2) likewise involved conduct that occurred overseas. In reaching this conclusion, the panel assumed that the trades were domestic transactions under Section 22, but explained that under Parkcentral all of the relevant conduct occurred abroad.

Petition argues Second Circuit in direct conflict with Ninth. The petition took issue with the application of Parkcentral to the CEA, based on a split between the Second and Ninth Circuits regarding the application of Morrison's domestic transaction test. The petitioner cast the Second Circuit's use of Parkcentral as resurrecting the "conducts and effects" test explicitly rejected in Morrison. This stands in direct disagreement with the Ninth Circuit's holding in Stoyas v. Toshiba Corp. distinguishing Parkcentral and concluding that the two-step Morrison test is sufficient to establish a domestic application of U.S. law.

The petition argued that Morrison says that the Exchange Act's antifraud provisions are intended to protect U.S. exchanges and institutions. So, the location of the manipulated transaction is key. The CEA has a similar focus, the petition observed, but the Second Circuit ignored direct parallels between the securities and commodities laws. The petition noted too that the Second Circuit had adhered to Morrison in two subsequent cases—Absolute Activist (finding a domestic transaction if irrevocable liability or transfer of title occurs in the U.S.) and Loginovskaya (concluding that the focus of the CEA, like Exchange Act Section 10(b), is transactional and, thus, Morrison applies to the CEA)—but abandoned this approach in Parkcentral.

In addition, the petition argued that the Second Circuit has held that even CEA claims based on transactions on U.S. exchanges are not necessarily territorial. This "indefensible" decision represents the court's refusal to apply Morrison's reasoning to the CEA and has enormous consequences for the protection of U.S. commodities and futures markets. According to the petition, the CFTC and DOJ regularly pursue overseas actors whose behavior affects U.S. markets or exchanges, and if the CEA does not apply overseas, the viability of such enforcement actions is in doubt.

The petition is No. 19-1141.

Attorneys: David E. Kovel (Kirby McInerney LLP) and Charles H. Davis (Goldstein & Russell, PC) for Atlantic Trading USA, LLC.

Companies: Atlantic Trading USA, LLC; BP P.L.C.

MainStory: TopStory CFTCNews CommodityFutures Derivatives ExchangesMarketRegulation FraudManipulation GCNNews SecuritiesOfferings Swaps SupremeCtNews ConnecticutNews NewYorkNews VermontNews

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