New York Judges Limit Commodity Exchange Act Claims To Domestic Transactions

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...