Justices' Cert Snub Perpetuates Commodities Act Uncertainty

June 15, 2020
by Katherine Cooper

(As Published in Law360)

The U.S. Supreme Court announced Monday its denial of a petition for a writ of certiorari in Atlantic Trading USA LLC v. BP PLC,[1] which sought the court's review of a U.S. Court of Appeals for the Second Circuit decision that limited the extraterritorial reach of the Commodity Exchange Act.

In Prime International Trading Ltd. v. BP PLC,[2] the Second Circuit found that the plaintiffs' claims under the CEA alleging the defendants' misconduct in the Brent oil market in Europe, which the plaintiffs claim manipulated the price of Brent oil futures traded in the U.S., were too attenuated to state a claim under the CEA. If the high court had granted certiorari, it would have been a case of first impression regarding the application of the CEA to offshore conduct.

In reaching its conclusion, the Second Circuit purported to apply the Supreme Court's decision in Morrison v. National Australia Bank Ltd.,[3] which overturned decades of Second Circuit precedent regarding the extraterritorial reach of Section 10(b) of the Securities Exchange Act.

For years, the Second Circuit had used "effects" and "conduct" tests to determine whether Section 10(b) applied to extraterritorial activity.[4] In Morrison, the Supreme Court criticized the effects and conduct tests as leading to arbitrary and unpredictable results. Instead, the Supreme Court articulated a new "transactions test,"[5] which it said would provide a bright-line test that lower courts could more easily apply and achieve more consistent results.

Morrison involved the fraudulent mismarking of the books of a Florida-based subsidiary of National Australia Bank. The Australian plaintiffs had purchased NAB's stock through the transactions executed on the Australian Stock Exchange prior to the disclosure of the fraud. The plaintiffs sought damages under Section 10(b) for losses they suffered by the drop in NAB's share price after the fraud was uncovered.

The Supreme Court noted:

The focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States. Section 10(b) does not punish deceptive conduct, but only deceptive conduct "in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered." Those purchase-and-sale transactions are the objects of the statute's solicitude. It is those transaction that the statute seeks "regulate," it is parties or prospective parties to those transactions that the statute seeks to "protec[t]."[6]

Because the shares in Morrison were not listed on a U.S. securities exchange and the plaintiffs purchased the shares in Australia, the Supreme Court ruled that the plaintiffs' claims failed the transactions test, notwithstanding the fact that the fraud that had damaged the plaintiffs occurred in Florida.

After the Supreme Court's Morrison decision and prior to the Second Circuit's decision in Prime Trading, the Second Circuit issued its decision in Parkcentral Global Hub Ltd. v. Porsche Auto Holdings SE.[7] In Parkcentral, the plaintiffs asserted claims under Section 10(b) against Porsche on the ground that the value of the equity swaps on Volkswagen shares that they had entered into in the U.S. had fallen based on Porsche's allegedly fraudulent statements regarding Porsche's intent to acquire a significant interest in VW shares.

The VW shares were only traded in Europe and Porsche's alleged fraudulent statements were also only made in Europe but accessible in the U.S. As a result, the Second Circuit noted that to allow the plaintiffs' claims to proceed based on the mere fact that the security transaction — the equity swap trades — occurred in the U.S. would result in an extraterritorial application of Section 10(b) to "conduct that occurred in a foreign country, concerning securities in a foreign company, traded entirely on foreign exchanges."[8]

The Second Circuit reasoned that such a result was one not contemplated by the Supreme Court in Morrison, and therefore, Morrison's transactions test was a necessary condition but not sufficient basis for permitting the extraterritorial application of Section 10(b).[9]

The Second Circuit's Parkcentral decision has been heavily criticized by the U.S. Court of Appeals for the Ninth Circuit. In Stoyas v. Toshiba Corporation,[10] the Ninth Circuit found that Parkcentral was "contrary to Section 10(b) and Morrison itself."[11] Moreover, the Ninth Circuit concluded that

Parkcentral's test for whether a claim is foreign is an open-ended, under-defined multi-factor test, akin to the vague and unpredictable tests that Morrison criticized and endeavored to replace with a "clear," administrable rule.[12]

In the Second Circuit's decision in Prime Trading, the court first analyzed the extraterritorial application of Section 22 of the CEA which gives private plaintiffs a cause of action for certain harms resulting from violations of specified provisions of the CEA.[13] Relying on Parkcentral, the court found the alleged misconduct to be "'so predominantly foreign' as to render the claims impermissibly extraterritorial" under Section 22.[14] The futures transactions on the New York Mercantile Exchange, or NYMEX, were necessary but not sufficient to assert extraterritorial jurisdiction.

Alternatively, the Second Circuit distinguished Morrison on the ground that it dealt with Section 10(b) and not the CEA's anti-fraud provision, Section 6(c)(1), at issue in Prime Trading. The court determined Section 6(c)(1) not to have the same focus on where the transaction took place as Section 10(b). It reasoned:

But the language of Section 6(c)(1) crucially differs from Section 10(b), as the latter prohibits "us[ing] or employ[ing], in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered ... any manipulative or deceptive device ... while Section 6(c)(1) contains no mention of a "national securities exchange." Morrison's determination that Section 10(b) focused specifically on "deceptive conduct 'in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.'" There is nothing in Section 6(c)(1)'s text suggesting that it is focused on "purchases and sales of securities in the United States."[15]

Needless to say, it seems the Second Circuit missed a trick here. Of course, Section 6(c)(1) is not focused on purchases and sales of securities in the U.S. It is an anti-fraud provision that Congress in the Dodd-Frank Act added to the CEA to combat commodity frauds. Section 10(b) is designed to combat securities frauds. Section 6(c)(1) is, however, clearly based on Section 10(b), and like Section 10(b), Section 6(c)(1) is limited to frauds committed in connection with transactions. Section 6(c)(1) provides, in relevant part:

It shall be unlawful for any person, directly or indirectly, to use or employ, or attempt to use or employ, in connection with ... or a contract of sale of any commodity ... for future delivery on or subject to the rules of any registered entity, any manipulative or deceptive device or contrivance.[16]

The plaintiffs claimed that the defendants' alleged fraud in the Brent oil market manipulated the price of Brent oil futures which they traded on NYMEX in the U.S. In other words, they alleged that a fraud had occurred in connection with the sale of a commodity for future delivery on NYMEX, which is a registered entity.

The Second Circuit's distinction between transactions in securities on national securities exchanges and transactions in futures contracts on U.S. futures exchanges would seem to be a distinction without a meaningful difference.

It may well be that, if the Morrison transaction test were properly applied to the facts in Prime Trading, the same result would obtain: the dismissal of plaintiffs' claims. However, the reasoning put forth by the Second Circuit regarding the language of Section 6(c)(1) for dismissing the plaintiffs' claims appears dubious.

However meritorious a particular appeal would be based on a circuit court's misapplication of the law, that in itself, rarely justifies the Supreme Court's grant of certiorari to hear an appeal of a wrongfully decided decision. The Supreme Court is not an ordinary appellate court designed to, and capable of, correcting every lower court decision over which it has appellate jurisdiction. Rather, the Supreme Court focuses on resolving splits — inconsistent decisions — between the circuit courts.

Accordingly, the plaintiffs' petition for certiorari asserted that the Second Circuit's decision in Prime Trading represented a split in the circuits by conflicting with the Ninth Circuit's decision in Stoyas and therefore merited the Supreme Court's review. In response, the defendants argued that Stoyas did not represent a split in the circuits:

This case ... concerns the extraterritorial reach of the CEA, a different statute [from the SEA] with different text and structure that addresses different markets. [Plaintiffs] point to no circuit split on the CEA's extraterritorial reach or on Morrison's application to the CEA, and the decision below does not conflict any decision of this Court. Neither this Court no any other court of appeals has applied Morrison to the CEA.[17]

It seems that the Supreme Court agreed with the defendants.[18] Atlantic Trading probably did not offer the best vehicle to address whether the Second Circuit's regression to the effects and conduct tests through the guise of a necessary and sufficient condition requirement glommed onto the transactions test is in keeping with Morrison.

Atlantic Trading involved a different statute that regulates different markets. That said, the SEA and CEA provisions at issue were nearly identical, and if the Supreme Court had been willing to acknowledge the similarities between Section 10(b) and Section 6(c)(1), it might well have taken up Atlantic Trading and given us our first Supreme Court decision regarding the extraterritorial reach of the CEA.

Now, we will have to wait for another matter to raise the question to the Supreme Court of the extraterritorial reach of the CEA.

Katherine Cooper is a shareholder at Murphy & McGonigle. Previously, she served as a lawyer at the Commodity Futures Trading Commission and as chief regulatory officer of futures exchange NYSE Liffe US LLC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Supreme Court Dkt. No. 19-1141.

[2] 937 F.3d 94 (2d Cir. 2019).

[3] 561 U.S. 247 (2010).

[4] E.g., Leasco Data Processing Equip. Corp. v. Maxwell , 468 F.2d 1326 (2d Cir. 1972); SEC v. Berger , 332 F.3d 187 (2d Cir. 2003).

[5] 561 U.S. at 269-70 (citations omitted).

[6] Id. at 266-67.

[7] 763 F.3d 198 (2d Cir. 2014).

[8] Id. at 215-16.

[9] Id.

[10] 896 F.3d 933 (9th Cir. 2018), cert. denied, 139 S.Ct. 2768 (2019).

[11] Id. at 950.

[12] Id.

[13] 7 U.S.C. § 25.

[14] 937 F.3d at 107, quoting Parkcentral, 763 F.3d at 216.

[15] 937 F.3d at 107 (citations omitted).

[16] 7 U.S.C. § 9.

[17] Respondents' Brief in Opposition, Sup. Ct. Dkt. No. 19-1141 (Apr. 27, 2020) at 2.

[18] It is worth noting that the Second Circuit previously applied Morrison to the CEA's extraterritorial reach in Loginovskaya v. Batratchenko , 764 F.3d 266 (2d Cir. 2014). Argued before, but decided after, Parkcentral, the Second Circuit in Loginovskaya used a straightforward transaction test to reject jurisdiction. There the CPO's fraudulent sales material were written in Russian, and delivered to the plaintiff in Russia from the CPO's office in Moscow. Although the CPO traded in U.S. futures markets, the transaction — the sale of a commodity pool interest — occurred entirely outside the United States.