UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF INDIANA

FORT WAYNE DIVISION

DENNIS TROYER, )

)

Plaintiff, )

)

v. ) No. 1:16-cv-00146-SLC

)

NATIONAL FUTURES ASSOCIATION, )

)

Defendant. )

OPINION AND ORDER

On July 12, 2017, this Court granted a motion to dismiss filed by Defendant National

Futures Association (“NFA”) pursuant to Federal Rule of Civil Procedure 12(b)(6), dismissing

Plaintiff Dennis Troyer’s amended complaint without prejudice. (DE 46). Now before the Court

is NFA’s second motion to dismiss (DE 48), together with a supporting memorandum (DE 49),

seeking to dismiss Troyer’s second amended complaint (DE 47) under Rule 12(b)(6). Troyer has

filed a response in opposition (DE 50), and the NFA has filed a reply brief (DE 51). This motion

is ripe for ruling.1 

For the reasons set forth below, the NFA’s motion to dismiss will be GRANTED IN

PART and DENIED IN PART. 

I. LEGAL STANDARD

Federal Rule of Civil Procedure 12(b)(6) provides for the dismissal of a complaint, or any

portion of a complaint, for failure to state a claim upon which relief can be granted. “To survive

a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state

1 Federal question jurisdiction exists under 28 U.S.C. § 1331. Jurisdiction of the undersigned Magistrate

Judge is based on 28 U.S.C. § 636(c), all parties consenting. (DE 41).
a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

(quoting Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007)); see also Ray v. City of

Chicago, 629 F.3d 660, 662-63 (7th Cir. 2011) (“While the federal pleading standard is quite

forgiving, . . . the complaint must contain sufficient factual matter, accepted as true, to state a

claim to relief that is plausible on its face.” (citation and internal quotation marks omitted)). A

plaintiff is required to include allegations in the complaint that “plausibly suggest that the

plaintiff has a right to relief, raising that possibility above a ‘speculative level’; if they do not,

the plaintiff pleads [himself] out of court.” EEOC v. Concentra Health Servs., Inc., 496 F.3d

773, 776 (7th Cir. 2007) (quoting Bell Atlantic Corp., 550 U.S. at 554). Thus, “a plaintiff must

do better than putting a few words on paper that, in the hands of an imaginative reader, might

suggest that something has happened to [him] that might be redressed by the law.” Swanson v.

Citibank, N.A., 614 F.3d 400, 403 (7th Cir. 2010) (citation omitted). 

II. FACTUAL AND PROCEDURAL BACKGROUND2

In this suit, Troyer seeks to hold the NFA, a self-regulatory organization (“SRO”) for the

futures industry, liable for an allegedly fraudulent scheme perpetuated by Thomas Heneghan, a

2 Troyer attached several documents to his response to the NFA’s motion to dismiss: several complaints

from actions publicly filed by the NFA (DE 50-1; DE 50-3; DE 50-7); a decision on one of the complaints (DE 50-

2); the NFA’s articles of incorporation (DE 50-5); two bylaws of the NFA (DE 50-4; DE 50-6); and two compliance

rules of the NFA (DE 50-8; DE 50-9). Generally, “[a] motion under Rule 12(b)(6) can be based only on the

complaint itself, documents attached to the complaint, documents that are critical to the complaint and referred to in

it, and information to that is subject to proper judicial notice.” Geinosky v. City of Chi., 675 F.3d 743, 745 n.1 (7th

Cir. 2012) (citations omitted). “If a moving party relies on additional materials, the motion must be converted to one

for summary judgment under Rule 56.” Id. (citing Fed. R. Civ. P. 12(d)). 

“A plaintiff, however, has much more flexibility in opposing a Rule 12(b)(6) motion . . . .” Id. “[A] party

opposing a Rule 12(b)(6) motion may submit materials outside the pleadings to illustrate the facts the party expects

to be able to prove.” Id. (collecting cases). Here, Troyer submitted the additional documents in an effort to illustrate

the facts that he expects to be able to prove. Accordingly, the documents will be considered by the Court. However, 

as explained infra in footnote 3, the Court’s outcome in this Opinion and Order would not change even if it did not

consider the additional documents.

2
broker and an associate member of the NFA. Troyer alleges that from December 2009 to April

2015, all while Heneghan was an associate member of the NFA, Heneghan solicited and

accepted funds from Troyer for the purpose of purchasing commodities futures. (DE 47 ¶¶ 10-

17, 25-31, 37-39, 43-54). Troyer alleges that he has never received any of the more than

$500,000 in assets purportedly held in his account with Heneghan; nor has he been able to

recover any of the more than $200,000 that he invested through Heneghan. (DE 47 ¶¶ 10-17, 25-

31, 43-41, 63). More particularly, Troyer alleges the following facts in his amended complaint: 

In 2009, Heneghan was registered as an associated person (“AP”) of Statewide FX Inc.

(“Statewide”), an introducing broker registered with the NFA that functioned as an introducing

broker for Vision Financial Markets LLC (“Vision”). (DE 47 ¶¶ 5, 6). At Heneghan’s request,

Troyer opened a commodities trading account with Vision, and on December 24, 2009, Troyer

purchased futures contracts by issuing a check to Vision. (DE 47 ¶¶ 6, 7). 

On March 18, 2010, Heneghan’s registration with Statewide was terminated. (DE 47 ¶

8). Heneghan, however, instructed Troyer to work with another Statewide AP, Oliver Livolsi,

and to continue purchasing commodities futures contracts through Statewide in Troyer’s account

at Vision. (DE 47 ¶ 9). Troyer did so, issuing seven more checks to Vision for the purpose of

purchasing commodities futures contracts. (DE 47 ¶¶ 9-16). Throughout this time, Troyer

received monthly statements from Vision showing that he held futures contracts in currencies

and commodities; additionally, Heneghan repeatedly assured Troyer that the value of his account

was increasing. (DE 47 ¶ 17). 

On the same day that his registration with Statewide was terminated, Heneghan applied

for registration with Atlantis Trading Corp. (“Atlantis”), an introducing broker registered with

3
the NFA. (DE 47 ¶ 22). The NFA approved Heneghan’s registration as an AP and principal

with Atlantis. (DE 47 ¶ 22). 

On March 29, 2010, Troyer, at Heneghan’s request, opened an account with Peregrine

Financial Group Inc., d/b/a PFG Best (“PFG”), an introducing broker registered with the NFA. 

(DE 47 ¶ 23). Although Heneghan had been registered with PFG from January 1999 to July

2001, he was not registered with PFG during the time period relevant to this suit. (DE 47 ¶ 24). 

From March to October 2010, Troyer issued six checks to PFG for the purpose of purchasing

futures contracts, mailing the checks to Heneghan’s attention at PFG’s address. (DE 47 ¶¶ 25-

31). Troyer also requested that his accounts at Vision be transferred to PFG. (DE 47 ¶ 28). 

Throughout this time, Troyer received monthly statements from PFG showing that he held

futures contracts in currencies and commodities; additionally, Heneghan assured Troyer that the

value of his account was increasing. (DE 47 ¶ 32).

In March 2010, December 2010, and January 2011, on Heneghan’s recommendation,

Troyer issued three checks to Crossland, LLC (“Crossland”), for the purpose of purchasing

futures contracts, sending at least two of the checks to Heneghan’s attention. (DE 47 ¶¶ 37-39). 

Heneghan was never registered with Crossland. (DE 47 ¶ 37). 

In December 2010, unbeknownst to Troyer, the NFA issued a complaint charging

Statewide and several of its principals with making deceptive and misleading sales solicitations. 

(DE 47 ¶ 18). In May 2011, the NFA issued a complaint against Vision for failing to supervise

several of its broker-dealers, including Statewide; the NFA never notified Troyer that it had

uncovered issues with Vision at the time Troyer held accounts with Vision. (DE 47 ¶ 21). In

July 2011, unbeknownst to Troyer, the NFA terminated Statewide’s registration and ordered it to

4
never reapply for NFA membership or to act as a principal of an NFA member. (DE 47 ¶ 19). 

The NFA never notified Troyer that it had terminated Statewide’s registration. (DE 47 ¶ 20). 

In July 2012, unbeknownst to Troyer, the Commodities Futures Trading Commission

(“the CFTC”) filed a complaint against PFG and its owner, Russell Wasendorf, alleging fraud,

misappropriation of customer funds, violation of customer fund segregation laws, and making

false statements. (DE 47 ¶ 33). The following month, unbeknownst to Troyer, Wasendorf was

indicted on 31 counts of lying to regulators. (DE 47 ¶ 34). 

In October 2012, Heneghan applied for registration as an AP with Portfolio Managers,

Inc. (“PMI”), an introducing broker registered with the NFA. (DE 47 ¶ 41). The NFA approved

Heneghan’s registration. (DE 47 ¶ 41). By this time, Heneghan had been registered with 13

different NFA-member firms over a 27-year period. (DE 47 ¶ 42). Many of those firms had

been accused of serious violations. (DE 47 ¶ 42). 

 In February 2013, unbeknownst to Troyer, the CFTC issued an order permanently barring

PFG and Wasendorf from the industry. (DE 47 ¶ 35). The NFA never notified Troyer of the

fraud uncovered regarding PFG, and never investigated that PFG was receiving checks from

Troyer in Heneghan’s name even though Heneghan was not registered with PFG at the time. 

(DE 47 ¶ 36).

At some point in early 2013, while Heneghan was registered as an AP of PMI, Heneghan

encouraged Troyer to participate in a new commodities trading program. (DE 47 ¶ 43). 

Heneghan told Troyer that the program was set up under Heneghan’s trading account in order to

avoid account maintenance fees and additional commissions. (DE 47 ¶ 43). Heneghan then

instructed Troyer to issue checks directly to Heneghan so that he could deposit them into the

5
program. (DE 47 ¶ 43). Heneghan assured Troyer that his funds would be segregated into a

separate sub-account. (DE 47 ¶ 43). From April 2013 to April 2015, Troyer issued 11 checks

payable to Heneghan for the purpose of purchasing commodities futures contracts through this

program. (DE 47 ¶¶ 44-54). Throughout this time, Heneghan repeatedly assured Troyer that his

futures contracts were performing well and that the value of his account was increasing. (DE 47

¶ 55). 

In July 2014, Crossland’s registration as an NFA member was terminated. (DE 47 ¶ 40). 

At some point in 2015, Heneghan informed Troyer that his futures contacts were

performing well and that the value of his account exceeded $500,000. (DE 47 ¶ 55). Troyer

instructed Heneghan to close his account and wire the funds to him. (DE 47 ¶ 56). Heneghan,

however, repeatedly made excuses as to why he could not transfer the funds to Troyer. (DE 47 ¶

57). 

In December 2015, Troyer filed a complaint against PMI, its president Amanda Murphy

(“Murphy”), Heneghan, and two other APs who worked with Heneghan in PMI’s Los Angeles

(“LA”) branch. (DE 47 ¶ 59). In the complaint, the NFA noted, among other things: 

8. Heneghan, who, as previously alleged, was an AP at the LA

branch, had also worked at several firms which were the subject of

prior disciplinary actions brought by this Committee for sales

practice fraud. Like [another AP defendant], Heneghan had also

worked at Statewide. Prior to that, Heneghan had worked at a

number of different firms, including Siegel Trading Co., another

firm which was permanently barred from NFA for sales practice

fraud. Additionally, Heneghan worked at Jack Carl Associates,

Inc. and Trading Centers of America, Inc., two other firms which

were the subject of disciplinary Complaints by this Committee.

9. In the course of its exam of PMI, NFA reviewed customer

activity statements and tax forms for the various branch offices. 

NFA’s review revealed that between October 2012 and August

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2015 all but two of the LA branch office’s 68 customers lost

money, totaling about $1.2 million, and paid over $660,000 in

commissions. Additionally, many of these accounts had

commission to equity ratios equal to or exceeding 20% and traded

both outright long options and option spreads, which may be

indicative of abusive trading practices.

(DE 47 ¶ 60 (alteration in original)). Additionally, as to Heneghan, the NFA’s complaint

alleged:

22. NFA’s review of the customer trading activity showed that

97% of PMI’s LA branch customers had net losses and that 98% of

all Heneghan’s customers had net losses and, on average, lost 94%

of their investment. NFA’s review also found that Heneghan

routinely made misleading and deceptive sales solicitations that

downplayed the impact of commissions on profitability;

exaggerated profit potential and minimized risk of loss; and failed

to disclose that 97% of PMI’s LA branch customers low money

trading with PM[I].

(DE 47 ¶ 61). As to Murphy, the NFA’s complaint alleged that she failed to adequately

supervise the LA branch to ensure that it complied with the NFA’s sales practice rules. (DE 47 ¶

62). The NFA also faulted Murphy for failing to apply heightened supervision to Heneghan,

given his past employment with NFA firms that had been disciplined. (DE 47 ¶ 62).

As stated earlier, Troyer has never received any of the more than $500,000 in assets

allegedly held in his account with Heneghan, nor has he been able to recover any of the more

than $200,000 that he invested through Heneghan. (DE 47 ¶ 63). On May 8, 2016, Troyer filed

the instant case against Heneghan, Livolsi, PMI, and the NFA, alleging various violations under

the Commodities Exchange Act (“the CEA”), 7 U.S.C. §§ 1 et seq. (DE 1). On January 30,

2017, Troyer filed an amended complaint, dismissing Heneghan and Livolsi and advancing four

claims against PMI and the NFA. (DE 30). On May 7, 2017, Troyer voluntarily dismissed PMI

from this suit (DE 44), leaving the NFA as the sole Defendant. 

7
As explained earlier, on July 12, 2017, the Court granted the NFA’s motion to dismiss

Troyer’s amended complaint, affording him to and including August 2, 2017, to file a second

amended complaint against the NFA in an attempt to state a claim upon which relief could be

granted. (DE 46). On August 1, 2017, Troyer filed his proposed second amended complaint

(DE 47), which is the subject of the instant motion to dismiss (DE 48). In Count 1, Troyer

alleges that the NFA failed to enforce a rule or bylaw that it was statutorily required to enforce,

in violation of § 25(b)(2) of the CEA; and in Count 2, Troyer alleges that the NFA is vicariously

liable for Heneghan’s purported violations of §§ 6b(a) and 6b(e) of the CEA and its related

regulations. 

III. DISCUSSION 

A. An Overview of Commodities Futures Contracts, the CEA, the NFA, and the CFTC

It is helpful to begin with a brief overview of commodities futures contracts, the CEA, 

the NFA, and the CFTC:

“A commodity futures contract is a contract to buy (or sell) a standard quantity of a

particular commodity at a specified price and time in the future.” Commodity Futures Trading

Comm’n v. Risk Capital Trading Grp., Inc., 452 F. Supp. 2d 1229, 1235 (N.D. Ga. 2006). “The

owner of a futures contract is exposed to risk beyond the purchase price of the futures contract.” 

Id. “If he still owns the contract at maturity, he would be forced to purchase (or sell) the specific

commodity at the price set in the contract or to meet his obligation through alternative means.” 

Id. “Two types of investors purchase commodity futures contracts: hedgers and speculators. 

Hedgers buy futures contracts to minimize (or transfer) risk and to lock in a price certain for the

underlying commodity; speculators buy futures contracts to take on risk in the hopes of realizing

8
capital gains on their investments.” Id. at 1235 n.6. “[S]peculators (especially retail investors . .

. ) typically do not hold commodity futures contracts to maturity; speculators purchase futures

contracts to make a profit, not to take actual delivery of a large quantity of commodities.” Id. 

“The CEA governs the trading of commodity futures contracts, and grants to the [CFTC]

the authority, in large measure, to implement the regulatory regime established therein.” Am.

Agric. Movement, Inc. v. Bd. of Trade of Chi., 977 F.2d 1147, 1150 (7th Cir. 1992), abrogated

on other grounds by Time Warner Cable v. Doyle, 66 F.3d 867 (1995). “The CEA has been

described as a ‘comprehensive regulatory structure to oversee the volatile and esoteric futures

trading complex.’” Vitanza v. Bd. of Trade of N.Y., No. 00 CV 7393(RCC), 2002 WL 424699, at

*3 (S.D.N.Y. Mar. 28, 2002) (quoting Sam Wong & Son, Inc. v. N.Y. Mercantile Exch., 735 F.2d

653, 661 (2d Cir. 1984)). “Section 22 of the CEA expressly provides for a private right of

action, explicitly enumerating the exclusive circumstances under which a private litigant may

assert a right of action for violations of the CEA or CFTC regulations.” Id. (citing 7 U.S.C. §

25(b)(5)); see Klein & Co. Futures, Inc. v. Bd. of Trade of New York, 464 F.3d 255, 259 (2d Cir.

2006) (“CEA § 22 enumerates the only circumstances under which a private litigant may assert a

private right of action for violations of the CEA.”). “Section 22(a) relates to claims against

persons other than registered entities and registered futures associations.” Klein & Co. Futures,

Inc., 464 F.3d at 259 (citing 7 U.S.C. § 25(a)). “Section 22(b) deals with claims against

[registered] entities and their officers[,] directors, governors, committee members and

employees.” Id.; see 7 U.S.C. § 25(b).

“[The] NFA is a Registered Futures Association which, pursuant to the [CEA] § 17, 7

U.S.C. § 21, functions as the futures industry’s self-regulatory organization[,]” that is, an SRO. 

9
Nicholas v. Saul Stone & Co., LLC, 224 F.3d 179, 181 n.6 (3d Cir. 2000); see also Commodity

Futures Trading Comm’n v. R.J. Fitzgerald & Co., 310 F.3d 1321, 1326 n.3 (11th Cir. 2002)

(“[The NFA] is a congressionally authorized futures industry [SRO].”). The NFA operates under

the oversight of the CFTC, the federal government’s regulator for the futures industry. See U.S.

Commodity Futures Trading Comm’n v. Altamount Glob. Partners, LLC, No. 6:12-cv-1095-Orl31TBS, 2014 WL 644693, at *3 (M.D. Fla. Feb. 19, 2014). “The purpose of the NFA is to

assure high standards of business conduct by its [m]embers and to protect the public interest.” 

R.J. Fitzgerald & Co., 310 F.3d at 1326 n.3. “[The NFA] performs screening to determine

fitness to become and remain a member of the NFA, establishes and enforces certain rules and

standards, audits and investigates members, and conducts arbitration in futures disputes.” 

Nicholas, 224 F.3d at 181 n.6. “Membership in the NFA is mandatory for all entities conducting

business on U.S. futures exchanges.” Commodity Futures Trading Comm’n v. Levy, 541 F.3d

1102, 1104 n.4 (11th Cir. 2008); see also Nicholas, 224 F.3d at 182. 

To further its goal of creating and implementing a comprehensive program for selfregulation of the commodity futures industry, “[the] NFA is required to adopt rules governing

the conduct of its membership.” MBH Commodity Advisors, Inc. v. Commodity Futures Trading

 Comm’n, 250 F.3d 1052, 1056 (7th Cir. 2001). “Pursuant to its statutory mandate, the NFA has

adopted numerous rules governing member conduct.” Id. (citation omitted). “These rules are

subject to [the CFTC’s] approval and must provide standards governing the sales practices of

NFA members.” Id. (citing 7 U.S.C. § 21(p)(3); 17 C.F.R. § 170.5). “In addition, these rules

must be ‘designed to prevent fraudulent and manipulative acts and practices, to promote just and

equitable principles of trade, in general, to protect the public interest, and to remove

10
impediments to and perfect the mechanism of free and open futures trading.’” Id. (quoting 7

U.S.C. § 21(b)(7)). 

B. Count 1 States a Plausible Claim Under § 25(b)(2) of the CEA

In Count 1, Troyer advances a claim against the NFA under 7 U.S.C. § 25(b)(2), alleging

that it violated the CEA by failing to enforce a bylaw or rule required by 7 U.S.C. § 21. The

NFA seeks to dismiss Count 1, asserting that Troyer still fails to plausibly allege that the NFA

violated a bylaw or regulation required by 7 U.S.C. § 21, and that the NFA acted in “bad faith”

as required by § 25(b)(4). (DE 49 at 2). 

Section 25(b)(2) states: 

A registered futures association that fails to enforce any bylaw or

rule that is required under section 21 of this title or in enforcing

any such bylaw or rule violates this chapter or any Commission

rule, regulation, or order shall be liable for actual damages

sustained by a person that engaged in any transaction specified in

subsection (a) of this section to the extent of such person’s actual

losses that resulted from such transaction and were caused by such

failure to enforce or enforcement of such bylaw or rule.

7 U.S.C. 25(b)(2). Additionally, § 25(b)(4) requires: “A person seeking to enforce liability

under this section must establish that the . . . registered futures association . . . acted in bad faith

in failing to take action or in taking such action as was taken, and that such failure or action

caused the loss.” 7 U.S.C. § 25(b)(4). 

In support of his allegations against the NFA, Troyer cites to § 21(b)(3)(C) and NFA

Bylaw 301(a)(ii)(D). Section 21(b)(3)(C) states that the association’s rules must provide that,

except with the approval of the CFTC, “no person shall be admitted to or continued in

membership . . . if such person . . . whether prior or subsequent to becoming a member, by his

conduct while associated with a member, was a cause of any suspension, expulsion, or order . . .

11
which is in effect with respect to such member . . . .” 7 U.S.C. § 21(b)(3)(C); (see DE 47 ¶ 65). 

NFA Bylaw 301(a)(ii)(D) provides, in essence, that no person shall be permitted to become or

remain affiliated with an NFA Member if that person was a cause of any suspension, expulsion,

or order of another NFA Member. (DE 47 ¶ 66; DE 50-4). 

In the context of these provisions, Troyer makes the following allegations:

67. NFA conducted an audit which found that, in 2009, 95% of

Statewide FX’s customers lost money because of

manipulative trading practices used by the firm’s APs and

that those losses totaled over $5 million.

68. Although NFA brought charges against Statewide FX’s

President, CEO, and three of its APs, NFA’s complaint also

noted that “. . . other Statewide AP’s consistently

recommended trades to customers which were not in their

best interest but maximized commissions for Statewide.”

69. NFA also alleged Statewide’s owners “developed this

trading strategy, and implemented it through Statewide’s

sales force.”

70. According to NFA’s membership records, Heneghan was

registered as an AP of Statewide FX from January 8, 2007

until March 18, 2010, which meant he was part of the sales

force that employed the firm’s manipulative trading

practices in 2009, resulting in $5 million in customer

losses.

71. As such, Heneghan’s conduct while registered as an AP

with Statewide FX was “a cause” of NFA’s decision to

permanently expel the firm from its membership.

72. Therefore, pursuant to 7 U.S.C. §21(b)(3)(C) and NFA

Bylaw 301(a)(ii)(D), NFA should have terminated

Heneghan’s registration when it expelled Statewide FX on

July 28, 2011.

(DE 47 ¶¶ 67-72). Troyer then further alleges that had NFA investigated Heneghan at the time it

terminated Statewide’s membership, it would have uncovered Heneghan’s other alleged

12
misdeeds, including his using Livolsi as a straw man after Heneghan’s registration with

Statewide ended, and his soliciting payments to PFG and Crossland when he was not registered

with either firm. (DE 47 ¶¶ 73-74). Troyer alleges that had the NFA followed its own

membership rules, it would have avoided not only the future losses Troyer suffered as a result of

Heneghan’s ongoing fraud, but it also would have enabled Troyer to recover those funds that

Heneghan wrongfully directed to Statewide, PFG, and Crossland when those firms were still

solvent. (DE 47 ¶ 75). 

The NFA acknowledges that Troyer’s allegations now identify a bylaw that NFA

purportedly violated—a deficiency that the Court identified in its Order dismissing Troyer’s first

amended complaint. (DE 46 at 18). The NFA argues, however, that Troyer’s second amended

complaint still fails to state a claim under § 25(b)(2) because Troyer’s claim that Heneghan was

a cause of Statewide’s supposed expulsion is “contradicted by the facts of the pleadings” and “is

a legal conclusion that must be disregarded for the purposes of this motion.” (DE 49 at 3-4). In

that regard, the NFA points to the complaint that the NFA filed against Statewide in December

2010.3

 (DE 50-1). The NFA argues that it never mentioned Heneghan by name in the Statewide

complaint and never found in the complaint that Heneghan was a cause of Statewide’s supposed

expulsion. (DE 49 at 3-4). 

 While “[l]egal conclusions will be ignored where specific facts are pleaded that are to

the contrary,” Anderson v. Cornejo, 199 F.R.D. 228, 247 (N.D. Ill. 2000), Troyer does not plead

facts contrary to his allegation that Heneghan was a cause of the NFA’s decision to expel

3

 The Court observes that even if it excluded the additional documents that Troyer submitted with his

response brief, the NFA’s argument would still fail, as nothing in Troyer’s complaint contradicts his allegation that

“Heneghan’s conduct while registered as an AP with Statewide FX was ‘a cause’ of NFA’s decision to permanently

expel the firm from its membership.” (DE 47 ¶ 71). 

13
Statewide from its membership. (DE 47 ¶ 71). The Statewide complaint does not, on its face,

contradict Troyer’s allegation that Heneghan was a cause of Statewide’s supposed expulsion. 

Although the Statewide complaint does not mention Heneghan by name, it does make various

allegations about “Statewide’s APs,” which included Heneghan at the time. 

In that regard, the Statewide complaint alleges, in relevant part:

• “For the most part, the trade recommendations that Statewide’s

APs made to their customers were not in the customers’ best

interest and were intended, instead, to benefit Statewide by

generating high commissions.” (DE 50-1 ¶ 17).

• “Statewide’s APS routinely recommended option and bull call

option spreads to customers that had little chance of being

profitable due to their high break even points.” (DE 50-1 ¶ 18).

• “[A]ll of Statewide’s APs recommended and placed trades in their

customers’ accounts that had extremely high break even points . . .

.” (DE 50-1 ¶ 21).

• “Statewide’s strategy of recommending trades to maximize

commissions without regard for the best interests of its customers

was developed by Hennequin and Colin and implemented by

Statewide’s APs and constituted a failure on their part to observe

high standards of commercial honor and just and equitable

principles of trade.” (DE 50-1 ¶ 25).

• “Statewide APs also used misleading sales tactics in order to

persuade customers to enter into the recommended trades and/or

deposit additional funds into their accounts.” (DE 50-1 ¶ 26).

• “Statewide’s APs exaggerated the profit potential and downplayed

the risk of loss of trading futures and options and failed to disclose

that nearly 95% of Statewide’s customers lost money in 2009.” 

(DE 50-1 ¶ 26).

• “Statewide’s APs failed to make adequate disclosures and/or

clearly explain the way in which commissions would be charged

and how they would affect the trading, including any likelihood of

achieving a profit, in customer accounts.” (DE 50-1 ¶ 26). 

14
As such, the Court does not see anything in Troyer’s complaint or the additional documents that

contradicts his allegation that “Heneghan’s conduct while registered as an AP with Statewide FX

was ‘a cause’ of NFA’s decision to permanently expel the firm from its membership.” (DE 47 ¶

71). Therefore, the NFA’s first argument in support of its motion to dismiss Count I of Troyer’s

second amended complaint is unpersuasive.

Moving on to the NFA’s second argument, the NFA contends that Troyer still fails to

plausibly allege that the NFA acted in “bad faith” when failing to enforce its bylaws, as required

by 7 U.S.C. § 25(b)(4). In that regard, Troyer makes the following allegations, in relevant part:

79. In the complaint it filed against PMI and Murphy, NFA

admitted knowledge of Heneghan’s past associations with

firms NFA had expelled from its membership based upon

their fraudulent activities.

80. In the same action, NFA admitted its own Compliance

Manual required consideration of Heneghan’s past

association with firms it had previously disciplined before

he could register with another NFA member.

81. In fact, pursuant to NFA Bylaw 301(e), given his

disqualification, NFA could only permit Heneghan to

remain registered as an NFA Associate Member if the

CFTC directed it to do so or upon a finding by NFA’s

Membership Committee that his participation in Statewide

FX’s manipulative trading scheme did not cause him to

pose a threat to Members, Associates or customers.

82. However, the CFTC did not order NFA to maintain

Heneghan’s registration and its Membership Committee

never investigated his activities to determine if he posed a

threat to commit additional fraudulent acts.

83. Instead, . . . NFA delegated the authority granted to it by

the CFTC to determine whether Heneghan would be

permitted to maintain his registration to PMI, an

introducing broker-dealer, and Murphy, who served as

PMI’s president.

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84. PMI and its President had strong financial interests in

allowing Heneghan and other brokers to join their firm –

despite their past involvement in fraudulent trading

schemes – as they needed APs to generate business for the

firm.

85. Similarly, NFA’s operating income consists of dues,

assessments, fees and other charges upon its Members. 

This includes an assessment NFA collects on every

commodities futures contract and option trade.

86. As a result, NFA also had a financial interest in allowing its

Member firms to hire APs who had previously engaged in

fraudulent trading activity because those APs were needed

to solicit trades that financially supported NFA’s

operations.

. . . . 

92. NFA has an established pattern of ignoring its own

membership rules to permits its Members and Associate

Members to continue to solicit commodities trades – after

finding they had previously participated in conduct that

contributed to the expulsion of other Member firms – so

they can continue to generate activity that supports NFA’s

funding.

93. By abdicating its registration duties to a for-profit Member

to maintain its own funding source, NFA acted in bad faith

in failing to enforce a rule that required it to dismiss

Heneghan based upon his prior involvement in a

manipulative trading scheme and led to Troyer suffering

financial and emotional damages.

(DE 47 ¶¶ 92-93).

 The NFA asserts that Troyer’s allegations of bad faith are based on “pure speculation”

and consist of “nothing more than a standard negligence claim—alleging that NFA erred in

investigating and registering Heneghan.” (DE 49 at 5). The NFA argues that allegations of

negligence and even gross indifference cannot support a claim under § 25(b). (DE 49 at 5 (citing

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DGM Invs., Inc. v. N.Y. Futures Exch., Inc., 265 F. Supp. 2d 254, 260 (S.D.N.Y. 2003); W.

Capital Design, LLC v. N.Y. Mercantile Exch., 180 F. Supp. 2d 438, 441 (S.D.N.Y. 2001)). 

The Seventh Circuit Court of Appeals in Bosco v. Servant, 836 F.2d 271 (7th Cir. 1987),

employed a dual standard when considering the term “bad faith” as used in § 25(b)(4):

“[I]n the present setting, involving an exchange’s failure to

enforce its rule in accordance with the exchange’s own

interpretation, the courts, including our own, have treated

the term “bad faith” as if it read negligence. . . . Thus, if an

exchange’s regulation imposes a duty that the exchange

should know is being flouted, the exchange is acting

wrongfully—in an attenuated sense, perhaps, but one

sufficient under the cases we have cited to demonstrate bad

faith. The test is different if the exchange injures a trader

through the exercise of a discretionary power, such as the

power to take emergency actions to prevent substantial

losses; then more must be shown to constitute bad

faith—either that the exchange acted unreasonably or that it

had an improper motivation. 

Id. at 277-78 (citations omitted). Here, the NFA asserts that its continuation of Heneghan’s

membership without an investigation was an exercise of its discretionary power, and as such, the

term “bad faith” requires “a showing of something more than mere negligence.” Braman v.

CME Grp., Inc., 149 F. Supp. 3d 874, 892 (N.D. Ill. 2015) (citing Bosco, 836 F.2d at 276). The

NFA, however, fails to cite to any authority to support its assertion that the NFA’s consideration

of Heneghan’s membership was an exercise of its discretionary power. 

Furthermore, contrary to the NFA’s assertion, Troyer has alleged more than that the NFA

simply erred in investigating and registering Heneghan. Troyer alleges that the NFA, knowing

that Heneghan had participated in conduct that contributed to the expulsion of other Members,

deliberately ignored its own membership rules in order to permit Heneghan to continue to solicit

commodities trades. (DE 47 ¶¶ 79, 80, 92). Troyer further alleges that the NFA ignored its own

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membership rules so that it could continue to generate sales activity to support the NFA’s

funding. (DE 47 ¶¶ 85, 92). Thus, Troyer alleges that the NFA failed to enforce its own bylaw

or rule, and that it did so for “an improper motivation,” Bosco, 836 F.2d at 278, or “selfinterest,” Holladay v. CME Group, No. 11-cv-8226, 2012 WL 3096698, at *4 (N.D. Ill. July 30,

2012). See also Vitanza v. Bd. of Trade of City of New York, No. 00 CV 7393(RCC), 2002 WL

424699, at *6 (S.D.N.Y. Mar. 18, 2002); W. Capital Design, LLC, 180 F. Supp. 2d at 441-42. 

In sum, on this record, the Court concludes that Troyer has alleged enough to state a

plausible claim against the NFA under 7 U.S.C. § 25(b)(2) that it failed to enforce a bylaw or

rule required by 7 U.S.C. § 21. Accordingly, the NFA’s motion to dismiss will be DENIED as to

Count I of Troyer’s second amended complaint. 

C. Count 2 Fails to State a Plausible Claim Under § 2(a)(1)(B) of the CEA 

In Count 2 of his second amended complaint, Troyer seeks to hold the NFA vicariously

liable for the purportedly fraudulent actions committed by Heneghan, a broker and an associate

member of the NFA. In its motion to dismiss, the NFA argues that Heneghan’s status as an

associate member of the NFA, without more, does not make him an agent of the NFA. 

Section 2(a)(1)(B), the CEA’s vicarious liability provision, states: 

The act, omission, or failure of any official, agent, or other person

acting for any individual, association, partnership, corporation, or

trust within the scope of his employment or office shall be deemed

the act, omission, or failure of such individual, association,

partnership, corporation, or trust, as well as of such official, agent,

or other person. 

7 U.S.C. § 2(a)(1)(B). Section 2(a)(1)(B) “enacts a variant of the common law principle of

respondeat superior.” Rosenthal & Co. v. Commodity Futures Trading Comm’n, 802 F.2d 963,

965 (7th Cir. 1986). “The common law principle makes an employer strictly liable—that is to

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say, regardless of the presence or absence of fault on the employer’s part—for torts committed

by his employees in the furtherance of his business[.]” Id. (citation omitted); see also Bosco,

836 F.2d at 280 (“Section 2(a)(1) of the [CEA] . . . imputes liability for an agent’s violations of

the Act to the agent’s principal . . . , consistently with usual notions of respondeat superior.”

(citation omitted)); U.S. Commodity Futures Trading Comm’n v. Byrnes, 58 F. Supp. 3d 319,

324 (S.D.N.Y. 2014) (collecting cases). This provision “varies from the common law only to the

extent that it may be interpreted as a quasi-criminal statute and that it applies to torts committed

by agents that are not necessarily employees of the princip[al].” Shroff v. Rosenthal Collins

Grp., LLC, No. 08 C 929, 2009 WL 2704582, at *4 (N.D. Ill. Aug. 25, 2009) (citations omitted);

see, e.g., Commodity Futures Trading Comm’n v. Commodities Fluctuations Sys., Inc., 583 F.

Supp. 1382, 1383-85 (S.D.N.Y. 1984) (imputing violations of the CEA salespersons not only to

their employer, but also to the clearing firm with whom the salespersons were registered as

associated persons). 

“The language of § 2(a) is broad, and extends vicarious liability to ‘any individual,

association, partnership, corporation, or trust.’” U.S. Commodity Futures Trading Comm’n v.

Yumin Li, No. 15 C 5839, 2016 WL 8256392, at *8 (N.D. Ill. Dec. 9, 2016) (quoting 7 U.S.C. §

2(a)(1)(B)). “Principals are strictly liable for their agents’ acts—even if the agents are not

employees—if the principals authorize or ratify the acts or even just create an appearance that

the acts are authorized.”4

 Rosenthal & Co., 802 F.2d at 966; see Commodity Futures Trading

4 To elaborate, “[a]n agent’s authority may be actual or apparent; if it is actual, it may be express

or implied.” Moriarty v. Glueckert Funeral Home, Ltd., 155 F.3d 859, 865-66 (7th Cir. 1998) (citing

Restatement (Second) of Agency §§ 7-8 and § 7 cmt. c). “Implied authority is that authority which is

inherent in an agent’s position and is, simply, actual authority proved through circumstantial evidence.” 

Id. “Actual authority ‘to do an act can be created by written or spoken words or other conduct of the

principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act

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Comm’n v. Gibraltar Monetary Corp., 575 F.3d 1180, 1182 (11th Cir. 2009) (Under §

2(a)(1)(B), “the test for vicarious liability is common law agency.”). “This is so even though in

a case of ratification or apparent authority the principal does not himself direct the act and may

indeed know nothing about it when it occurs . . . .” Rosenthal & Co., 802 F.2d at 966. A court

makes an “overall assessment of the totality of the circumstances” to determine whether an

agency relationship exists. Shroff, 2009 WL 2704582, at *4 (quoting Stotler & Co. v.

Commodity Futures Trading Comm’n, 855 F.2d 1288, 1292 (7th Cir. 1988)); see also Gibraltar

Monetary Corp., Inc., 575 F.3d at 1187 (discussing the legal standards for vicarious liability

under the CEA); Yumin Li, 2016 WL 8256392, at *7 (same). 

 Troyer argues that he has adequately pled an agency relationship between Heneghan and

the NFA under § 2(a)(1)(B). In support, Troyer points to the following allegations in his

amended complaint:

117. NFA manifested its consent for Heneghan to act as its

agent by accepting his application to conduct commodities

trades as an NFA Member. In fact, pursuant to NFA

Compliance Rule 2-22, Heneghan had NFA’s permission to

advertise his status as an NFA Associate Member.

118. Pursuant to NFA Bylaw 301(F)(ii)(c), Heneghan’s

application to bec[o]me an NFA Associate Member

constituted, 

. . . an express agreement by the applicant

that, if admitted to NFA membership or

registered as an Associate, the applicant

shall become and remain bound by all NFA

on the principal’s account.’” Id. (quoting Restatement (Second) of Agency § 26). “In contrast, ‘apparent

authority to do an act is created as to a third person by written or spoken words or any other conduct of

the principal which, reasonably interpreted, causes the third person to believe that the principal consents

to have the act done on his behalf by the person purported to act for him.’” Id. (quoting Restatement

(Second) of Agency § 26). 

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requirements as are then and thereafter in

effect and that such agreement shall apply

each time the applicant becomes a Member

or Associate.

119. Therefore, NFA consented to allow Heneghan to operate as

its agent and Heneghan accepted NFA’s authority to

control his trading activities by requiring that he comply

with its conduct rules. 

120. NFA exercised further control over Heneghan by assigning

an NFA Member and Associate Member to supervise his

activities pursuant to NFA Compliance Rule 2-9(a).

121. NFA’s control over Heneghan in this regard is best

exhibited by the fact – based in part on the allegations in

this complaint – NFA permanently barred him from its

membership for violating its rules. . . .

. . . . 

126. In addition, Troyer reasonably relied upon Heneghan’s

representation he was an Associate Member of NFA as

indicating Heneghan’s trading activities were valid and

authorized by NFA.

127. NFA supported that belief by asserting on its website:

Investor confidence is crucial to the success

of the derivatives markets, and the best way

to gain investor confidence is to demand the

highest levels of integrity of all market

participants and intermediaries.

Rigorous registration screening. NFA

thoroughly screens all firms and individuals

wishing to register with the CFTC and

become Members of NFA. Applicants must

meet stringent fitness requirements and must

provide fingerprint cards for FBI

background checks. In addition, individual

registrants must pass comprehensive

proficiency testing requirements. NFA has

the authority to deny, revoke, suspend,

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restrict or condition any firm’s or

individual’s registration.

128. Troyer reasonably believed that, when Heneghan [was]

advertising his services as an “NFA Associate Member,” he

was authorized to act on NFA’s behalf in providing those

services.

. . . .

130. By allowing Heneghan to advertise as an NFA Associate

Member and making public representations that its

members were thoroughly screened and subject to its strict

oversight, NFA created a reasonable impression in Troyer’s

mind that Heneghan was operating under NFA’s auspices –

thus establishing an apparent agency.

131. Therefore, Heneghan was acting as the actual, inherent, and

apparent agent of NFA when he perpetrated his fraudulent

acts on Troyer and, pursuant to 7 U.S.C. § 2(a)(1)(B), NFA

is vicariously liable for the damages Troyer suffered as a

result of Heneghan’s violations of the CEA. 

(DE 47 ¶¶ 117-131). 

 Here, even if a private right of action were to exist under the CEA for a vicarious liability

claim against a registered futures association,5

 Troyer fails to plead a plausible agency

relationship between Heneghan and the NFA, because Troyer’s allegations in his second

amended complaint still rest solely on Heneghan’s status as an associate member of the NFA. 

As this Court held in its Order (DE 46) dismissing Troyer’s first amended complaint,

Heneghan’s status as an associate member of the NFA, without more, does not make him an

agent of the NFA for purposes of vicarious liability under the CEA. Troyer is conflating

Heneghan’s registration as an NFA associate member (apparently, the NFA has tens of

5 See generally DGM Investments, Inc. v. N.Y. Futures Exch., Inc., 288 F. Supp. 2d 519, 524 (S.D.N.Y.

2003).

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thousands of associate members (DE 49 at 8)), with permission to act on the NFA’s behalf. As

the NFA persuasively asserts, merely issuing a license or registration to an individual does not

constitute an approval by the registering agency for the licensee to act on the registering entity’s

behalf. Expanding agency law in this manner would reach an absurd result where any licensing

agency would become vicariously liable for the acts of all of its licensees, merely by the fact that

it issued a license to the professionals. 

To cut to the chase, there are no allegations in the amended complaint that the NFA ever

employed Heneghan, directed his day-to-day activities, or authorized him to act on the NFA’s

behalf. See Gibraltar Monetary Corp., 575 F.3d at 1187-89 (discussing the legal test for

vicarious liability under the CEA); see Leon v. Caterpillar Indus., Inc., 69 F.3d 1326, 1334 (7th

Cir. 1995) (“[T]he Indiana courts have held that the mere existence of a formal licensing or

dealership agreement will not create an agency relationship in the absence of evidence that the

principal is exercising control over the details of the purported agent’s work.” (citation

omitted)); Gallant Ins. Co. v. Isaac, 751 N.E.2d 672, 675 (Ind. 2001) (“[A]pparent authority

refers to a third party’s reasonable belief that the principal has authorized the acts of its agent; it

arises from the principal’s indirect or direct manifestations to a third party and not from the

representations or acts of the agent.” (citations omitted)). Nor is Troyer’s assertion that the

language on the NFA’s website offering assurances of high standards of professional conduct by

the NFA’s members sufficient to create a reasonable belief that Heneghan was authorized to act

on the NFA’s behalf. 

Perhaps most telling is that Troyer has not cited any case in which a broker and associate

member has been viewed as an agent of the NFA. See Asa-Brandt, Inc. v. ADM Inv’r Servs.,

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Inc., 344 F.3d 738, 749 (8th Cir. 2003) (acknowledging that a party’s “mere status” as an

introducing broker, without more, was insufficient to plausibly plead an apparent agency

relationship with a futures commissions merchant); Lacovara v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 551 F. Supp. 601, 604 (E.D. Pa. 1982); see generally Jerry W. Markham,

Commodities Regulation: Fraud, Manipulation & Other Claims, 13 Commodities Reg. § 4:1

(2017); Jerry W. Markham, Judicial Decisions on Respondeat Superior Under the Commodity

Exchange Act, 13 Commodities Reg. § 4:14 (2017); Deborah Sprenger, J.D., Who Is “Agent,” so

as to Subject Principal to Liability, Under § 2(a)(1)(a) of Commodity Exchange Act (7 U.S.C.A §

4), 98 A.L.R. Fed 588 (1990). 

In short, Troyer has not pled facts sufficient to create a plausible claim that Heneghan’s

status as an associate member of the NFA—without more—equates to the NFA’s consent to

have Heneghan act on the NFA’s behalf in soliciting futures commodities. See Stotler & Co.,

855 F.2d at 1292 (“The real question is whether Allen was acting as Stotler’s agent for soliciting

customers to trade commodity futures accounts.”). As such, Troyer fails to state a plausible

claim of vicarious liability against the NFA under § 2(a)(1)(B) of the CEA, and therefore, Count

2 of his second amended complaint will be dismissed. 

“Whether to permit a plaintiff to amend [his] pleadings is a matter committed to the

Court’s ‘sound discretion.’” In re Amaranth Nat. Gas Commodities Litig., 587 F. Supp. 2d 513,

547-48 (S.D.N.Y. 2008) (quoting Fed. R. Civ. P. 15(a)). When dismissing Troyer’s first

amended complaint, the Court stated that it would afford him one additional opportunity to

amend his complaint in an attempt to state a plausible claim, observing that he had already

amended his complaint once in response to the NFA’s first motion to dismiss. (DE 46 at 25); see

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Bianchi v. McQueen, 917 F. Supp. 2d 822, 835 (N.D. Ill. 2013) (“Plaintiffs who meet resistance

to their complaint through a successful Rule 12(b)(6) motion generally are allowed at least one

opportunity to replead . . . .”). Because Troyer has now been given three opportunities to plead a

plausible claim of vicarious liability under the CEA and has still failed to do so, the dismissal of

Count 2 will be without leave to re-plead. 

IV. CONCLUSION

For the foregoing reasons, the NFA’s motion to dismiss (DE 48) is GRANTED with

prejudice as to Count II (vicarious liability under the CEA), but is DENIED as to Count I (failure

to enforce the CEA), which survives. The Court sets this case for a telephonic scheduling

conference on March 1, 2018, at 10:00 a.m. 

SO ORDERED. 

Entered this 14th day of February 2018.

/s/ Susan Collins 

Susan Collins 

 United States Magistrate Judge

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