Source: http://www.brokeandbroker.com/3901/kospi-tower-2cir/
Timestamp: 2019-04-21 06:23:07+00:00

Document:
[D]efendants "manipulate[d] the price of KOSPI 200 futures contracts traded on the CME [Globex] for their own profit" by misleading other traders about the prevailing price and number of contracts available. Id. ¶ 2. Defendants allegedly did so by entering hundreds of large-volume orders either to buy or to sell KOSPI 200 futures contracts without intending these orders to be matched by others users. Id. ¶¶ 2, 29.
Instead, Defendants took advantage of flash-trading technology to respond to their own orders within a fraction of a second by either (1) cancelling the orders before they could be matched, or (2) fulfilling the orders themselves. Id. ¶¶ 2, 29. The purpose of this trading strategy -- sometimes known as "spoofing" -- was to create a "false impression regarding the number of contracts available in the market, along with illusory price and volume information" and thereby manipulate the price of KOSPI 200 futures contracts in Tower's favor. Id. ¶¶ 2, 29, 31. This false information was intended to trick other traders into believing that the prevailing price was either higher or lower than it actually was. Id. ¶ 31. Tower was then able to "purchase [KOSPI 200 futures] contracts at prices lower, or sell contracts at prices higher, than were available in the market before Tower entered its fictitious large-volume buy or sell orders." Id. ¶ 29.
Here, despite Plaintiffs' description of Tower's conduct as "fraudulent," the Complaint does not allege that Tower made any false or misleading statements of fact or material omissions as part of its alleged manipulation. The submission of an above- or below-market bid-even if the party intends to withdraw the bid before it can ever be matched-does not constitute a false or misleading statement that would trigger the application of Rule 9(b). See 27 F. Supp. 3d at 532.
Defendants argue that United States law does not apply to the alleged misconduct. See (Mot. to Dismiss, 5-10). In Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), the United States Supreme Court held that the Securities Exchange Act (SEA) does not apply to conduct that occurs abroad, but rather applies only to the purchase or sale of a security that (1) is made in the United States, or (2) is listed on a domestic exchange. Id. at 269-70.4 Both the Second Circuit and this Court have held that Morrison's transactional test applies to the CEA as well . . .. See Loginovskaya v. Batratchenko, 936 F. Supp. 2d 357, 372 (S.D.N.Y. 2013) (Oetken, J.) aff'd, 764 F.3d 266 (2d Cir. 2014); Starshinova v. Batratchenko, 931 F. Supp. 2d 478, 487 (S.D.N.Y. 2013) (Wood, J.).
Although the parties agree that Morrison's transactional test governs the analysis under the CEA, they dispute (1) whether the alleged transactions took place in the United States or in South Korea, and (2) whether they took place on a U.S. exchange or a Korean exchange. See (Mot. to Dismiss, 6); (Pls.' Opp'n, 5). Plaintiffs contend that the CME Globex trading platform itself qualifies as a domestic exchange, (Pls.' Opp'n, 5), and that, for all transactions taking place on the CME Globex, the "meeting of the minds required for the trade takes place on the CME Globex in Illinois." (Compl. ¶ 21). By contrast, Defendants contend that all transactions in KOSPI 200 futures contracts occur on the KRX, a South Korean exchange, and that the "use of CME Globex computers in Chicago" to effectuate these transactions during the night market "does not alter that fact." (Mot. to Dismiss, 7). Defendants contend that "[u]nder Morrison, what matters is the exchange's location, not where the technology is located." Id.
In response to Plaintiffs' Amended Complaint, SDNY found that there was no additional allegation that cured the previously enunciated failure to state a claim. Myun-Uk Choi, Jin-Ho Jung, Sung-Hun Jungm, Sung-Hee Lee, and Kyung-Sub Lee, individually and on behalf of all others similarly situated, Plaintiffs‐Appellan v. Tower Research Capital LLC and Mark Gorton, Defendants‐Appellees (Opinion and Order, SDNY 14-CV-9912 / February 8 2017) (the "2017 SDNY Opinion") http://brokeandbroker.com/PDF/ChoiSDNY2.pdf Accordingly, the 2017 SDNY Opinion dismissed Plaintiffs' Complaint with prejudice.
[T]he Supreme Court set out to define the territorial reach of § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b). After discussing the presumption against extraterritoriality, 561 U.S. at 255, the Court concluded that, given its text, § 10(b) (and Rule 10b‐5, promulgated thereunder) has only a domestic reach, and therefore applies only to one of two types of transactions: (i) "transactions in securities listed on domestic exchanges;" and (ii) "domestic transactions in other securities," id. at 267.
Consequently, plausible allegations that parties to a transaction subject to the CEA incurred irrevocable liability in the United States suffice to overcome a motion to dismiss CEA claims on territoriality grounds. We believe in this case that Plaintiffs' allegations make it plausible that parties trading on the KRX night market incur irrevocable liability in the United States. This being a sufficient basis to resolve the extraterritoriality question at this stage, there is no need for us to address whether the CEA has a territorial reach on the basis that the CME Globex is a "domestic exchange."
Plaintiffs' allegations easily establish a connection sufficient for the unjust enrichment claim to proceed. Plaintiffs alleged it to be a near statistical certainty that they directly traded with Defendants on the KRX night market during the relevant period, in which Defendants continually manipulated the market on which the trades 11 occurred. AC ¶ 31 n.13. Moreover, even if none of Plaintiffs' trades were executed directly with Defendants, that would not necessarily defeat Plaintiffs' claim at this stage because Plaintiffs plausibly allege that Defendants' spoofing strategy artificially moved market prices in a way that directly harmed Plaintiffs while benefitting Defendants. . .
Sometimes you see a reversal coming or you sense that there are issues in a lower court's opinion that will likely warrant a remand. To be candid here, I didn't see the 2Cir hanging SDNY out to dry. In reviewing the SDNY 2016 and 2017 Opinions, it's hard to find a flaw in the lower Court's logic -- which doesn't mean that you have to agree with the judge's analysis or findings but in the case of the two aforementioned SDHY rulings, the content and context are set forth with impressive depth and the opinions are compelling. That being said, I also find that 2Cir set forth its basis for vacating and remanding with equally compelling strength. Which leaves me in the somewhat odd and uncomfortable position of agreeing with both the lower and upper courts' analysis and findings.

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