'Deriving' an Understanding of the Extraterritorial Applicability of the Commodity Exchange Act

By Schwartz, Gabrielle | St. John's Law Review, Fall 2017 | Go to article overview

'Deriving' an Understanding of the Extraterritorial Applicability of the Commodity Exchange Act


Schwartz, Gabrielle, St. John's Law Review


INTRODUCTION

"[H]ad Loginovskaya resided on Main Street, U.S.A. or Sutton Place, New York rather than in Surgut, Russia at the time she made her investments, we all agree that her suit would have been allowed to proceed^]"1

Every single day, individual investors are defrauded in the derivatives marketplace. Should an individual be able to pursue a claim against the fraudster? Absolutely. Unfortunately, confusion has diluted this seemingly obvious "yes" over time, ultimately barring individuals like Ludmila Loginovskaya, a Russian citizen, from pursuing a cause of action in the Southern District of New York against a domestic commodity broker.

Derivative markets have existed for centuries, but were not widely followed until the late 2000s. In the early 1930s, the commodity Exchange Act ("cEA") was enacted to regulate commodities, such as wheat, corn, and potatoes, and other agricultural futures contracts.2 These are the products that continue to come to mind for most people when they think about what the Act must regulate today. However, the derivatives marketplace has expanded vastly and rapidly over time, and the Act also regulates major financial instruments, including credit, currency, and interest rate swaps.

It was not until the Financial Crisis of 2008 that individuals, governments, and industry experts alike realized the magnitude and significance of the derivatives market and the damage that could be done if it was not responsibly regulated. while the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") closed many of these market loopholes, questions remain regarding the extent to which extraterritorial jurisdiction exists over claims related to commodities and other derivative products that are subject to the CEA, and who is permitted to assert such a claim.

This Note argues that courts should return to using a holistic approach, similar to the traditional "conducts" and "effects" test previously used by courts to analyze extraterritorial securities and commodities claims, to assess claims brought under the CEA. Furthermore, this Note argues that both the Commodity Futures Trading Commission and private individuals including foreign plaintiffs, should be permitted to bring these claims to uphold Congress's intent in establishing a regulatory regime and maintaining the integrity of the international derivatives market. Part i discusses the history of derivative regulation and how both court decisions and statutory changes have created the potential for confusion when asserting causes of action in the commodities context. Fueling this confusion, one Supreme Court case in particular, Morrison v. National Australia Bank Ltd., held that the presumption against extraterritoriality is applicable in Rule 10b-5 cases, and eliminated the used of the "conducts" and "effects" test to assess these extraterritorial claims. Part ii uses recent case law, specifically a case out of the Second Circuit, Loginovskaya v. Batratchenko, to illustrate the problems and inconsistencies with extending the Morrison decision to commodity and derivative fraud claims under the CEA in a post-Dodd-Frank world. Part III.A argues that courts should return to using a holistic, fact-specific approach, rather than Morrison's transactional test, when evaluating extraterritorial jurisdiction in commodity and derivative fraud cases. Part III.B argues that, consistent with the use of a holistic test outlined in Part III.A, foreign plaintiffs should continue to be afforded private rights of action for commodity and derivative fraud or manipulation suits in U.S. courts. Lastly, Part III.C addresses the steps that courts must take to correct or address policy misstatements when presented with these claims in the future.

I. THE EVOLVING REGULATION OF THE DERIVATIVES MARKETPLACE AND THE EXTRATERRITORIAL JURISDICTION OF THE CEA

A.Understanding Derivatives and Their Role in the 2008 Financial Crisis

A derivative is a contract between two parties whose value is derived from an asset's underlying price and performance. …

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