Commodity Futures Trading Comm'n v. Monex Credit Co.

311 F.Supp.3d 1173

COMMODITY FUTURES TRADING COMMISSION

v.MONEX CREDIT COMPANY, et al.

Case No. SACV 17–01868 JVS (DFMx)

United States District Court, C.D. California.

Filed May 1, 2018

Carlin R. Metzger, Pro Hac Vice, Eric L. Schleef, Pro Hac Vice, Jon J. Kramer, Pro Hac Vice, Joseph A. Konizeski, Pro Hac Vice, Michael David Frisch, Pro Hac Vice, US Commodity Futures Trading Commission, Chicago, IL, Kent A. Kawakami, AUSA–Office of US Attorney, Los Angeles, CA, for Plaintiff.

Stephen Jay Senderowitz, Pro Hac Vice, Geoffrey M Miller, Pro Hac Vice, Jacqueline A. Giannini, Pro Hac Vice, Marilyn B. Rosen, Pro Hac Vice, Steven L. Merouse, Pro Hac Vice, Dentons LLP, Chicago, IL, Joel D. Siegel, Dentons LLP, Paul M. Kakuske, Dentons US LLP, George B. Newhouse, Jr, Los Angeles, CA, Andrew C. Lourie, Pro Hac Vice, Kobre and Kim LLP, Washington, DC, Benjamin J. A. Sauter, Pro Hac Vice, Kobre and Kim LLP, New York, NY, Matthew I. Menchel, Pro Hac Vice, Kobre and Kim LLP, Miami, FL, C. Brandon Wisoff, Jessica K. Nall, Neil A. Goteiner, Farella Braun and Martel LLP, San Francisco, CA, for Defendant.

Proceedings: (IN CHAMBERS) (Corrected May 17, 2018) Order Granting Defendants' Motion to Dismiss; Denying Plaintiff's Motion for Preliminary Injunction as Moot; and Denying Defendant's Motion to Exclude CFTC's Expert Report of Dr. Robert D. Salvaggio as Moot

The Honorable James V. Selna

Before the Court are three motions.

First, Defendants Monex Deposit Company, Monex Credit Company, Newport Services Corporation (collectively, "Monex"), Michael Carabini, and Louis Carabini (the "Individual Defendants" and, with Monex, "Defendants") move to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) Plaintiff Commodity Futures Trading Commission's ("CFTC") Complaint. (Notice of Motion to Dismiss ("MTD"), Docket No. 40; Mem. re MTD, Docket No. 41–1.) The CFTC filed an opposition. (Opp'n to MTD, Docket No. 164.) Defendants filed a reply. (Reply re MTD, Docket No. 180.)

For the following reasons, the Court grants the motion to dismiss.

Second, the CFTC filed a motion for preliminary injunction pursuant to § 6c(a) of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 13a–1(a). (Mot. for Preliminary Injunction ("PI"), Docket No. 6.) Defendants opposed. (Opp'n to Mot. for PI, Docket No. 166.) The CFTC replied. (Reply re Mot. for PI, Docket No. 177.)

For the following reasons, the Court denies the motion for preliminary injunction as moot.

Third, Defendants filed a motion to exclude the evidence of the CFTC's expert Dr. Robert D. Selvaggio pursuant to Federal Rule of Evidence 702 and Daubertv.MerrellDowPharmaceuticals,Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). (Motion to Exclude ("MTE"), Docket No. 154.) The CFTC opposed. (Opp'n to MTE, Docket No. 165.) Defendants replied. (Reply re MTE, Docket No. 175.)

For the following reasons, the Court denies the motion to exclude as moot.

I. BACKGROUND

The CFTC alleges the following facts. Monex, located in Newport Beach, California, offers retail customers two type of transactions. (Compl., Docket No. 1 ¶¶ 14, 24.) Through the first type, which is not at issue in this case, retail customers pay full price for precious metals. (Id. ¶ 24.) Through the second type, called the Atlas program, Monex offers precious metals on a leveraged, margined, or financed basis: retail customers purchase precious metals by only paying a portion of the purchase price, and the balance is financed. (Id. ) Customers with Atlas trading accounts may take open positions in precious metals, but the trading does not take place on a regulated exchange or board of trade. (Id. ¶ 25.) Monex acts as the counterparty to every transaction and sets the price for every trade. (Id. ¶¶ 25, 34.)

When Atlas customers trade "on leverage" or "on margin," Monex finances a portion of their trading positions. (Id. ¶ 28.) Monex requires that Atlas customers deposit funds to serve as margin for open trading positions in their trading accounts, generally 22–25% of the value of the trading account's open positions. (Id. ) If equity in a customer's trading account declines to Monex's "call" level, Monex can issue a margin call and require its customer to immediately deposit additional funds. (Id. ¶ 31.) Monex can change its margin requirements at any time in its sole discretion. (Id. ) Trading positions can be liquidated without notice in "forced liquidations." (Id. ¶ 32.) Monex automatically liquidates trading positions if a customer's account equity falls to 7% and can also liquidate a customer's trading position at any time in its sole discretion. (Id. )

Atlas customers must sign an Atlas account agreement.¹ (Id. ¶ 38.) Atlas customers with open trading positions do not take physical delivery of the metals. (Id. ¶ 39.) The metals are stored in depositories, subject to contracts between Monex and the depositories. (Id. ) Atlas customers may only get physical possession of the metal if they make full payment, request actual delivery of specific physical metals, and have Monex ship the metals to them, a pick-up location, or the customer's agent. (Id. ¶ 40.) When an Atlas customer opens a long position, Monex transfers the customer ownership of all the metals underlying his position. (Id. ¶ 41.) The CFTC asserts that this transfer is just a book-entry in Monex's records because it can close out the customer's position at any time in its sole discretion, at a price of its choosing, and without notice. (Id. ) When customers open a short position, Monex claims that it loans the customer metals that the customer immediately sells back to Monex. (Id. ¶ 42.) The CFTC also argues that this purported transfer is just a book-entry in Monex's records. (Id. )

The CFTC filed suit against Defendants alleging four causes of action for (1) off-exchange transactions in violation of CEA § 4(a), 7 U.S.C. § 6(a) ; (2) fraud in violation of CEA § 4b(a)(2)(A), 7 U.S.C. § 6b(a)(2)(A), (C) ; (3) fraud in violation of CEA § 6(c)(1) and Regulation 180.1(a)(1)–(3), 7 U.S.C. § 9(1) and 17 C.F.R. § 180(a)(1)–(3); and (4) violation of CEA § 4d, 7 U.S.C. § 6d, for failure to register with respect to financed transactions.

II. DISCUSSION

A. Motion to dismiss pursuant to Rule 12(b)(6)

1. Legal Standard

Under Rule 12(b)(6), a defendant may move to dismiss for failure to state a claim upon which relief can be granted. Federal Rule of Civil Procedure 8(a) requires that a complaint contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). A plaintiff must state "enough facts to state a claim to relief that is plausible on its face." BellAtl.Corp.v.Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim has "facial plausibility" if the plaintiff pleads facts that "allow[ ] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroftv.Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

In resolving a Rule 12(b)(6) motion under Twombly, the Court must follow a two-pronged approach. First, the Court must accept all well-pleaded factual allegations as true, but "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. Second, assuming the veracity of well-pleaded factual allegations, the Court must "determine whether they plausibly give rise to an entitlement to relief." Id. at 679, 129 S.Ct. 1937. This determination is context-specific, requiring the Court to draw on its experience and common sense, but there is no plausibility "where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct." Id. For purposes of ruling on a Rule 12(b)(6) motion, the court must "accept factual allegations in the complaint as true and construe the pleadings in the light most favorable to the nonmoving party." Manzarekv.St.PaulFire&MarineIns.Co., 519 F.3d 1025, 1031 (9th Cir. 2008). However, courts "are not bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955 ).

Under Federal Rule of Civil Procedure 9(b), a plaintiff must plead each element of a fraud claim with particularity, i.e. , the plaintiff "must set forth more than the neutral facts necessary to identify the transaction." Cooperv.Pickett, 137 F.3d 616, 625 (9th Cir. 1997) (emphasis in original) (quoting InreGlenFed,Inc.Sec.Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) ). A fraud claim must be accompanied by "the who, what, when, where, and how" of the fraudulent conduct charged. Vessv.Ciba–GeigyCorp.USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (quoting Cooper, 137 F.3d at 627 ). "A pleading is sufficient under rule 9(b) if it identifies the circumstances constituting fraud so that a defendant can prepare an adequate answer from the allegations." Moorev.KayportPackageExpress,Inc., 885 F.2d 531, 540 (9th Cir. 1989). Statements of the time, place, and nature of the alleged fraudulent activities are sufficient, but mere conclusory allegations of fraud are not. Id.

2. The Actual Delivery Exception

The Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111–203, § 742, 124 Stat. 1376 (2010) ("Dodd–Frank"), expanded the enforcement authority of the CFTC. CFTCv.HunterWiseCommodities,LLC, 749 F.3d 967, 970 (11th Cir. 2014). Relevant to the present action, Dodd–Frank added CEA § 2(c)(2)(D) (the "Retail Commodity Provision"), which extended the scope of CEA §§ 4(a), 4(b), and 4b to apply to covered "retail commodity transactions," as if they were contracts of sale of a commodity for future delivery, unless the transactions resulted in "actual delivery" within 28 days (the "Actual Delivery Exception"). 7 U.S.C. § 2(c)(D) ; CFTCv.WorthGrp.,Inc., No. 13-80796-CIV, 2014 WL 11350233, at *1 (S.D. Fla. Oct. 27, 2014). Only retail commodity...