Commodity Futures Trading Comm'n v. My Big Coin Pay, Inc.

334 F.Supp.3d 492

COMMODITY FUTURES TRADING COMMISSION

v.MY BIG COIN PAY, INC. et al.

CIVIL ACTION NO. 18-10077-RWZ

United States District Court, D. Massachusetts.

Signed September 26, 2018

Paul G. Hayeck, Traci L. Rodriguez, A. Daniel Ullman, II, John C. Einstman, Jonah E. McCarthy, Commodity Futures Trading Commission, Washington, DC, for Plaintiff.

My Big Coin Pay, Inc., pro se, Ray E. Chandler, Pro Hac Vice, Chandler & Jennings, North Charleston, SC, Steven N. Fuller, Wellesley, MA, Laura Greenberg-Chao, Boston, MA, Katherine Cooper, Pro Hac Vice, Murphy & McGonigle, New York, NY, for Defendant.

MEMORANDUM OF DECISION

RYA W. ZOBEL, SENIOR UNITED STATES DISTRICT JUDGE

Defendant Randall Crater and all Relief Defendants¹ move to dismiss this case brought by plaintiff Commodity Future Trading Commission ("CFTC"). The amended complaint alleges a fraudulent "virtual currency scheme" in violation of the Commodity Exchange Act ("CEA" or "the Act") and a CFTC implementing regulation banning fraud and/or manipulation in connection with the sale of a commodity. See 7 U.S.C. § 9(1) ; 17 C.F.R. § 180.1(a). Defendants' principal argument is that CFTC fails to state a claim because My Big Coin ("MBC" or "My Big Coin"), the allegedly fraudulent virtual currency involved in the scheme, is not a "commodity" within the meaning of the Act. They also argue that the CEA provision and CFTC regulation are restricted to cases involving market manipulation and do not reach the fraud alleged here. Finally, they assert that plaintiff's amended complaint fails to support its allegations of misappropriation. The motion is denied.

I. Factual Background

For purposes of resolving this motion I accept as true the following well-pleaded facts, recited as alleged in the amended complaint. See Ocasio-Hernández v. Fortuño-Burset, 640 F.3d 1, 5 (1st Cir. 2011).

Mr. Crater and the non-moving codefendants² "operated a virtual currency scheme in which they fraudulently offered the sale of a fully-functioning virtual currency" called "My Big Coin".³ Docket # 63 (hereinafter "Am. Compl.") ¶ 1. In short, defendants enticed customers to buy My Big Coin by making various untrue and/or misleading statements and omitting material facts. The falsities included that My Big Coin was "backed by gold," could be used anywhere Mastercard was accepted, and was being "actively traded" on several currency exchanges. See, e.g., id. ¶ 39. Defendants also made up and arbitrarily changed the price of My Big Coin to mimic the fluctuations of a legitimate, actively-traded virtual currency. When victims of the fraud purchased My Big Coin, they could view their accounts on a website but "could not trade their MBC or withdraw funds ...." Id. ¶ 37. Defendants obtained more than $6 million from the scheme, some of which is currently held by the several Relief Defendants.

Plaintiff brought suit on January 16, 2018, alleging violations of Section 6(c)(1) of the Commodities Exchange Act, 7 U.S.C. § 9(1), and CFTC Regulation 180.1(a), 17 C.F.R. § 180.1(a). It also moved for a temporary restraining order and a preliminary injunction. The court granted the temporary restraining order and defendants subsequently consented to a preliminary injunction. Thereafter, plaintiff amended its complaint and defendants filed the pending motion to dismiss, which both parties extensively briefed and argued.

II. Legal Principles

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. For purposes of a motion to dismiss, the court accepts all well-pleaded factual allegations as true and draws all reasonable inferences in the plaintiff's favor. See Rodríguez-Reyes v. Molina-Rodríguez, 711 F.3d 49, 52–53 (1st Cir. 2013).

III. Application

A. Jurisdiction

As an initial matter, although defendants suggest that this court does not have subject matter jurisdiction for lack of a federal question, their underlying argument that the alleged conduct did not involve a "commodity" goes to the merits of plaintiff's claim, not jurisdiction. This court has subject matter jurisdiction because the case presents a federal question, see 28 U.S.C. § 1331, and because federal law expressly authorizes CFTC to sue and the court to grant appropriate relief, see 7 U.S.C. § 13a-1(a) ; 28 U.S.C. § 1345. See, e.g., CFTC v. Hunter Wise Commodities, LLC, 749 F.3d 967, 974 (11th Cir. 2014) ("[Defendant-Appellants] argue the Commission's statutory authority, its ‘jurisdiction,’ does not reach the transactions at issue, but we note at the outset that this is not a matter of the court's jurisdiction to hear this case.").

B. Whether Plaintiff Has Adequately Alleged the Sale of a "Commodity" Under the CEA

"The Commodity Exchange Act (CEA) has been aptly characterized as a ‘comprehensive regulatory structure to oversee the volatile and esoteric futures trading complex.’ " Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 356, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982) (internal citation omitted) (quoting H.R.Rep. No. 93–975, at 1 (1974) (hereinafter "House Report") ). Accordingly, the present Act generally grants CFTC exclusive jurisdiction over futures contracts and the exchanges where they are traded. See 7 U.S.C. § 2(a)(1)(A).⁴ CFTC has additional powers under the statute, including the general anti-fraud and anti-manipulation authority over "any ... contract of sale of any commodity in interstate commerce" pursuant to which it brings the claims in this case. See 7 U.S.C. § 9(1).

As noted above, plaintiff alleges violations of CEA Section 6(c)(1) and CFTC regulation 180.1(a). Both provisions apply to the fraud alleged in this case if the conduct involved a "commodity" under the CEA. See 7 U.S.C. § 9(1) (banning, inter alia, the use of "any manipulative or deceptive device or contrivance" "in connection with any ... contract of sale of any commodity in interstate commerce"); 17 C.F.R. § 180.1(a) (banning, inter alia, the use of "any manipulative device, scheme, or artifice to defraud" "in connection with any ... contract of sale of any commodity in interstate commerce"). Therefore, to state a viable claim, plaintiff must adequately plead that My Big Coin is a commodity.

"Commodity" is a defined term in the CEA. See 7 U.S.C. § 1a(9). It includes a host of specifically enumerated agricultural products as well as "all other goods and articles ... and all services rights and interests ... in which contracts for future delivery are presently or in the future dealt in." Id. The full definition reads:

The term "commodity" means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions (as provided by section 13-1 of this title) and motion picture box office receipts (or any index, measure, value, or data related to such receipts), and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.

Defendants contend that because "contracts for future delivery" are indisputably not "dealt in" My Big Coin, it cannot be a commodity under the CEA. They take the position that in order to satisfy the CEA's "commodity" definition, the specific item in question must itself underlie a futures contract. Plaintiff responds that "a ‘commodity’ for purposes of [the CEA definition] is broader than any particular type or brand of that commodity." Docket # 70 at 10.⁵ Pointing to the existence of Bitcoin futures contracts, it argues that contracts for future delivery of virtual currencies are "dealt in" and that My Big Coin, as a virtual currency, is therefore a commodity.⁶

The text of the statute supports plaintiff's argument. The Act defines "commodity" generally and categorically, "not by type, grade, quality, brand, producer, manufacturer, or form." Docket # 70 at 11. For example, the Act classifies "livestock" as a commodity without enumerating which particular species are the subject of futures trading. Thus, as plaintiff urges, Congress' approach to defining "commodity" signals an intent that courts focus on categories—not specific items—when determining whether the "dealt in" requirement is met.

This broad approach also accords with Congress's goal of "strengthening the federal regulation of the ... commodity futures trading industry," House Report at 1, since an expansive definition of "commodity" reasonably assures that the CEA's regulatory scheme and enforcement provisions will comprehensively protect and police the markets. That goal is particularly relevant here, given that the court is construing the term "commodity" not in a vacuum, but rather as it functions within the CEA's anti-fraud enforcement provision of Section 6(c)(1). As the Supreme Court has instructed in an analogous context, such statutes are to be "construed ‘not technically and restrictively, but flexibly to effectuate [their] remedial purposes." SEC v. Zandford, 535 U.S. 813, 819, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002) (analyzing Section 10(b) of the Securities Exchange Act) (quoting SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963...