Cruz v. Fxdirectdealer, LLC

855 F.Supp.2d 89

Hugo CRUZ, on behalf of himself and all others similarly situated, Plaintiff,

v.FXDIRECTDEALER, LLC (FXDD), Defendant.

No. 11 Civ. 1008(PAC).

United States District Court, S.D. New York.

Feb. 29, 2012.

Tucker H. Byrd, J. Carlos Real, Damien H. Prosser, J. Andrew Meyer, Pro Hac, Vice, James S. Byrd, Morgan & Morgan, P.A., Orlando, FL, Rachel Soffin, Pro Hac, Vice, Tamra Givens, Pro Hac, Vice, Morgan & Morgan, P.A., Tampa, FL, Scott Weinstein, Pro Hac, Vice, Morgan & Morgan, P.A., Fort Myers, FL, for Plaintiff.

Jeffrey Rourke Burke, Winston & Strawn LLP, New York, NY, Micol Olimpia Sordina, Winston & Strawn LLP, Los Angeles, CA, for Defendant.

OPINION & ORDER

Honorable PAUL A. CROTTY, District Judge.

Plaintiff filed an Amended Class Action Complaint on May 31, 2011, alleging that Defendant FXDirectDealer, LLC (“FXDD”), a foreign currency trading service, executed a fraudulent scheme to loot its customers' accounts by manipulating trades and pricing information through its computer software. Plaintiff asserts five claims against FXDD for violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq.; the New York General Business Law §§ 349 and 350; breach of contract; and breach of the implied covenant of good faith and fair dealing. Plaintiff seeks compensatory and treble damages under 18 U.S.C. § 1964(c), injunctive and declaratory relief pursuant to 18 U.S.C. § 1964(a), and attorney's fees and costs.

On August 22, 2011, FXDD moved to dismiss, pursuant to Fed.R.Civ.P. 12(b)(6), arguing that Plaintiff's RICO claim fails because (1) Plaintiff has not satisfied the standard under Fed.R.Civ.P. 9(b) to plead the predicate acts of mail and wire fraud with particularity; (2) Plaintiff fails to allege a RICO enterprise distinct from the RICO “person”; (3) Plaintiff has no standing under RICO because he does not allege how the scheme caused his losses; and (4) Plaintiff's claims are barred by the applicable four-year statute of limitations. FXDD also contends that Plaintiff's four state law claims fail as a matter of law. For the reasons discussed below, the Court grants FXDD's motion to dismiss the Amended Complaint.

BACKGROUND

Defendant FXDD ¹ provides online off-exchange foreign exchange (“Forex”) trading and related services to retail, institutional, and individual customers. (Am. Compl. ¶ 11.) The Forex market is a worldwide, off-exchange financial market for the trading of currencies. ( Id. ¶ 14.) Trades typically occur between large, institutional investors on the “interbank market,” rather than on a regulated exchange. ( Id. ¶ 15.) With the rise of online trading systems, individual investors may now trade in the Forex market via retail brokers such as FXDD. ( Id. ¶ 16.) Plaintiff Hugo Cruz, an individual investor, alleges that he entered into a contractual agreement (the “Customer Agreement”) ² with FXDD in or around September/October 2006 to trade on FXDD's Forex platform. ( Id. ¶ 46.)

As part of its marketing strategy, FXDD allows potential customers to simulate trading activity through “Demo,” “Paper Trading,” or “Practice Accounts” (the “Demo Account”) without any financial risk. ( Id. ¶ 19.) Before trading on FXDD's platform, customers must acknowledge that they have “conducted simulated trading using the [FXDD] Demo Trading Platforms ....” ( Id.) Plaintiff alleges that before this action was filed, the FXDD website stated that “[t]he demo accounts for both platforms mirror exactly what you will see if you sign-up for a live account, and [t]he pricing and spreads are the same in demo and in live accounts.” ( Id.) (emphasis removed). After Plaintiff filed his initial complaint, FXDD allegedly modified this statement to read: “The pricing on the demo platforms, while indicative of live pricing, is not a mirror image of what you will see if you sign up for a live account.” ( Id.) (emphasis removed).

A. The Alleged Dishonest Trading Practices

Plaintiff contends that FXDD “engages in a series of dishonest trade execution practices that are never disclosed to customers.” ( Id. ¶ 22.) Specifically, the Amended Complaint alleges that FXDD's actual trading platforms are a “rigged game” controlled by “sophisticated back-end administrative consoles” that allow Defendant “to interfere with and manipulate customers' trades so as to systematically ‘loot’ customers' accounts ....” ( Id. ¶¶ 22, 24.)

Plaintiff alleges that FXDD's dishonest trading practices include the following, among others: (1) routing customer accounts to slow servers during profitable trading activity, thus “allowing Defendant the time to hijack any potential profit in the trade by buying and selling in-between the customer's order and the real market”; (2) generating false “error” messages, “slow fill” or “no fill” messages to prevent the customer from closing out a profitable trade while generating “illicit profits” for FXDD; (3) creating artificial short term price spikes to trigger a customer's stop order and pirate the customer's profits, a practice known as “stop hunting” or “stop loss hunting”; (4) taking advantage of the change in price between the time when a price is quoted and a market order is placed, known as “slippage”; and (5) targeting trades of profitable customers using any combination of these tactics. ( Id. ¶ 25.) Plaintiff alleges that these practices “were inherently self-concealing,” and that he and other proposed Class Members ³ suffered damages as a direct and proximate result. ( Id. ¶¶ 27, 38.) During the two years that Plaintiff traded on FXDD's Forex platform, he allegedly lost approximately $281,170.24. ( Id. ¶ 48.)

B. Alleged RICO Violation

Count 1 of the Amended Complaint asserts that FXDD conducted the affairs of the “FXDD Fraud Enterprise” through a “pattern of racketeering activity” in violation of 18 U.S.C. § 1962(c). ( Id. ¶ 50.) Plaintiff alleges that FXDD and the members of the FXDD Fraud Enterprise committed predicate acts of mail and wire fraud in order to execute their scheme.

1. The FXDD Fraud Enterprise

Plaintiff alleges that beginning in “at least October 2002,” FXDD formed an enterprise with various entities and individuals to commit the alleged RICO violations. ( Id. ¶¶ 66, 72.) The members of the enterprise included: FXDD and certain of its individual executives, COO Lubomir Kaneti and Managing Director and Corporate Counsel James E. Green ⁴; Tradition, FXDD's parent company, and ATG, both of whom allegedly provided financial and professional assistance to FXDD during its start-up phase; certain software companies, such as MetaQuotes and Currenex, that develop trade platforms and applications used by FXDD; additional software companies and individual programmers that aided FXDD in developing its proprietary trading platforms; and brokers who received commissions from FXDD in exchange for providing Forex educational services to consumers and for “steering” or introducing customers to FXDD's service(the “Introducing Brokers”). ( Id. ¶ 56(a)-(g).) According to the Amended Complaint, the “overarching purpose” of the FXDD Fraud Enterprise “is for each of its members to profit from customers opening Live Accounts with [FXDD].” ( Id. ¶ 73.)

Plaintiff contends that this “FXDD Fraud Enterprise” is an association in fact within the meaning of 18 U.S.C. § 1961(4), and that it “consists of a group of ‘persons' associated together for the common purpose of employing the multiple deceptive, abusive and fraudulent acts” alleged in the Amended Complaint. ( Id. ¶ 66.) Specifically, Plaintiff alleges that FXDD worked with the other members of this enterprise “to design, customize, and employ specialized trading platforms and Application Programming Interface software (“API”) that allows [FXDD] to dishonestly manipulate the trade execution process” in order to generate profits “at the expense of [FXDD's] customers.” ( Id. ¶ 67.) FXDD's alleged dishonest trading practices are “in furtherance of the goals of the FXDD Fraud Enterprise,” and these practices continue as the members of the enterprise maintain and upgrade the software used by FXDD's trading platform. ( Id.)

The Amended Complaint alleges that the FXDD Fraud Enterprise forms a hierarchy with Kaneti, Green, and Tradition at the top. Kaneti and Green oversee FXDD's day-to-day financial operations, “including implementation and supervision of the deceptive trading practices” alleged. ( Id. ¶ 68.) Tradition lent FXDD start-up funding as well as reputational capital “as a world leader in the brokerage and trading of financial and non-financial products to induce trust and reliance” on FXDD's trading service. ( Id. ¶ 69.) ATG also provided start-up capital and helped Tradition promote FXDD to consumers. ( Id. ¶ 70.) The Introducing Brokers are at the foot of the hierarchy and, according to Plaintiff, are not aware of FXDD's dishonest trading practices. ( Id. ¶ 71.) Nevertheless, the Introducing Brokers continue to bring additional customers to FXDD and “predictab[ly] pass[ ] on and repeat[ ] the various fraudulent statements of [FXDD],” thus “bolstering the believability of [FXDD's] false statements” and furthering the goals of the enterprise. ( Id.)

2. Predicate Acts

The Amended Complaint alleges that FXDD committed RICO predicate acts of mail and wire fraud in the course of conducting its pattern of racketeering activity.

(a) Mail Fraud

Plaintiff alleges that FXDD violated the mail fraud statute, 18 U.S.C. § 1341, by mailing customer agreements that contained incomplete risk disclosures, which omitted the true nature of FXDD's allegedly deceptive and fraudulent practices. (Am. Compl. ¶ 75.) The risk disclosures represented that: (1) FXDD acted as “a counterparty” or “opposing principal broker” in customers' transactions; (2) Forex trading entails liquidity risks, possible “fast market” conditions, and technology risks “inherent in trading online”; and (3) FXDD accepts and undertakes all orders on...