Behrens et al v. JP Morgan Chase Bank N. A. et al

MEMORANDUM OF LAW in Support re: 116 MOTION to Dismiss Plaintiffs' Second Amended Complaint. . Document

S.D.N.Y.December 14, 2017

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK BRUCE BEHRENS, et al., Plaintiffs, vs. JPMORGAN CHASE BANK, N.A., et al., Defendants. Index No. 1:16-cv-05508-VSB Hon. Vernon Broderick CHICAGO MERCANTILE EXCHANGE’S MEMORANDUM OF LAW IN SUPPORT OF ITS MOTION TO DISMISS PLAINTIFFS’ SECOND AMENDED COMPLAINT Dated: December 14, 2017 Abby F. Rudzin O’MELVENY & MYERS LLP Times Square Tower 7 Times Square New York, New York 10036 Tel: (212) 326-2000 Fax: (212) 326-2061 arudzin@omm.com Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 1 of 29 TABLE OF CONTENTS Page PRELIMINARY STATEMENT ................................................................................................... 1 STATEMENT OF FACTS ............................................................................................................ 3 ARGUMENT ................................................................................................................................. 7 I. Plaintiffs’ claims are time-barred. ................................................................................... 7 A. None of the claims against the Exchange was brought within the applicable statute of limitation. .................................................................................................. 7 B. Plaintiffs’ claims against the Exchange are not saved by equitable tolling. ............ 8 1. Plaintiffs have not adequately alleged fraudulent concealment. ....................... 8 2. American Pipe tolling does not apply to Plaintiffs’ claims against the Exchange because it was not a defendant in the Chicago class action. .......... 10 II. Plaintiffs have failed to state any cognizable claims against the Exchange. ................. 12 A. Plaintiffs have failed to state a CEA claim against the Exchange.......................... 12 1. The CEA does not allow private claims against the Exchange based on a mere disagreement with the Exchange’s rules. ............................................ 13 2. The Exchange is not liable for failing to enforce existing rules. .................... 14 (a) Plaintiffs have not identified any “bylaw, rule, regulation, or resolution” that the Exchange failed in its obligation to enforce. ............ 15 (b) Plaintiffs’ own allegations foreclose the possibility that any failure by the Exchange caused their losses. ....................................................... 16 (c) Plaintiffs have failed to plausibly allege that the Exchange acted in bad faith. .................................................................................................. 18 B. Plaintiffs have failed to state any common-law claim against the Exchange. ....... 20 1. The CEA bars Plaintiffs’ common-law claims. .............................................. 21 2. Plaintiffs have failed to state a claim for unjust enrichment or intentional infliction of emotional distress. ..................................................... 22 CONCLUSION ............................................................................................................................ 24 Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 2 of 29 Table of Authorities Page ii CASES Adams Pub. Sch. Dist. v. Asbestos Corp., 7 F.3d 717 (8th Cir. 1993) ........................................................................................................ 11 Am. Agric. Movement, Inc. v. Bd. of Trade, 977 F.2d 1147 (7th Cir. 1992) ............................................................................................ 14, 21 Amato v. W. Union Int’l, Inc., 773 F.2d 1402 (2d Cir. 1985).................................................................................................... 22 Am. Pipe & Const. Co. v. Utah, 414 U.S. 538 (1974) ........................................................................................................... 10, 11 Anderson v. Cornejo, 1999 WL 258501 (N.D. Ill. Apr. 21, 1999) .............................................................................. 10 Andrews v. Metro N. Commuter R. Co., 882 F.2d 705 (2d Cir. 1989)........................................................................................................ 5 Arneil v. Ramsey, 550 F.2d 774 (2d Cir. 1977)...................................................................................................... 10 Ashcroft v. Iqbal, 556 U.S. 662 (2009) .................................................................................................................. 12 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) .................................................................................................................. 21 Boyd v. J.E. Robert Co., 2010 WL 5772892 (E.D.N.Y. March 31, 2010) ....................................................................... 11 Brawer v. Options Clearing Corp., 807 F.2d 297 (2d Cir. 1986)...................................................................................................... 19 Carson Optical Inc. v. eBay Inc., 202 F. Supp. 3d 247 (E.D.N.Y. 2016) ...................................................................................... 18 DGM Inv. v. New York Futures Exch., 2002 WL 31356362 (S.D.N.Y. Oct. 17, 2002). .................................................................. 21, 22 ESI, Inc. v. Coastal Power Prod. Co., 995 F. Supp. 419 (S.D.N.Y. 1998) ........................................................................................... 23 Fischer v. Maloney, 43 N.Y. 2d 553 (1978) .............................................................................................................. 23 Georgia Malone & Co. v. Rieder, 19 N.Y. 3d 513 (2012) .............................................................................................................. 23 Grossman v. Citrus Assocs. of the N.Y. Cotton Exch., Inc., 706 F. Supp. 221, 228 (S.D.N.Y. 1989)........................................................................ 13, 18, 19 Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 3 of 29 Table of Authorities Page iii Highland Park Ass’n of Bus. & Enters. v. Abramson, 91 F.3d 143 (6th Cir. 1996) ...................................................................................................... 11 Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995)...................................................................................................... 18 Howell v. N.Y. Post Co., 81 N.Y. 2d 115 (1993) .............................................................................................................. 24 In re Cathode Ray Tube Antitrust Litig., 2014 WL 1091589 (N.D. Cal. Mar. 13, 2014) .......................................................................... 11 In re Parmalat Secs. Litig., 412 F. Supp. 2d 392 (S.D.N.Y. 2006)....................................................................................... 12 In Re: Merrill Lynch Ltd. P’ships Litig., 154 F.3d 56 (2d Cir. 1998)........................................................................................................ 10 Kelber v. Forest Elec. Corp., 799 F. Supp. 326 (S.D.N.Y. 1992) ............................................................................................. 7 Klein & Co. Futures, Inc. v. Bd. of Trade, 464 F.3d 255 (2d Cir. 2006)...................................................................................................... 12 Koch v. Christie’s Int’l PLC, 699 F.3d 141 (2d Cir. 2012).............................................................................................. 8, 9, 10 Levy v. BASF Metals Ltd., 2017 WL 2533501 (S.D.N.Y. June 9, 2017) .............................................................................. 8 Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011) .............................................................................................................. 23 Michelson v. Merrill Lynch Pierce Fenner & Smith, Inc., 669 F. Supp. 1244 (S.D.N.Y. 1987) ......................................................................................... 20 Martin v. Dickson, 100 F. App’x 14 (2d Cir. 2004) ............................................................................................... 21 Mott v. R.G. Dickinson & Co., 1993 WL 63445 (D. Kan. Feb. 24, 1993) ................................................................................. 11 Ping He (Hai Nam) Co. Ltd. v. NonFerrous Metals (U.S.A.) Inc., 22 F. Supp. 2d 94 (S.D.N.Y. 1998) .......................................................................................... 16 Robinson v. Fountainhead Title Grp. Corp., 447 F. Supp. 2d 478 (D. Md. 2006) .......................................................................................... 11 Rojas v. Roman Catholic Diocese of Rochester, 660 F.3d 98 (2d Cir. 2011).......................................................................................................... 5 Ryder Energy Dist. Corp. v. Merrill Lynch Commodities Inc., 748 F.2d 774 (2d Cir. 1984)...................................................................................................... 18 Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 4 of 29 Table of Authorities Page iv S & A Farms, Inc. v. Farms.com, Inc., 678 F.3d 949 (8th Cir. 2012) .................................................................................................... 16 Shak v. JPMorgan Chase & Co., 156 F. Supp. 3d 462 (S.D.N.Y. 2016)......................................................................................... 7 Taggart v. Costabile, 14 N.Y.S.3d 388 (App. Div. 2015) ........................................................................................... 24 Tex. Indus. v. Radcliff Materials, 451 U.S. 630 (1981) .................................................................................................................. 22 Troyer v. Nat’l Futures Ass’n, 2017 WL 2971962 (N.D. Ind. Jul. 12, 2017) ................................................................ 14, 16, 21 Vitanza v. Bd. of Trade of N.Y.C., 2002 WL 424699 (S.D.N.Y. Mar. 18, 2002) ............................................................................ 19 Wade v. Danek Med., Inc., 182 F.3d 281 (4th Cir. 1999) .................................................................................................... 11 Watson v. United States, 865 F.3d 123 (2d Cir. 2017)........................................................................................................ 8 W. Capital Design, LLC v. New York Mercantile Exch., 180 F. Supp. 2d 438 (S.D.N.Y. 2001)........................................................................... 19, 20, 22 Wyser-Pratte Mgmt. Co. v. Telxon Corp., 413 F.3d 553 (6th Cir. 2005) .................................................................................................... 10 STATUTES 7 U.S.C. § 1 ................................................................................................................................... 12 7 U.S.C. § 7 ............................................................................................................................... 4, 13 7 U.S.C. § 7a-2 .............................................................................................................................. 13 7 U.S.C. § 25 .......................................................................................................................... passim RULES CME Rule 402.C .......................................................................................................................... 15 CME Rule 930 .......................................................................................................................... 4, 15 Fed. R. Civ. P. 12(b)(6)................................................................................................................. 12 Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 5 of 29 PRELIMINARY STATEMENT Plaintiffs are retirees who, like so many Americans, lost money in the 2008 financial crisis. Because Plaintiffs chose to invest in commodity derivatives rather than diversify across more conservative asset classes, the crash hit them especially hard. By early October 2008, they had lost much of their savings. Within a year, Plaintiffs had filed arbitration claims against Peregrine Financial Group, Inc., the futures merchant through which Plaintiffs’ trades were conducted, complaining about the trading that had been conducted with their money. Another factor might also have been to blame: Plaintiffs say that Peregrine began stealing their funds as early as 2007. On July 9, 2012, Peregrine Chairman and CEO Russell Wasendorf Sr. admitted as much, revealing in a suicide note that he had stolen millions from customer accounts. Peregrine filed for bankruptcy protection the next day. Plaintiffs were promptly contacted by a lawyer about bringing potential fraud claims, but they chose to file claims only in the bankruptcy case and eschewed other legal options. They apparently thought they would recover something in a class action filed in Chicago that same month on behalf of Peregrine customers against Wasendorf, several other individuals, and two supposedly complicit banks. But after the last defendant in that action settled in mid-2015, Plaintiffs realized they would receive nothing. After all, their accounts had been emptied and closed years before the class action on behalf of Peregrine customers was filed. Now, some nine years after suffering their losses, Plaintiffs finally come to this Court for relief. This time, they decide to include the Chicago Mercantile Exchange (the “Exchange”) in their list of parties to blame because, they say, Wasendorf used trades executed there in Plaintiffs’ accounts between October 2 and October 8, 2008, to conceal his theft. Ignoring that the Exchange did not solicit Plaintiffs’ investment, make the trading decisions, steal anything from Plaintiffs, or even benefit from Plaintiffs’ losses, Plaintiffs attempt to hold the Exchange Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 6 of 29 2 liable for Peregrine’s conduct. In their initial 2016 complaint, Plaintiffs alleged that the Exchange is liable to Plaintiffs for failing to enforce its margin rules against Peregrine. Now Plaintiffs acknowledge that the margin rules did not apply to Peregrine, so they pivot to argue that the Exchange’s rules were not good enough. Plaintiffs go so far as to complain that the entire industry set-up in which futures commissions merchants like Peregrine clear and settle their trades through clearing members was somehow a nefarious scheme to permit Peregrine to commit fraud. Plaintiffs assert that the Exchange’s actions violated the Commodity Exchange Act (the “CEA”). Plaintiffs also include the Exchange in their catch-all claims against all Defendants for intentional infliction of emotional distress and unjust enrichment. None of the allegations against the Exchange states a cognizable claim, but the claims suffer from an even more fundamental defect: They were filed years too late. The longest statute of limitations for any of Plaintiffs’ claims against the Exchange is two years, and Plaintiffs admit that they began litigation efforts shortly after losing their money in 2008. They further admit that by 2012 they understood they might have additional claims and even had communications with counsel on that topic. Thus, under any version of a discovery- accrual rule, Plaintiffs’ window to bring these claims closed years before their initial 2016 complaint. Plaintiffs request equitable tolling, but such tolling is not available against the Exchange. They have not pleaded fraudulent concealment—they admit they knew about their losses and the Peregrine fraud and point to nothing the Exchange concealed—and cannot rely on the Chicago class action to deny the Exchange the benefit of the statute of limitations because the Exchange was not a defendant there. Plaintiffs’ claims should be dismissed on this basis alone. Each of Plaintiffs’ claims also fails as a matter of law. The CEA explicitly limits the Exchange’s liability to a bad-faith failure to enforce its rules. The CEA contains no provision for Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 7 of 29 3 private parties to challenge the sufficiency of those rules (which are, after all, approved by the Exchange’s regulator). Moreover, Plaintiffs must plead (and prove) that the Exchange’s alleged regulatory lapse caused Plaintiffs’ losses. Given their repeated allegations that it was Wasendorf who stole their money and that it was he and the other Defendants who proximately caused Plaintiffs’ losses, Plaintiffs cannot plausibly make this showing. Nor do Plaintiffs’ boilerplate allegations of profit-maximization and professional relationships suggest the requisite bad faith—i.e., knowledge that rules were being violated and an ulterior motive not to enforce them. Finally, Plaintiffs’ tacked-on common-law claims of unjust enrichment and intentional infliction of emotional distress fail. They are preempted by the CEA, which provides Plaintiffs’ exclusive remedy against the Exchange. Nor have Plaintiffs pleaded that any inequity requires that the Exchange make Plaintiffs whole for Wasendorf’s theft, or that the Exchange’s failure to prevent a handful of ordinary trades placed during a single week in October 2008 was sufficiently bad—i.e., outrageous, atrocious, or intolerable—so as to state a claim for intentional infliction of emotional distress. For any of these reasons, Plaintiffs’ claims against the Exchange should be dismissed with prejudice. STATEMENT OF FACTS1 Plaintiffs invested their retirement savings in what they believed was a “winning strategy [that] was risk averse.” (SAC ¶ 201.) Specifically, Plaintiffs used their money to buy commodity futures through Peregrine Financial Group, a futures commission merchant (an 1 The Exchange distills the allegations in Plaintiffs’ 210-page Second Amended Complaint (referred to as the “Complaint” in text and cited as “SAC”) as best it can and accepts them as true for purposes of this motion. Because paragraph 110 to 121 and 714 to 741 appear twice in the Complaint, citations to those paragraphs include page numbers. Unless otherwise stated, this memorandum omits from quotations all original alterations, internal citations, and internal quotation marks and adds all emphasis. Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 8 of 29 4 “FCM”). (See id. ¶ 66.) The strategy in fact turned out to be “extremely risky” and “unsuitable for conservative retirees” like Plaintiffs (id. ¶ 280), particularly in the infamous September 29, 2008 market crash. Plaintiffs’ “account values were wiped out” by October 8, 2008. (Id. ¶ 279.) The Exchange is a registered “Board of Trade” based in Chicago. (Id. ¶¶ 132–33.) It is therefore required under the CEA to create and enforce rules governing the transactions it facilitates. See 7 U.S.C. § 7(d)(2)(A). Among other things, the Exchange has rules governing the behavior of its clearing members—firms that have been approved by the Exchange to clear and settle trades on the Exchange. (See SAC ¶¶ 160–62.) FCMs like Peregrine can execute transactions on the Exchange, but they need a CME-authorized clearing member to complete the process by clearing and settling those trades. (See id. ¶ 161.) Some of the Exchange’s rules govern how clearing members must manage margin accounts—accounts containing assets to secure performance of future obligations. (See id. ¶¶ 25–30; see also CME Rules 930 D, E, and K, http://www.cmegroup.com/rulebook/CME/I/9/9.pdf.) If a clearing member has a client (such as an FCM like Peregrine) whose account balance falls below the margin requirement, the clearing member must impose a margin call and can liquidate the account if the margin call is not satisfied. (See SAC ¶ 27; CME Rule 930.E.1 (“Clearing members must issue calls for performance bond . . . within one business day.”); CME Rule 930.K.1 (“If an account holder fails to comply with a performance bond call within a reasonable time . . . the clearing member may close out the account holder’s trades.”).) In turn, the FCM (here, Peregrine) also has margin rules and can impose a margin call on its own individual clients. (See SAC ¶ 31 (referring to Peregrine obeying margin rules “in their own PFG handbook”); id. ¶ 290 (noting that Peregrine’s “Compliance and Procedure Manual” describes procedures for margin calls).) Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 9 of 29 5 Plaintiffs’ accounts at Peregrine fell below margin in early October 2008. (Id. ¶ 116 (p. 25).) Peregrine notified at least some of the Plaintiffs here of this situation by letter (id. ¶ 288), but continued to allow additional trades in Plaintiffs’ accounts (id. ¶¶ 295–97). Within a week, Plaintiffs’ accounts had lost all value. (Id. ¶¶ 87, 286, 300.) Plaintiffs worked with an attorney and filed claims against Peregrine for “alleged trading violations” with the National Futures Association in June 2009, but all claims were denied by late 2011. (Id. ¶¶ 221–22, 709.) Nearly four years after Plaintiffs suffered their losses, on July 9, 2012, Peregrine CEO and Chairman Russell Wasendorf Sr. wrote a suicide note admitting to having committed fraud, in part by “pocketing customer moneys in segregated accounts.” (Id. ¶¶ 112 (p. 27), 699.) Peregrine declared bankruptcy the next day. (Id. ¶ 225.) Plaintiffs “learned of the actions of [Peregrine] and Wasendorf, and the actions and inaction of the Defendants, through extensive media coverage, personal interviews and their independent investigation.” (FAC ¶ 496.)2 Plaintiffs were even told by their attorney that Wasendorf had “admitted that he stole customer money during the time [their] account was open” and therefore there was “a very good opportunity to move forward” with litigation. (SAC ¶ 694 & Ex. 22.) In short, by July 2012, Plaintiffs were able to “understand the nature of the total conduct giving rise to the Class Action claims alleged [in the Complaint].” (Id. ¶ 716 (p. 145).) Litigation about the Peregrine fraud immediately ensued in federal court in Chicago. The Commodity Futures Trading Commission (“CFTC”), which regulated Peregrine (id. ¶ 377), sued both Wasendorf and Peregrine. See generally U.S. Commodity Futures Trading Commission v. 2 Plaintiffs have now dropped this allegation, presumably in response to Defendants’ statute-of- limitations arguments, but Plaintiffs are still bound to it. See, e.g., Rojas v. Roman Catholic Diocese of Rochester, 660 F.3d 98, 106 (2d Cir. 2011) (“A party’s assertion of fact in a pleading is a judicial admission by which it normally is bound throughout the course of the proceeding.”); Andrews v. Metro N. Commuter R. Co., 882 F.2d 705, 707 (2d Cir. 1989) (“The amendment of a pleading does not make it any the less an admission of the party.”). Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 10 of 29 6 Peregrine Financial Grp., Inc., 12-cv-5383 (N.D. Ill. 2012). Peregrine customers also filed a class-action complaint against Wasendorf, several other individuals, and the two banks where Peregrine kept customers’ money. (SAC ¶ 225.) The Exchange was not named as a defendant. See generally In re Peregrine Fin. Grp. Customer Litig., 12-cv-5546 (N.D. Ill. 2012). Plaintiffs here filed claims in the pending Peregrine bankruptcy case (SAC ¶¶ 714–15 (p. 145)), but chose not to bring their own lawsuit at that time because they “were under the distinct impression that they would be entitled to a distribution” from the bankruptcy or the class action. (Id. ¶ 715 (p. 145); see also id. ¶¶ 724–28 (p. 147) (describing Plaintiffs’ decision to pursue claims here only after learning that they would not recover in that class action).) It was not until this action was filed in 2016 that Plaintiffs suggested that the Exchange was responsible for their losses. Plaintiffs continue to claim that they were victims of Wasendorf’s theft and bad trades. As Plaintiffs tell it, the “funds at issue in this Class Action were stolen from plaintiffs . . . from 2007 through 2008,” and “[a]fter these funds were stolen, Wasendorf Sn. and his cronies and co- conspirators gave instructions to . . . [the] defendants charged with the handling of plaintiffs’ accounts,” who conducted additional trades during that fateful week in October 2008. (Id. ¶ 80.) Yet unlike in any of the other Peregrine litigations, Plaintiffs here contend that the Exchange should be held liable for its failure to catch and stop the wrongdoers. (Id. ¶¶ 453–510.) Plaintiffs offer two bases for their claims against the Exchange. First, they complain that the Exchange did not sufficiently enforce its margin rules (Rules 930 D, E, and K) against Peregrine or catch its supposed improper conduct. (See, e.g., SAC ¶ 118 (p. 26), ¶ 471.) Yet they acknowledge that the margin rules apply only to clearing members—i.e., not to Peregrine. (See id. ¶¶ 282–83, 473, 491.) Second, they complain that the Exchange wrongfully adopted the margin rules only for clearing members rather than expanding them to all FCMs. (See id. Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 11 of 29 7 ¶¶ 282, 463, 471, 487–90.) Consequently, Plaintiffs sue the Exchange for supposedly violating the CEA (Claims XVI and XXV) and sue all Defendants for unjust enrichment and intentional infliction of emotional distress (Claims XXII and XXIII). ARGUMENT I. Plaintiffs’ claims are time-barred. As Plaintiffs acknowledge, they had suffered their losses—and knew that they had suffered their losses—by 2008. As a matter of fact, they brought claims against Peregrine in 2009. Plaintiffs also concede that they understood their other potential claims in 2012, when they learned of Wasendorf’s suicide note, Peregrine’s bankruptcy, the governmental investigations, and the Chicago class action; at that time, Plaintiffs conducted an investigation and consulted an attorney, but chose not to litigate. Plaintiffs’ 2016 claims are therefore time- barred as a matter of law and should be dismissed with prejudice. A. None of the claims against the Exchange was brought within the applicable statute of limitation. There can be no dispute that Plaintiffs failed to bring their claims against the Exchange within the applicable limitations periods. To be timely, Plaintiffs’ CEA claim must have been “brought not later than two years after the date the cause of action arises.” 7 U.S.C. § 25(c). And because their unjust-enrichment claim is based on the same allegations, it likewise must have been brought within two years. See Shak v. JPMorgan Chase & Co., 156 F. Supp. 3d 462, 478 (S.D.N.Y. 2016) (applying same two-year limitations period to unjust-enrichment claim as CEA claim, because both were based on same allegations, and dismissing both as untimely). Plaintiffs had only one year to file their claim for intentional infliction of emotional distress. See, e.g., Kelber v. Forest Elec. Corp., 799 F. Supp. 326, 340–41 (S.D.N.Y. 1992) (dismissing intentional infliction of emotional distress claim as untimely because one-year limitations period Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 12 of 29 8 applies). The math is simple: Plaintiffs’ claims accrued in 2008 (when the margin rules were allegedly violated and Plaintiffs lost their money), and certainly by 2012 (when Plaintiffs understood their claims), so all these claims expired long before Plaintiffs filed their initial complaint here in 2016. B. Plaintiffs’ claims against the Exchange are not saved by equitable tolling. Apparently aware that their claims were filed too late, Plaintiffs try to salvage them by requesting equitable tolling. To obtain equitable tolling, a plaintiff must prove “(1) that he has been pursuing his rights diligently, and (2) that some extraordinary circumstance stood in his way.” Watson v. United States, 865 F.3d 123, 133 (2d Cir. 2017). Plaintiffs note their “limited resources and limited education.” (SAC ¶ 708.) But the Second Circuit has explicitly rejected such common circumstances as irrelevant to equitable tolling. See Watson, 865 F.3d at 132–33 (reversing trial court’s equitable tolling where plaintiff had “11th-grade education and the corollary that he lacks knowledge of the law” because “those characteristics [are] commonplace . . . for a substantial segment of the population”). Plaintiffs also claim “Equitable Tolling based on Fraudulent Concealment” (SAC ¶¶ 698–729 (p. 147)) and “Equitable Tolling Under American Pipe” (id. ¶ 730 (p. 148)). Plaintiffs are entitled to neither. 1. Plaintiffs have not adequately alleged fraudulent concealment. Tolling based on fraudulent concealment requires that “(1) the defendant wrongfully concealed material facts relating to defendant’s wrongdoing; (2) the concealment prevented plaintiff’s discovery of the nature of the claim within the limitations period; and (3) plaintiff exercised due diligence in pursuing the discovery of the claim during the period plaintiff seeks to have tolled.” Koch v. Christie’s Int’l PLC, 699 F.3d 141, 157 (2d Cir. 2012). Plaintiffs must plead all three elements with particularity. See, e.g., Levy v. BASF Metals Ltd., 2017 WL 2533501, at *8 (S.D.N.Y. June 9, 2017) (rejecting equitable tolling and granting motion to Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 13 of 29 9 dismiss where plaintiff failed to plead her “claim of fraudulent concealment . . . with particularity, in accordance with the heightened pleading standards of Rule 9(b)”). Plaintiffs have not adequately pleaded any of these three requirements. First, Plaintiffs do not allege anything that the Exchange “wrongfully concealed.” Koch, 699 F.3d at 157. Plaintiffs assert that because the Exchange is a self-regulatory agency their claims are “self-concealing.” (SAC ¶ 706.) But that conclusory allegation does not relieve Plaintiffs of their obligation to plead what facts were concealed by the Exchange or otherwise nullify Congress’s decision to protect the Exchange with a two-year limitations period. Moreover, the rules that Plaintiffs complain were insufficient were all public, not concealed. While Plaintiffs offer copious allegations of concealment by other Defendants (see, e.g., SAC ¶¶ 369, 692, 700, 702, 746, 879, 886, 887), that says nothing about the Exchange. In truth, Plaintiffs cannot point to a single allegation in their Complaint of anything the Exchange affirmatively concealed—much less wrongfully—so their request for “Equitable Tolling based on Fraudulent Concealment” fails as to the Exchange. Second, Plaintiffs cannot possibly assert that anyone’s “concealment prevented [their] discovery of the nature of the claim within the limitations period.” Koch, 699 F.3d at 157. Plaintiffs knew that they lost their money in October 2008 (SAC ¶ 699), had an attorney file claims against Peregrine in June 2009 (id. ¶ 709), and learned of the Wasendorf fraud and their potential claims arising out of it in July 2012 (id. ¶ 694 & Ex. 22). Plaintiffs say only that they “could not reasonably have discovered the facts constituting defendants’ violations until after the law enforcement and regulatory investigations began on July 9, 2012. Until then, Plaintiffs . . . did not understand the nature of the total conduct giving rise to [their] claims.” (SAC ¶ 716 (p. Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 14 of 29 10 145).) Plaintiffs therefore concede that they could understand their potential claims in 2012, so they cannot get equitable tolling through 2014 (i.e., two years before filing this suit). Third, Plaintiffs have not sufficiently pleaded how they “exercised due diligence in pursuing the discovery of the claim” against the Exchange. Koch, 699 F.3d at 157. Plaintiffs do not identify a single thing they did to determine if they had a claim against the Exchange. See In Re: Merrill Lynch Ltd. P’ships Litig., 154 F.3d 56, 60 (2d Cir. 1998) (rejecting allegation of diligence where plaintiffs pleaded no details of inquiries they made). To the contrary, Plaintiffs admit that they sat back to see if they would receive compensation in the Chicago class action or Peregrine bankruptcy. (See SAC ¶¶ 695, 715 (p. 145).) But neither of those proceedings involved a claim against the Exchange: For claims against the Exchange, Plaintiffs did nothing. 2. American Pipe tolling does not apply to Plaintiffs’ claims against the Exchange because it was not a defendant in the Chicago class action. Plaintiffs also seek tolling from the Chicago class action. (SAC ¶ 730 (p. 148).) It is true that a pending class action can toll the limitations period for members of the putative class under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), but the Exchange was not a defendant in the 2012 class action. “[N]othing in American Pipe suggests that the statute be suspended from running in favor of a person not named as a defendant in the class suit, and [the Second Circuit has] decline[d] so to extend the rule.” Arneil v. Ramsey, 550 F.2d 774, 782 n.10 (2d Cir. 1977), overruled on other grounds, Crown v. Parker, 462 U.S. 345 (1983). American Pipe tolling therefore does not apply to Plaintiffs’ claims against the Exchange. Numerous courts have held that “class action tolling does not apply to a defendant not named in the class action complaint.” Wyser-Pratte Mgmt. Co. v. Telxon Corp., 413 F.3d 553, 567–68 (6th Cir. 2005) (collecting cases); accord Anderson v. Cornejo, 1999 WL 258501, at *4 (N.D. Ill. Apr. 21, 1999) (“[T]he tolling rule of [American Pipe] does not apply to persons who Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 15 of 29 11 were not previously named as defendants in a plaintiff class action.”); Mott v. R.G. Dickinson & Co., 1993 WL 63445, at *5 (D. Kan. Feb. 24, 1993) (“The American Pipe case . . . only applies to tolling the complaint for putative class members as to the same defendants.”). This conclusion follows the reasoning of the American Pipe decision, which justified equitable tolling for absent class members because the class-action defendants had notice of the claims from the class-action complaint. See 414 U.S. 554–55. But “[o]bviously, those parties that were not also defendants in the class action never received notice of the potential claims, and thus the reasoning in American Pipe does not support tolling the statute with regard to claims against them.” Adams Pub. Sch. Dist. v. Asbestos Corp., 7 F.3d 717, 719 (8th Cir. 1993); accord Wade v. Danek Med., Inc., 182 F.3d 281, 288 n. 9 (4th Cir. 1999) (defendants not named in previous class action “did not receive sufficient notice within the limitations period to justify equitable tolling”). As one court put it, “to afford plaintiffs the benefit of American Pipe tolling against defendants that had never been placed on notice of the substantive claims asserted against them by being named in the prior class suit would undermine in a fundamental way the very purposes served by statutes of limitations.” Boyd v. J.E. Robert Co., 2010 WL 5772892, at *17 (E.D.N.Y. March 31, 2010). Courts thus routinely dismiss claims against new defendants where the plaintiff’s claim is untimely without American Pipe tolling. See, e.g., Highland Park Ass’n of Bus. & Enters. v. Abramson, 91 F.3d 143 (6th Cir. 1996) (unpublished) (affirming dismissal on limitations grounds of defendant not previously named in class action); In re Cathode Ray Tube Antitrust Litig., 2014 WL 1091589, at *15 (N.D. Cal. Mar. 13, 2014) (rejecting American Pipe tolling for claim against defendant “never named as a defendant in any” earlier class action); Robinson v. Fountainhead Title Grp. Corp., 447 F. Supp. 2d 478, 484 (D. Md. 2006) (dismissing claim on Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 16 of 29 12 limitations grounds because there is no American Pipe tolling for new defendants). Plaintiffs’ belated claims against the Exchange here should likewise be dismissed. II. Plaintiffs have failed to state any cognizable claims against the Exchange. Even if Plaintiffs could somehow overcome their tardiness, their Complaint would still fail to state a cognizable claim against the Exchange. To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), “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 (2009). 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. Plaintiffs’ claims against the Exchange do not meet this threshold. A. Plaintiffs have failed to state a CEA claim against the Exchange. “CEA § 22 enumerates the only circumstances under which a private litigant may assert a private right of action for violations of the CEA. Section 22 includes two types of claims. Section 22(a) relates to claims against persons other than registered entities and registered futures associations. Section 22(b) deals with claims against those entities and their officers, directors, governors, committee members and employees.” Klein & Co. Futures, Inc. v. Bd. of Trade, 464 F.3d 255, 259 (2d Cir. 2006) (footnote omitted).3 Plaintiffs, however, appear to seek relief from the Exchange under both sections. (Compare Claim XVI (claiming violations under 22(a) against all defendants but Wasendorf and his son) with Claim XXV (claiming violation of 22(b) against the Exchange).) Both claims fail.4 3 The CEA is codified at 7 U.S.C. § 1 et seq. The provisions creating a private right of action, CEA Section 22, are codified at 7 U.S.C. § 25. To follow common practice and avoid confusion, we refer to the provision by its CEA section number, not the U.S. Code section number. 4 Plaintiffs also present a “claim” for “Principal-Agent Liability in Violation of the [CEA]” (Claim I), asserting the general principle that “each defendant is vicariously liable for the acts of its employees and agents.” (SAC ¶ 714 (p. 152).) This is not an independent claim. See In re Parmalat Secs. Litig., 412 F. Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 17 of 29 13 1. The CEA does not allow private claims against the Exchange based on a mere disagreement with the Exchange’s rules. Plaintiffs’ Section 22(a) claim against the Exchange fails on its face because that section applies to persons “other than a registered entity.” 7 U.S.C. § 25(a)(1). Plaintiffs acknowledge that the Exchange is a registered entity (SAC ¶ 133); thus, their Section 22(a) claim against the Exchange must be dismissed under the plain language of the statute. See Grossman v. Citrus Assocs. of the N.Y. Cotton Exch., Inc., 706 F. Supp. 221, 228 (S.D.N.Y. 1989) (dismissing Section 22(a) claim against exchange because “that subsection expressly excludes contract markets and similar organizations . . . whose liability is defined by subsection (b)”), aff’d 927 F.2d 594 (2d Cir. 1991). Moreover, both CEA claims against the Exchange appear to rest on the contention that the Exchange violated the CEA by permitting the industry practice of FCMs clearing and settling their trades through a clearing member. Plaintiffs refer to this structure as an “Omnibus Trading Sub-Account,” under “Omnibus Sub Account rules.” (SAC ¶¶ 282, 453, 485; see also id. ¶ 816(c) (complaining that the Exchange “allow[ed] the rules relating to Omnibus accounts to exist”), ¶ 853 (complaining that the Exchange “set[] up rules to insulate [Peregrine] from scrutiny as in the case of these Omnibus Sub account rules”).) But as Plaintiffs acknowledge, Congress has granted the Exchange “rule-making authority” (id. ¶ 157), and the Exchange has “reasonable discretion” in carrying out that mandate, 7 U.S.C. § 7(d)(1)(B). And of course the Exchange’s rules must be reviewed and approved by the CFTC. See 7 U.S.C. § 7a-2(c). Plaintiffs can point to no provision of the CEA giving private litigants a claim that an exchange’s rules were insufficient. Instead, Section 22(b) describes the “exclusive remedy Supp. 2d 392, 405 (S.D.N.Y. 2006) (“Vicarious liability is a theory of liability . . . not a separate cause of action.”). And it fails for the same reasons as Plaintiffs’ other CEA claims. Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 18 of 29 14 available to any person who sustains a loss as a result of a violation of the CEA or an exchange rule by a contract market.” Am. Agric. Movement, Inc. v. Bd. of Trade, 977 F.2d 1147, 1153 (7th Cir. 1992) (affirming dismissal of CEA claim); see also Troyer v. Nat’l Futures Ass’n, 2017 WL 2971962, at *8–11 (N.D. Ind. Jul. 12, 2017) (dismissing CEA claim alleging registered entity had insufficient rules). In Troyer, the court rejected a plaintiff’s attempt to criticize the National Futures Association for failing to have a particular rule because the language of Section 22(b)(2) permits liability only when the registered entity fails to enforce a rule. The court explained that Congress set up a structure in which the CFTC has responsibility to review and approve a registered entity’s rules and private parties may not try to second-guess that determination through a civil lawsuit. As the court put it: “That [the plaintiff] believes different rules should be required . . . does not state a claim under [Section 22(b)(2)], much less state a claim that the NFA acted in bad faith by failing to adopt the rules that he endorses.” 2017 WL 2971962 at *10. Likewise here, Plaintiffs’ claim that the CEA requires the Exchange to adopt better rules fails. 2. The Exchange is not liable for failing to enforce existing rules. Although they complain that the Exchange’s rules were insufficient, Plaintiffs continue to pursue a Section 22(b) claim that the rules were not properly enforced. Section 22(b)(1) creates a private right of action against a “registered entity” (i.e., a contract market or board of trade like the Exchange) that fails to enforce its trading rules. See 7 U.S.C. § 25(b)(1).5 To recover under Section 22(b)(1), however, Plaintiffs must demonstrate (1) that the Exchange “fail[ed] to enforce any bylaw, rule, regulation, or resolution that it is required to enforce,” (2) ”that such failure . . . caused the loss,” and (3) that the Exchange “acted in bad faith in failing to take action.” 7 U.S.C. § 25(b)(1), (4). Plaintiffs have not pleaded any of these requirements. 5 Section 22(b)(2) concerns liability for a “registered futures association,” 7 U.S.C. § 25(b)(2), which the Exchange is not. (See SAC ¶ 133.) Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 19 of 29 15 (a) Plaintiffs have not identified any “bylaw, rule, regulation, or resolution” that the Exchange failed in its obligation to enforce. Plaintiffs do not point to any rule that the Exchange had an obligation to enforce but failed to do so. Plaintiffs identify CME’s margin rules: Rules 930 D, E, and K (see, e.g., SAC ¶ 118 (p. 26)), but these rules govern only “clearing members.”6 And Plaintiffs acknowledge that Peregrine was not a clearing member; it was an FCM that had to associate with a clearing member to complete its trades. (See, e.g., SAC ¶ 491 (agreeing that “Rule 930 K, D and E would not even apply” to Peregrine); see also id. ¶ 473 (“PFG was not a Clearing member.”); id. ¶ 508 (referring to “the clearing firm holding PFG’s account”).) The Exchange therefore had no duty to ensure that Peregrine followed margin rules for its individual investor accounts. The Complaint acknowledges as much: “The CME is supposed to monitor all open positions on a daily basis and prevent undermargined accounts from remaining open. But not in this case, because the CME’s own rules allowed for an exception to its CME rulebook as part of the CME’s Omnibus Sub-Account rules.” (SAC ¶ 282; see also id. ¶¶ 453, 463, 472 (complaining that the Exchange’s rules could “allow” Peregrine’s fraud).) Plaintiffs also point to Rule 402.C (SAC ¶¶ 475–76), which authorizes the Exchange to take emergency actions if it believes them warranted. (See http://www.cmegroup.com/rulebook/ CME/I/4/4.pdf.) But that is not a “rule” the Exchange was required to enforce against Peregrine. Plaintiffs also allege that CME was “authorized to expell [sic] or stop members or non-members who committed offenses listed in CME Rule 432.” (SAC ¶ 472; see also id. ¶ 471 (making similar allegation about Rule 575).) But being authorized to take disciplinary action is not an 6 CME Rulebook Chapter 9 is entitled “Clearing Members.” Rule 930.D provides that “Clearing members may not accept orders for an account that has been in debit an unreasonable time.” Rule 930.E provides that “Clearing members must issue calls for performance bond . . . within one business day.” Rule 930.K. provides that if the performance bond is not posted, “the clearing member may close out the account holder’s trades.” (See https://www.cmegroup.com/rulebook/CME/9/9.pdf.) Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 20 of 29 16 obligation to do so, so it is not a basis for Section 22(b) liability. See 7 U.S.C. § 25(b)(1) (“registered entity that fails to enforce any [rule] that it is required to enforce”). Plaintiffs also refer to the Exchange’s general duty “to protect the public interest and to preserve fair and/or unmanipulated and fraud-free markets for the trading of futures contracts.” (SAC ¶ 850.) But Congress did not make registered entities liable for failing in all their duties. Section 22(b)(1) requires a plaintiff to point to a “bylaw, rule, regulation, or resolution” that the registered entity failed to enforce. A general duty—even if derived from a statute—does not qualify. See Troyer, 2017 WL 2971962 at *10 (rejecting plaintiff’s attempt to base CEA claim on registered entity’s statutory duty to have rules designed to “prevent fraudulent practices”). (b) Plaintiffs’ own allegations foreclose the possibility that any failure by the Exchange caused their losses. Plaintiffs’ allegations also prevent them from demonstrating that the Exchange’s alleged regulatory lapse caused their losses. In the words of then-Judge Sotomayor: “Even if [the Exchange] violated every provision of the CEA or the CFTC rules, under the express language of [the statute, Plaintiffs are] only authorized to bring suit, and can only recover, for those violations that caused [them] to suffer ‘actual damages.’” Ping He (Hai Nam) Co. Ltd. v. NonFerrous Metals (U.S.A.) Inc., 22 F. Supp. 2d 94, 107 (S.D.N.Y. 1998) (interpreting analogous language in Section 22(a)), vacated on other grounds, 187 F.R.D. 121 (S.D.N.Y. 1999). See also S & A Farms, Inc. v. Farms.com, Inc., 678 F.3d 949, 953 (8th Cir. 2012) (“[I]t is not enough for a plaintiff to show a CEA violation and damages, rather a plaintiff must show that the CEA violation proximately caused the damages for which the plaintiff seeks relief.”) (emphasis in original). Plaintiffs do not allege that they were damaged by the Exchange’s supposed dropping of the regulatory ball in October 2008; to the contrary, Plaintiffs claim that Wasendorf and other Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 21 of 29 17 Defendants used trades on the Exchange to create the illusion of on-the-market losses as cover for Peregrine’s earlier theft. The Complaint emphasizes that it was Wasendorf himself who stole Plaintiffs’ money. (See, e.g., SAC ¶ 17 (alleging that “customers’ accounts were completely and intentionally destroyed so that the stolen customer moneys that were previously pocketed by defendants would not be apparent to the clients”); ¶ 121 (p. 27) (attributing losses “to Wasendorf Sn. and his cronies pocketing the plaintiffs’ life-savings”).) And Plaintiffs contend that the theft was completed before the October 2008 trades, explaining: “After [the] funds were stolen, Wasendorf and his cronies . . . gave instructions” to conduct the October 2008 trading. (SAC ¶ 80; see also id. ¶ 40 (referring to trades violating Rule 930 as “fictitious . . . to ensure customer losses in each one’s accounts” because money “had already been diverted by Wasendorf”); id. ¶ 120 (p. 26) (describing October 2008 transactions as “perfect strategy” so “Wasendorf Sn. and his co-conspirators could nicely reconcile their books after having previously pocketed the investment funds in plaintiffs’ accounts”).)7 This chronology destroys Plaintiffs’ ability to show that the Exchange caused Plaintiffs’ losses.8 Instead they accuse Wasendorf (SAC ¶¶ 452, 748, 759, 765, 775, 780, 803), his son (id. ¶¶ 759, 791, 796, 811), the “Bank Defendants” (id. ¶¶ 452, 734 (p. 157)) Millennium Trust (id. ¶¶ 833, 836, 839), and the National Futures Association (id. ¶ 546) of all being the “direct and proximate” cause of their losses. Plaintiffs’ choice to plead that other Defendants undertook intentional acts to cause their losses precludes an inference that the Exchange’s allegedly 7 Plaintiffs’ reference to a co-location agreement between Peregrine and the Exchange (SAC ¶¶ 502– 04) only highlights the temporal disconnect: It was executed in 2011 (see SAC Ex. 5), three years after Plaintiffs’ money was lost. 8 Plaintiffs do allege that if the Exchange “or the clearing firm holding [Peregrine’s] account enforced its plain rules under 930,” losses to one couple would have been more limited. (SAC ¶ 508.) Of course, if that couple had not invested in futures at all, their losses would have been less. That is not causation. Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 22 of 29 18 inadequate enforcement of its margin rules did so. The Court should rely on these specific allegations about theft and fraud causing Plaintiffs’ losses to dismiss the Complaint against the Exchange. See, e.g., Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1095 (2d Cir. 1995) (affirming dismissal because “the Complaint’s attenuated allegations . . . are contradicted . . . by more specific allegations in the Complaint”); Carson Optical Inc. v. eBay Inc., 202 F. Supp. 3d 247, 255 (E.D.N.Y. 2016) (“[W]here [a] plaintiff’s own pleadings are internally inconsistent, a court is neither obligated to reconcile nor accept the contradictory allegations in the pleadings as true in deciding a motion to dismiss.”) (collecting cases). (c) Plaintiffs have failed to plausibly allege that the Exchange acted in bad faith. Plaintiffs’ CEA claim fails for yet another reason: Plaintiffs have not adequately alleged that the Exchange acted in bad faith. See 7 U.S.C. § 25(b)(4) (“A person seeking to enforce liability under this section must establish that the registered entity . . . acted in bad faith in failing to take action.”). To adequately plead bad faith, Plaintiffs must plead facts suggesting two things: “first, that the exchange acted or failed to act with knowledge; and second, that the exchange’s action or inaction was the result of an ulterior motive.” Ryder Energy Dist. Corp. v. Merrill Lynch Commodities Inc., 748 F.2d 774, 780 (2d Cir. 1984). Plaintiffs have not adequately pleaded either prerequisite. Knowledge. To adequately plead knowledge, Plaintiffs must allege that the Exchange actually knew of Peregrine’s alleged violations of its margin rules or “consciously avoided acquiring such knowledge.” Grossman, 742 F. Supp. at 853. They have not. Instead, Plaintiffs claim that the Exchange knew or should have known about the violations, because it “had a duty to investigate” and was “supposed to monitor all open positions on a daily basis to prevent under-margined accounts from remaining open.” (SAC ¶¶ 22, 282.) But if a general duty to Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 23 of 29 19 investigate and monitor records were enough, this allegation could always be made against an exchange. It would render the knowledge prong of the bad-faith requirement meaningless. Not surprisingly, Grossman found such an allegation insufficient. See 742 F. Supp. at 853 (plaintiff did not adequately plead knowledge element of bad faith by alleging “that the defendant knew or had reason to believe that there was a price distortion or manipulation”). Ulterior Motive. Plaintiffs’ motive allegations are likewise deficient. Unable to allege that the Exchange stood to benefit from helping Wasendorf, Plaintiffs suggest that the Exchange failed to act against Peregrine in order to “earn fees and maximize profits.” (SAC ¶ 507.) Again, this allegation could be made in every case; if it alone were sufficient, the burden to plead facts suggesting bad faith would be rendered a nullity. And like Plaintiffs’ conclusory knowledge allegations, it has been repeatedly rejected as insufficient to state a claim under the CEA. See, e.g., Brawer v. Options Clearing Corp., 807 F.2d 297, 303 (2d Cir. 1986) (affirming dismissal of CEA claim alleging motive was for “increased trading volumes and revenues”); Vitanza v. Bd. of Trade of N.Y.C., 2002 WL 424699, at *7 (S.D.N.Y. Mar. 18, 2002) (dismissing CEA claim where complaint contained no allegation that “self-interest or personal animus motivated” exchange in its regulatory failure). Western Capital Design, LLC v. New York Mercantile Exchange, 180 F. Supp. 2d 438 (S.D.N.Y. 2001), is instructive. There, as here, the plaintiff argued that the court could infer a bad motive from the exchange’s alleged indifference to enforcing its rules. Judge Hellerstein rejected that argument and dismissed the CEA claim with prejudice. He first noted that Ryder Energy dictates that the bad-faith “requirement is strictly applied” and referred to “the special pleading rule of Ryder Energy.” Id. at 441, 442. He then held that the plaintiff’s allegation of Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 24 of 29 20 “indifference” was insufficient because it could have been mere “negligent inattention” and thus did not alone give rise to an inference of bad faith. Id. at 442. He explained: Plaintiff’s allegation of indifferent monitoring is mere hyperbole— an effort to substitute rhetoric for the obligation to plead bad faith by specific facts. No specific facts have been pleaded to support the claim that [the exchange] acted out of “self-interest or other motive unrelated to proper regulatory concerns” in its enforcement activities. Negligence does not constitute bad faith. Id. The same is true here. The Complaint contains conclusory assertions that the Exchange’s failure to detect Peregrine’s violations of its margin rules was “blatantly unethical” (SAC ¶ 510), but those epithets are no substitute for the “specific facts” necessary to support a plausible inference of something more sinister than garden-variety negligence. Plaintiffs’ newly added allegations about Wasendorf’s relationship with Jack Sandner, a former chairman of the Exchange’s parent company (see SAC ¶¶ 454–56), add nothing to the mix. Plaintiffs do not allege any facts suggesting that the Exchange would look the other way on Peregrine’s rule violations—not that there were any—because of the relationship. As Plaintiffs themselves describe it, Messrs. Wasendorf and Sandner had a “working relationship” because they sat together on the board of the National Futures Association. (Id. ¶ 456.) Again, allegations of friendship and professional ties can be made about anyone. They do not lead to a plausible inference that the Exchange acted in bad faith by failing to enforce its rules against Peregrine, much less rules that do not apply on their face. B. Plaintiffs have failed to state any common-law claim against the Exchange. Plaintiffs assert common-law claims for unjust enrichment (Claim XXII) and intentional infliction of emotional distress (Claim XXIII) against all Defendants.9 Besides being untimely, 9 Plaintiffs also present a “claim” for “Punitive Damages” (Claim XXIV), but punitive damages are not available under the CEA here. See 7 U.S.C. § 25 (permitting punitive damages only for violating floor orders); see also Michelson v. Merrill Lynch Pierce Fenner & Smith, Inc., 669 F. Supp. 1244, 1266 Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 25 of 29 21 both claims against the Exchange should be dismissed for two independent reasons. First, the CEA provides the exclusive remedy for an exchange’s exercise of its self-regulatory functions; common-law claims are barred. Second, Plaintiffs have not even pleaded the elements of their claims, much less provided “[f]actual allegations [that are] enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). 1. The CEA bars Plaintiffs’ common-law claims. The CEA establishes “a comprehensive regulatory structure to oversee the volatile and esoteric futures trading complex,” and allowing a plaintiff to bring state-law claims against an exchange “would frustrate Congress’ intent to bring the markets under a uniform set of regulations.” Am. Agric. Movement, 977 F.2d at 1155, 1156. Courts therefore routinely find that the CEA preempts all other claims against an exchange based on insufficient regulation—like the ones Plaintiffs assert here. See, e.g., id. at 1156–57 (dismissing as preempted state-law claim against exchange accused of improperly implementing market rule); Troyer, 2017 WL 2971962 at *12 (finding fraudulent misrepresentation claim preempted by the CEA because it “directly challenges the NFA’s performance of its regulatory functions”). DGM Investments v. New York Futures Exchange is right on point. There, complaining that an exchange failed to sufficiently enforce its rules, an investment fund asserted a CEA claim and assorted common-law claims. See 2002 WL 31356362, at *1–2 (S.D.N.Y. Oct. 17, 2002). In considering the viability of the state-law claims, Judge Sweet began by thoroughly analyzing American Agriculture Movement and noting that its reasoning was adopted by the Second Circuit in Barbara v. New York Stock Exchange, Inc., 99 F.3d 49 (2d Cir. 1996). See 2002 WL (S.D.N.Y. 1987) (striking demand for punitive damages because the CEA “has limited liability to actual damages”). Nor is “Punitive Damages” a cause of action under state law. See Martin v. Dickson, 100 F. App’x 14, 16 (2d Cir. 2004) (“[T]here is no separate cause of action in New York for punitive damages.”). And it fails for the same reasons as Plaintiffs’ other state-law claims. Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 26 of 29 22 31356362, at *4–5. He then dismissed the investment fund’s state-law claims as preempted, explaining that the fund’s complaints about how the exchange should have enforced its rules “are matters for uniform federal regulation subject to review by the CFTC, not matters for review or adjudication by individual state courts.” Id. at *5. In Western Capital Design, Judge Hellerstein likewise held that “a claim under state law that implicates [an exchange’s] duties to self-police and regulate as required under the Commodity Exchange Act is pre-empted.” 180 F. Supp. 2d at 443 (citing American Agriculture Movement and Barbara and dismissing with prejudice common-law fraud claim against exchange). Here, Plaintiffs’ common-law claims against the Exchange, which rest entirely on the contention that the Exchanged failed in its regulatory obligations, should likewise be dismissed. Framing their unjust-enrichment claim as arising under both state and “federal common law” (SAC ¶ 841) does not help Plaintiffs’ cause. It is appropriate to adopt a federal common- law rule only when “a federal rule of decision is necessary to protect uniquely federal interests.” Tex. Indus. v. Radcliff Materials, 451 U.S. 630, 640 (1981). Here the CEA already protects the federal interests, delegating rule-making and enforcement authority to the Exchange and delineating the types of private rights of action that can be brought. Plaintiffs’ “federal” unjust- enrichment claims must be dismissed. See, e.g., Amato v. W. Union Int’l, Inc., 773 F.2d 1402, 1419 (2d Cir. 1985) (affirming dismissal of federal common-law unjust-enrichment claim because ERISA already provided sufficient “extensive regulatory network”). 2. Plaintiffs have failed to state a claim for unjust enrichment or intentional infliction of emotional distress. In any event, Plaintiffs have not alleged sufficient facts to plead their claims for “unjust enrichment” or “intentional infliction of emotional distress.” Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 27 of 29 23 Unjust enrichment. As a basis for relief, unjust enrichment “lies as a quasi-contract claim and contemplates an obligation imposed by equity to prevent injustice, in the absence of an actual agreement between the parties.” Georgia Malone & Co. v. Rieder, 19 N.Y. 3d 513, 516 (2012); ESI, Inc. v. Coastal Power Prod. Co., 995 F. Supp. 419, 436 (S.D.N.Y. 1998) (“[U]njust enrichment is a quasi-contractual doctrine.”). Plaintiffs fail this threshold obligation to plead that they even had a relationship with the Exchange—that is, “a relationship between the parties that could have caused reliance or inducement.” Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182–83 (2011) (affirming dismissal of unjust-enrichment claim); accord Georgia Malone, 19 N.Y. 3d at 516 (unjust-enrichment claim requires “connection between the parties that is not too attenuated”). Plaintiffs had their accounts at Peregrine, and it was Peregrine that was supposed to notify Plaintiffs of the margin calls and prevent further trading. (See, e.g., SAC ¶¶ 31, 66, 290.) Plaintiffs point to no relationship between themselves and the Exchange. Moreover, to state an unjust-enrichment claim, Plaintiffs must allege that the Exchange was enriched at Plaintiffs’ expense and “that it is against equity and good conscience to permit [the Exchange] to retain what is sought to be recovered.” Georgia Malone, 19 N.Y. 3d at 516; Mandarin Trading, 16 N.Y.3d at 183 (unjust-enrichment plaintiff must demonstrate an “equitable injustice requiring a remedy to balance a wrong”). There is, however, nothing “equitable” about foisting onto the Exchange the tab for Wasendorf’s theft, allegedly aided by numerous others but not the Exchange. Intentional Infliction of Emotional Distress. To state a claim for intentional infliction of emotional distress, Plaintiffs must plead that the Exchange engaged in “extreme and outrageous conduct.” Fischer v. Maloney, 43 N.Y. 2d 553, 557 (1978). This requirement is “rigorous, and difficult to satisfy”; it “is so difficult to reach,” in fact, that such claims are routinely dismissed Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 28 of 29 24 as a matter of law. Taggart v. Costabile, 14 N.Y.S.3d 388, 393–94 (App. Div. 2015) (dismissing intentional infliction of emotional distress claim as a matter of law, even where defendants’ conduct was “easy to condemn”). “Liability has been found only where the conduct has been so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community.” Howell v. N.Y. Post Co., 81 N.Y. 2d 115, 122 (1993). Plaintiffs’ allegation that the Exchange failed in its regulatory role for a single week in October 2008 comes nowhere close to qualifying. CONCLUSION Whether they suffered from bad investments nine years ago or lost their money to a criminal whose fraud was exposed five years ago—or both—what happened to Plaintiffs is unfortunate. But none of those events can serve as the basis for a legally viable claim against the Exchange today. Plaintiffs have already been given two opportunities to cure their pleading defects, so their Complaint against the Exchange should now be dismissed with prejudice. Dated: December 14, 2017 New York, New York O’MELVENY & MYERS LLP By: /s/ Abby F. Rudzin Abby F. Rudzin Times Square Tower 7 Times Square New York, New York 10036 Ph: (212) 326-2000 Fx: (212) 326-2061 Attorneys for Defendant Chicago Mercantile Exchange Inc. Case 1:16-cv-05508-VSB Document 117 Filed 12/14/17 Page 29 of 29