Futures & Derivatives Law

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1 REPORT Reprinted with permission from Futures and Derivatives Law Report, Volume 37, Issue 7, K2017 Thomson Reuters. Further reproduction without permission of the publisher is prohibited. For additional information about this publication, please visit July 2017 Volume 37 Issue 7 The Journal on the Law of Investment & Risk Management Products Futures & Derivatives Law THE EXTRATERRITORIAL REACH OF THE COMMODITY EXCHANGE ACT IN THE WAKE OF MORRISON AND DODD-FRANK By Michael L. Spafford and Daren F. Stanaway* I. Introduction When a statute gives no clear indication of an extraterritorial application, it has none. 1 This seemingly simple, straightforward canon a longstanding principle of American law 2 has challenged American courts for decades. 3 Far from a clear-cut inquiry, it leaves courts to determine what qualifies as Congress s affirmative and clearly expressed intent. 4 In the recent past, when faced with congressional silence, numerous courts sought to divin[e] what Congress would have wanted if it had thought of the situation before the court. 5 That approach proved unpredictable and inconsistent, 6 however, and in Morrison v. National Australia Bank Ltd., a decision addressing the transnational reach of Section 10(b) of the Securities Exchange Act of 1934 ( Exchange Act ), 7 the Supreme Court put an end to it, in favor of preserving a stable background against which Congress can legislate with predictable effects. 8 The Morrison Court found that an affirmative indication... that [a statute] applies extraterritorially 9 is required as clear evidence of congressional intent 10 to overcome the presumption against extraterritoriality. Mere statutory silence on the issue is not enough. 11 Morrison did not put to rest the extraterritoriality issue, however. Rather, in the wake of Morrison, and the subsequent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ), 12 important questions remain. Principal among them, and the focus of this article, is whether and how Morrison and Dodd-Frank impacted the extraterritorial reach of other statutes, 13 and the ability of other agencies to bring claims arising from extraterritorial conduct under those statutes in particular, the Commodity Futures Trading Commission s ( CFTC s ) ability to pursue violations of the Commodity Exchange Act ( CEA ). 14 Under what circumstances may the CFTC assert in a U.S. court CEA claims premised upon extraterritorial activities? And further, to what extent should the CFTC have the ability to do so, given the scope of its existing authority? Although courts have not yet had occasion to assess the precise contours of the extraterritorial reach of the CEA in suits brought by the CFTC, as opposed to private plaintiffs, both the text of the CEA and recent jurisprudence in private plain-

2 July 2017 Volume 37 Issue 7 Futures and Derivatives Law Report tiffs cases suggest that the CFTC generally may not pursue CEA claims stemming from allegedly fraudulent or manipulative conduct occurring abroad at least insofar as that conduct concerns transactions executed extraterritorially or on non- U.S. exchanges regardless of their impact upon the United States. II. Morrision and Dodd-Frank Morrison involved the question of whether Section 10(b) of the Exchange Act provides a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges. 15 The Court parsed the language of the statute and answered in the negative, overruled a long line of circuit court decisions to the contrary, and held that Section 10(b) applies to only transactions in securities listed on domestic exchanges, and domestic transactions in other securities. 16 Displeased with Morrison, Congress acted swiftly. In July 2010, just weeks after the Supreme Court decided Morrison, Congress passed Dodd-Frank. 17 Dodd-Frank constituted Congress s primary response to the U.S. financial crisis, and as such, extraterritoriality was not [its] principal focus. 18 Nonetheless, Congress included language in Dodd-Frank to make the extraterritorial applicability of Section 10(b) clear. Congress amended the Exchange Act, as well as the Securities Act of 1933 ( Securities Act ) 19 and the Investment Advisers Act of 1940 ( Investment Advisers Act ), 20 to include new subsections governing their Extraterritorial application. 21 These additions afforded U.S. courts jurisdiction over suits alleging violations of enumerated sections of these statutes, if brought by the Securities and Exchange Commission ( SEC ) or the U.S. Department of Justice ( DOJ ) and arising from either (1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States. 22 In passing Dodd-Frank, Congress spoke with unmistakable clarity: the SEC or DOJ may allege certain Exchange Act, Securities Act, or Investment Advisors Act violations stemming from specified extraterritorial conduct, effectively abrogating Morrison. 23 Yet Dodd-Frank s extraterritoriality provisions made no reference to other statutes, leaving unchanged Morrison s anti-extraterritoriality pronouncement as it applies to them. 24 III. Dodd-Frank s Specific Grant of Extraterritorial Application Does Not Extend to Claims Brought by the CFTC Under the CEA. The CEA... contains nothing on its face that suggests extraterritorial application and is silent as to its extraterritorial reach. 25 [N]either the CEA nor its legislative history specifically authorizes extraterritorial application of the statute. Instead, the statute is silent on this issue and shows neither a [c]ongressional intent to apply the CEA to foreign agents nor a wish to restrict the statute to domestic activities. 26 Accordingly, although Morrison dealt with Exchange Act claims, not CEA claims, courts have not hesitated to apply its presumption against extraterritoriality to claims arising under the CEA, in cases commenced by both private plaintiffs and 2 K 2017 Thomson Reuters

3 Futures and Derivatives Law Report July 2017 Volume 37 Issue 7 the CFTC. 27 In Loginovskaya v. Batratchenko, for example, the court held that Morrison s presumption against extraterritoriality applies with full force to Plaintiff s claims under the CEA, since the presumption is appropriately applied in all cases. 28 Thus, in order for the CEA to be applicable, the implicated fraud prohibited by the [CEA] must be domestic. 29 Although Loginovskaya post-dated both Morrison and Dodd-Frank, the claims at issue in the case stemmed from conduct pre-dating Dodd- Frank. 30 Because the Dodd-Frank extraterritoriality provisions do not apply retroactively, 31 the Loginovskaya court had no occasion to consider Dodd-Frank s impact, if any, upon the CEA claims before it. Another court recently addressed that issue, however, and in doing so, extended the Loginovskaya rationale to post-dodd-frank conduct. In re Foreign Exchange Benchmark Rates Antitrust Litigation involved a number of CEA claims, including claims for (1) manipulation under CEA 4b(a), 4c(a), 9(a) and 22(a), 7 U.S.C. 6b(a), 6c(a), 13(a)(2) and 25(a); (2) principal-agent liability under CEA 2(a)(1), 7 U.S.C. 2(a)(1); (3) aiding and abetting manipulation under CEA 13c(a), 7 U.S.C. 13; and (4) manipulation by false reporting and by fraud and deceit under CEA 6(c)(1), 22, 7 U.S.C. 9, 25 and CFTC Rule 180.1(a). 32 The allegations stemmed from conduct that occurred both before and after Dodd-Frank s passage. 33 The plaintiffs contended that claims arising out of transactions on foreign-based exchanges should be dismissed because the CEA does not apply extraterritorially. 34 The court agreed 35 and did not distinguish between pre- and post-dodd- Frank conduct. Instead, the court first cited Morrison for the proposition that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States, 36 then relied upon the Second Circuit s affirmance in Loginovskaya to note that because the CEA is silent as to extraterritorial reach, courts must presume it is primarily concerned with domestic conditions. 37 The Foreign Exchange plaintiffs conceded that the CEA does not apply extraterritorially, but then contended that exchanges accessible in the United States with the CFTC s express permission essentially, foreign exchanges... made available to American investors through electronic trading platforms accessible on the Internet nonetheless constitute domestic transactions under the CEA. 38 The court rejected that argument, holding that the investor s location [in the United States] at the time of placing his order does not disturb the conclusion that the transaction occurred on the foreign exchange, and that [t]hese types of transactions fall within Loginovskaya s holding that the CEA does not apply to transactions conducted outside of the United States. 39 In so holding, the Foreign Exchange court made clear that Dodd-Frank did not disturb Morrison s applicability to the CEA and specifically acknowledged that the CEA does not reach allegedly manipulative activity occurring abroad, in connection with transactions on foreign exchanges even if a plaintiff accesses those exchanges from within the United States. Even more recently, the court in Sullivan v. Barclays PLC expressly held that [t]he CEA is subject to Morrison s analysis with respect to pre- and post-dodd-frank conduct again in reliance upon Loginovskaya. 40 The court dis- K 2017 Thomson Reuters 3

4 July 2017 Volume 37 Issue 7 Futures and Derivatives Law Report missed CEA allegations premised on trades plaintiffs made on foreign exchanges through terminals located in the United States, and held that those did not constitute domestic transactions under the CEA. 41 In doing so, however, the court noted that the CEA draws a distinction between the extraterritoriality limits on a private action and enforcement actions brought by the CFTC itself, 42 thereby leaving open the possibility that the reach of the CFTC could extend beyond that of private plaintiffs. 43 Regardless, however, Sullivan reaffirmed the viability of Morrison as applied to CEA claims. Stated simply, Dodd-Frank superseded Morrison only to the extent that it expanded the applicability of the three referenced statutes (and the SEC s and DOJ s ability to bring suit under them) to certain extraterritorial activities beyond those already deemed permissible under Morrison. With those exceptions, Morrison s general pronouncements regarding limitations on the extraterritorial reach of U.S. statutes remain intact. This accords with established canons of statutory interpretation. Indeed, where Congress includes particular language in one section of a statute but omits it in another... it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion. 44 Dodd-Frank s express references to the Exchange Act, Securities Act, and Investment Advisers Act (but not the CEA) in its extraterritoriality provisions evidence Congress s intent not to extend those provisions to the CEA. 45 Congress clearly knew how to 46 amend the CEA to extend its extraterritorial application if it wanted to do so; by not doing so, it clearly and expressly 47 left the CEA unchanged. This conclusion is further bolstered by the fact that Congress amended other portions of the CEA and granted additional authority to the CFTC when it passed Dodd-Frank. 48 Thus, any argument that amendment of the CEA or the powers of CFTC were not on Congress s radar screen when it passed Dodd-Frank lacks teeth. 49 Accordingly, the CFTC s authority to bring actions under the CEA is limited to domestic conduct. Morrison and its progeny remain in full force as applied to CEA claims, notwithstanding the subsequent passage of Dodd-Frank. IV. The CFTC s Authority Under the CEA is Largely, but Not Exclusively, Limited to Domestic Transactions. Even absent the extension of express extraterritorial jurisdiction in Dodd-Frank, the CFTC is not without authority to pursue CEA claims stemming from certain extraterritorial activities. As noted in Loginovskaya, the language of the CEA and the Exchange Act differs, and [i]n a post- Morrison universe... determining whether actionable conduct falling within a given statute is domestic in nature presents complications for provisions whose language departs from that of 10(b). 50 Accordingly, the precise language of the CEA and how courts have applied it warrants examination. As an initial matter, jurisprudence regarding the extent to which Dodd-Frank impacted the extraterritorial reach of the CEA for claims brought by the CFTC, as opposed to private plaintiffs, is sparse, and few courts have considered the issue. A recent Florida district court case sheds some light on the issue, however. CFTC v. Vision Financial Partners, LLC involved seven CEA claims brought by the CFTC, including a 4 K 2017 Thomson Reuters

5 Futures and Derivatives Law Report July 2017 Volume 37 Issue 7 claim in connection with a swap under the CEA s anti-manipulation provision, 7 U.S.C. 9(1), against a company and its key man stemming from post-dodd-frank trades executed on three foreign trading platforms located in Israel, Cyprus, and the UK. 51 The defendants operated in, and committed the alleged misconduct from, Florida and relied upon Morrison to argue that the CFTC lacked authority to bring suit to the extent that it concerns foreign purchasers of instruments traded on foreign exchanges. 52 The court rejected that argument, distinguishing Morrison on the ground that that case dealt with the Exchange Act, and at the time of the decision, the Exchange Act permitted suits only concerning domestic transactions those made in the United States or involving securities listed on American exchanges. 53 The Vision Financial Partners court noted that the CEA, unlike the Exchange Act provision at issue in Morrison, does contain an affirmative indication that it applies to extraterritorial transactions, at least concerning suits brought by the [CFTC] itself. 54 The court highlighted one CEA provision, 7 U.S.C. 6(b)(2), which permits the [CFTC] to adopt rules and regulations proscribing fraud, and other rules, even if they concern instruments or transactions made... or to be made [on or] subject to the rules of a board of trade, exchange, or market located outside the United States, so long as that fraud or other regulated behavior is committed by any person located in the United States. 55 The court then found the defendants arguments under Morrison inapposite because the CFTC alleged that they committed misconduct in the United States, from Florida. 56 Notably, although the CEA provision highlighted in Vision Financial Partners permits the CFTC to promulgate certain rules proscribing fraud with respect to transactions executed outside the United States, including on foreign exchanges, any such rules may apply only when the persons engaging in the misconduct are located in the United States when they engage in fraud or manipulation. Vision Financial Partners says nothing about whether the CFTC may pursue purely extraterritorial conduct under the CEA post-dodd-frank. The decision affords no indication that the CFTC could pursue wrongdoers for fraudulent or manipulative activity committed abroad, in connection with transactions executed on foreign exchanges, for example even if the counterparties to those transactions accessed those exchanges from the United States, as in Sullivan. Accordingly, Vision Financial Partners does not obviate the CEA s inapplicability to most extraterritorial conduct. Courts have established a two-part test for deciding questions of extraterritoriality. 57 First, courts examine whether Congress clearly expressed its intent that a statute apply extraterritorially. 58 Second, absent such an affirmative indication, courts presume that a statute applies only domestically and then determine which domestic conduct the statute regulates. 59 With the exception of the provisions discussed in further detail herein, the CEA largely lacks an explicit grant of extraterritorial effect 60 under the first prong of this test and is primarily concerned with domestic conditions. 61 The CEA contains a lengthy section outlining the scope of the CFTC s jurisdiction, for example, which grants the CFTC exclusive jurisdiction... with respect to accounts, agreements... and transactions involving swaps or contracts of sale of a commodity for future delivery... traded or executed on a contract market desig- K 2017 Thomson Reuters 5

6 July 2017 Volume 37 Issue 7 Futures and Derivatives Law Report nated pursuant to section 7 of this title or a swap execution facility pursuant to section 7b-3 of this title or any other board of trade, exchange, or market, and transactions subject to regulation by the Commission pursuant to section 23 of this title, except as otherwise provided by Dodd- Frank. 62 The CEA also specifies the types of agreements, contracts, and transactions over which the CFTC does, and does not, have jurisdiction. Namely, the CFTC has jurisdiction over an agreement, contract, or transaction that is (1) a contract of sale of a commodity for future delivery (or an option on such a contract), or an option on a commodity (other than foreign currency or a security or a group or index of securities), that is executed or traded on an organized exchange; (2) a swap; or (3) an option on foreign currency executed or traded on an organized exchange that is not a national securities exchange registered pursuant to [the Exchange Act]. 63 These provisions govern trading on U.S. exchanges and do not discuss extraterritorial application. 64 Similarly, Section 4c of the CEA renders it unlawful for any person to offer to enter into, enter into, or confirm the execution of a transaction... involving the purchase or sale of any commodity for future delivery (or any option on such a transaction or option on a commodity) or swap if the transaction is used or may be used to (A) hedge any transaction in interstate commerce in the commodity or the product or byproduct of the commodity; (B) determine the price basis of any such transaction in interstate commerce in the commodity; or (C) deliver any such commodity sold, shipped, or received in interstate commerce for the execution of the transaction. 65 Section 4b of the CEA, too, governs unlawful actions, rendering it unlawful to make any contract of sale of any commodity for future delivery, or swap, that is made... to cheat or defraud or willfully... deceive or attempt to deceive the other person. 66 Section 9 of the CEA further provides that it is a felony for, among other items: (1) [a]ny person registered or required to be registered under this chapter, or any employee or agent thereof, to embezzle, steal, purloin, or with criminal intent convert to such person s use or to the use of another, any money, securities, or property... which was received by such person... to margin, guarantee, or secure the trades or contracts of any customer or accruing to such customer as a result of such trades or contracts or which otherwise was received from any customer, client, or pool participant in connection with the business of such person; (2) [a]ny person to manipulate or attempt to manipulate the price of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, or of any swap... ; and (3) [a]ny person knowingly to make, or cause to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder... which statement was false or misleading with respect to any material fact, or knowingly omit any material fact required to be stated therein or necessary to make statements therein not misleading. 67 These provisions contain[] nothing on [their] face that suggests extraterritorial application. 68 To the contrary, Section 4b expressly states that it does not apply to any activity that occurs on a board of trade, exchange, or market, or clearinghouse for such board of trade, exchange, or market, located outside the United States... involving any contract of sale of a commodity for future delivery that is made, or to be made, on or subject 6 K 2017 Thomson Reuters

7 Futures and Derivatives Law Report July 2017 Volume 37 Issue 7 to the rules of such board of trade, exchange, or market. 69 Having established the absence of an explicit grant of extraterritorial application under the first prong of the extraterritoriality inquiry, courts will look to see what domestic conduct does and does not fall within the reach of the CEA s prohibitions. Indeed, it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States, and thus the presumption against extraterritoriality, to have any meaning, must limit the statute s application to those domestic activities that are the objects of the statute s solicitude, that the statute seeks to regulate. 70 That said, despite the CEA s domestic focus, the CFTC s authority remains broad, and it does not lack the ability to pursue CEA violations with foreign ties. Indeed, the presumption of non-extraterritoriality is not always dispositive when a statute regulates domestic events and the facts of a case allege sufficient domestic activities to state a claim. 71 In implementing the second prong of the extraterritoriality analysis, courts first examine the focus of congressional concern in enacting the CEA that is, whether the focus of a statutory provision is domestic conduct, domestic transactions, or some other phenomenon localized to the United States. 72 Most of the CEA s antifraud provisions are transaction-based. 73 In evaluating whether a CEA violation occurs under those provisions, Morrison s presumption against extraterritoriality applies, and courts will apply Morrison s transactional test to determine whether the purchase or sale [of the commodity or futures contract] is made in the United States, or involves a [futures contract or commodity] listed on a domestic exchange that gave rise to the alleged fraud. 74 Stated simply, the CEA affords causes of action for conduct arising from (1) trades executed on U.S. exchanges, 75 and (2) commodities in interstate commerce that is, domestic purchases or sales of commodities and futures contracts. 76 The CEA, like the Exchange Act, is primarily concerned, not with the place where the deception originates, but with the regulation of [commodities and futures contracts] listed on domestic exchanges. 77 Thus, the plaintiff must bring suit based on transactions occurring in the United States, such that the transaction at issue the conduct underlying the suit [] occurred within the United States. 78 To meet this rubric, a domestic transaction that is not executed on a U.S. exchange must involve either (1) the transfer of title in the United States, or (2) the incurrence of irrevocable liability, such as liability to pay for or deliver the commodity or futures contract, in the United States. 79 These same principles and interests underscore both the civil and criminal provisions of the CEA. For this reason, courts have acknowledged that the presumption against extraterritoriality does apply to criminal statutes, except in situations where the law at issue is aimed at protecting the right of the government to defend itself. 80 The purpose of the CEA, like that of the Exchange Act, is to prohibit [c]rimes against private individuals or their property, 81 not to protect the U.S. government s right to defend itself. Thus, the Morrison presumption against extraterritoriality applies to criminal cases, and the CEA s reach remains the same regardless of whether liability is sought criminally or civilly. 82 Aside from the CEA s transaction-based provisions, the CEA contains other provisions governing registered persons and swaps, whose extrater- K 2017 Thomson Reuters 7

8 July 2017 Volume 37 Issue 7 Futures and Derivatives Law Report ritorial breadth exceeds that permitted under Morrison and its progeny: First, Section 4o of the CEA makes it unlawful for a commodity trading advisor, associated person of a commodity trading advisor, commodity pool operator, or associated person of a commodity pool operator, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly (A) to employ any device, scheme, or artifice to defraud any client or participant or prospective client or participant; or (B) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant. 83 Courts have acknowledged that this provision appears to reach[] more broadly than Morrison s domestic transaction test, in that it focuses on the conduct of commodity trading advisors and associated persons, as U.S. registered persons, without requiring that any transactions in question have an express connection with the United States, other than use of the mails or other means of interstate commerce. 84 This leaves open the possibility that Section 4o could regulate the conduct of certain registered persons in other countries. 85 Second, the CEA permits the CFTC to adopt rules and regulations proscribing fraud and requiring minimum financial standards, the disclosure of risk, the filing of reports, the keeping of books and records, the safeguarding of customers funds, and registration with the Commission by any person located in the United States... who engages in the offer or sale of any contract of sale of a commodity for future delivery that is made or to be made on or subject to the rules of a board of trade, exchange, or market located outside the United States, its territories or possessions. 86 Although this does not address extraterritorial conduct in the traditional sense, the Vision Financial Partners court construed this provision to permit CFTC enforcement actions arising from wrongdoing committed by persons while located in the United States, even if the title transfers or incurrence of irrevocable liability did not occur in the United States (and thus otherwise might be deemed extraterritorial ). 87 Third, the CEA provides that its provisions governing swaps, enacted through Dodd-Frank, 88 and their implementing regulations, shall not apply to activities outside the United States unless those activities (1) have a direct and significant connection with activities in, or effect on, commerce of the United States; or (2) contravene CFTC rules or regulations promulgated to prevent the evasion of any provision of the CEA enacted by Dodd-Frank. 89 Thus, the CEA carves out an exception to the Morrison antiextraterritoriality presumption with respect to swaps, to the extent that swaps-related activities have a direct and significant impact on U.S. commerce. The CFTC has interpreted this provision as a clear expression of congressional intent that the swaps provisions of Title VII of the Dodd-Frank Act apply to activities beyond the borders of the United States when certain circumstances are present. 90 Congress enacted this legislation in the wake of the U.S. financial crisis, to reduce systemic risk (including risk to the U.S. financial system created by interconnections in the swaps market), increase transparency, and promote market integrity within the financial system by (1) providing for comprehensive regulation and registration of swap dealers; (2) imposing clearing and trade ex- 8 K 2017 Thomson Reuters

9 Futures and Derivatives Law Report July 2017 Volume 37 Issue 7 ecution requirements; (3) creating rigorous recordkeeping and data reporting regimes; and (4) enhancing the CFTC s rulemaking and enforcement authorities over all registered entities, intermediaries, and swap counterparties subject to the CFTC s oversight. 91 In particular, the swaps carve-out sought to address [t]he potential for cross-border activities to have a substantial impact on the U.S. financial system, as exemplified by the failures and near-failures of U.S. financial giants AIG, Lehman Brothers, and Bear Stearns precipitated in part by their swaps transactions with foreign affiliates and other foreign entities. 92 Pursuant to Dodd-Frank s mandate, the CFTC subsequently adopted rules regulating clearing, transparency and competition, registration and compliance, risk control, and reporting associated with swaps. 93 In July 2013, the CFTC issued interpretive guidance ( Interpretive Guidance ) regarding the cross-border application of these rules, and the extent to which they apply to transactions involving non- U.S. persons. 94 Therein, in outlining the extraterritorial reach of the new CEA swaps provisions, the CFTC construed the direct connection with U.S. activities requirement to mandate only a reasonably proximate causal nexus and rejected a transaction-by-transaction analysis in favor of evaluating swap activities... as a class or in the aggregate. 95 Similarly, the CFTC construed the term U.S. person to include persons who, individually or in the aggregate, could satisfy the direct and significant connection with U.S. activities jurisdictional requirement set forth in the CEA; namely, both persons located within the United States and those domiciled or [that] operate outside the United States... whose swap activities nonetheless have a direct and significant connection with or effect on U.S. commerce, including foreign branches of U.S. swap dealers. 96 In December 2013, three trade associations challenged the Interpretive Guidance in D.C. District Court, alleging that it constituted an arbitrary and capricious substantive interpretation of the CEA s extraterritoriality provision. 97 The court dismissed the associations challenges, concluding that Congress has clearly indicated that the swaps provisions within Title VII of the Dodd-Frank Act including any rules or regulations prescribed by the CFTC apply extraterritorially whenever the jurisdictional nexus in 7 U.S.C. 2(i) is satisfied. 98 Notably, Dodd-Frank s amendments to the CEA extraterritoriality provisions governing swaps do not mirror its grant of extraterritorial application to the securities laws. 99 Evidently, then, in passing Dodd-Frank, Congress did not seek a return to pre-morrison precedent with respect to CEA swaps provisions; rather, Congress crafted a new, separate standard governing their extraterritorial reach. 100 Given this disparity, jurisprudence addressing the extraterritorial reach of securities laws affords an imperfect analogy, and courts will need to further define what jurisdictional nexus constitutes a direct and significant connection with or effect on U.S. commerce in evaluating the reach of CEA swaps provisions. Nonetheless, Congress s decision to specifically state that those provisions have limited extraterritorial application suggests that their reach extends beyond that afforded to other CEA provisions under Morrison that is, beyond trades made on U.S. exchanges, title transfers in the United States, and transactions incurring irrevocable liability in the United States. K 2017 Thomson Reuters 9

10 July 2017 Volume 37 Issue 7 Futures and Derivatives Law Report In sum, the CFTC s ability to bring claims arising from extraterritorial conduct is largely limited to claims arising from transactions involving U.S. exchanges 101 or U.S. persons. However, mere tangential involvement of a U.S. person or U.S. exchange, without more, is insufficient. The CFTC s ability to pursue claims arising from extraterritorial conduct by non-u.s. persons or not involving a U.S. exchange is further limited to those few swaps-related circumstances in which a direct and significant impact on the United States occurs nonetheless. 102 Like the United States, foreign countries regulate their domestic... exchanges and... transactions occurring within their territorial jurisdiction. And the regulation of other countries often differs from ours as to what constitutes fraud, what disclosures must be made, what damages are recoverable, what discovery is available in litigation, what individual actions may be joined in a single suit, what attorney s fees are recoverable, and many other matters. 103 Expanding the CFTC s authority, and the reach of the CEA, beyond existing parameters could risk infringing upon the jurisdiction of foreign regulators and conflicting with foreign laws. 104 In addition, it would present an element of unfairness for business activities taking place abroad, in that individual and corporate actors would have no reasonable expectation of being hauled into U.S. court for those foreign activities. 105 Instead, should their activities be fraudulent or deceptive, these foreign actors should be required to answer to foreign regulatory authorities, which have ample powers to pursue violations occurring abroad. V. Conclusion Although Congress declined to expand the extraterritorial reach of the CEA in the same manner in which it amended the securities laws in Dodd-Frank, it did not leave the CFTC without recourse to pursue foreign entities. Indeed, Congress s choice to exclude the CEA from Dodd- Frank s extraterritoriality provisions appears to have been well-reasoned and deliberate, and the existing statutory regime affords the CFTC ample ammunition to pursue individuals and entities that violate the CEA through domestic transactions, including transactions executed on U.S. exchanges. That said, the CFTC may not pursue wholly extraterritorial conduct, including fraud or manipulation occurring abroad with respect to non-u.s. exchanges, under the CEA. Extending the CEA beyond its current parameters would risk conflicts with foreign regulators and laws and threaten to infringe upon the jurisdiction of the CFTC s international counterparts. To the extent that American entities engage in commodities trades on foreign exchanges and suffer injuries arising from fraud or manipulation not covered by the CEA, they are not without recourse; indeed, they may seek assistance from foreign regulators, thereby preserving the integrity of the separation between U.S. and foreign authorities and ensuring that the CFTC does not overstep its bounds and inappropriately transform into an international regulatory body. ENDNOTES: *Michael L. Spafford is a partner in the White Collar Defense practice of Paul Hastings LLP. Mr. Spafford represents companies, committees of the board of directors, officers and directors, and other individuals in connection with government investigations, enforcement proceedings brought by the Department of Justice, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Energy 10 K 2017 Thomson Reuters

11 Futures and Derivatives Law Report July 2017 Volume 37 Issue 7 Regulatory Commission, and other federal, state, and local government enforcement entities, and related parallel litigation. In particular, Mr. Spafford has represented several companies and hedge funds, executives, and traders in connection with numerous government investigations of trading of natural gas, power, crude oil, natural gas liquids, gasoline, ethanol, and other commodities. Mr. Spafford also currently represents clients involved in multiple government investigations of alleged manipulation of Libor and other benchmarks referenced in connection with various derivatives. Mr. Spafford is featured in Chambers USA, White Collar Crime & Government Investigations (District of Columbia) ( ), The Best Lawyers in America, Derivatives and Futures ( ), and Super Lawyers, Washington, D.C., Criminal Defense ( ). Daren F. Stanaway is a senior associate in the White Collar Defense practice of Paul Hastings LLP. Her practice focuses on white collar litigation and defense and government investigations and enforcement initiatives. Ms. Stanaway represents prominent individuals, corporations, and financial institutions in federal and state court litigation and administrative actions, and in connection with investigations by the Department of Justice, the Securities and Exchange Commission, the Federal Energy Regulatory Commission, the Commodity Futures Trading Commission, and congressional committees. Her practice has included pretrial and appellate briefing in numerous federal district and appellate courts, in the white collar, securities, and environmental fields. Ms. Stanaway earned her J.D. from Harvard Law School, where she received the Dean s Scholar Prize. She graduated with a B.A., magna cum laude, Phi Beta Kappa, from Harvard College. Ms. Stanaway is admitted to practice law in Massachusetts and the District of Columbia, and before the United States Supreme Court. 1 Morrison v. Nat l Austl. Bank Ltd., 561 U.S. 247, 255 (2010). 2 EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991), superseded by statute on other grounds, as stated in Arbaugh v. Y & H Corp., 546 U.S. 500, (2006). 3 See generally William S. Dodge, Understanding the Presumption against Extraterritoriality, 16 Berkeley J. Int l L. 85, (1998). 4 Benz v. Compania Naviera Hidalgo, S.A., 353 U.S. 138, 147 (1957). 5 Morrison, 561 U.S. at Id. at U.S.C. 78j(b) (prohibiting the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange... [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement any manipulative or deceptive device or contrivance... ). (1993). 8 Morrison, 561 U.S. at Id. at Smith v. United States, 507 U.S. 197, See Morrison, 561 U.S. at 255, 261 ( using congressional silence as a justification for judgemade rules violates the traditional principle that silence means no extraterritorial application ). 12 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No , 124 Stat (2010). 13 Several courts have mistakenly confused this issue whether a given statute may apply extraterritorially, such that the allegations the plaintiff makes entitle him to relief with [s]ubject matter jurisdiction, which constitutes a court s power to hear a case. Morrison, 561 U.S. at 254 (citations and internal quotation marks omitted). [T]he question of whether a statute can be applied extraterritorially essentially asks how far a statute s prohibitions reach, whereas subject matter jurisdiction involves a court s ability to adjudicate claims under the statute in question. CFTC v. Garofalo, No. 10 C 2417, 2010 U.S. Dist. LEXIS , at *14 (N.D. Ill. Dec. 21, 2010) (citation omitted). Courts have made clear that the CEA is subject to an independent jurisdictional ground under a federal court s general jurisdiction over acts of K 2017 Thomson Reuters 11

12 July 2017 Volume 37 Issue 7 Futures and Derivatives Law Report Congress regulating commerce. Id. (citing 28 U.S.C. 1337; Tamari v. Bache & Co. (Lebanon) S.A.L., 730 F.2d 1103, 1106 n.7 (7th Cir. 1984)). Accordingly, this analysis focuses upon the CEA s extraterritorial reach, not federal courts subject matter jurisdiction U.S.C. 1-27f. 15 Morrison, 561 U.S. at Id. at 267; see id. at The Court further elaborated that the domestic transactions requirement involves whether the purchase or sale is made in the United States. Id. at See Dodd-Frank, Pub. L. No , 124 Stat (2010). 18 Richard W. Painter, The Dodd-Frank Extraterritorial Jurisdiction Provision: Was it Effective, Needed or Sufficient?, 1 Harv. Bus. L. Rev. 195, 196, 199 (2011). Commentators have deemed the Dodd-Frank extraterritoriality provision awkwardly drafted and an afterthought. Id. at U.S.C. 77v(a), (c) U.S.C. 80b Dodd-Frank, Pub. L. No , 929P(b)(1)-(3), 124 Stat. 1376, (2010). 22 Id. 929P(b)(2) (applicable to the Exchange Act). The subsections applicable to the Securities Act and the Investment Advisers Act contain substantially similar language. See id. 929P(b)(1), (3). 23 See generally Jennifer Wu, Morrison v. Dodd-Frank: Deciphering the Congressional Rebuttal to the Supreme Court s Ruling, 14 U. Pa. J. Bus. L. 317 (2011). 24 See, e.g., Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659, (2013) (applying Morrison s presumption against extraterritorial application to private plaintiffs Alien Tort Statute (28 U.S.C. 1350) claim arising from conduct undertaken outside of the United States). 25 Loginovskaya v. Batratchenko, 936 F. Supp. 2d 357, 372 (S.D.N.Y. 2013), aff d, 764 F.3d 266 (2d Cir. 2014); see also Rohrer v. FSI Futures, Inc., 981 F. Supp. 270, 276 (S.D.N.Y. 1997) ( Federal commodities and securities laws... are silent regarding the issue of extraterritorial jurisdiction over cases of alleged fraud. ). However, with the passage of Dodd-Frank, the CEA was amended to afford the CFTC jurisdiction over certain extraterritorial activities, as discussed further infra. 26 Garofalo, 2010 U.S. Dist. LEXIS , at *17 (citation omitted). 27 See, e.g., Loginovskaya, 936 F. Supp. 2d at ; Starshinova v. Batratchenko, 931 F. Supp. 2d 478, 485 (S.D.N.Y. 2013) (dismissing private plaintiffs CEA claims because the transactions occurred abroad, and the Morrison presumption against extraterritoriality applies to the CEA ); Garofalo, 2010 U.S. Dist. LEXIS , at *13-19 (acknowledging that Morrison recently abrogated the conduct and effects test previously used to determine extraterritoriality and holding that [t]he similarities underlying the Securities Exchange Act and the CEA lead the Court to conclude that Morrison s... test should also be applied under the CEA ). 28 Loginovskaya, 936 F. Supp. 2d at 366, 372 (emphasis in original). 29 Id. at See id. at (detailing conduct at issue between 2006 and 2009). 31 SEC v. Battoo, 158 F. Supp. 3d 676, (N.D. Ill. 2016) (Dodd-Frank Section 929P(b), which contains the extraterritoriality provisions, does not apply retroactively to any pre-dodd- Frank enactment conduct ) (emphasis in original); cf. Painter, supra note 18, at ( Can the SEC or DOJ use Section 929P [of Dodd- Frank] to pursue fraudulent conduct in connection with securities transactions outside the United States before the effective date of Dodd- Frank? Probably not. ); see also SEC v. Wyly, 950 F. Supp. 2d 547, 562 n.104 (S.D.N.Y. 2013) (acknowledging that Dodd-Frank Section 929O, which amended another section of the Exchange Act, does not apply retroactively ). 32 In re Foreign Exch. Benchmark Rates Antitrust Litig., No. 13 Civ. 7789, 2016 U.S. Dist. 12 K 2017 Thomson Reuters

13 Futures and Derivatives Law Report July 2017 Volume 37 Issue 7 LEXIS , at *67 (S.D.N.Y. Sept. 20, 2016). 33 See id. at *16 (discussing class period extending from 2003 through 2013). 34 Id. at *93. 71). 35 Id. 36 Id. (quoting Morrison, 561 U.S. at 255). 37 Id. (quoting Loginovskaya, 764 F.3d at Id. at *94-95 (internal quotation marks omitted). 39 Id. at * Sullivan v. Barclays PLC, No. 13-cv-2811, 2017 U.S. Dist. LEXIS 25756, at *87-91 (S.D.N.Y. Feb. 21, 2017) (acknowledging that a private plaintiff under the CEA must demonstrate that the transfer of title or the point of irrevocable liability... occurred in the United States to avoid Morrison s extraterritoriality bar) (quoting Loginovskaya, 764 F.3d at 274); see id. at *14 (referencing alleged misconduct occurring between 2005 and March 31, 2011). Several other courts recently reached similar conclusions. See, e.g., Choi v. Tower Research Capital LLC, No. 14 CV 9912, 2017 U.S. Dist. LEXIS 18174, at *1-2, *9-13 (S.D.N.Y. Feb. 8, 2017) (declining to apply the CEA extraterritorially to transactions executed on a Korean securities exchange in 2012 and dismissing associated CEA claims with prejudice); MBC Fin. Servs. v. Boston Merch. Fin., LLC, No. 15-cv-00275, 2016 U.S. Dist. LEXIS , at *6, *30-32 (S.D.N.Y. Oct. 4, 2016) (holding a direction to wire transfer money to the United States, where plaintiff failed to demonstrate the title transfer of a swap or commodity or incurrence of irrevocable liability in the United States, insufficient to demonstrate a domestic transaction under the CEA based on conduct occurring in 2014: The wire transfer of funds to a bank account in New York were actions needed to carry out the transactions, and not the transactions themselves.... The direction to wire transfer money to the United States is insufficient to demonstrate a domestic transaction. ) (quoting Loginovskaya, 764 F.3d at 275). 41 Sullivan, 2017 U.S. Dist. LEXIS 25756, at * infra. 42 Id. at * This possibility is discussed in further detail 44 Keene Corp. v. United States, 508 U.S. 200, 208 (1993) (quoting Russello v. United States, 464 U.S. 16, 23 (1983)). 45 Cf. FCC v. NextWave Pers. Commc ns, Inc., 537 U.S. 293, 302 (2003) ( where Congress has intended to provide regulatory exceptions to provisions of the Bankruptcy Code, it has done so clearly and expressly ); Franklin Nat l Bank of Franklin Square v. New York, 347 U.S. 373, 378 (1954) ( We find no indication that Congress intended to make this phase of national banking subject to local restrictions, as it has done by express language in several other instances. ). 46 See Meghrig v. KFC W., Inc., 516 U.S. 479, 485 (1996) ( Congress... demonstrated in CERCLA that it knew how to provide for the recovery of cleanup costs, and... the language used to define the remedies under RCRA does not provide that remedy. ); Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, (1994) (finding no aiding and abetting liability under Exchange Act provision because Congress knew how to impose aiding and abetting liability when it chose to do so and did not employ the requisite language in the statute at issue) NextWave Pers. Commc ns, 537 U.S. at 48 See, e.g., Dodd-Frank, Pub. L. No , 713(b)-(c), , 124 Stat. 1376, (2010). 49 See Keene, 508 U.S. at 208 (acknowledging courts duty to refrain from reading a phrase into the statute when Congress has left it out ). 50 Loginovskaya, 936 F. Supp. 2d at CFTC v. Vision Fin. Partners, LLC, 190 F. Supp. 3d 1126, (S.D. Fla. 2016). 52 Id. at 1128, Id. at In response to Morrison, Dodd- Frank subsequently amended the Exchange Act K 2017 Thomson Reuters 13

14 July 2017 Volume 37 Issue 7 Futures and Derivatives Law Report to apply extraterritorially in certain circumstances, as set forth supra. 54 Vision Fin. Partners, 190 F. Supp. 3d at 1131 (emphasis in original). 55 Id. (quoting 7 U.S.C. 6(b)(2)(A)). The court also highlighted a second provision of the CEA, 7 U.S.C. 13a-1, which permits the [CFTC] to sue over any [act or] practice constituting a violation of any provision of [the Commodity Exchange Act] or any rule, regulation, or order thereunder. Id. (quoting 7 U.S.C. 13a- 1(a)). 56 Id. 57 In re LIBOR-Based Fin. Instruments Antitrust Litig., 935 F. Supp. 2d 666, 695 (S.D.N.Y. 2013), vacated and remanded on other grounds by Gelboim v. Bank of Am. Corp., 823 F.3d 759 (2d Cir. 2016). 58 Id. 59 Id. at * Garofalo, 2010 U.S. Dist. LEXIS , 61 Loginovskaya, 764 F.3d at 272 (quoting Morrison, 561 U.S. at 255) U.S.C. 2(a)(1)(A). However, nothing in the CEA supersede[s] or limit[s] the jurisdiction of either the SEC or other regulatory authorities under the laws of the United States or any State, or restrict[s] the SEC or other authorities from carrying out their duties and responsibilities in accordance with such laws. Id. 63 Id. 2(c)(2)(A). 64 However, the CEA also affords the CFTC, together with the SEC, certain regulatory authority to address security futures products traded on foreign exchanges [t]o the extent necessary or appropriate in the public interest to promote the protection of investors and the maintenance of fair and orderly markets by issuing rules, regulations, or orders as are necessary and appropriate to permit the offer and sale of a security futures product traded on or subject to the rules of a foreign board of trade to United States persons. Id. 2(a)(1)(E). 65 Id. 6c(a)(1). 66 Id. 6b(a). 67 Id. 13(a). 68 Loginovskaya, 936 F. Supp. 2d at 372. The references to interstate commerce in the CEA are insufficient to establish extraterritorial applicability. See Starshinova, 931 F. Supp. 2d at 486 (because even statutes that contain broad language in their definitions of commerce that expressly refer to foreign commerce do not apply abroad... the reference to interstate commerce in [the CEA] does not indicate [that the CEA] was intended to apply abroad ) (citation omitted) (emphasis in original) U.S.C. 6b(d) (emphasis added). 70 In re LIBOR, 935 F. Supp. 2d at 696 (quoting Morrison, 561 U.S. at ) (internal quotation marks omitted). 71 Garofalo, 2010 U.S. Dist. LEXIS , at * Loginovskaya, 764 F.3d at 272 (quoting Morrison, 561 U.S. at 266) (internal quotation marks omitted). 73 See, e.g., 7 U.S.C. 6b, 6c(a)-(b), 13(a)(2), Garofalo, 2010 U.S. Dist. LEXIS , at *18-19 (citation and internal quotation marks omitted) (applying the Morrison transactional test to claims under 7 U.S.C. 6c(a)-(b) and noting that the CEA s provisions in this case are concerned with where the underlying options contracts were actually traded, not [defendants ] locations at the times the trades were made ); see Loginovskaya, 764 F.3d at 272 ( Given that CEA 22 [7 U.S.C. 25] limits the private right to suits over transactions, the suits must be based on transactions occurring in the territory of the United States, and Morrison s domestic transaction test in effect decides the territorial reach of CEA 22 ); In re LIBOR, 935 F. Supp. 2d at 696 (CEA Section 9(a), 7 U.S.C. 13(a)(2), clearly focuses on commodities in interstate commerce and futures contracts traded on domestic exchanges ); see also Tamari, 730 F.2d at 1106, 1108 ( the [CEA] creates a comprehensive regulatory scheme premised on control over domestic futures exchanges and the trading of 14 K 2017 Thomson Reuters