Cruz v. FXDirectDealer, LLC

Citations: 855 F. Supp. 2d 89; 2012 U.S. Dist. LEXIS 26417; 2012 WL 652038Docket: No. 11 Civ. 1008(PAC)

Court: District Court, S.D. New York; February 28, 2012; Federal District Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Plaintiff Hugo Cruz filed an Amended Class Action Complaint against FXDirectDealer, LLC (FXDD) on May 31, 2011, alleging that FXDD engaged in a fraudulent scheme to manipulate trades and pricing information, resulting in losses for its customers. The complaint includes five claims: violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), New York General Business Law sections 349 and 350, breach of contract, and breach of the implied covenant of good faith and fair dealing. Cruz seeks compensatory and treble damages, injunctive and declaratory relief, as well as attorney's fees and costs. 

On August 22, 2011, FXDD filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that Cruz's RICO claim is insufficiently pleaded, failing to meet the particularity requirement for mail and wire fraud, lacking an allegation of a distinct RICO enterprise, failing to demonstrate standing due to a lack of causal connection to his losses, and being barred by the four-year statute of limitations. FXDD also contended that the state law claims are legally deficient. 

The court granted FXDD's motion to dismiss the Amended Complaint. FXDD is described as providing online off-exchange Forex trading services, allowing customers to engage in simulated trading through demo accounts, which Cruz claims were misrepresented in terms of pricing. Before initiating trading on FXDD's platform, customers must acknowledge their use of demo accounts. Cruz asserts that FXDD's website initially claimed demo accounts mirrored live accounts, which was later altered to indicate that demo pricing is only indicative and not identical to live account pricing.

Plaintiff accuses FXDD of engaging in deceptive trade execution practices that are undisclosed to customers, characterizing the trading platform as a "rigged game" manipulated via advanced administrative tools. Specific allegations include: (1) routing accounts to slow servers during profitable trades to allow FXDD to exploit potential profits; (2) generating false error messages to prevent customers from closing profitable positions; (3) creating artificial price spikes to trigger stop orders and seize profits; (4) exploiting price changes between quotes and market orders through slippage; and (5) targeting profitable customers with these tactics. Plaintiff claims these practices are self-concealing and resulted in approximately $281,170.24 in losses over two years.

Count 1 of the Amended Complaint alleges a RICO violation under 18 U.S.C. 1962(c), asserting that FXDD operated the “FXDD Fraud Enterprise” through a pattern of racketeering activity, including mail and wire fraud. The enterprise, purportedly formed around October 2002, includes FXDD, its executives, its parent company Tradition, software developers, and brokers who promote FXDD's services. The enterprise's main objective is for its members to profit from customers opening live accounts, and it is described as an association in fact under 18 U.S.C. 1961(4). Plaintiff claims that FXDD collaborated with other members to create and utilize specialized software that allows for dishonest manipulation of trade execution, furthering the goals of the fraud enterprise, which continues to upgrade its trading platform software.

The Amended Complaint identifies the FXDD Fraud Enterprise as a hierarchical organization led by Kaneti, Green, and Tradition, with Kaneti and Green managing FXDD’s financial operations and overseeing deceptive trading practices. Tradition provided initial funding and credibility to FXDD, while ATG also contributed capital and assisted in marketing FXDD. The Introducing Brokers, positioned at the base of this hierarchy, are unaware of the fraudulent practices but inadvertently promote FXDD by repeating its misleading statements, thereby enhancing the credibility of FXDD's false claims.

The Complaint alleges violations of the RICO Act through mail and wire fraud. For mail fraud, it claims FXDD breached 18 U.S.C. § 1341 by sending customer agreements that lacked complete risk disclosures, failing to inform clients about the true nature of its deceptive practices. Specific omissions included FXDD's role as a counterparty, risks associated with Forex trading, and the nature of their order execution.

Regarding wire fraud, the allegations are twofold: (1) the distribution of misleading marketing materials and advertisements from January 5, 2005, to January 31, 2011, and (2) the financial transactions resulting from their “improper marketing scheme.” The Complaint cites fifteen types of marketing activities that allegedly violated 18 U.S.C. § 1343, including false claims about FXDD not trading against clients, providing transparent pricing, and the swift execution of trades. These representations purportedly misrepresented the risks of using FXDD’s services.

The Plaintiff asserts that these acts of mail and wire fraud were deliberate attempts to defraud customers, leading them to invest in FXDD without closing their accounts or seeking refunds. The Complaint concludes that these violations constitute a "pattern of racketeering activity" under 18 U.S.C. § 1961(5), as they were interconnected and part of a fraudulent scheme aimed at deceiving and financially exploiting customers.

Counts Two through Five assert state law claims against FXDD under the New York General Business Law and contract law. Count Two alleges violations of N.Y. Gen. Bus. Law § 349, claiming FXDD engaged in unfair or deceptive practices causing harm to the Plaintiff and Class Members. Count Three presents a false advertising claim under N.Y. Gen. Bus. Law § 350. Count Four alleges breach of contract, asserting FXDD failed to execute customer orders on a “Best Efforts Basis,” did not ensure that prices and liquidity reflected prevailing interbank market conditions, and allowed manipulation of its trading systems. Count Five claims FXDD breached the covenant of good faith and fair dealing through unscrupulous acts intended to defraud customers.

Regarding the motion to dismiss standard under Fed. R. Civ. P. 12(b)(6), the court must accept all factual allegations as true and draw inferences in favor of the plaintiff. Mere conclusory statements are insufficient; factual support is necessary to make claims plausible. The RICO statute (18 U.S.C. § 1962(c)) prohibits engaging in enterprise affairs through racketeering activity, which includes mail and wire fraud. To succeed on a RICO claim, the plaintiff must demonstrate a violation of the RICO statute, an injury to business or property, and that the injury resulted from the statutory violation. Establishing a RICO violation requires proving conduct of an enterprise through a pattern of racketeering activity, defined as at least two predicate acts.

FXDD contends the Plaintiff has not sufficiently pleaded mail and wire fraud under Fed. R. Civ. P. 9(b), lacking details on how FXDD's alleged fraud misled him. To plead these frauds, the Plaintiff must show the existence of a fraudulent scheme, FXDD's intentional participation, and the use of interstate communications to advance the scheme, including demonstrating the materiality of the falsehoods involved.

A complaint alleging RICO violations based on mail or wire fraud must demonstrate the defendant's involvement in at least two acts of such fraud, as established in First Interregional Advisors Corp. v. Wolff. Additionally, these allegations must adhere to the stringent requirements of Federal Rule of Civil Procedure 9(b), which necessitates specificity regarding false statements, the context of the fraud, timing and location of the statements, and identification of those responsible. Although a plaintiff is not required to detail reliance on alleged fraudulent misrepresentations if claiming that the mails or wires were used to further a broader scheme, they must satisfy Rule 9(b) if asserting that the mailings themselves were fraudulent. In this case, the plaintiff's claims regarding Customer Agreements mailed by FXDD as containing "deceptive information" fail to meet these requirements, as the agreements included comprehensive risk disclosures, including a clear disclaimer about the lack of guarantees in trading outcomes. The plaintiff has not adequately demonstrated how the agreements and marketing statements were misleading, thus failing to support a claim under 18 U.S.C. 1341 and 1343, as well as a violation of 1962(c).

Moreover, FXDD contends that the plaintiff has not established the existence of a separate RICO enterprise, arguing that the "FXDD Fraud Enterprise" does not exist independently from the alleged racketeering activity. The RICO statute defines an "enterprise" as any legal entity or group associated in fact, which requires three structural features: a purpose, relationships among members, and sufficient longevity. The enterprise must also be distinct from the pattern of racketeering activity and the RICO "person" committing the violation. The Amended Complaint lacks allegations that its members functioned as a separate association-in-fact from the alleged RICO acts, indicating they were solely organized to facilitate FXDD's purportedly deceptive practices.

The Amended Complaint alleges that members of the FXDD Fraud Enterprise acted together for fraudulent purposes but fails to establish that the enterprise is distinct from the pattern of racketeering or from the RICO "person." The enterprise includes FXDD and its corporate officers, Tradition, ATG, software companies, and Introducing Brokers. FXDD, the sole defendant, is said to operate through its agents, Kaneti and Green, but these claims do not satisfy the distinctness requirement under 18 U.S.C. § 1962(c). Tradition, as FXDD's parent, is not a separate "person" for liability purposes. Additionally, the Introducing Brokers allegedly acted "unwittingly" in relaying FXDD’s statements, lacking intent to participate in any scheme. The court concludes that no valid enterprise exists, resulting in the dismissal of Count One with prejudice.

Regarding New York General Business Law §§ 349 and 350, the Plaintiff claims that FXDD engaged in deceptive acts and false advertising. FXDD contends that these claims fail since the alleged deceptive acts did not occur in New York, and the Plaintiff lacks standing. Both statutes require that deceptive practices occur within the state. The Plaintiff, residing in Virginia, does not allege any deceptive practices taking place in New York or that he executed trades there. Therefore, Counts Two and Three are also dismissed with prejudice.

Count Four alleges that FXDD breached customer agreements through fraudulent trading practices, including failing to execute orders on a "Best Efforts Basis," not reflecting market liquidity, and not prohibiting manipulation of trading systems.

FXDD contends that the customer agreements clearly disclaim liability for not executing orders on a "Best Efforts Basis" and adequately disclose the associated investment risks. Under New York law, a breach of contract claim requires establishing a valid contract, the plaintiff's compliance with the contract, the grounds for the defendant's breach, and resultant damages. A claim will not survive a motion to dismiss if it contradicts the contract's explicit terms. The Customer Agreement notes the high-risk nature of Forex trading and states that FXDD does not guarantee the accuracy of bid and ask prices, nor continuous availability of dealing prices and liquidity due to various factors, including technological issues and market volatility. While FXDD intends to execute orders at its discretion, it is not liable for losses from factors beyond its control, including transmission delays. This intention to act on a "best-efforts-basis" is qualified, with the customer acknowledging that FXDD may not always execute orders at the desired market level, thus waiving liability for such failures. Additionally, a three-page Risk Disclosure clarifies that FXDD does not guarantee profits or execution at specific prices, contradicting the plaintiff’s breach allegations, leading to the dismissal of Count Four with prejudice.

The covenant of good faith and fair dealing is inherently part of all contracts but does not constitute a separate cause of action if it is based on the same facts as a breach of contract claim. Count Five is deemed redundant as it relies on the same allegations as Count Four, resulting in its dismissal with prejudice.

In conclusion, Count One alleging RICO violations is dismissed with prejudice due to lack of predicate acts and enterprise existence, Counts Two and Three under N.Y. Gen. Bus. Law 349-350 are dismissed for lack of standing, and Counts Four and Five are dismissed for failure to state a valid claim.

Plaintiffs' request for attorney’s fees and costs has been denied, and the Clerk is instructed to enter judgment and terminate the case. FXDD, established in 2002 as a joint venture between Tradition (North America, Inc.) and Advanced Technologies Group, Ltd. (ATG), acquired ATG's trading platform for a 25% equity stake in FXDD, which remains a Tradition subsidiary. The Customer Agreement signed by Plaintiff Hugo Cruz is included as Exhibit C in Jeffrey Burke's Declaration. In ruling on a motion to dismiss under Rule 12(b)(6), the Court may consider attachments to the complaint, documents subject to judicial notice, and those the plaintiffs relied on. The proposed class includes all individuals in the U.S. who contracted with FXDD for foreign currency trading from January 1, 2005, to the present and were affected by alleged fraudulent practices. Neither Kaneti nor Green are defendants in this case. Under 1961(3), 'person' encompasses any individual or entity with legal or beneficial property interests. The plaintiff contends that the Supreme Court's decision in Cedric Kushner distinguishes it from Riverwoods regarding RICO liability, asserting that a corporation can be separate from its employees in this context. FXDD argues for the dismissal of the plaintiff's state law claims due to lack of subject matter jurisdiction linked to the RICO claim but is countered by the Court's diversity jurisdiction over remaining state claims. The plaintiff dismisses FXDD's standing argument as irrelevant, citing the New York choice of law provision in the Customer Agreement without legal support for this assertion. The Customer Agreement includes risk acknowledgments indicating that trading in leveraged OTC Foreign Currency Contracts is highly speculative and suited only for those who can bear the risk of loss beyond their margin deposit.