On March 29, 2018, Cohen Milstein obtained a path-marking victory before a three-judge panel of U.S. Court of Appeals for the Second Circuit, when the panel unanimously vacated a lower court’s dismissal of a class action against a New York high-frequency trading firm, Tower Research Capital, and its owner, Mark Gorton. The class action alleged that Tower “spoofed” prices of KOSPI 200 futures on CME Globex, an electronic exchange owned by the Chicago Mercantile Exchange, by entering orders that were not intended to be filled. The Second Circuit’s opinion held, for the first time, that trading occurs in the United States when buy and sell orders are matched here, and that such trading is subject to the Commodity Exchange Act. The Second Circuit’s reversal means the case is now in discovery.

Case Background

Cohen Milstein is representing traders who transacted in KOSPI 200 futures contracts on the “night market,” via CME Globex, between January 1, 2012 – December 31, 2012, in a class action against Tower Research Capital and Mark Gorton for violations of the Commodity Exchange Act and for unjust enrichment.

Plaintiffs allege that Defendants used fictitious trades and other “spoofing” techniques to manipulate the price of KOSPI 200 futures contracts traded on the CME Globex for their own profit.

Specifically, Tower – a flash trading firm founded and run by Gorton repeatedly entered large-volume buy or sell orders that it had no intention of fulfilling legitimately and then either immediately canceled these large-volume orders or traded those large volume contracts with itself using its algorithms and flash trading process to fill its own orders before those contracts could be matched by other traders. These strategies allowed Tower to create a false impression regarding the number of contracts available in the market, along with illusory price and volume information, and thereby manipulate the price of KOSPI 200 futures on the CME Globex. Tower’s strategy – which it utilized hundreds of times – moved the KOSPI 200 price on the CME Globex in a direction favorable to Tower which allowed it to either purchase contracts at prices lower, or sell contracts at prices higher, than were available in the market before Tower entered its fictitious large-volume buy or sell orders.

Tower then immediately repeated this strategy in the opposite direction – allowing it to immediately obtain a riskless profit by buying futures contracts at a lower price than it just paid for them or by selling futures contracts at a higher price than it had just paid for them. As part of its scheme, Tower designed its trading programs to place several layers of “quote orders” on the opposite side of the market from its trade orders to create a fictitious illusion of market interest. Tower’s quote orders were either orders to buy contracts at a price higher than the prevailing offer, or orders to sell contracts at a price lower than the prevailing bid. Tower engineered its algorithms so that these above or below market quote orders were automatically cancelled within a fraction of a second. Tower did this because it did not intend for the quote orders to be filled when it entered them, but instead intended to trick other participating traders into reacting to the false price, and volume information it created with its fraudulent and misleading quote orders.

During the class period, Tower utilized these spoofing tactics hundreds of times, illegally earning approximately US $14.1 million (₩14.1 billion Korean Wan) in profits. The illegal scheme was exposed on May 28, 2014 when government regulators in Korea issued a press release revealing that they had referred Tower and a number of its traders to the prosecutor’s office for engaging in this illegal scheme.

In February 2017, the district court found that, despite being matched on the U.S.-based CME Globex, the trades’ location for the purposes of the CEA was Korea, taking them outside the CEA’s territorial reach. The district court also found that Plaintiffs had not alleged a sufficiently direct relationship between their trades and Defendants’ trades to sustain an unjust enrichment claim under New York law.

On March 29, 2018, the Second Circuit reversed. It held that, because the trades were matched in the U.S., and because the parties normally would be bound to those trades at that point, “irrevocable liability” attached in the U.S. and the trades were domestic, not foreign. As such, they were subject to the CEA. The Second Circuit also found that Plaintiffs had alleged a sufficiently direct relationship between their trading and Defendants’ trading to sustain an unjust enrichment claim under New York law.

Case Name: Myun-Uk Choi, et al. v. Tower Research Capital LLC, et al., Case No. 1:14-cv-09912 (S.D.N.Y.)