United States District Court, N.D. Indiana, Fort Wayne Division
OPINION AND ORDER
Collins, United States Magistrate Judge
the Court is a motion to dismiss and a supporting memorandum
filed by Defendant National Futures Association (“the
NFA”) seeking to dismiss Plaintiff Dennis Troyer's
amended complaint pursuant to Federal Rule of Civil Procedure
12(b)(6). (DE 34; DE 37). Troyer has filed a response in
opposition (DE 38), and the NFA has filed a reply brief (DE
40). This motion is now ripe for ruling.
reasons set forth below, the NFA's motion to dismiss will
Rule of Civil Procedure 12(b)(6) provides for the dismissal
of a complaint, or any portion of a complaint, for failure to
state a claim upon which relief can be granted. “To
survive a motion to dismiss, 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) (quoting
Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1974
(2007)); see also Ray v. City of Chicago, 629 F.3d
660, 662-63 (7th Cir. 2011) (“While the federal
pleading standard is quite forgiving, . . . the complaint
must contain sufficient factual matter, accepted as true, to
state a claim to relief that is plausible on its face.”
(citation and internal quotation marks omitted)). A plaintiff
is required to include allegations in the complaint that
“plausibly suggest that the plaintiff has a right to
relief, raising that possibility above a ‘speculative
level'; if they do not, the plaintiff pleads [himself]
out of court.” EEOC v. Concentra Health Servs.,
Inc., 496 F.3d 773, 776 (7th Cir. 2007) (quoting
Bell Atlantic Corp., 550 U.S. at 554). Thus,
“a plaintiff must do better than putting a few words on
paper that, in the hands of an imaginative reader,
might suggest that something has happened to [him]
that might be redressed by the law.”
Swanson v. Citibank, N.A., 614 F.3d 400, 403 (7th
Cir. 2010) (citation omitted).
FACTUAL AND PROCEDURAL BACKGROUND
suit, Troyer seeks to hold the NFA, a self-regulatory
organization (“SRO”) for the futures industry,
liable for an allegedly fraudulent scheme perpetuated by
Thomas Heneghan, a broker and an associate member of the NFA.
Troyer alleges that from December 2009 to April 2015, all
while Heneghan was an associate member of the NFA, Heneghan
solicited and accepted funds from Troyer for the purpose of
purchasing commodities futures. (DE 30 ¶¶ 10-17,
26-31, 40-51). Troyer alleges that he has never received any
of the more than $500, 000 in assets purportedly held in his
account with Heneghan; nor has he been able to recover any of
the $206, 126 that he invested through Heneghan. (DE 30
¶¶ 10-17, 26-31, 40-51, 63). More particularly,
Troyer alleges the following facts in his amended complaint:
2009, Heneghan was registered as an associated person
(“AP”) of Statewide FX Inc.
(“Statewide”), an introducing broker registered
with the NFA that functioned as an introducing broker for
Vision Financial Markets LLC (“Vision”). (DE 30
¶¶ 6, 7). At Heneghan's request, Troyer opened
a commodities trading account with Vision, and in December
2009, Troyer purchased futures contracts by issuing a check
to Vision. (DE 30 ¶¶ 7, 8). In March 2010,
Heneghan's registration with Statewide was terminated.
(DE 30 ¶ 9). Heneghan, however, instructed Troyer to
work with another AP of Statewide, Oliver Livolsi, and to
continue purchasing commodities futures contracts through
Statewide in his account at Vision. (DE 30 ¶ 10). Troyer
did so, issuing seven more checks to Vision for the purpose
of purchasing commodities futures contracts. (DE 30
¶¶ 11-17). Throughout this time, Troyer received
monthly statements from Vision showing that he held futures
contracts in currencies and commodities; additionally,
Heneghan repeatedly assured Troyer that the value of his
account was increasing. (DE 30 ¶ 18).
March 2010, Heneghan applied for registration with Atlantis
Trading Corp. (“Atlantis”), an introducing broker
registered with the NFA. (DE 30 ¶ 23). The NFA approved
Heneghan's registration as an AP and principal. (DE 30
that same month, Troyer, at Heneghan's request, opened an
account with Peregrine Financial Group Inc., d/b/a PFG Best
(“PFG”), an introducing broker registered with
the NFA. (DE 30 ¶ 24). Although Heneghan had been
registered with PFG from January 1999 to July 2001, he was
not registered with PFG during the time period relevant to
this suit. (DE 30 ¶ 25). From March to October 2010,
Troyer issued six checks to PFG for the purpose of purchasing
futures contracts, mailing the checks to Heneghan's
attention at PFG's address. (DE 30 ¶¶ 26-31).
Throughout this time, Troyer received monthly statements from
PFG showing that he held futures contracts in currencies and
commodities; additionally, Heneghan assured Troyer that the
value of his account was increasing. (DE 30 ¶ 32).
December 2010, unbeknownst to Troyer, the NFA issued a
complaint charging Statewide and several of its principals
with making deceptive and misleading sales solicitations,
alleging that the NFA's audit found that approximately
95% of Statewide's customers lost money trading with
Statewide. (DE 30 ¶ 19). In July 2011, unbeknownst to
Troyer, the NFA terminated Statewide's registration and
ordered it to never reapply for NFA membership or to act as a
principal of an NFA member. (DE 30 ¶ 20).
2012, Heneghan's registrations with Atlantis were
terminated. (DE 30 ¶ 33).
2012, unbeknownst to Troyer, the Commodities Futures Trading
Commission (“the CFTC”) filed a complaint against
PFG and its owner, Russell Wasendorf, alleging fraud,
misappropriation of customer funds, violation of customer
fund segregation laws, and making false statements. (DE 30
¶ 34). The following month, unbeknownst to Troyer,
Wasendorf was indicted on 31 counts of lying to regulators.
(DE 30 ¶ 35).
October 2012, Heneghan applied for registration as an AP with
Portfolio Managers, Inc. (“PMI”), an introducing
broker registered with the NFA. (DE 30 ¶¶ 5, 37).
NFA approved Heneghan's registration. (DE 30 ¶ 37).
By this time, Heneghan had been registered with 13 different
NFA-member firms over a 27-year period. (DE 30 ¶ 38).
With the exception of PFG, none of the firms with which
Heneghan had previously been registered were still in
business, and many of those firms had been accused of serious
violations. (DE 30 ¶ 39).
February 2013, unbeknownst to Troyer, the CFTC issued an
order permanently barring PFG and Wasendorf from the
industry. (DE 30 ¶ 36).
point in early 2013, Heneghan encouraged Troyer to
participate in a new commodities trading program. (DE 30
¶ 40). Heneghan told Troyer that the program was set up
under Heneghan's trading account in order to avoid
account maintenance fees and additional commissions. (DE 30
¶ 40). Heneghan then instructed Troyer to issue checks
directly to Heneghan so that he could deposit them into the
program. (DE 30 ¶ 40). Heneghan assured Troyer that his
funds would be segregated into a separate sub-account. (DE 30
¶ 4). From April 2013 to April 2015, Troyer issued 11
checks payable to Heneghan for the purpose of purchasing
commodities futures contracts through this program. (DE 30
¶¶ 41-51). Throughout this time, Heneghan
repeatedly assured Troyer that his futures contracts were
performing well and that the value of his account was
increasing. (DE 30 ¶ 52).
September 2013, unbeknownst to Troyer, the NFA filed a
complaint against Vision alleging that it had facilitated a
commodity trading advisor in misappropriating customer funds
to trade allocations. (DE 30 ¶ 21). In June 2014,
unbeknownst to Troyer, Vision was ordered to withdraw from
NFA membership and to pay a $1.5 million fine and $2.053
million in restitution to its customers. (DE 30 ¶ 22).
point in 2015, Heneghan informed Troyer that the value of his
account exceeded $500, 000. (DE 30 ¶ 52). Troyer
instructed Heneghan to close his account and wire the funds
to him. (DE 30 ¶ 53). Heneghan, however, repeatedly made
excuses as to why he could not transfer the funds to Troyer.
(DE 30 ¶ 54). Eventually, Troyer filed a complaint
against Heneghan with the CFTC. (DE 30 ¶ 55).
Troyer's counsel also contacted Amanda Murphy, president
and chief executive officer of PMI, to notify PMI that its
AP, Heneghan, was refusing to return funds contained in
Troyer's trading account. (DE 30 ¶ 56). At PMI's
request, Troyer's counsel provided PMI with copies of the
cancelled checks issued to Heneghan while he was registered
with PMI. (DE 30 ¶ 57). PMI, however, refused to
acknowledge Troyer's claims and instead alleged that his
payments to Heneghan were intended for wagers on sporting
events. (DE 30 ¶ 58).
December 2015, the NFA filed a complaint against PMI,
Heneghan, Murphy, and two additional APs who worked with
Heneghan at PMI's Los Angeles branch. (DE 30 ¶ 59).
In the complaint, the NFA noted, among other things: (1) that
its review of the branch's customer trading activity
revealed facts indicative of abusive trading practices and
that 97% of the branch's customers had net losses; (2)
that 98% of Heneghan's customers had net losses and, on
average, lost 94% of their investment; (3) that Heneghan
routinely made misleading and deceptive sales solicitations,
exaggerated profit potential, minimized risk of loss, and
failed to disclose that 97% of the branch's customers
lost money trading with PMI; (4) that Murphy failed to
adequately supervise the branch to ensure that it complied
with the NFA's sales practice rules; and (5) that Murphy
failed to apply heightened supervision to Heneghan, given
that he had previously worked at several firms, including
Statewide, that were the subject of prior disciplinary
actions for sales practice fraud. (DE 30 ¶ 62).
stated earlier, Troyer has never received any of the more
than $500, 000 in assets allegedly held in his account with
Heneghan, nor has he been able to recover any of the $206,
125 that he invested through Heneghan. (DE 30 ¶ 63). On
May 8, 2016, Troyer filed the instant case against Heneghan,
Livolsi, PMI, and the NFA, alleging various violations under
the Commodities Exchange Act (“the CEA”), 7
U.S.C. §§ 1 et seq. (DE 1). On January 30,
2017, Troyer filed an amended complaint, dismissing Heneghan
and Livolsi and advancing four claims against PMI and the
NFA. (DE 30). In Counts 1 and 2 of his amended complaint,
Troyer alleges that PMI and the NFA are vicariously liable
for Heneghan's purported violations of §§ 6b(a)
and 6b(e) of the CEA and its related regulations. (DE 30
¶¶ 64-89). In Count 3, Troyer advances a claim
against the NFA pursuant to § 25(b)(2) of the CEA,
alleging that NFA failed to enforce a rule or bylaw that it
was statutorily required to enforce. (DE 30 ¶¶
91-101). In Count 4, Troyer advances a state law fraud claim
against the NFA under Indiana Code § 35-43-5-3(a)(2),
Indiana's criminal deception statute, and §
34-24-3-1, Indiana's Crime Victims' Compensation Act.
(DE 30 ¶¶ 102-108). On May 7, 2017, Troyer
voluntarily dismissed PMI from this suit (DE 44), leaving the
NFA as the sole Defendant.
An Overview of Commodities Futures Contracts, the CEA, the
NFA, and the CFTC It is helpful to begin with a brief
overview of commodities futures contracts, the CEA, the NFA,
and the CFTC:
commodity futures contract is a contract to buy (or sell) a
standard quantity of a particular commodity at a specified
price and time in the future.” Commodity Futures
Trading Comm'n v. Risk Capital Trading Grp., Inc.,
452 F.Supp.2d 1229, 1235 (N.D.Ga. 2006). “The owner of
a futures contract is exposed to risk beyond the purchase
price of the futures contract.” Id. “If
he still owns the contract at maturity, he would be forced to
purchase (or sell) the specific commodity at the price set in
the contract or to meet his obligation through alternative
means.” Id. “Two types of investors
purchase commodity futures contracts: hedgers and
speculators. Hedgers buy futures contracts to minimize (or
transfer) risk and to lock in a price certain for the
underlying commodity; speculators buy futures contracts to
take on risk in the hopes of realizing capital gains on their
investments.” Id. at 1235 n.6.
“[S]peculators (especially retail investors . . .)
typically do not hold commodity futures contracts to
maturity; speculators purchase futures contracts to make a
profit, not to take actual delivery of a large quantity of
CEA governs the trading of commodity futures contracts, and
grants to the [CFTC] the authority, in large measure, to
implement the regulatory regime established therein.”
Am. Agric. Movement, Inc. v. Bd. of Trade of Chi.,
977 F.2d 1147, 1150 (7th Cir. 1992), abrogated on other
grounds by Time Warner Cable v. Doyle, 66 F.3d 867
(1995). “The CEA has been described as a
‘comprehensive regulatory structure to oversee the
volatile and esoteric futures trading complex.'”
Vitanza v. Bd. of Trade of N.Y., No. 00 CV
7393(RCC), 2002 WL 424699, at *3 (S.D.N.Y. Mar. 28, 2002)
(quoting Sam Wong & Son, Inc. v. N.Y. Mercantile
Exch., 735 F.2d 653, 661 (2d Cir. 1984)). “Section
22 of the CEA expressly provides for a private right of
action, explicitly enumerating the exclusive circumstances
under which a private litigant may assert a right of action
for violations of the CEA or CFTC regulations.”
Id. (citing 7 U.S.C. § 25(b)(5)); see Klein
& Co. Futures, Inc. v. Bd. of Trade of New York, 464
F.3d 255, 259 (2d Cir. 2006) (“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(a) relates to claims against
persons other than registered entities and registered futures
associations.” Klein & Co. Futures, Inc.,
464 F.3d at 259 (citing 7 U.S.C. § 25(a)).
“Section 22(b) deals with claims against [registered]
entities and their officers[, ] directors, governors,
committee members and employees.” Id.;
see 7 U.S.C. § 25(b).
NFA is a Registered Futures Association which, pursuant to
the [CEA] § 17, 7 U.S.C. § 21, functions as the
futures industry's self-regulatory organization[,
]” that is, an SRO. Nicholas v. Saul Stone &
Co., LLC, 224 F.3d 179, 181 n.6 (3d Cir. 2000); see
also Commodity Futures Trading Comm'n v. R.J. Fitzgerald
& Co., 310 F.3d 1321, 1326 n.3 (11th Cir. 2002)
(“[The NFA] is a congressionally authorized futures
industry [SRO].”). The NFA operates under the oversight
of the CFTC, the federal government's regulator for the
futures industry. See U.S. Commodity Futures Trading
Comm'n v. Altamount Glob. Partners, LLC, No.
6:12-cv-1095-Orl-31TBS, 2014 WL 644693, at *3 (M.D. Fla. Feb.
19, 2014). “The purpose of the NFA is to assure high
standards of business conduct by its [m]embers and to protect
the public interest.” R.J. Fitzgerald &
Co., 310 F.3d at 1326 n.3. “[The NFA] performs
screening to determine fitness to become and remain a member
of the NFA, establishes and enforces certain rules and
standards, audits and investigates members, and conducts
arbitration in futures disputes.” Nicholas,
224 F.3d at 181 n.6. “Membership in the NFA is
mandatory for all entities conducting business on U.S.
futures exchanges.” Commodity Futures Trading
Comm'n v. Levy, 541 F.3d 1102, 1104 n.4 (11th Cir.
2008); see also Nicholas, 224 F.3d at 182.
further its goal of creating and implementing a comprehensive
program for self-regulation of the commodity futures
industry, “[the] NFA is required to adopt rules
governing the conduct of its membership.” MBH
Commodity Advisors, Inc. v. Commodity Futures Trading
Comm'n, 250 F.3d 1052, 1056 (7th Cir. 2001).
“Pursuant to its statutory mandate, the NFA has adopted
numerous rules governing member conduct.” Id.
(citation omitted). “These rules are subject to [the
CFTC's] approval and must provide standards governing the
sales practices of NFA members.” Id. (citing 7
U.S.C. § 21(p)(3); 17 C.F.R. § 170.5). “In
addition, these rules must be ‘designed to prevent
fraudulent and manipulative acts and practices, to promote
just and ...