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Troyer v. National Futures Association

United States District Court, N.D. Indiana, Fort Wayne Division

July 12, 2017

DENNIS TROYER, Plaintiff,
v.
NATIONAL FUTURES ASSOCIATION, Defendant.

          OPINION AND ORDER

          Susan Collins, United States Magistrate Judge

         Before 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.[1]

         For the reasons set forth below, the NFA's motion to dismiss will be GRANTED.

         I. LEGAL STANDARD

         Federal 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).

         II. FACTUAL AND PROCEDURAL BACKGROUND

         In this 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:

         In 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).

         In 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 ¶ 23).

         Later 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).

         In 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).

         In May 2012, Heneghan's registrations with Atlantis were terminated. (DE 30 ¶ 33).

         In July 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).

         In 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).

         In February 2013, unbeknownst to Troyer, the CFTC issued an order permanently barring PFG and Wasendorf from the industry. (DE 30 ¶ 36).

         At some 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).

         In 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).

         At some 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).

         In 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).

         As 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.

         III. DISCUSSION

         A. 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:

         “A 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 commodities.” Id.

         “The 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).

         “[The] 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.

         To 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 ...


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