United States District Court, N.D. Indiana, Fort Wayne Division
OPINION AND ORDER
COLLINS UNITED STATES MAGISTRATE JUDGE
the Court are cross-motions for summary judgment filed by
Plaintiff Dennis Troyer and Defendant National Futures
Association (“NFA”) on Count I of the second
amended complaint, the sole remaining claim in this case.
(ECF 91; ECF 101). In that claim, Troyer alleges that NFA
failed to enforce a rule or bylaw that it was statutorily
required to enforce, in violation of § 25(b)(2) of the
Commodity Exchange Act (“CEA”), 7 U.S.C.
§§ 1-27. The cross-motions are now ripe for
ruling. (ECF 92; ECF 102-ECF 106).
following reasons, NFA’s motion for summary judgment
will be GRANTED, and Troyer’s motion for summary
judgment will be DENIED.
8, 2016, Troyer filed a four-count complaint against NFA, a
self-regulatory organization (“SRO”) for the
futures industry; Thomas Heneghan, a broker and an NFA
associate member; Olivier Livolsi, an NFA associate member,
and Portfolio Managers, Inc. (“PMI”), an
introducing broker and NFA member, seeking to hold them
liable for an allegedly fraudulent scheme perpetuated by
Heneghan, in which Heneghan solicited and accepted funds from
Troyer for the purpose of purchasing commodities
futures. (ECF 1). Troyer contends that he has never
been able to recover any of the more than $200, 000 he
invested through Heneghan, much less receive any of the more
than $500, 000 in assets purportedly held in his account by
Heneghan. (Id.). Troyer alleged in Counts I and II
of the complaint that Heneghan and Livolsi violated the CEA;
in Count III, that PMI and NFA should be vicariously liable
for Heneghan’s and Livolsi’s violations of the
CEA; and in Count IV, that NFA failed to enforce the
October 10, 2016, Troyer filed a motion to dismiss Heneghan
and Livolsi without prejudice, which the Court granted. (ECF
9; ECF 11). On January 30, 2017, Troyer filed an amended
complaint against NFA and PMI. (ECF 30). On February 21,
2017, NFA filed a motion to dismiss for failure to state a
claim upon which relief can be granted. (ECF 34). On May 7,
2017, Troyer moved to dismiss PMI with prejudice pursuant to
a settlement agreement between the parties, which the Court
granted, leaving NFA as the sole remaining Defendant in this
case. (ECF 44; ECF 45).
12, 2017, the Court granted NFA’s motion to dismiss,
affording Troyer an opportunity to replead his claims against
NFA. (ECF 46). On August 1, 2017, Troyer filed a two-count
second amended complaint against NFA; in Count I, Troyer
restated his prior Count IV claim, failure to enforce the
CEA, and in Count II, he restated his prior Count III claim,
vicarious liability for Heneghan’s violations of the
CEA. (ECF 47). Two weeks later, NFA again moved to dismiss
Troyer’s amended complaint for failure to state a
claim. (ECF 48).
February 14, 2018, the Court granted NFA’s motion to
dismiss as to Count II, vicarious liability for
Heneghan’s violations of the CEA, but denied
NFA’s motion as to Count I, failure to enforce the CEA.
(ECF 52). The Court held a scheduling conference on March 1,
2018, setting a discovery deadline of September 1, 2018,
which was later extended to December 21, 2018. (ECF 53; ECF
80). On November 26, 2018, the Court entered a scheduling
Order agreed upon by the parties, which included dispositive
motions deadlines. (ECF 85).
December 8, 2018, Troyer timely filed his motion for summary
judgment together with a supporting memorandum and evidence
on his sole remaining claim, failure to enforce the CEA. (ECF
91; ECF 92). On February 8, 2019, NFA filed its cross-motion
for summary judgment together with a supporting memorandum
and evidence. (ECF 101-ECF 103). The parties then timely
filed their respective response and reply briefs. (ECF
judgment may be granted only if there are no disputed genuine
issues of material fact. Payne v. Pauley, 337 F.3d
767, 770 (7th Cir. 2003). When ruling on a motion for summary
judgment, a court “may not make credibility
determinations, weigh the evidence, or decide which
inferences to draw from the facts; these are jobs for a
factfinder.” Id. (citations omitted). The only
task in ruling on a motion for summary judgment is “to
decide, based on the evidence of record, whether there is any
material dispute of fact that requires a trial.”
Waldridge v. Am. Hoechst Corp., 24 F.3d 918, 920
(7th Cir. 1994) (citations omitted). If the evidence is such
that a reasonable factfinder could return a verdict in favor
of the nonmoving party, summary judgment may not be granted.
Payne, 337 F.3d at 770.
must construe the record in the light most favorable to the
nonmoving party and “avoid the temptation to decide
which party’s version of the facts is more likely
true[, ]” as “summary judgment cannot be used to
resolve swearing contests between litigants.”
Id. (citations omitted). “[A] party opposing
summary judgment may not rest on the pleadings, but must
affirmatively demonstrate that there is a genuine issue of
material fact for trial.” Id. at 771 (citing
Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986)).
as here, cross-motions for summary judgment are filed, we
look to the burden of proof that each party would bear on an
issue of trial; we then require that party to go beyond the
pleadings and affirmatively to establish a genuine issue of
material fact.” Diaz v. Prudential Ins. Co. of
Am., 499 F.3d 640, 643 (7th Cir. 2007) (quoting
Santaella v. Metro. Life Ins. Co., 123 F.3d 456, 461
(7th Cir. 1997)); see also M.O. v. Ind. Dep’t of
Educ., 635 F.Supp.2d 847, 850 (N.D. Ind. 2009).
“The contention of one party that there are no issues
of material fact sufficient to prevent the entry of judgment
in its favor does not bar that party from asserting that
there are issues of material fact sufficient to prevent the
entry of judgment as a matter of law against it.”
M.O., 635 F.Supp.2d at 850 (citation omitted);
see Zook v. Brown, 748 F.2d 1161, 1166 (7th Cir.
is, cross-motions for summary judgment do not alter each
party’s burdens in the summary-judgment analysis; each
responsive party must establish a triable issue of fact to
defeat the moving party’s cross-motion for summary
judgment. See Rhino Linings USA, Inc. v. Harriman,
658 F.Supp.2d 892, 897 (S.D. Ind. 2009); M.O., 635
F.Supp.2d at 850. “[T]he court must consider the
evidence through separate lenses, always allowing the
non-moving party the benefit of all conflicts in the evidence
and choices among reasonable inferences from that
evidence.” Rhino Linings USA, Inc., 658
F.Supp.2d at 897.
has been investing in financial products since the 1990s.
(ECF 103-4 at 11). Since the early 2000s, Troyer has invested
hundreds of thousands of dollars in financial derivatives
through NFA members and their associates, including through
brokers other than Heneghan. (Id. at 15-18). Since
that time, Troyer has been aware of NFA and has visited its
website. (Id. at 21-22).
past 20 years, Troyer has owned and operated three businesses
in Shipshewana, Indiana, and his responsibilities include
performing the bookkeeping for his businesses. (Id.
at 4, 10, 13-14). Troyer previously worked as a loan officer
at a bank, where he was responsible for performing due
diligence on loan applicants. (Id. at 5-9).
been a registered futures association with the Commodity
Futures Trading Commission (“CFTC”) under the CEA
since September 22, 1981. (ECF 103-19 ¶ 5). NFA is the
industry-wide, independent, SRO for the derivatives industry.
(Id. ¶ 5). NFA’s regulatory activities
include screening, rule-making, auditing, investigation, and
enforcement functions for the futures industry. (Id.
¶¶ 8, 14, 15, 17-20).
oversees NFA’s compliance with the regulations
governing its activities as an SRO, along with CFTC’s
delegation of responsibilities. (Id. ¶ 24). In
doing so, CFTC reviews NFA’s policies and procedures,
the work performed by NFA staff, and final orders issued in
adverse registrations actions and decisions issued in
disciplinary matters. (Id.). NFA is required to
submit all new rules and amendments to existing rules to CFTC
for review, and CFTC has the authority to approve or decline
the new or amended rule. (Id. ¶ 25).
membership consists of futures commission merchants, swap
dealers, commodity pool operators, commodity trading
advisors, introducing brokers, and retail foreign exchange
dealers. (Id. ¶ 6). Persons or entities
registered with CFTC in these capacities are required to be
“members” of NFA, and individuals associated with
such members (other than swap dealers) are required to
register with CFTC as “associated persons”
(“APs”) and be “associate members” of
NFA. (Id.). As of December 31, 2018, NFA had
approximately 3, 600 member firms and 49, 000
associates. (Id. ¶ 7).
NFA’s Registration Responsibilities
a series of delegation orders beginning in August 1983, CFTC
delegated to NFA the responsibility to process registrations
for futures commission merchants, commodity pool operators,
commodity trading advisors, and introducing brokers, along
with associated persons of those entities. (Id.
¶ 9). On August 1, 1985, with CFTC approval, NFA Bylaw
301(b) became effective, and all individuals then currently
registered as APs of CFTC became NFA associates, subject to
NFA requirements. (Id. ¶ 10). In a delegation
order effective September 30, 1985, CFTC expanded NFA’s
registration responsibilities and authorized NFA to conduct
proceedings to deny, condition, suspend, restrict, or revoke
the registration of any person applying for registration as a
futures commission merchant, introducing broker, commodity
pool operator, commodity trading advisor, and APs of such
entities. (Id. ¶ 11).
2012, NFA has granted CFTC registration and NFA membership to
approximately 5, 800 members and 99, 000 associates.
(Id. ¶ 13). The fitness standards for NFA
membership and CFTC registration are effectively the same
because NFA membership is compulsory and the effect of a
denial of NFA membership is the same as a denial of CFTC
registration. (Id.). NFA is prohibited from applying
more stringent membership fitness standards than CFTC
registration fitness standards. (Id.).
NFA’s Disciplinary Responsibilities
institute a disciplinary action against any member or
associate for violation of NFA’s compliance rules,
financial requirements, or bylaws. (Id. ¶ 17).
NFA’s compliance department conducts regulatory
examinations of members’ and associates’
compliance with NFA requirements. (Id. ¶ 18).
Those examinations can be periodic or in response to
information NFA learns from its members, CFTC, the public, or
NFA’s own internal operations. (Id.). If
NFA’s compliance department believes that the findings
of an examination or investigation warrant further
disciplinary action, it refers the matter to an internal
committee comprised of representatives of NFA’s legal
and compliance departments to determine whether to recommend
instituting a formal disciplinary action. (Id.
¶ 19). Disciplinary actions may ultimately be resolved
through settlement or through an evidentiary hearing, where a
neutral hearing panel renders a written decision.
(Id. ¶ 21).
maintained a public website
(http://www.nfa.futures.org/) since 1997.
(Id. ¶ 26). Since 1999, NFA through its website
has made available information regarding all disciplinary
actions taken since NFA’s inception in 1982, all
administrative and injunctive actions taken by CFTC since
1975, and all formal disciplinary actions issued by U.S.
futures exchanges since 1990. (Id. ¶ 27). The
website also includes other non-disciplinary information,
including registration, membership status and history,
business addresses, identities of principals, and other
assumed business names. (Id. ¶ 27). Prior to
1999, this information was available from NFA via telephone
and email inquiry. (Id. ¶ 28).
Troyer Invests Funds Through Heneghan
October 2008, Troyer received an unsolicited telephone call
from Heneghan, an associate of Statewide FX, Inc.
(“Statewide”), at the time. (ECF 103-4 at 23,
37-38). During the call, Heneghan made trade recommendations
to Troyer. (Id.).
October 2008 through March 2011, Troyer deposited more than
$160, 000 into trading accounts with Statewide, where
Heneghan was associated from 2007 to 2010, and with Atlantis
Trading Corp. (“ATC”), where Heneghan was
associated from 2010 to 2012. (Id. at 37-38, 43-44;
ECF 103-9). During this time period, Heneghan discussed with
Troyer about once a week the trades that he made on
Troyer’s behalf. (ECF 103-4 at 27, 32). Although Troyer
“didn’t know always where [he] stood with
[Heneghan], ” Troyer was still comfortable telling
Heneghan “no, ” and Heneghan did not place any
trades that Troyer did not authorize. (Id. at 34,
2008 and 2011, Troyer received account statements from the
NFA members with which he invested (Statewide and ATC), which
reflected that his investments were losing value.
(Id. at 38-42). Troyer nevertheless kept investing
through Heneghan and authorizing Henegan’s trades.
(Id. at 40, 42-44). By March 2011, the roughly $160,
000 in investments that Troyer had made through Heneghan were
effectively worthless. (Id. at 42). Because of those
losses, Troyer did not invest any more funds through Heneghan
from March 2011 to April 2013. (Id. at 45-46).
April 2011, NFA interviewed Troyer in connection with its
examination of ATC, where Heneghan was an associate and a
principal. (ECF 103-5 at 3-4; ECF 103-6 at 2-3). In that
interview, Troyer told NFA that overall his experience with
Heneghan had been very good, even though his account was down
in value. (ECF 103-5 at 3; ECF 103-6 at 2-3). Troyer also
told NFA that he spoke with Heneghan several times a week,
had received monthly account statements, did not feel
pressured to make investments, and always confirmed trades
with Heneghan prior to Heneghan placing the trades. (ECF
103-6 at 2-3). After this initial interview, NFA tried to
contact Troyer numerous times, but Troyer was unwilling to
communicate further with NFA. (ECF 103-5 at 3).
April 2013, Troyer began sending money to Heneghan
personally, purportedly so that Heneghan could make trades
authorized by Troyer and take advantage of alleged discounted
fees that were available to Heneghan as a trading firm
employee. (ECF 103-4 at 19-20, 47; ECF 47 ¶ 43). Troyer
alleges that he sent approximately $82, 000 to Heneghan from
April 2013 to April 2015. (ECF 47 ¶ 95). While Troyer
was never completely comfortable sending these funds to
Heneghan personally, he continued to do so because Heneghan
was “very convincing.” (ECF 103-4 at 48-49).
Having said that, Troyer never felt pressured in any way to
send these funds to Heneghan. (Id. at 50). Troyer
never received any statements or other documentation related
to the $82, 000, and he never asked Heneghan for any such
documentation. (Id. at 35-36).
the end of [the 2013 to 2015] time period, ” Troyer
began disbelieving Heneghan’s oral representations that
Troyer’s trading account had increased in value.
(Id. at 52-53). This was after Heneghan told Troyer
that he had made a large amount of money on one investment,
and such amount kept “climbing and climbing and
climbing” every few days, to the point that “it
was pretty much an unbelievable number.” (Id.
at 52-53). At some point in the summer of 2015, Heneghan
informed Troyer that his trading account had increased to
about $525, 000. (ECF 103-8). Troyer then directed Heneghan
to “cash out” and send him all the funds in his
trading account. (ECF 103-4 at 52-54). Troyer states that
“that’s when all hell broke loose between
[Heneghan] and [him].” (Id. at 53).
NFA’s Registration, Examination, and Disciplinary
History of Heneghan and His Associated Firms
was an AP of 14 different NFA member firms between 1983 and
2015. (ECF 92-2; ECF 103-9). On March 14, 1985, CFTC found
that Heneghan had churned a customer’s account in
violation of § 4(b) of the CEA, and Heneghan and his
employer, Madda Trading Co., were ordered, jointly and
severally, to pay the customer $6, 389, plus interest and
costs. (ECF 92-3 at 17).
NFA Bylaw 301(b) became effective on August 1, 1985, Heneghan
was an AP of NFA member Jack Carl Associates, Inc.
(“JCA”), and thus, Heneghan automatically became
an NFA associate on that date. (ECF 103-19 ¶ 29). On or
about September 27, 1985, NFA received a notice of
termination from JCA, indicating that Heneghan had
voluntarily terminated his association with JCA on August 30,
1985. (Id. ¶ 30; ECF 103-20). With the notice
of termination, JCA enclosed documentation of several former
customer complaints that it had received regarding
Heneghan. (ECF 92-5; ECF 103-19 ¶ 30; ECF
not aware of these customer complaints previously, so it
contacted JCA on October 29, 1985, for additional information
regarding the complaints. (ECF 103-2; ECF 103-19 ¶¶
30-31). During Heneghan’s time with JCA, CFTC
investigated JCA concerning whether JCA had unregistered APs
who were the subject of various customer complaints. (ECF
103-10; ECF 103-19 ¶ 32). On February 7, 1986, CFTC
informed NFA via telephone that Heneghan was not a subject of
the investigation, that the result of its investigation
“will not hinder or cause any charges to be filed
against Heneghan, ” and that the investigation
“should not prevent Heneghan from being
registered.” (ECF 103-10; see ECF 103-19
was an associate of Peregrine Financial Group, Inc.
(“PFG”), from January 22, 1999, to July 27, 2001.
(ECF 103-9 at 4). Between June 30, 2000, and September 14,
2000, NFA learned through a routine examination of PFG that
Heneghan was telling potential investors that he had never
had a customer complaint with CFTC or NFA. (ECF 92-7 at 2-3;
ECF 103-12 at 4; ECF 103-19 ¶ 34). NFA contacted PFG
about these statements and issued a letter to PFG, noting
PFG’s representation that “corrective action has
been or will be taken with respect to these items, therefore,
no further response is necessary.” (ECF 103-11;
see ECF 92-7 at 3; 103-19 ¶ 34).
January 17, 2008, NFA received a customer complaint regarding
Heneghan, alleging that Heneghan had made misleading sales
solicitations and used high-pressure sales tactics when he
was an associate of Statewide. (ECF 92-8; ECF 103-19 ¶
36; ECF 103-22). NFA conducted an investigation, which
included multiple phone interviews with the complainant, a
review of the complainant’s account documentation, and
information gathered from Statewide. (ECF 92-8; ECF 103-19
¶ 37; ECF 103-22). NFA concluded that the evidence did
not show a clear pattern of Heneghan using misleading or high
pressure sales tactics; NFA closed the matter with no further
action, stating that it would “continue to monitor
Statewide and Heneghan for any futures sales practice
problems.” (ECF 92-8 at 6; ECF 103-19 ¶ 37; ECF
103-22 at 7).
2009, NFA received a customer complaint in which the customer
alleged that Heneghan and another broker made unauthorized
trades on the customer’s behalf in 2005. (ECF 92-9; ECF
103-19 ¶ 39; ECF 103-23). The customer invested $5000,
but the account was left with just $85.81 two months later.
(ECF 92-9 at 2). NFA investigated this complaint, but it was
unable to obtain the trading authorizations indicating who
placed the trades for the customer’s account.
(Id. at 3; ECF 103-19 ¶ 19; ECF 103-23 at 4).
Consequently, NFA was unable to determine if the unauthorized
trades had been placed in the customer’s account, and
NFA closed the matter with no further action. (ECF 92-9 at 3;
ECF 103-19 ¶ 39; ECF 103-23 at 4).
7, 2010, NFA began an examination of Statewide, which
included reviewing account and company records, interviewing
customers and employees, and analyzing approximately 17
Statewide APs, including Heneghan. (ECF 92-10; ECF 103-13;
ECF 103-19 ¶¶ 41, 42; ECF 103-24). On October 26,
2010, NFA’s compliance department recommended that
NFA’s business conduct committee initiate a
disciplinary action against Statewide, its principals and
three of its APs, none of whom were Heneghan. (ECF 92-10 at
10; ECF 103-19 ¶ 42; ECF 103-25). In doing so,
NFA’s compliance committee stated:
Upon review of the firm’s monthly internal tracking of
trades placed in customer accounts by each broker (which is
used by Statewide to determine the commission earnings of
APs), NFA noted that all of the brokers appeared to place
similar trades in their customer accounts. Specifically, from
February 2010 through May 2010, NFA noted it appeared that
the majority of brokers recommend the same types of contracts
each month, most commonly the RBOB contract that were traded
as spreads, essentially doubling the commission charged to
each customer. From NFA’s analysis, it appears that the
firm was using a “template” formula regarding
what trades to place for each customer that was not based on
real market conditions.
(ECF 92-10 at 3). NFA’s compliance committee further
noted that in 2009, “477 of 504 customers (94.6%)
during the year suffered overall losses totaling $5, 041,
828, while only 27 customers (5.4%) experienced profits equal
to a total of about $56, 000.” (Id. at 2).
Heneghan’s customers were included in that calculation.
(See ECF 92-12; ECF 92-13; ECF 92-14). NFA’s
compliance committee also observed that “even though
the firm claimed to have commission rate structures of both
$79 and $59, the majority of customers were charged the $79
commission rate.” (ECF 92-10 at 3-4). In February 2010,
most of Heneghan’s trades were at the $79 rate, and in
March 2010, all of Heneghan’s trades were at the $79
rate. (ECF 92-12; ECF 92-13).
NFA’s business conduct committee initiated a
disciplinary action against Statewide on December 9, 2010,
while Statewide was in the process of voluntarily withdrawing
from NFA membership. (ECF 92-10 at 1; ECF 103-19 ¶ 42;
ECF 103-25 ¶ 5). Count 1 of the Statewide complaint
For the most part, the trade recommendations that
Statewide’s APs made to their customers were not in the
customers’ best interest and were intended, instead, to
benefit Statewide by generating high commissions. Hennequin
and Colin developed this trading strategy and instructed
Statewide’s APs to carry out this strategy through the
trade recommendations they made to their customers.
With the knowledge and encouragement of Hennequin and Colin,
Statewide’s APs routinely recommended option and bull
call option spreads to customers that had little chance of
being profitable due to their high break even points.
(ECF 92-11 ¶¶ 17-18). Heneghan was not registered
with Statewide when NFA conducted the audit, but the conduct
alleged in NFA’s complaint took place while Heneghan
was employed at Statewide. (ECF 103-19 ¶ 42). Two
principals and three APs of Statewide were named in the
complaint, but 14 other APs, including Heneghan, were not.
(ECF 92-10 at 2-3; ECF 92-11; ECF 103-25).
2010, NFA placed ATC in NFA’s enhanced surveillance
program (“ESP”), which is used to monitor the
sales solicitation of NFA members and their associates. (ECF
103-16; ECF 103-19 ¶ 47). Under the ESP, NFA’s
compliance department staff posed as prospective customers to
receive sales solicitations from the monitored NFA member or
its associates. (ECF 103-19 ¶ 48). On February 9, 2011,
in a memo to file, Mark Arnold of NFA wrote:
Per review of NFA’s Online Registration system
(“ORS”), NFA noted multiple APs who were
previously registered at Statewide . . . are currently
registered with [ATC]. As of the date of this memo, NFA noted
there are 3 APs currently registered at ATC: Robert Lewis (.
. . former [Statewide] AP), Thomas Heneghan (. . . former
[Statewide] AP), and Mogar Telesca . . . .
Given the recent disciplinary action taken against
[Statewide] . . ., NFA referred ATC to NFA’s Enhanced
Surveillance Program (“ESP”) to determine the
type of solicitation practices currently in use by the firm.
Per review of the 2 ESP Matters opened as a result of such
referral . . ., ...