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Troyer v. National Futures Association

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

September 26, 2019




         Before 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.[1] (ECF 92; ECF 102-ECF 106).

         For the following reasons, NFA’s motion for summary judgment will be GRANTED, and Troyer’s motion for summary judgment will be DENIED.


         On May 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.[2] (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 CEA.[3] (Id.).

         On 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).

         On July 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).

         On 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).

         On 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 104-ECF 106).


         Summary 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.

         A court 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)).

         “When, 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. 1984).

         That 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.


         A. Troyer

         Troyer 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).

         For the 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).

         B. NFA

         NFA has 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).

         CFTC 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).

         NFA’s 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.[4] (Id. ¶ 7).

         1. NFA’s Registration Responsibilities

         Through 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).

         Since 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.).

         2. NFA’s Disciplinary Responsibilities

         NFA may 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).

         NFA has maintained a public website ( 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.[5] (Id. ¶ 28).

         C. Troyer Invests Funds Through Heneghan

         In 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.).

         From 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, 41, 49).

         Between 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).

         In 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).

         In 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).

         “[T]owards 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).

         D. NFA’s Registration, Examination, and Disciplinary History of Heneghan and His Associated Firms

         Heneghan 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).

         When 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.[6] (ECF 92-5; ECF 103-19 ¶ 30; ECF 103-21).

         NFA was 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 ¶ 32).

         Heneghan 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).

         On 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).

         In 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).

         On June 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).

         Accordingly, 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 alleged:

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).

         Also in 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 . . ., ...

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