Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—2ndCir: Out-of-state customer can pursue New York statutory deceptive acts claims arising from in-state transactions, (Jun 21, 2013)

By William Zale, J.D.

A Virginia resident, who allegedly lost over $281,000 as a customer of a New York-based online foreign exchange trading platform, asserted a sufficient nexus between the trading transactions and New York to fall within the territorial reach of the New York statutes prohibiting deceptive acts and practices and false advertising, the U.S. Court of Appeals in New York City has ruled (Cruz v. FXDirectDealer, LLC, June 19, 2013, Lohier, R.). The court vacated dismissal of the New York statutory claims but affirmed dismissal of a federal RICO claim.

Hugo Cruz, a former customer of FXDirectDealer, LLC (FXDD), seeks to represent a proposed class of persons in the United States who, from January 1, 2005 to the present, contracted with FXDD to trade on its platforms and whose accounts were subject to FXDD’s allegedly dishonest trade practices. Cruz asserted claims including violations of RICO Section 1962(c) and Sections 349 and 350 of the New York General Business Law.

RICO. To establish a violation of § 1962(c), a plaintiff must show that a person engaged in (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Under the so-called “distinctness” requirement, a plaintiff must allege the existence of two distinct entities: (1) a “person”; and (2) an “enterprise” that is not simply the same “person” referred to by a different name, the court noted. The court agreed with the district court that Cruz’s RICO claim failed because the he did not allege a continuing RICO enterprise distinct from the culpable person.

Cruz alleged that FXDD is a RICO “person” that conducts the deceptive practices of an association of individuals dubbed the “FXDD Fraud Enterprise” consisting of the following: FXDD itself; Tradition Inc., FXDD’s parent company; Advanced Technologies Group, Ltd. (ATG), a former equity stakeholder in FXDD; FXDD’s chief operating officer; FXDD’s managing director and corporate counsel; software companies that develop and sell FXDD’s software; software companies and programmers who assisted FXDD in the development of its trading platforms; and “introducing brokers” who received commissions from FXDD for educating consumers about foreign exchange trading.

The court found that ATG, the software companies, and the introducing brokers were properly excluded from the alleged RICO enterprise because they were not plausibly alleged to share a common purpose to engage in a particular fraudulent course of conduct. FXDD’s corporation counsel and chief operating officer could not be part of the alleged enterprise by carrying on the regular affairs of the firm. FXDD and Tradition, as corporations that were legally separate but operated within a unified corporate structure and guided by a single corporate consciousness could not form an enterprise under Section 1962(c) separate from FXDD as the culpable person. Finally, neither FXDD or Tradition standing along could constitute an association-in-fact enterprise, the court concluded.

New York deceptive acts and practices and false advertising laws. New York General Business Law Section 349 prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state” and provides a cause of action to “any person who has been injured” by a violation of the section. Section 350 prohibits “[f]alse advertising in the conduct of any business, trade or commerce or in the furnishing of any service in this state.”

The district court held that Cruz lacked statutory standing to bring these claims because he failed to plead that the deceptive practices or relevant trading occurred in New York. The court observed that the New York Court of Appeals in Goshen v. Mutual Life Insurance Company of New York, 98 N.Y.2d 314, 324 & n.1 (2002), appears to have interpreted the limiting phrase “in this state” in Sections 349(a) and 350 to require that the transaction in which the consumer is deceived occur in New York. The court read Goshen and the cases construing it to conclude that a deceptive transaction in New York falls within the territorial reach of section 349 and suffices to give an out-of-state victim who engaged in the transaction statutory standing to sue under Section 349.

FXDD is paid in New York and refuses to disburse funds from customer accounts until it receives a “Funds Redemption Form” at its New York office, according to the court. FXDD requires that all customer communications, including the customer agreement and objections to trades, be sent to its New York office. The agreement specifies that New York law governs all disputes and provides that all suits relating to the agreement are to be adjudicated in state or federal courts located in New York. Based on these various alleged ties between the customer transactions and New York, the court was persuaded that, at this stage, some part of the underlying transaction occurred in New York State, giving Cruz statutory standing to sue for deceptive practices and false advertising under Sections 349 and 350.

The case is No. 12-1252-cv.

Attorneys: Damien H. Prosser (Morgan & Morgan, P.A.) for Hugo Cruz. Jeffrey R. Burke (Winston & Strawn LLP) for FXDirectDealer, LLC.

Companies: FXDirectDealer, LLC

Cases: Advertising RICO StateUnfairTradePractices ConnecticutNews NewYorkNews VermontNews