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Commodity Futures Trading Commission v. EOX Holdings LLC

United States District Court, S.D. Texas, Houston Division

September 26, 2019

COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
EOX HOLDINGS L.L.C., and ANDREW GIZIENSKI, Defendants.

          MEMORANDUM OPINION AND ORDER

          SIM LAKE, SENIOR UNITED STATES DISTRICT JUDGE

         This action is brought by plaintiff, the Commodity Futures Trading Comission ("CFTC" or "Plaintiff"), against defendants, EOX Holdings L.L.C. ("EOX") and Andrew Gizienski ("Gizienski") (collectively, "Defendants"), for violations of the Commodity Exchange Act ("CEA"), 7 U.S.C. §§ 1-27f, and the Regulations promulgated thereunder, 17 C.F.R. parts 1-190, during the period beginning in or about August of 2013 and continuing through May of 2014 ("relevant period"). Pending before the court is the Notice of Motion to Dismiss and for Summary Judgment on Counts I and II of the Complaint as to EOX and Gizienski, and Motion to Dismiss All Counts Against Gizienski for lack of personal jurisdiction and improper venue (Docket Entry No. 23). Because this case was transferred from the Southern District of New York, Gizienski's motion to dismiss for lack of personal jurisdiction and improper venue is considered moot and withdrawn.[1] For the reasons stated below the Defendants' pending motion to dismiss and for summary judgment on Counts I and II will be denied.

         I. Factual Allegations and Procedural Background

         Plaintiff alleges that it is a federal agency "charged by Congress with the administration and enforcement of the [CEA] and the Regulations promulgated thereunder, "[2] and that defendant

EOX has been registered with the [CFTC] as an Introducing Broker ("IB") since 2009. EOX is a wholly owned subsidiary of OTC Global Holdings LP ("OTC Global"), an inter-dealer broker in the over-the-counter energy commodities. EOX executes block futures and options trades on behalf of OTC Global's affiliate companies, and all of OTC Global's individual brokers within the United States are registered with the [CFTC] as Associated Persons ("AP") of EOX.[3]

         Plaintiff alleges that at all relevant times defendant Gizienski "has been employed by Choice Power, an OTC Global affiliate company, as a broker[, ] . . . and has been registered with the [CFTC] as an AP of EOX since February 2013."[4]

         Plaintiff alleges that EOX brokers report their block trades to ICE Futures U.S. ("IFUS"), which "at all times during the relevant period . . . [was] a board of trade designated as a contract market, and self-regulatory organization. "[5] Plaintiff alleges that "[t]he unlawful conduct described in [its] Complaint was in connection with the trading of futures and options contracts listed for trading on IFUS and subject to its rules and regulations."[6]

         In pertinent part Plaintiff alleges:

17. An "order, " in the context of electronic exchange trading, is a request submitted to an exchange to buy (that is, "bid") or sell (that is, "offer" or "ask") a certain quantity (number of contracts) of a specified futures or options contract. Orders are entered into the exchange's order book. When there exists both a willing buyer and seller for a contract at a given price, a transaction occurs and is referred to as a "fill" (or a "trade" or "execution").
18. A block trade is a permissible, privately negotiated transaction either at or exceeding an exchange-determined minimum threshold quantity of futures or options contracts which is executed apart and [a]way from the open outcry or electronic markets. IFUS Rule 4.07 sets forth the requirements for executing and reporting block trades.
19. With respect to the futures and options contracts at issue in this Complaint, at all relevant times IFUS required that block trades be reported to the exchange within fifteen (15) minutes from the time of execution. Block trades outside of normal trading hours are required to be reported to the exchange no later than five (5) minutes prior to the open of the next trading session for that particular contract.
20. At all relevant times, Defendants owed duties of trust and confidentiality to EOX customers by law or rule, by agreement, and by understanding.
21. During the relevant period, EOX maintained written agreements with customers which prohibited EOX from using or disclosing confidential customer information, such as the customer's trading activity, except as necessary for the facilitation of block trades with third parties.
22. During the relevant period, Gizienski was employed by EOX pursuant to a written agreement that expressly provided for his access to confidential information relating to EOX customers, including the customers' trading histories, patterns, preferences, tendencies, and market positions. The written agreement prohibited Gizienski from revealing, disclosing, or communicating such confidential information to anyone outside of EOX.
26. At relevant times, IFUS Rule 4.02(i) provided that, in connection with the placement of any order or execution of any transaction, it shall be a violation of exchange rules for any person to disclose or divulge the buy or sell order of another person except in furtherance of executing the order or pursuant to other exceptions not applicable here.
27. With respect to block trading conducted subject to IFUS rules, a broker negotiating a potential trade for a customer may, with the customer's consent, disclose the customer's identity and whether the negotiation has ended, to one or more of the parties involved in negotiating the block trade. Parties involved in the solicitation or negotiation of a block trade are prohibited from disclosing the terms of a block trade to non-involved parties prior to the block trade being publicly reported by the IFUS.
28. As an experienced broker, Gizienski understood he was expected and obligated to maintain the confidentiality of customer information. In the course of an IFUS interview, Gizienski acknowledged that brokers are prohibited from disclosing nonpublic customer information. . . .
29. At all relevant times, EOX provided brokerage services for customers interested in purchasing or selling certain futures or options contracts via block trades. To arrange block trades on behalf of customers, brokers must generally disclose the existence of a potential buyer or seller and the buyer's or seller's interest in a particular contract. It is neither necessary nor, in the absence of a customer's consent, appropriate for EOX or its brokers to disclose such customer's identity or trading activity.
30. As a broker, Gizienski had access to material, nonpublic information about EOX customers, including their identities, the prices at which they bought or sold particular contracts, the prices at which they were interested in buying or selling particular contracts, their trading positions, and their trading patterns.
31. Over the course of the spring and summer of 2013, Gizienski sought and obtained discretionary trading authority from Customer A, a successful trader and friend with whom he socialized in Las Vegas, Nevada, Scottsdale, Arizona, and elsewhere. Gizienski also sought and obtained from EOX a waiver of the firm policy prohibiting brokers from exercising discretion over customer accounts. . . .
32. During the relevant period, Gizienski acted as a trader for Customer A while continuing to work as a broker for other EOX customers, and while continuing to have access to material, nonpublic information about EOX customers.
34. In an effort to curry favor with Customer A and prove his worth as a trader, and in violation of duties of trust and confidence owed to EOX customers, Gizienski disclosed to Customer A material, nonpublic information about other EOX customers, knowing, or in reckless disregard of the fact, that the information would be used for trading. Gizienski also traded, or attempted to trade, for Customer A while in knowing possession of material, nonpublic information relating to other EOX customers.[7]

         Plaintiff alleges that

[o]n at least twenty instances throughout the relevant period, Gizienski disclosed material, nonpublic information about other EOX customers to Customer A, not for the purpose of effecting execution of block trades for the other customers, but rather for the purpose of trading, or attempting to trade, futures or options contracts.[8]

         Plaintiff alleges that

[o]ver the course of 2013 and 2014, in addition to the prospect of becoming a trader and/or establishing an investment venture with Customer A, Gizienski received benefits from Customer A, including assorted entertainment in Las Vegas and Scottsdale, including restaurants and nightclubs, and reimbursement for tens of thousands of dollars in additional entertainment expenses, including tickets to championship boxing fights.[9]

         Plaintiff alleges:

57. During the relevant period, EOX customers communicated their trading interest to Gizienski believing he was acting solely in the capacity of a broker, when in fact, on behalf of Customer A, Gizienski was trading in the same contracts and at the same time as those customers.
58. During the relevant period, Gizienski provided customers with bid and/or ask prices without disclosing that he was doing so for the benefit of his discretionary trading on behalf of another EOX customer, and was not merely relaying the interest of third parties.
59. On more than 100 occasions, Gizienski executed block trades against other EOX customers, without their prior consent and without disclosing that he was taking the opposite side of their order for the benefit of Customer A.
60. During the relevant period, Gizienski traded, or attempted to trade on behalf of Customer A, based on confidential customer information he had access to by virtue of being an EOX broker, and further acted as a conduit of such information to Customer A.
61. At no time during the relevant period did EOX or Gizienski disclose to customers that he would be acting as a trader for the benefit of a preferred customer while continuing his role as a broker on EOX's North East Power Desk.[10]

         Plaintiff initiated this action on September 28, 2018, by filing Plaintiff s Complaint in the Southern District of New York asserting claims against EOX and Gizienski for violations of § 6(c) (1) of the CEA, 7 U.S.C. § 9(1), and Regulation 180.l(a), 17 C.F.R. § 180.l(a), arising from multiple instances in which Gizienski allegedly traded on the basis of material, nonpublic information or tipped material, nonpublic information to Customer A (Count I), [11] and for violations of Regulation 155.4(b), 17 C.F.R. § 155. 4 (b), arising from multiple instances in which Gizienski allegedly disclosed to Customer A the orders of other customers held by EOX or any of its affiliated persons when such disclosures were not necessary to the effective execution of customer orders, and Gizienski knowingly took the other side of customer orders revealed to EOX or its affiliated persons without the customer's prior consent (Count II) .[12] Plaintiff's Complaint also asserts claims against EOX for violation of§ 4g of the CEA, 7 U.S.C. § 6g, and Regulations 1.31 and 1.35 promulgated thereunder, 17 C.F.R. §§ 1.31 and 1.35 arising from EOX's alleged failure to keep records of all pre-trade communications with customers and alleged failure to prepare and keep adequate written records of customer orders (Count III), and for violation of Regulation 166.3, 17 C.F.R. § 166. 3 arising from EOX's alleged failures (1) to establish, implement, and enforce policies and procedures to detect and prevent Gizienski's misuse of confidential customer information, (2) to review Gizienski's discretionary trading, his communications with Customer A, or the brokerage services he provided to Customer A, and (3) to establish, implement, or enforce policies or procedures governing its brokers' handling of customer orders, preparation and retention of required records, and protection of confidential customer information (Count IV).

         On December 3, 2018, Defendants filed the Notice of Motion to Transfer (Docket Entry No. 20), the pending motion to dismiss and for summary judgment (Docket Entry No. 23), and the Joint Memorandum of Law of Defendants EOX Holding LLC and Andrew Gizienski in Support of Their Motion to Dismiss and for Summary Judgment on Counts I and II of the Complaint as to Both Defendants, and to Dismiss All Claims Against Gizienski ("Memorandum in Support of MD") (Docket Entry No. 24).

         On July 31, 2019, the Southern District of New York entered an Order pursuant to 28 U.S.C. § 1404(a) granting defendants' motion to transfer the action to this court (Docket Entry No. 52).

         On August 27, 2019, the court entered an Order setting an initial pretrial and scheduling conference for September 27, 2019, at 3:00 p.m. (Docket Entry No. 59).

         On August 30, 2019, Defendants filed Expedited Motion by Defendants to Postpone the Pretrial Conference Until After the Court Rules on Defendants' Motion to Dismiss and for Summary Judgment on Counts I and II of the Complaint (Docket Entry No. 65). On September 5, 2019, Plaintiff filed Plaintiff's Response in Opposition to Defendants' Motion to Postpone the Pretrial Conference Until After the Court Rules on Defendants' Motion to Dismiss and for Summary Judgment on Counts I and II of the Complaint (Docket Entry No. 68) . On the same day, the court entered an Order denying Defendants' expedited motion to postpone the pretrial conference, advising defendants that the court normally limits the parties to one dispositive motion, and directing the defendants to advise the court by September 10, 2019, whether they wished to proceed with their dispositive motion or to withdraw the motion and reserve their right to file a motion for summary judgment pursuant to the scheduling order that the court will enter at the September 27, 2019, initial pretrial and scheduling conference (Docket Entry No. 69) . On September 10, 2019, Defendants advised the court that they wish to proceed with their motion to dismiss and for summary judgment on Counts I and II of Plaintiff's Complaint (Docket Entry No. 70).

         II. Rule 12(b) (6) Provides the Apropriate Standard of Review

         Defendants argue that "[w]hen considering the Complaint and the documents referenced therein, and two undisputed facts set forth in a declaration (see 56.1 Stmt.), the Court should dismiss under Rule 12(b) (6) and grant summary judgment under Rule 5 6 for [them] on Counts I and II of the Plaintiff's Complaint."[13]

         A. Standards of Review

         A Rule 12(b) (6) motion tests the formal sufficiency of the pleadings and is "appropriate when a defendant attacks the complaint because it fails to state a legally cognizable claim." Ramming v. United States, 281 F.3d 158, 161 (5th Cir. 2001), cert. denied sub nom. Cloud v. United States, 122 S.Ct. 2665 (2002). The court must accept the factual allegations of the complaint as true, view them in a light most favorable to the Plaintiffs, and draw all reasonable inferences in the Plaintiffs' favor. Id.

         Under Federal Rule of Civil Procedure 8 (a) (2), a pleading must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." To defeat a motion to dismiss pursuant to Rule 12(b) (6) a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1974 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Igbal, 129 S.Ct. 1937, 1949 (2009) (citing Twombly, 127 S.Ct. at 1965). "The plausibility standard is not akin to a 'probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (quoting Twombly, 127 S.Ct. at 1965). "Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of entitlement to relief."' Id. (quoting Twombly, 127 S.Ct. at 1966).

         Allegations of fraud or mistake are subject to the pleading requirements of Rule 9(b). Rule 9(b) provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). "In cases concerning fraudulent misrepresentation and omission of facts, Rule 9(b) typically requires the claimant to plead the type of facts omitted, the place in which the omissions should have appeared, and the way in which the omitted facts made the representations misleading." United States ex rel. Riley v. St. Luke's Episcopal Hospital, 355 F.3d 370, 381 (5th Cir. 2004). A dismissal for failure to plead fraud with particularity is a dismissal on the pleadings for failure to state a claim. Southland Securities Corp. v. INSpire Insurance Solutions, Inc., 365 F.3d 353, 361 (5th Cir. 2004).

         When considering a motion to dismiss courts are generally limited to the complaint and its proper attachments. Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 338 (5th Cir. 2008). Courts may, however, rely on "'documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.'" Id. (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499, 2509 (2007)). If on a motion under Rule 12(b) (6), "matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56." Fed.R.Civ.P. 12(d).

         Federal Rule of Civil Procedure 56 authorizes summary judgment if the movant establishes that there is no genuine dispute about any material fact and the law entitles it to judgment. Fed.R.Civ.P. 56. See Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2552 (198 6) (interpreting the plain language of Rule 56 to mandate the entry of summary judgment "after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial"). A "party moving for summary judgment must 'demonstrate the absence of a genuine issue of material fact, ' but need not negate the elements of the nonmovant's case." Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en bane) (per curiam). "If the moving party fails to meet this initial burden, the motion must be denied, regardless of the nonrovant's response." Id.

         B. Aalysis

         Defendants contend that their pending motion

primarily presents an issue of law for this Court to decide: are Counts I and II of the Complaint precluded by the fundamental principle of agency law that when an agent represents two principals in the same transaction, the agent's knowledge is imputed to both principles and the agent does not owe a duty of confidentiality to either principal ?[14]

         Defendants argue, however, that

[t]o present this legal issue, Defendants needed to introduce two facts beyond the Complaint: (1) in the type of trading at issue here, it is customary for a broker to act on behalf of both the buyer and the seller in the same transaction, and this is well understood by the buyer and seller; and (2) a broker acting for both sides of a transaction must disclose information of one customer to another in order to match a buyer and seller to execute a trade.
Because these two facts beyond the Complaint are necessary to present the legal issue, Defendants' Motion seeks summary judgment in addition to dismissal. The Motion is fully briefed, and therefore ready for decision.[15]

         In support of their argument that they are entitled to summary judgment, defendants submit a Rule 56.1 Statement of Undisputed Facts taken almost verbatim from the Declaration of Steven Valji ("Valj i Declaration") (Docket Entry No. 2 6):

1. In block trading, it is customary for a broker or brokerage firm to act as broker for both the buyer and the seller in a transaction, and this is well understood by customers of brokers in block trading. (See Declaration of Steven Valji ("Valji Deel.") at, 6.)
2. In block futures trading, a request submitted to a broker to buy (that is, "bid") or sell (that is, "offer" or "ask") a certain quantity (number of contracts) of a specified futures or options contract constitutes an order. (Id. at 1 7.) It is necessary for the broker to disclose this information to potential counterparties in order to identify both a willing buyer and seller whom the broker can match for a transaction to occur, which is referred to as a "fill" (or "trade" or "execution"). (Id.)[16]

         Plaintiff does not dispute that brokers customarily represent parties to both sides of a block trade, and that to arrange block trades, a broker must generally disclose the existence of a potential buyer or seller and their interest in a particular contract to potential counterparties.[17] But plaintiff does dispute defendants' contention that they are entitled to judgment as a matter of law because their Rule 56.1 Statement establishes that brokers are permitted to disclose other confidential, nonpublic information such as a buyer's or seller's identity and trading history without prior consent.[18] Plaintiff also argues that defendants' "Rule 56.1 statement fails to address the CFTC s allegations or any factual issues determinative of liability."[19]

         Defendants' Rule 56.1 Statement and the Valji Declaration on which it is based make general statements about customary practices in block trading, but fail to cite evidence that bears on the specific transactions alleged in the Plaintiff's Complaint. Defendants' statements about customary practices in block trading are not capable of establishing that there is no genuine dispute about any material fact regarding specific transactions alleged in the Plaintiff s Complaint or that the law entitles them to judgment. Because neither Defendants' Rule 56.1 Statement nor the Valji Declaration on which it is based are capable of eliminating issues of material fact about specific transactions alleged in the Plaintiff s Complaint, the court concludes that at this early stage of the case before discovery has taken place, it is not appropriate to consider matters outside of the pleadings or to evaluate defendants' motion as a motion for sumary judgment under Rule 56. Accordingly, the court declines to consider Defendants' Rule 56.1 Statement and the Valji Declaration on which it is based.

         III. Analysis of Defendants' ...


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