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Effex Capital, LLC v. National Futures Association

United States Court of Appeals, Seventh Circuit

August 13, 2019

Effex Capital, LLC, et al., Plaintiffs-Appellants,
National Futures Association, et al., Defendants-Appellees.

          Argued November 29, 2018

          Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. l:17-cv-04245 - Andrea R. Wood, Judge.

          Before Flaum, Ripple, and Manion, Circuit Judges.

          Ripple, Circuit Judge

         Effex Capital, LLC ("Effex"), brought this action alleging that the National Futures Association (the "NFA") had defamed it in documents related to a settlement between the NFA and one of its members, Forex Capital Markets, LLC ("FXCM").[1] It sought injunctive relief and damages. The district court dismissed the action, holding that Effex had failed to exhaust its administrative remedies.[2] Effex timely appealed the district court's dismissal.[3]

         For the reasons set forth more fully in the following opinion, we now affirm the judgment of the district court.[4] In the Commodity Exchange Act, 7 U.S.C. § 1 et seq., Congress has regulated comprehensively all matters relating to NFA discipline. As such, a federal Bivens remedy is unavailable.[5] Further, the Commodity Exchange Act preempts Effex's state law claims. Any remedy available to Effex must be based on the provisions of that statute.




         We begin our consideration of this matter with a summary discussion of the relevant provisions of the Commodity Exchange Act. In its current form, [6] the Commodity Exchange Act seeks to curb price manipulation, ensure the financial integrity of commodities transactions, avoid systemic risk, protect market participants from fraud or abusive sales practices, and promote responsible and fair competition within the commodities market. 7 U.S.C. § 5(b). The Commodity Exchange Act serves these public interests "through a system of effective self-regulation of trading facilities, clearing systems, market participants and market professionals under the oversight of the Commission."[7] Id. As part of this regulatory scheme, the Commodity Futures Trading Commission Act of 1974 authorized the creation of registered futures associations as self-regulatory organizations ("SRO") to complement the Commodity Futures Trading Commission's (the "Commission" or the "CFTC") regulation of commodity futures markets and their participants.[8]

         The Commodity Exchange Act requires that SROs set forth many types of regulations and rules, including rules that "provide that its members and persons associated with its members shall be appropriately disciplined ... for any violation of its rules." 7 U.S.C. § 21(b)(8). Moreover, disciplinary proceedings against members and persons permitted to register as "associate[s]"[9] of a member must follow "fair and orderly procedure[s]." Id. § 21(b)(9). This mandate includes requiring "that specific charges be brought; that such member or person shall be notified of, and be given an opportunity to defend against, such charges; that a record shall be kept; and that the determination shall include" statements setting forth the impermissible acts the member or person took, the rules violated, and penalty imposed. Id.; see also 17 C.F.R. § 170.6(b) (requiring the SRO to "[c]onduct proceedings in a manner consistent with the fundamental elements of due process").

         The statute provides for CFTC review of an SRO's disciplinary action. It requires that SROs "promptly shall give notice" of any final disciplinary action against a member or person associated with a member "to such member or person and file notice thereof with the Commission." 7 U.S.C. § 21(h)(1). Final disciplinary actions are "subject to review by the Commission on its motion, or on application by any person aggrieved by the action." Id. § 21(h)(2).[10] The accompanying regulations permit appeal to the Commission by "[a]ny party aggrieved by the final decision of the National Futures Association in a disciplinary ... action." 17 C.F.R. § 171.23(a). The regulations define a party as "any person who has been the subject of a disciplinary action ... by the National Futures Association; the National Futures Association itself; [and] any person granted permission to participate as a party pursuant to § 171.27 of these rules." 17 C.F.R. § 171.2(i). Section 171.27 provides that, "[u]pon motion of any interested person or, on its own motion, the Commission may permit, or solicit, limited participation in the proceeding by such interested person." 17 C.F.R. § 171.27(a). Interested persons include "parties and any other persons who might be adversely affected or aggrieved by the outcome of a proceeding; ... and any other person having a direct or indirect pecuniary or other interest in the outcome of a proceeding." Id. § 171.27(b). Intervention by such an interested person is appropriate "[i]f the Commission determines that participation would serve the public interest." Id. § 171.27(a). Beyond these specific regulations regarding application for Commission review of an SRO's disciplinary action, there is a general regulation that permits the Commission to "waive any rule" in § 171 "in a particular case" and "order proceedings in accordance with its direction" if waiver would "prevent undue hardship on any party or for any other good cause shown." 17 C.F.R. § 171.14. An order under this provision "shall be based upon a determination that no party will be prejudiced thereby and that the ends of justice will be served," and "[r]easonable notice" shall be "given to all parties of any action taken." Id.

         The CFTC has the power to "set aside the sanction imposed by the [SRO] and, if appropriate, remand the case to the [SRO] for further proceedings." 7 U.S.C. § 21(i)(1)(B); see also 17 C.F.R. § 171.33(a) ("Upon review, the Commission may affirm, modify, set aside, or remand for further proceedings, in whole or in part, the decision of the National Futures Association."). The Commission's decision may be appealed to the appropriate United States Court of Appeals. 7 U.S.C. § 21(i)(4) ("Any person aggrieved by a final order of the Commission ... may file a petition for review with a United States court of appeals ... .").


         The NFA is an SRO that is registered under the Commodity Exchange Act.[11] It is subject to the broad authority of the CFTC. See 7 U.S.C. § 21. This authority includes review of NFA disciplinary actions or denials of membership. Id. § 21(h).

         Effex is a closely held, foreign-currency trading firm managed and controlled by John Dittami. It operates as an institutional over-the-counter, foreign-exchange liquidity provider and engages solely in transactions with other eligible contract participants such as financial institutions or highly capitalized trading counterparts. Because of the nature of Effex's trading, it is not subject to regulation by the NFA and is therefore not a member of the NFA.[12]

         In accordance with its responsibilities under the Commodity Exchange Act, the NFA initiated an investigation into an association member, FXCM, and found that the company had engaged in several practices that violate the NFA's rules. FXCM chose to settle with the NFA, and on February 6, 2017, the NFA released several documents related to the settlement (collectively, the "FXCM Settlement Documents").[13] These documents include: (1) a complaint setting forth the NFA's allegations against FXCM; (2) a decision by the NFA Business Conduct Committee finding that FXCM committed the violations outlined in the complaint and detailing the terms of a settlement between the NFA and FXCM; (3) a publicly accessible narrative summarizing the decision; and (4) a press release announcing the decision and directing the public to the narrative posted on the NFA's website.

         The NFA's complaint against FXCM alleged that FXCM failed to comply with a litany of NFA rules. More pertinently, the NFA claimed that Effex was involved in the misconduct allegedly committed by FXCM. The resulting decision outlined the allegations in the complaint, including those involving Effex, and accepted them as true. The accompanying narrative summarized the decision, including its statements about Effex. The press release, although it did not specifically reference Effex, noted that FXCM committed numerous deceptive and abusive actions and directed the public to the narrative on the NFA's website. Effex alleges that the NFA's findings in the FXCM Settlement Documents are false and that their publication is defamatory.

         Although its investigation into FXCM implicated Effex, the NFA did not contact Effex or provide Effex with notice of the investigation. The CFTC, on the other hand, conducted its own investigation into FXCM. As part of its investigation, the Commission subpoenaed documents from Effex and took the deposition of Mr. Dittami and other Effex employees. Effex alleges that the NFA obtained documents necessary for its investigation from the CFTC despite Effex's request that its responses as a third party be kept confidential.

         On the same day that the NFA announced its settlement with FXCM, the CFTC issued its own decision about FXCM and its business practices.[14] It determined that FXCM had concealed an improper trading relationship with a "high-frequency trader" and a company the trader formed (which the Commission termed "HFT Co").[15] Although not explicitly named, the HFT Co is Effex. The CFTC found materially the same facts as the NFA did regarding Effex.

         Effex did not seek review of either the NFA's decision or the Commission's decision regarding FXCM. Rather, four months after the decisions were released, Effex filed this action against the NFA in the district court.


         On July 31, 2017, Effex brought this action against the NFA. In its federal claims, Effex alleges that the NFA violated its due process rights by not providing it with notice of the investigation or an opportunity for a hearing before the publication of the FXCM Settlement Documents. The federal claims further submit that the NFA denied Effex due process of law when it did not allow Effex access to a post-deprivation remedy. In its state-law claims, Effex alleges that the statements about it in the FXCM Settlement Documents, published by the NFA, were defamatory. Additionally, Effex alleged business tort claims and a claim under the Illinois Trade Secrets Act, 765Ill.Comp.Stat. 1065 et seq.

         Effex sought injunctive relief, asking for an order requiring the NFA to remove the FXCM Settlement Documents from its website, to delete all references to Effex, or, alternatively, to provide Effex with a "name clearing hearing."[16] It further requested an order compelling the NFA to "issue a new press release stating: (a) NFA did not make any findings against Effex or Dittami; (b) Effex was not a de facto dealing desk of FXCM; (c) Effex was not controlled by FXCM; and (d) FXCM was not ordered to make any customer restitution."[17] Effex also asked for money damages of $10, 000, 000 for lost profits and to redress its constitutional injury.

         The NFA moved to dismiss the complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).[18] With respect to the federal claims, it submitted that dismissal was proper because there is no federal Bivens remedy and Effex had not exhausted its administrative claims under the Commodity Exchange Act. As for the state-law claims, the NFA contended that all were preempted by the Commodity Exchange Act. Finally, it claimed absolute immunity from any damages because the claims were based on its disciplinary proceedings.

         The district court held that Effex failed to exhaust its remedies under the Commodity Exchange Act and dismissed without prejudice. The district court determined that the Commodity Exchange Act provides a statutorily mandated exhaustion requirement and that Effex had four avenues to pursue relief under the scheme. First, it found that Effex could have petitioned the CFTC to exercise its authority under 7 U.S.C. § 21(h)(2) to review the FXCM Settlement sua sponte because the statute permits the Commission to review an NFA decision "on its motion." Id. § 21(h)(2). Second, relying on the CFTC's decision in Paribas Futures, Inc. v. New York Mercantile Exchange, CFTC No. 90-E-3, 1990 WL 282868, at *2 (Mar. 22, 1990), [19] the district court decided that if Commission review under § 21(h)(2) is only available to aggrieved parties, Effex could have intervened to become a party under the relevant regulations. Third, citing In re Petition of Lake Shore Alternative Financial Asset Ltd., CFTC No. CRAA-07-03, 2007 WL 2751884, at *2 (Sept. 17, 2007), [20] the district court noted that the CFTC had previously suggested that a nonparty could ask the Commission to waive ...

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