Krause v Forex Exch. Mkt., Inc.

[*1] Krause v Forex Exch. Mkt., Inc. 2006 NY Slip Op 51542(U) [12 Misc 3d 1192(A)] Decided on March 1, 2006 Supreme Court, New York County Heitler, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on March 1, 2006
Supreme Court, New York County

Luis Alfonso Krause, Copernic, Inc., Miguel Angel Rubini, Gisella Lucia, Salinas De Rubini, Andres Arata, and Gaby Llona De Arata, Plaintiffs,

against

Forex Exchange Market, Inc., ANDRES PREVOO,HENRY J.S. LEE, FOREX CAPITAL MARKETS, LLC, BIRKIN MCLAUGHLEN GROUP, INC., ALEXANDER D. LEE, FX SOLUTIONS LLC, THOMAS FREDERICK PLAUT and ROBERT CORTRIGHT, Defendants.



05-601854

Sherry Klein Heitler, J.

In this action by foreign nationals to recover damages for losses incurred in foreign currency trading, defendant Forex Capital Markets, LLC, (FXCM), moves (motion sequence 001) for an order dismissing the complaint as against it for failure to state a cause of action (CPLR 3211 [a] [7]), and on the basis of documentary evidence (CPLR 3211 [a] [1]). For the following reasons, the motion is granted.

Starting in 2002, non-moving defendant Andres Prevoo (Prevoo), who is a Peruvian citizen, a resident of New Jersey, and president of defendant Forex Exchange Markets, Inc. (FXEM), solicited several individual Peruvian investment advisors to encourage their clients to open foreign currency trading accounts with FXCM, a duly registered futures commission merchant (FCM) with offices in New York. In August 2002, FXEM entered into an introducing agreement with FXCM, whereby FXCM agreed to act as broker, and at times counterparty [FN1], on trades placed by FXEM on behalf of clients introduced by FXEM, and to share commissions. [*2]

In late 2002, the Peruvian advisors, who formed the investment advisory firm Private Investors Peru, SAC (PIP), introduced plaintiffs to defendants Prevoo and Henry J.S. Lee, who provided foreign currency trading advice through FXEM. In 2003, FXEM merged with defendant Birkin McLaughlen Group, Inc., and the accounts were transferred from FXCM to defendant FX Solutions, Inc., a duly registered commodities broker.

The individual plaintiffs, all citizens and residents of Peru, and plaintiff Copernic, Inc., a British Virgin Islands corporation represented by plaintiff Krause, opened foreign currency trading accounts with FXCM. Each plaintiff signed a client agreement and risk disclosure statement provided by FXCM. Plaintiffs authorized FXEM to act as trading agent with full discretion over their accounts with FXCM. Of the $618,000 placed in these accounts, $347,000.07 was spent on commissions, and the balance was consumed by trading losses.

Plaintiffs initially brought suit against the same parties in federal court. See Krause v. Forex Exchange Markets, Inc., 356 F. Supp. 2d 332 (S.D.NY 2005). The court dismissed the federal law claims for lack of subject-matter jurisdiction.[FN2] Id. at 337. The court declined to exercise supplemental jurisdiction over the State claims, with the exception of the aiding and abetting fraud and aiding and abetting a breach of fiduciary duty claims;[FN3] with respect to these claims, the court held that the aiding and abetting claims all of which were based upon allegations of fraud were inadequately pleaded for failure to plead the fraud elements with particularity. Id. at 339. See also FED. R. CIV. P. 9(b). The court granted plaintiffs leave to replead. Krause v. Forex Exchange Markets, Inc., 356 F. Supp. 2d at 340.

Instead, plaintiffs brought this action without any substantive amendment to the aiding and abetting claims held deficient in federal court. This complaint is virtually identical to the complaint dismissed in federal court in its factual allegations, although it relies exclusively on New York [*3]law. It alleges the following causes of action against FXCM: aiding and abetting fraud; aiding and abetting breach of fiduciary duty; unjust enrichment; breach of fiduciary duty; breach of contract; negligence; conversion; negligent misrepresentation; and vicarious liability under the doctrine of apparent authority. It also seeks an accounting as a separate cause of action.

In support of its motion to dismiss, FXCM relies on the terms of the many documents signed by plaintiffs, primarily the client agreement and risk disclosure statements, as well as the limited powers of attorney (though Copernic apparently did not sign a limited power of attorney), which granted FXCM discretion to trade plaintiffs' accounts. FXCM argues that the provisions of the client agreements and risk disclosure statement fully insulate FXCM from liability for losses on trades directed by FXEM as plaintiffs' trading agent. FXCM also argues that the federal court dismissal of the aiding and abetting causes of action is on the merits and, therefore, precludes plaintiffs' claims against FXCM.

In opposition to this motion, plaintiffs argue that: despite the preclusive effect of the federal court's decision, this court should decline to enforce the exculpatory terms of the FXCM client agreements on public policy grounds; FXCM failed to fulfill its fiduciary obligations to plaintiffs in its capacity as a futures contract merchant; FXCM was aware of alleged unlawful trading by reason of its generation of statements showing large losses in a short period of time; FXCM failed to supervise FXEM, which was allegedly its agent; and that plaintiffs, who are unsophisticated investors, relied on the superior knowledge of FXCM. Plaintiffs also argue that FXCM transferred plaintiffs' assets over a forged signature that FXCM failed to detect, and that the alleged failure of FXCM to provide plaintiffs with online access to their accounts was a proximate cause of their losses.

Plaintiffs acknowledge in their brief that the terms of the various agreements insulate FXCM from liability, absent public policy negation. The court does not agree that public policy considerations prevent enforcement of the exculpatory provisions of FXCM's client agreements.

As a futures commission merchant, FXCM plays an important and integral role in facilitating international commerce, as do speculators, who provide liquidity to the market. See generally Leist v. Simplot, 638 F.2d 283, 305 (2d Cir. 1980). There is no public policy consideration that would prevent a FCM from protecting itself against liability for the bad decisions of speculators especially speculators acting through two layers of investment advisors, here, PIP and FXEM whether in choosing trades, choosing a trading agent, or choosing to speculate in [*4]currency markets in the first place. Notably, it was PIP, plaintiffs' investment advisor, that recommended that plaintiffs commit money to foreign currency trading. The cases relied upon by plaintiff involving exculpation from liability for gross negligence or intentional wrongdoing are inapposite. See, e.g. Kalisch-Jarcho, Inc. v. City of New York, 58 NY2d 377 (1983); Van Dyke Products v Eastman Kodak Corp., 12 NY2d 301 (1963).

Paragraph 8 of the Notice to Traders in the Client agreement between FXCM and each of plaintiffs provides: "[i]n the event that Trader grants trading authority or control over Trader's account to a third party (Trading Agent) . . . FXCM shall not be responsible for any loss to Trader occasioned by the actions of the Trading Agent ... ." The court holds that this provision is enforceable.

Plaintiffs argue that FXCM breached a fiduciary duty allegedly owed to plaintiffs by failing to supervise the trading agents, failing to monitor the statements to discover alleged illegal trading activity by virtue of the large losses in a short period, and that FXCM had a duty to supervise defendants because it held them out as agents, and that it owed a fiduciary duty to plaintiffs. However, the client agreement makes clear that FXCM had no duty to supervise the trading agents. See Trader's Agreement ¶ 15, ex. B to moving affidavit; see also "Referral Dislosure," id. at 2: "FXCM does not supervise the activities of referring agent [FXEM] and assumes no liability for the representations made by [FXEM] ... FXEM is not an agent or employee of FXCM)."

Plaintiffs rely on the administrative law commodities reparation case, Tymniak, Glinski, and Wyrzykowski v. Murlas Commodities, Inc., Int'l Futures Strategists, Inc., and Bendtsen, CFTC No. 88-R36, 1989 WL 242101, affd., 1990 WL 294106, as support for their contention that the introducing agents (FXEM) were agents of FXCM and had apparent authority to act on FXCM's behalf. In Tymniak, the administrative law judge declined to enforce the provisions of the client agreements insulating the commodities broker.

At the outset, it should be noted that Tymniak was decided under the Commodities Exchange Act, the same act which the federal court decision by Judge Kaplan specifically held inapplicable to the plaintiffs herein. Moreover, the summary affirmance in Tymniak states that the administrative law judge's decision "shall neither be cited as Commission precedent in any Commission proceeding nor deemed an expression of the Commission's views on the issues raised in this case." Finally,

Tymniak was not decided under New York law, and this court declines to apply Tymniak to these facts.

FXCM's duty was to provide an honest trading platform. There is no provision in the agreements requiring FXCM to monitor [*5]client accounts. Large losses in short periods of time in highly leveraged foreign currency trading are a risk inherent in highly leveraged currency trading, which plaintiffs assumed and acknowledged in the client agreements. See Risk Disclosure Statement, ex. B to moving papers, p. 1.

The aiding and abetting fraud cause of action is dismissed, for the reasons stated by Judge Kaplan in the federal court proceeding.

C.P.L.R.§ 3211 (a) (1) also bars plaintiffs' contention that FXCM failed to detect an allegedly forged signature on a form seeking transfer of assets. There is no allegation of a requirement for a signature guaranty. Plaintiffs authorized FXCM, under the provision captioned "Authorization to Transfer Funds," to transfer any funds in their account to another regulated account in their name. See Trader's Agreement, p. 5, ex. B to moving affidavit. Thus, the conversion claim is dismissed pursuant to C.P.L.R. § 3211 (a)(1).

Inasmuch as the court holds that no public policy considerations under New York law preclude enforcement of the agreements at issue, effect must be given to those provisions that exculpate FXCM from liability for the acts of plaintiffs' trading agents.

The negligent misrepresentation cause of action is dismissed for failure to specify what representation was allegedly false. See Tajan v Pavia & Harcourt, 257 AD2d 299, 304 (1st Dept. 1999), appeal dis'd, 94 NY2d 837 (1999). Moreover, in the absence of a fiduciary relationship, there can be no cause of action for negligent misrepresentation under New York law. See Tradewinds Financial Corp. v Refco Securities, Inc., 5 AD3d 229, 230 (1st Dept 2004).

The negligence, unjust enrichment, and accounting claims also must be dismissed. Since the contracts fully define the duties owed between the parties, the negligence cause of action fails, in that it does not identify any duty outside the contracts which FXCM might conceivably have violated. See Clark-Fitzpatrick, Inc. V Long Island Ry Co., 70 NY2d 382 (1987). Similarly, there is no basis for the quasi-contractual claim of unjust enrichment, inasmuch as there was a valid contract in existence. See id. at 388. Finally, there is no basis for an accounting here absent a fiduciary duty or an inadequate remedy at law. See Cadwalader Wickersham & Taft v. Spinale, 177 AD2d 315 (1st Dept 1991).

Plaintiffs' claim with respect to the alleged failure to provide adequate internet access to their accounts is barred by C.P.L.R. § 3211 (a) (1), see Notice to Traders (id. at 1), and, in any event, would not be a proximate cause of plaintiffs' losses. There is no allegation that plaintiffs ever complained to FXCM about access to their account information. Also, the [*6]complaint alleges that, in December 2002, PIP was able to access plaintiffs' accounts online. See Complaint ¶ 80.

Accordingly, it is

ORDERED that the motion to dismiss brought by defendant Forex Capital Markets, LLC (motion sequence 001), is granted, and the complaint is dismissed, as against FXCM, with costs and disbursements to defendant FXCM, as taxed by the Clerk of the Court; and it is further

ORDERED that the clerk is directed to enter judgment accordingly; and it is further

ORDERED that counsel for the remaining parties shall appear for a conference at 2:15 p.m. on March 20, 2006, at Room 438, 60 Centre Street, New York, New York 10007.

This shall constitute the decision and order of the court.

DATED: March 1, 2006

SHERRY KLEIN HEITLER

J.S.C. Footnotes

Footnote 1: Defendant FXCM describes its role as "counterparty" as follows: "FXCM was the buyer to each Plaintiff/seller and the seller to each Plaintiff/buyer. In each trade, the Trading Agents involved represented Plaintiffs, not FXCM."

Footnote 2: Jurisdiction in the federal court proceeding had been predicated under the Commodity Exchange Act and the Commodity Futures Modernization Act of 2000, which the court held inapplicable to these plaintiffs.

Footnote 3: As to the other State claims unjust enrichment, breach of fiduciary duty, breach of contract, negligence and conversion the court declined to exercise jurisdiction because these "non-federal claims substantially predominate[] over the . . . claims over which the district court has original jurisdiction.'" Krause v Forex Exchange Markets, Inc., 356 F.Supp2d 332, 338 (S.D.NY 2005)(internal citation omitted).