Thursday, June 20, 2013

NY consumer protection standing exists when deceptive transaction occurred in NY

Cruz v. FXDirectDealer, LLC, --- F.3d ----, 2013 WL 3021904 (2d Cir.)

Cruz appealed from the dismissal of his complaint against FXDD for dishonest and deceptive practices in managing its online foreign exchange trading platform. The court of appeals affirmed the dismissal of the RICO claim, but reinstated NY GBL §§ 349-350 claims and a claim for breach of contract.

FXDD provides forex trading and related services.  Since forex doesn’t have a regulated exchange or central marketplace, FXDD and other retail brokers provide individual investors access to the market.  “As market makers, they create their own market and set the prices they offer to their customers. In addition to facilitating trading by customers, FXDD buys and sells currency for its own account, and may act as a counterparty in customer transactions.”  (In other words, FXDD is not on its customers’ sides.)

The FXDD contract warns that, “due to market conditions or other circumstances, FXDD may be unable to execute [a customer's] Order at the Market or specified level and the Customer agrees that FXDD will bear no liability for failure to execute such orders.” The Agreement also provides, however, that “all Market Orders and non-Market Orders ... are accepted by FXDD and undertaken on a ‘best-efforts basis.’” In addition, “FXDD makes no warranty expressed or implied; that Bid and Ask Prices shown represent prevailing bid and ask prices in the interbank market.”

Cruz alleged that FXDD misrepresented the actual risks of participating in its forex market.  A 2005 website ad stated that FXDD “Does Not Trade Against Their Clients, but Facilitates Trade Via Transparent Real–Time Bid/Offer Pricing,” while a 2007 advertisement represented that “[m]arket orders are filled instantaneously at the rate you request, with no manual dealer intervention or slippage.”  Contrary to these representations, Cruz alleged, FXDD engaged in several undisclosed practices to turn customer trades to its own benefit, such as: (1) rerouting profitable customer trading activity to a “slow server,” which delays trades and allows FXDD to “hijack” customer profits by buying and selling in the time between a customer's order and trade execution; (2) refusing to execute profitable customer trade orders by generating false error messages; (3) manipulating prices so that the change in price between the time the price is quoted and a market order is placed generally favors FXDD over its customers.  Cruz lost over $280,000 during two years of trading on the FXDD platform.

On the GBL claims, the district court found that Cruz lacked statutory standing because he lived in Virginia and had not alleged that FXDD's dishonest practices occurred, or that his trades were executed, in New York.  GBL § 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.  GBL § 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 court of appeals found that the complaint alleged a “sufficient nexus between Cruz's transactions with FXDD and New York to fall within the territorial reach of these two provisions.” 

NY’s highest court apparently interpreted “in this state” to require that “the transaction in which the consumer is deceived ... occur in New York.” Subsequently, a split of authority developed: a “transaction-based” test or a test premised on where the victim is deceived, regardless of where the transaction occurs.  The two tests weren’t mutually exclusive, but the court of appeals found that the appropriate test here was the location of the transaction, “and in particular the strength of New York's connection to the allegedly deceptive transaction, rather than ‘on the residency of the parties.’”  The language was not intended to function as a per se bar on out of state plaintiffs, though the fact that NY is a defendant’s principal place of business is insufficient.

Here, Cruz alleged a series of allegedly deceptive transactions that occurred in NY and implicated the state’s interest.  “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. FXDD requires that all customer communications, including the Agreement and objections to trades, be sent to its New York office. The Agreement specifies that New York law governs all disputes between Cruz and FXDD; indeed, it provides that all suits relating to the Agreement are to be adjudicated in state or federal courts located in New York.” The complaint properly alleged that some part of the underlying transaction occurred in NY.

The court also reinstated the breach of contract claim: intentionally delaying trades or causing them to fail were incompatible with a promise to execute orders on a “best-efforts basis.”  There’s no separate claim for breach of the implied covenant of good faith and fair dealing in NY when there’s a basic breach of contract claim, though, so that wasn’t reinstated.

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