NFA, Effex Capital clash over CFTC stance in case about FXCM publications

Maria Nikolova

NFA and Effex Capital offer different interpretations as to whether third parties may challenge NFA disciplinary actions under CFTC rules.

Less than a month after the Commodity Futures Trading Commission (CFTC) clarified its stance in a lawsuit concerning the National Futures Association’s publications about FXCM from February 6, 2017, the parties in the lawsuit – Effex Capital and NFA, have offered their rather different interpretations of the CFTC’s text.

Let’s recall that On June 6, 2017, Effex and its CEO, John Dittami, sued NFA and various NFA employees in the Illinois Northern District Court. Effex and Dittami alleged that NFA’s complaint against FXCM and associated documents included false statements regarding Effex and Dittami; and that NFA’s process of investigating and settling with FXCM provided Effex and Dittami with no way to defend themselves. Effex and Dittami asserted a number of state and federal legal claims, including:

  • defamation;
  • violation of due process;
  • interference with business relationships;
  • interference with economic advantage; and
  • violation of the Illinois Trade Secrets Act.

Effex and Dittami sought relief in the form of money damages and an injunction ordering NFA to (1) remove the FXCM complaint and related documents from its website or redact references to Effex and Dittami and (2) issue a release correcting the allegedly false statements.

NFA filed a motion to dismiss. One of NFA’s arguments was that Effex and Dittami were required to, but did not, exhaust administrative remedies by appealing to the CFTC.

In a decision issued on April 5, 2018, the district court dismissed Effex and Dittami’s complaint for failure to exhaust administrative remedies.

Effex and Dittami appealed. Following briefing and oral argument, the Seventh Circuit U.S. Court of Appeals issued its order inviting the CFTC to file an amicus brief.

In its amicus curiae brief, submitted earlier in April 2019, the CFTC notes that rules and precedent support the conclusion that non-parties to NFA disciplinary proceedings cannot appeal NFA decisions in such proceedings to the CFTC as a matter of right. However, they may request the Commission to waive its usual rules to permit review in limited circumstances at the discretion of the Commission.

Under the law, third parties who did not take part in proceedings before the NFA may sometimes become parties to appeal proceedings before the Commission. These rules authorize “limited participation” by such persons with the permission of the Commission. Persons seeking such permission must demonstrate that their intervention will “serve the public interest.”

However, the CFTC notes that efficiency dictates that third parties should not be able to routinely obtain review of NFA disciplinary actions when the subjects of those actions do not want such review. But it is reasonable for the CFTC to reserve the power to permit third parties to obtain review in unusual situations where such review may be needed to avoid a serious injustice.

As one might expect, this statement triggered various interpretations.

On April 29, 2019, Effex Capital and NFA filed their responses to the CFTC’s brief with the Court.

Effex notes that, in its amicus curiae brief, the CFTC concluded its rules do not permit Appellants, a non-party, to appeal the disciplinary decision made by NFA. More specifically CFTC stated: “The CFTC’s rules do not give third parties a right to appeal NFA disciplinary actions…” However, the CFTC then referenced 17 C.F.R. § 171.14 as its basis to conclude that the “Commission may waive its rules as a matter of discretion to permit review at the request of third parties in extraordinary circumstances”. According to Effex, the CFTC did not and could not describe such waiver as a remedy for Appellants because, at best, it merely constitutes a preliminary act which, if successful, could arguably create an avenue for Appellants to seek a review of the Consent Judgment. A preliminary step cannot and should not be construed as a remedy which must be exhausted pre-suit. Thus, according to Effex, this Court should reverse the District Court’s decision dismissing the claims for failure to exhaust remedies.

In addition, Effex stresses that although CFTC has authority to waive its rules, it does not have authority to create a new substantive right – the right for a non-party to appeal a disciplinary decision. In order to create such new substantive right, CFTC would be required to enact a new rule pursuant to 5 U.S.C. § 553. This renders any “waiver” argument moot, and, hence, the Court should reverse the District Court’s Decision.

NFA, however, sees the CFTC’s brief as providing support for its own position. According to NFA, the CFTC’s brief establishes that the District Court’s judgment should be affirmed for two reasons. First, Effex had an available avenue for relief in the CFTC. Thus, it failed to exhaust. Second, review in the CFTC is the only way to obtain review of an NFA decision. If a party cannot obtain review at the CFTC, that party falls outside of the Commodity Exchange Act’s “zone of interests”—which means it cannot sue NFA in district court either.

The lawsuit continues at the Seventh Circuit U.S. Court of Appeals.

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