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From Securities Regulation Daily, June 9, 2016

CFTC has enforcement authority over binary options traded overseas

By Mark S. Nelson, J.D.

The CFTC can pursue enforcement litigation against a firm that sold binary options because these financial instruments are options under the Commodity Exchange Act and the foreign character of at least some options buyers and the related trading platforms involved in the allegedly fraudulent scheme did not bar the litigation under the Supreme Court’s Morrison test. The case arose from the CFTC’s seven-count complaint alleging that Vision Financial Partners, LLC and its founder, Neil Pecker, caused funds investor’s thought were being invested in binary options instead to be diverted to Pecker’s personal use (CFTC v. Vision Financial Partners, LLC, June 3, 2016, Cohn, J.).

Vision initially launched a broadside attack on the CFTC’s complaint under FRCP 12(b)(1) (subject matter jurisdiction) and 12(b)(6) (failure to state a claim), but the court winnowed that attack to the validity of the claim because the court had jurisdiction of the matter based on the CFTC’s invocation of the CEA. The court then quickly rejected Vision’s arguments that the matter was beyond the CFTC’s enforcement authority.

For one, contrary to Vision’s assertion, binary options are options under the CEA. Vision had argued that binary options do not confer the right to buy or sell an underlying asset and, thus, fall outside the CEA’s definition of an option. But the court said even if that was true, the CEA also includes text that covers instruments whose popular names imply that they are options (Vision conceded this point). Specifically, the CEA treats binary options as options because they are “commonly known to the trade” as options.

As for the foreign nature of Vision’s transactions, the court noted that while the Supreme Court’s Morrison opinion limiting the reach of the Securities Exchange Act has been used to similarly limit private suits under the CEA, it did not necessarily have the same effect on the CFTC’s enforcement authority. Vision had argued that the binary options involved in the case had foreign buyers and were traded on foreign exchanges. But the court noted the CEA affirmatively states that it applies extraterritorially for purposes of CFTC enforcement if, as was true of Vision and Pecker (both are based in Florida), the fraud was committed in the U.S. (See Second Circuit opinion discussing district court ruling cited by Judge Cohn here.)

Vision also argued that binary options are not swaps under the CEA and, alternatively, that the CEA’s swaps provisions are impermissibly vague. But the court said in a footnote that it declined to deal with this line of attack because the CFTC was otherwise authorized to regulate the options involved in the case.

The case is No. 16-cv-60297.

Attorneys: Elizabeth Lan Davis for the CFTC. Howard Seth Goldfarb (Homer Bonner Jacobs, P.A.) for Vision Financial Partners, LLC and Prometheus Enterprises, Inc.

Companies: Vision Financial Partners, LLC

MainStory: TopStory CommodityFutures Derivatives Enforcement ExchangesMarketRegulation FraudManipulation InternationalNews Swaps FloridaNews

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