GAIN Capital Faces Challenge in Lawsuit Over Negative Crude Oil Prices

About a month after the New Jersey District Court dismissed a case against online trading company GAIN Capital concerning negative crude oil prices, it has become clear that the plaintiff will appeal from the Courts ruling.

According to a notice filed with the Court and seen by FX News Group, the plaintiff Jun Zhang a.k.a. June Zhang, appeals to the United States Court of Appeals for the Third Circuit from the order and opinion of the United States District Court, District of New Jersey, entered in the action on May 25, 2021.

Lets recall that the plaintiff is a self-directed trader who has been using the GAIN Trader platform to trade derivatives of commodity futures since 2017. Zhang alleges this action arose from the negative pricing of WTI futures.

On April 3, 2020, the CME Group announced to its CME Globex and Market Data customers that effective April 5, 2020, futures and options including crude oil “will be flagged as eligible to trade at negative prices.” On April 8, 2020, CME Group published an advisory notice which stated, in relevant part, that if major energy prices continued to fall towards zero in the following months, CME Clearing had a tested plan to support the possibility of negative options and enable markets to continue to function normally. The notice specifically mentioned WTI Crude Oil futures, RBOB Gasoline futures, and Heating Oil futures for possible negative pricing.

On April 15, 2020, CME Group sent a memorandum to all clearing member firms under the subject “Testing opportunities in CME‘s ’News Release‘ environment for negative prices and strikes for certain NYMEX energy contracts.” The memorandum stated, “Support for zero or negative futures and/or strike prices is standard throughout CME systems.” It also stated, “Effective immediately, firms wishing to test such negative futures and/or strike prices in their systems may utilize CME’s ‘News Release’ testing environments.”

On April 20, 2020, the day the WTI May 2020 contracts were set to expire, their prices dropped into the negatives, reaching -$40.32 per barrel at its lowest point, and closing at -$37.63 per barrel. However, GAINs US_OIL contract pricing remained in the positives, with the lowest price shown as $0.01 per barrel and the closing price at $0.05 per barrel.

On the same day, approximately twenty-two minutes before the closing of U.S. crude oil trading, GAIN‘s US_OIL trading halted, “thus dissociating the derivative from its underlying WTI future contracts.” On April 21, 2020, GAIN’s platform showed the settlement pricing of US_OIL for the May contracts as $0.01.

On April 23, 2020, Zhang received an email from GAIN announcing that Zhang‘s US_OIL account had been assessed an “adjustment” of -$143,032.00 due to the negative pricing of WTI’s May 2020 contract and that GAIN had withdrawn that adjustment amount from the plaintiffs Trust Account.

After inquiring about the adjustment with GAIN‘s customer service, the trader was told the adjustment was a decision made by GAIN’s trading platform management.

On July 24, 2020, the plaintiff filed a three-count putative class action Complaint alleging breach of fiduciary duty (Count I); negligence (Count II); and consumer fraud (Count III).

On October 2, 2020, GCH filed two Motions: (1) a Motion to Dismiss pursuant to the doctrine of forum non conveniens; and (2) a Motion to Dismiss for failure to state a claim.

Lets explain that Forum non conveniens requires a decision whether a case should be adjudicated elsewhere, and is the proper mechanism for enforcing a forum selection clause. A district court therefore may dispose of an action by a forum non conveniens dismissal . . . when considerations of convenience fairness, and judicial economy so warrant.

GAIN asserts when the plaintiff opened his trading accounts on forex.com, he assented to the Customer Agreement, which contains a forum selection clause.

This forum selection clause provides the courts of the Cayman Islands will have “exclusive jurisdiction” over any claim arising under the Customer Agreement. GAIN makes two arguments in relation to the forum selection clause: (1) the forum selection clause is enforceable and (2) the forum selection clause applies to this action. GAIN argued the doctrine of forum non conveniens justifies dismissal of this action and the Court has sided with the defendant.

In his opinion issued on May 25, 2021, the Judge noted that a few public interest factors support dismissal. First, New Jersey does not have a “local interest” in deciding a “localized controversy” at home, since the plaintiff is a Chinese resident that contracted with a Cayman Islands business regulated by the Cayman Islands Monetary Authority.

And second, since Cayman law applies to the claims in this action, “having a trial of a diversity case in a forum that is at home with the law that must govern” also favors the Cayman Islands in this diversity action. Therefore, the plaintiff has not carried his burden under either prong of the forum non conveniens inquiry.

Because the plaintiff has not carried his burden, the Court dismissed the action for forum non conveniens. Now, the case goes to the Appeals Court.

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