“Direct and Significant” Means What It Says: Second Circuit Clarifies CEA § 2(i)(1) Extraterritorial Reach and Confirms No Artificial-Price Element for Rule 180.1 Fraud

Introduction

United States v. Phillips is the Second Circuit’s first appellate construction of the Commodity Exchange Act’s (CEA) post–Dodd-Frank extraterritorial provision, 7 U.S.C. § 2(i)(1), in a criminal case. The decision affirms the commodities-fraud conviction of Neil Phillips, a U.K. hedge fund manager whose late-night, illiquidity-driven spot FX trades in dollar–rand “one-touch” barrier option markets allegedly intended to “trade through” barriers and trigger $20 million payouts to his fund.

The appeal placed six questions before the court: (1) what § 2(i)(1)’s “direct and significant connection with activities in, or effect on, commerce of the United States” requires; (2) whether the evidence satisfied § 2(i)(1); (3) the proper scienter and intent standard for Rule 180.1 manipulation-by-fraud; (4) whether the government must prove an “artificial price” to obtain a felony fraud conviction under § 9(1)/Rule 180.1; (5) materiality; and (6) fair notice/due process. The court affirmed on all fronts, establishing important guidance on cross-border swaps jurisdiction, open-market manipulation via fraud, and the CEA/Securities Exchange Act (SEA) convergence in antifraud doctrine.

Summary of the Judgment

Extraterritoriality: The CEA’s swaps jurisdiction extends to foreign conduct with a “direct and significant connection” to U.S. commerce. The court rejected the defense’s proposed “systemic risk” gloss. “Significant” means meaningful or consequential; “direct” means immediate, without deviation or interruption. U.S.-based obligated counterparties and prime brokers (here, Morgan Stanley Capital Services and JPMorgan Chase Bank, N.A.) provided a direct and significant connection.
Intent/Scienter: The district court properly charged that manipulative trading under Rule 180.1 focuses on intent to inject a false price signal. A “sole intent to defraud” is not required. A but-for formulation—would the trades have been done at the same time and in the same manner but for the intent to deceive—was permissible, read together with the willfulness and intent-to-defraud instructions.
No Artificial-Price Element under § 9(1)/Rule 180.1: Unlike classic price-manipulation claims under § 9(3)/Rule 180.2 and pre-Dodd-Frank cases like Amaranth, fraud-based manipulation under § 9(1) does not require proof that the price was artificial; intent to defraud suffices.
Materiality: The government presented sufficient evidence that intentional “barrier hunting” would matter to a reasonable counterparty’s payout decision. Materiality is objective; actual reliance is not required.
Due Process: Even though issues were of first impression, statutory text, willfulness, and Phillips’s sophistication provided fair notice; knowledge of the jurisdictional facts (U.S. counterparty) was not required.
Result: Conviction affirmed.

Analysis

Precedents Cited and Their Influence

Morrison v. National Australia Bank, 561 U.S. 247 (2010); RJR Nabisco v. European Community, 579 U.S. 325 (2016): Reaffirm the presumption against extraterritoriality and the need to honor a statute’s textual limits. The court emphasized that the CEA contains an express extraterritorial statement in § 2(i)(1), and Morrison tells courts to “limit that provision to its terms”—here, the ordinary meanings of “direct” and “significant.”
Prime International Trading v. BP, 937 F.3d 94 (2d Cir. 2019): Recognizes § 2(i)(1) as a clear statement of extraterritorial application, reinforcing that Congress chose to reach some foreign swaps activity.
Atlantica Holdings v. Samruk-Kazyna, 813 F.3d 98 (2d Cir. 2016): Defines “direct effect” (in FSIA) as an “immediate consequence,” a formulation the court analogized to § 2(i)(1)’s “direct” prong; the immediate obligation of Morgan Stanley Capital Services to pay upon barrier trigger matched this concept.
Bayerische Landesbank, N.Y. Branch v. Aladdin Capital Mgmt., 692 F.3d 42 (2d Cir. 2012): A branch is not usually a separate legal entity; relevant to treating JPMorgan’s London branch as part of a U.S. bank relationship.
Set Capital v. Credit Suisse, 996 F.3d 64 (2d Cir. 2021); Koch v. SEC, 793 F.3d 147 (D.C. Cir. 2015); GFL Advantage Fund v. Colkitt, 272 F.3d 189 (3d Cir. 2001); Chemetron v. Business Funds, 718 F.2d 725 (5th Cir. 1983); SEC v. Vali Mgmt., 2022 WL 2155094 (2d Cir. 2022) (sum. order): Securities cases emphasize that manipulative acts actionable under § 10(b)/Rule 10b-5 do not require proof of an artificial price when fraudulent intent is shown. Because § 9(1)/Rule 180.1 is modeled on § 10(b)/Rule 10b-5, the same principle carries into the CEA context.
In re Amaranth Natural Gas Commodities Litig., 730 F.3d 170 (2d Cir. 2013): Sets the four-element “artificial price” test for classic manipulation. The court explained that test fits § 9(3)/Rule 180.2 cases, not § 9(1)/Rule 180.1 fraud cases.
United States v. Technodyne, 753 F.3d 368 (2d Cir. 2014): Specific-intent crimes generally do not require “sole intent.” Helped rebut Phillips’s push for a sole-intent instruction.
United States v. Epskamp, 832 F.3d 154 (2d Cir. 2016); United States v. Eisenberg, 596 F.2d 522 (2d Cir. 1979): Knowledge of a jurisdictional fact (e.g., U.S. nexus) is not typically an element; the government need only prove the jurisdictional nexus exists.
United States v. Litvak, 889 F.3d 56 (2d Cir. 2018); United States v. Johnson, 945 F.3d 606 (2d Cir. 2019); Vilar, 729 F.3d 62 (2d Cir. 2013): Materiality’s objective standard; no need for actual reliance.
United States v. Coscia, 866 F.3d 782 (7th Cir. 2017): Unusual trading patterns can evidence manipulative intent—resonating with the court’s view that the trading here was inconsistent with benign “replace delta” strategies.
Restatement (Third) and (Fourth) of Foreign Relations Law; EU Market Abuse Regulation: Provide customary international law support for regulating foreign conduct that injures a nation’s financial institutions or markets.

Legal Reasoning

1) Extraterritoriality under § 2(i)(1): No “Systemic Risk” Requirement; U.S. Obligated Counterparties Satisfy “Direct and Significant”

Textual approach: Congress wrote that the CEA applies to foreign “activities” with a “direct and significant connection” to U.S. commerce, or a “direct and significant effect on” U.S. commerce. The disjunctive “connection” and “effect” clauses carry different burdens. Requiring “systemic risk” would collapse them into the same demanding threshold and rewrite “significant” into “systemic”—contrary to the statute’s ordinary meaning and structure.
“Direct” defined: An immediate consequence, “without deviation or interruption.” When the barrier was crossed, Morgan Stanley Capital Services—an American entity—was immediately obligated to pay $20 million. That is direct.
“Significant” defined: Meaningful or consequential; integral rather than ancillary. Being the obligated payor (or a prime broker contractually on the hook) is important to U.S. commercial activity. The identity of the harmed party as a U.S. financial institution matters for significance, though the statute is not limited solely to “U.S.-victim” cases.
What does not suffice: Server locations, incidental data storage, and downstream money flows to New York were “incidental and insubstantial.” The court drew a line between true commercial connections and mere technical or happenstance ties.
Knowledge not required: Phillips did not need to know the ultimate counterparty was a U.S. entity. The jurisdictional connection is an element the government proves; it is not a scienter component.
International comity: Regulating frauds that target U.S. financial institutions fits customary international law and global regulatory practice (e.g., EU MAR).

2) Elements of Commodities Fraud under § 9(1)/Rule 180.1: Intent, Artificial Price, Materiality

Intent (manipulative device by fraud): The jury was properly instructed that manipulation focuses on the intent to inject a false price signal or to mislead by artificially affecting price. Because open-market trades can be legitimate or deceptive, intent is the key dividing line. A “sole intent to defraud” standard was rejected; specific-intent crimes allow multiple motives as long as one is fraudulent. The court approved a but-for instruction tied to “same time and manner” trading, when read with the willfulness and fraudulent-intent requirements.
No artificial-price element: For § 9(1)/Rule 180.1 fraud-based manipulation, the government need not prove that an artificial price existed. That requirement pertains to § 9(3)/Rule 180.2 classic manipulation (Amaranth). Dodd-Frank deliberately expanded the antifraud toolkit by modeling § 9(1) on SEA § 10(b); intent, not price distortion success, is the centerpiece.
Materiality: Objective standard. Testimony from JPMorgan and Morgan Stanley personnel that intentional barrier-triggering would be important in payout decisions sufficed. Actual reliance is not necessary.

3) Due Process/Fair Notice

Even though this was a first-of-its-kind appellate application of § 2(i)(1), the combination of the statute’s express extraterritorial text, the Rule 180.1 antifraud framework, and the jury’s willfulness finding provided fair notice.
Defendants need not predict U.S. prosecution specifically; it suffices that they would reasonably understand the conduct was criminal somewhere. Phillips’s registration and training, firm policies, and sophistication made any claim of surprise untenable.

Impact

This decision meaningfully reshapes the risk and compliance calculus in global derivatives trading and enforcement under the CEA:

Broader cross-border reach without “systemic risk”: Prosecutors and the CFTC can reach foreign trading “in connection with” swaps where U.S. prime brokers or obligated counterparties are involved. The decision cements that “significant connection” is a practical, context-driven inquiry, not a macroeconomic threshold.
U.S. counterparty/prime-broker nexus is powerful: Where a U.S. entity is directly obligated (or potentially obligated) by the swap structure, that linkage can satisfy § 2(i)(1). The court expressly avoided making every U.S.-linked swap automatically significant; still, a $20 million obligation borne by U.S. firms weighed heavily.
Open-market manipulation via fraud is actionable without proving artificial price: Fraud-based manipulation cases under Rule 180.1 can proceed without showing an artificial price, aligning CEA practice with SEA § 10(b) doctrine. This lowers prosecutorial proof burdens relative to classic “artificial price” manipulation.
Spot FX exclusion has limits: Although spot FX remains largely outside direct CEA regulation, it can function as the “manipulative device” when used “in connection with” a regulated swap. Attempts to trigger options through liquidity gaps (“barrier hunting”) face heightened risk where intent to deceive is provable.
Compliance effects for non-U.S. traders: Non-U.S. funds trading exotics tied to FX or other benchmarks—especially through U.S. brokers or with U.S.-based ultimate counterparties—must treat U.S. antifraud exposure as real even when trading occurs abroad and in off-hours.
Contracting and risk management: Expect counterparties and prime brokers to tighten documentation, add certifications around “no manipulative trading to trigger barriers,” and deploy surveillance to detect patterns inconsistent with legitimate hedging (e.g., “replace delta” claims).
Enforcement horizon: The ruling invites more CEA fraud cases involving exotic options, illiquidity windows, and strategic trading “to print” barrier events. It also gives CFTC/DOJ a jurisdictional template grounded in obligated U.S. entities rather than servers or data paths.

Complex Concepts Simplified

One-touch barrier option: An option that pays out if the underlying exchange rate touches a specified barrier level at any moment before expiry. Here, a payout occurred if USD/ZAR dropped below 12.50 at any time.
Swap (under the CEA): A broad class of derivatives where payments depend on an event or value (e.g., FX rate hitting a barrier). Dodd-Frank brought swaps under CFTC oversight and created antifraud liability.
Spot FX vs. swaps: Spot FX (immediate currency exchange) is generally outside the CEA; swaps are within. But spot trading can be the “device” used “in connection with” a swap to commit fraud.
“Replace delta”: A hedging strategy to restore directional exposure lost when an option is close to or has triggered. The jury heard evidence that the trading here was inconsistent with genuine delta replacement and consistent with intent to trigger barriers.
“Direct and significant connection” (CEA § 2(i)(1)): “Direct” = immediate linkage to U.S. commercial activity; “significant” = meaningful or consequential. U.S. entities that must pay or guarantee swap obligations satisfy this in many cases.
Artificial price vs. fraud-based manipulation: “Artificial price” is a classic manipulation element (Rule 180.2/§ 9(3)). For fraud-based manipulation (Rule 180.1/§ 9(1)), the government must prove intent to defraud, not that price was in fact artificial.
Materiality (objective): Whether a reasonable investor would find the misconduct important. Actual reliance is unnecessary.
Willfulness: Acting with a purpose to disobey or disregard the law. It does not include knowledge of jurisdictional facts unless the statute says so.

Conclusion

United States v. Phillips is a significant precedential marker for the post–Dodd-Frank CEA. The Second Circuit held that § 2(i)(1)’s “direct and significant” language means what it says and does not import a “systemic risk” threshold. When U.S. financial institutions are contractually obliged or exposed as counterparties or prime brokers, foreign manipulation aimed at triggering exotic swap payoffs can be within U.S. reach. On the merits, the court aligned Rule 180.1 with § 10(b)/Rule 10b-5 doctrine, confirming that fraud-based manipulation does not require proof of an artificial price and rejecting a “sole intent” requirement in favor of ordinary specific intent standards, appropriately cabined by willfulness.

The judgment is a warning shot to cross-border traders who rely on illiquidity windows to “print” barrier events. Spot FX activity remains largely unregulated as such, but it is fully actionable as a manipulative device when used in connection with a regulated swap and with fraudulent intent. Going forward, market participants should expect tighter contractual safeguards, enhanced surveillance around barrier-sensitive periods, and a more assertive enforcement environment wherever U.S. prime brokers or U.S.-based obligated counterparties are in the chain.