Peltz v. SHB Commodities, Inc., 96-7401

• Decision Date: 15 May 1997
• Docket Number: No. 96-7401,96-7401
• Citation: 115 F.3d 1082
• Parties: , Comm. Fut. L. Rep. P 27,052 Samuel PELTZ, Appellant, v. SHB COMMODITIES, INC., Isaac Mayer, Solomon Mayer, and Bezalel Mayer, Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 1082

115 F.3d 1082

65 USLW 2800, Comm. Fut. L. Rep. P 27,052

Samuel PELTZ, Appellant, v. SHB COMMODITIES, INC., Isaac Mayer, Solomon Mayer, and Bezalel Mayer, Appellees.

No. 96-7401.

United States Court of Appeals, Second Circuit.

Argued Jan. 7, 1997.

Decided May 15, 1997.

Daniel V. Gsovski, Herzfeld & Rubin, New York City, for Appellant.

Martin H. Kaplan, Grusae, Kaplan & Bruno, New York City (Melvyn J. Falis and John E. Bersin, of counsel), for Appellees.

Before: NEWMAN, Chief Judge, FEINBERG and McLAUGHLIN, Circuit Judges.

McLAUGHLIN, Circuit Judge:

BACKGROUND

A. The Players

Samuel Peltz is an investor in commodities. Commodities, unlike stocks, comprise various items such as agricultural products, metals or energy. Investors purchase commodities "contracts," which represent a specific amount of the commodity. One of the principal markets where investors trade commodities contracts is the Commodities Exchange ("COMEX") in New York.

SHB Commodities, Inc. is a registered "futures commission merchant" ("FCM"), a firm authorized to deal on the COMEX. It is owned by defendants Solomon ("Shlomo") and Bezalel ("Buzzy") Mayer. As a "futures commission merchant," SHB solicits or accepts orders to buy or sell commodities for future delivery; in that regard, SHB accepts money or extends credit to margin, to guarantee or to secure any resulting trades. See 7 U.S.C. § 6. Peltz maintained an account at SHB through which he negotiated commodity trades.

Ludwig ("Leo") Weingarten, although not a party to this litigation, occupies center stage. Weingarten was a "floor broker" on the COMEX, i.e., one who literally stands on the floor of the COMEX, and does the work of buying and selling the commodities. He was never employed by SHB.

B. The Play

On March 23, 1989, in the morning hours before the COMEX opened, Peltz and Weingarten met for coffee in Lord's Coffee Shop in lower Manhattan. Apparently, the two had never had prior business dealings. Despite their unfamiliarity, Peltz agreed to let Weingarten sell copper futures contracts Weingarten and Peltz also agreed to "short sell" copper futures contracts, i.e., to sell contracts that one does not yet own. One who sells such a phantom contract is said to be in a "short position." The short seller gambles that the market will decline and he thus expects to purchase a contract sometime in the future at a price lower than that at which he sold it. This will "cover" his short position, and he will realize a profit.

from the floor of the COMEX that morning against Peltz's account at SHB. Peltz never gave Weingarten written authority to make trades against or otherwise control his account, and SHB never received any written authorization.

The profit potential is very high. There is, of course, the unhappy possibility that the price of copper will rise, resulting in serious economic loss. Weingarten testified that he and Peltz conspired to short sell copper contracts, and, to ensure a profit, also conspired to then depress the copper market with high volume offers to sell contracts. Once the price was depressed, Peltz was to buy these artificially reduced-price contracts to cover the short position created by Weingarten, and realize a great profit.

The two conspirators disagree as to how much authority Peltz gave Weingarten. Peltz says that the coffee shop agreement was that Weingarten would trade 500 contracts at prices no lower than $135.50. Peltz adds that he made clear that his position was to be "flat" at the end of the trading day (i.e., the short position was to be fully covered). Weingarten's version, on the other hand, was that Peltz gave him unfettered discretion to make whatever trades he thought would be profitable.

After the kaffeeklatsch, Peltz repaired to the SHB offices, and Weingarten to the copper pit on the floor of the COMEX. Peltz took a chair next to SHB's order clerk, in front of the commodities ticker, where he could observe the day's trade in commodities. During the morning, Weingarten phoned SHB and an employee named Eis answered. Weingarten explained that he would be "doing paper" for Peltz that day, to which Eis responded "okay." As soon as the copper futures market opened, Weingarten began to sell huge amounts of copper contracts.

Throughout the fateful day, Peltz and Weingarten kept in telephonic contact. SHB recorded these conversations. While it is difficult to discern the precise conversations, it is clear that Peltz knew that Weingarten was selling more than 500 contracts, and was doing it at prices lower than $135.50. Indeed, just minutes after the market opened, Weingarten was selling copper contracts at $135.20 and $135.30. Peltz maintained a tally sheet throughout the trading day and he noted that at 10:02 AM most of Weingarten's trades were at prices below $135.50, and that by 10:55 AM Weingarten had already sold over 1000 contracts.

Weingarten, from the trading floor, repeatedly warned Peltz to start buying contracts to cover the mushrooming short position. In the middle of the trading day, the situation began to turn sour. A jittery Peltz warned Weingarten to "be careful" because people on the floor were beginning to realize that "things ... [were] not normal." At 11:40 AM the two spoke. Weingarten said that he "sold twelve--fourteen hundred" contracts. Peltz responded that he bought only 675. Back and forth calls continued in this vein. The numbers were not adding up.

It was apparent by mid-afternoon that the short-selling plan was going awry. Weingarten told Peltz that COMEX officials threatened to remove him from the floor unless Weingarten could maintain $50,000 in his own personal trading account. Peltz immediately wrote Weingarten a personal check, keeping Weingarten on the trading floor, and breathing new life into the scheme.

At 2:30 PM, Buzzy Mayer, SHB's co-owner, first learned that SHB had acted as clearing agent for a significant amount of copper contracts. He also found out that Weingarten was the seller, and that the sales were against Peltz's account. Mayer went looking for Weingarten, who told Mayer that he had been selling all day for Peltz, and was now a few contracts short.

At 3:45 PM, COMEX officials summoned a representative of SHB to inform the company that, as the clearing member of the exchange By day's end, Weingarten had sold a total of 2667 contracts against Peltz's SHB account. Peltz, for his part, placed buy orders through SHB for 1165 contracts. In sum, Peltz failed to purchase the more than 1500 contracts necessary to cover fully the short position Weingarten had created.

involved in all these sales, it now faced a margin call for the short-selling of copper futures contracts. At 4:48 PM, Mayer called Peltz and asked him to describe the agreement with Weingarten. Peltz stated that he had agreed to only 500 or 600 contracts, but he would accept more from Weingarten so long as Peltz's position remained "flat" for the day.

Shortly after realizing that he had not fully covered his short position, Peltz telephoned SHB to protest that Weingarten had no authority to make trades against Peltz's account; and he disclaimed the short sales for which he had not purchased offsetting contracts. At 5:00 PM, SHB tried to disavow formally, or "dk" (literally, "doesn't know"), the trades with COMEX. COMEX officials rejected this effort.

C. Denouement

The next day the COMEX was closed for Good Friday. Weingarten testified that on Saturday Peltz called, first to threaten him, and then to bribe him. Weingarten testified that Peltz offered "to take care of him" if Weingarten would just say he went "crazy." The following Monday, SHB officials issued a margin call of over $3 million against Peltz's account at SHB. Peltz could not meet the call, forcing SHB to purchase the contracts. The net result was a charge to Peltz's account of $1,332,054.72.

Peltz sued SHB, the Mayer brothers and Weingarten, but soon dropped the suit against Weingarten. Peltz asserted claims against SHB and the Mayers for various violations of the Commodities Exchange Act ("CEA") and New York common law, claiming that SHB was liable for the loss incurred when it purchased the copper contracts to cover Peltz's short position. The theory driving Peltz's case was that SHB was responsible for the short position Weingarten created because, under 17 C.F.R. § 166.2, SHB should have received from Peltz either written or "specific" authorization for the sales. Peltz argued that SHB wrongfully cleared Weingarten's trades, thereby defrauding Peltz.

Peltz claimed that SHB was liable under § 4b of the CEA for willfully deceiving him regarding the disposition of an order. See 7 U.S.C. § 6(b). Peltz also alleged that SHB criminally intended to convert Peltz's money, and wilfully induced the commission of a violation of CEA regulations. See 7 U.S.C. § 1 et seq. Peltz added state law claims for breach of fiduciary duty, breach of contract, and fraud.

After a nine-day bench trial, the district court rejected Peltz's claims, concluding that Peltz had lied when he said he limited Weingarten's authority to make only 500 sales at prices exceeding $135.50. The court rejected Peltz's federal claims, finding that Peltz failed to show that SHB intended to defraud Peltz.

The district court also rebuffed Peltz's fraud, contract, and fiduciary duty claims, reasoning that there was no intent to deceive, and that Peltz failed to show the breach of any duty arising out of the relationship or the contract between himself and SHB. Any losses, the district court concluded, were caused by Peltz and Weingarten's ill-conceived scheme to manipulate the copper markets. "To allow Peltz to reject certain transactions undertaken by his independent, rogue-FCM [Weingarten] only after Peltz concluded that the transactions would be unprofitable," the district court wrote, "would be to offer [Peltz] a 'no risk, win-win, situation.' "

Peltz appeals, arguing that SHB is...