Eastern Trading Co. et al v. Refco, INC.

Citation229 F.3d 617
Decision Date10 October 2000
Docket NumberNos. 99-2362,s. 99-2362
Parties(7th Cir. 2000) Eastern Trading Company, et al., Plaintiffs-Appellants, Cross-Appellees, v. Refco, Inc., and Refco Capital Corporation, Defendants-Appellees, Cross-Appellants. & 99-3053
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 97 C 6815--Suzanne B. Conlon, Judge. [Copyrighted Material Omitted]

Before Cudahy, Posner, and Evans, Circuit Judges.

Posner, Circuit Judge.

Eastern Trading Company, a partnership located in Dubai that trades gold and silver bullion in large quantities, brought this suit against two commonly owned corporations--Refco, Inc., a Chicago commodities broker, and Refco Capital Corporation-- charging fraud and related misconduct in violation of the Commodity Exchange Act, 7 U.S.C. sec.sec. 1a et seq., and the common law of Illinois. The defendants counterclaimed for breach of contract. The jury brought in a verdict for the defendants on the main claim and a judgment for Refco, Inc. of $14 million on the counterclaim, the judge having dismissed Refco Capital Corporation as a counterclaimant before the trial. Eastern appeals. Refco (as we'll refer to Refco, Inc., the broker, except when discussing its affiliate) cross-appeals, seeking an award of attorneys' fees, as provided for in its commodity trading contract with Eastern, the basis for the successful counterclaim. The issues that we need to resolve are primarily ones of general law rather than of anything peculiar to the Commodity Exchange Act or Illinois law. In view of the jury verdict, Refco gets the benefit of the doubt on disputable facts.

The partners in Eastern are Haji Ashraf and his four eldest sons. They are equal partners in the sense of sharing the profits of the partnership equally. Although the firm does a substantial business, its offices consist of a single large room partitioned into separate cubicles for the partners by means of sliding glass doors. The partnership agreement authorizes each partner to sign contracts on behalf of the firm. The father is the chairman of the firm but during the period relevant to this case his eldest son, Zahid Ashraf, was the managing partner. Refco is represented in Dubai by a commodities broker called Ramada Financial Consultants that is owned and operated by a distant cousin of the Ashrafs named Zaheer Khawaja. Although Ramada is a "foreign correspondent" of Refco (the meaning of the term in this context is unclear), the contract between the two firms disclaims any intention of making Ramada an agent of Refco.

In January 1992 Eastern and Refco entered into a customer agreement by which Refco was to broker trades on U.S. commodities exchanges for Eastern. Eastern's trading account with Refco established pursuant to the agreement was nondiscretionary, meaning that Eastern was to make all the decisions on what trades to make and Refco was merely to execute them. The agreement authorized Zahid and two of his brothers (the three being identified as "general partners" in Eastern with Zahid also being designated "Managing Director") to act for Eastern and provided that "Refco may assume conclusively that all actions taken by and instructions from any one of the . . . named general partners have been properly taken or given pursuant to authority invested in them by all the partners in the Partnership."

At first the trades that Refco executed for Eastern involved options and futures contracts designed to hedge Eastern against unexpected changes in gold and silver prices between the time that it bought gold and silver and the time that it sold them. But after three years Zahid Ashraf began placing orders with Refco through Khawaja on behalf of Eastern for options and futures contracts in much greater quantities than required to hedge Eastern's bullion trading; in fact he was speculating, which is the opposite of hedging. And not for the first time. In 1994 he had opened a personal trading account (not an Eastern account) with another U.S. commodities broker, Republic Securities New York, through Khawaja. In March of the following year, at about the time that he started speculative trading through Khawaja and Refco, Zahid lost millions of dollars in his Republic account, which Republic liquidated. Zahid had funded that account from Eastern funds, and when his father got wind of this he forced Zahid to repay the money to Eastern and to promise never again to use Eastern's funds for commodities trading without the permission of the other partners.

The promise was not kept. In fact the trades that Zahid began making on Eastern's behalf after the Republic fiasco were ten times as large as any of the previous trades that Eastern had made. They were very risky; in three days in March, Eastern lost $22 million in trades at Zahid's direction executed by Refco. Refco was of course aware of the sudden and substantial increase in the scale and riskiness of Eastern's commodities trading and it also learned from Khawaja of Zahid's disastrous experience with Republic. But as the increase in scale translated into much larger commissions for Refco, and Eastern was a substantial and reputable firm and Zahid its managing partner, Refco was content.

Refco mailed Eastern daily statements of the trading results of the previous day, and Ramada faxed similar statements ("recaps") to Eastern. Zahid's partners did not read any of these documents, however; they left everything to do with commodities trading to Zahid. At his request, Ramada began sending Eastern two sets of recaps, one reflecting routine hedging transactions and the other the new, speculative trading by Zahid. Zahid did not show these recaps to his partners--in fact he destroyed them. When one of Zahid's brothers visited Refco's chief operating officer, the latter didn't tell him about the dramatic change in the amount of trading in Eastern's account.

Zahid informed Refco of a change in the mailing address of Eastern's account and also opened a separate account with Refco at the new address in Eastern's name and switched his speculative trading to that account. He did not consult his partners about either the change of the mailing address or the opening of the new account. He later opened still another account with Refco and switched his speculative trading to that account, again without consulting his partners. And he was no longer trading gold and silver futures and options. He was speculating in foreign currencies, at one point obtaining an exposure in British pound futures and options that exceeded $3 billion. Refco did not inform Zahid's partners of any of these developments.

Beginning in May 1996, the account (Zahid's third Eastern account) began experiencing large trading losses which caused it to become undermargined; nevertheless Refco continued executing trades in it at Zahid's direction. Refco also allowed him to withdraw money from the other accounts, even though the third was now undermargined. When finally liquidated in July of 1996, that account had a debit balance of $28 million, which Refco, Inc., as a clearing broker, had to make good to the people on the other side of Eastern's commodities trades. To eliminate the debit, Refco Capital, without advising Eastern, Zahid, or Khawaja, lent Eastern that amount, which was deposited in Eastern's account with Refco, Inc. Although the loan was from Refco Capital, Eastern was asked to give, and gave, a promissory note for the amount of the loan to Refco, Inc., which assigned the note to Refco Capital. Eastern repaid half the borrowed amount to Refco, Inc., not to Refco Capital, the assignee, but refused to repay the rest, and Refco's counterclaim is for the remaining debit balance. As a result of the losses, Zahid was stripped of his partnership interest in Eastern.

So far as its own claim, that of fraud, is concerned, Eastern argues only that the judge should not have instructed the jury on Refco's defenses of ratification, estoppel, and mitigation (the parties focus on the first of these, and we can ignore the others, which the parties treat as synonyms for ratification), because there was no evidence of ratification and so the jury was confused. Eastern is right of course that a jury should not be instructed on a defense for which there is so little evidentiary support that no rational jury could accept the defense. E.g., United States v. Perez, 86 F.3d 735, 736 (7th Cir. 1996); Aerotronics, Inc. v. Pneumo Abex Corp., 62 F.3d 1053, 1065-66 (8th Cir. 1995); Farrell v. Klein Tools, Inc., 866 F.2d 1294, 1297 (10th Cir. 1989). Such a defense should be excluded from the case altogether by a grant of partial summary judgment or by a partial directed verdict. Letting the jury consider it is just an invitation to jury lawlessness. But it doesn't follow from this that the jury's verdict must be set aside. The invitation isn't always taken. It cannot just be assumed that the jury must have been confused and therefore that the verdict is tainted, unreliable. It's not as if, here, the judge had failed to give an instruction to which Eastern was entitled, or had given an erroneous instruction. This is just a case of surplusage, where the only danger is confusion, and reversal requires a showing that the jury probably was confused. Griffin v. United States, 502 U.S. 46 (1991); Buhrmaster v. Overnite Transportation Co., 61 F.3d 461, 463-64 (6th Cir. 1995); Free v. Peters, 12 F.3d 700, 703 (7th Cir. 1993); Dwoskin v. Rollins, Inc., 634 F.2d 285, 292-95 (5th Cir. 1981); cf. Gile v. United Airlines, Inc., 213 F.3d 365, 374-75 (7th Cir. 2000); McCarthy v. Pennsylvania R.R., 156 F.2d 877, 882 (7th Cir. 1946); Lattimore v. Polaroid Corp., 99 F.3d 456, 468 (1st Cir. 1996). Buhrmaster suggests that such an error is harmless as a matter of law, 61 F.3d at 463-64, implying that there is to be no...

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