NAT. SUPER SPUDS, INC. v. New York Mercantile Exch.

• Decision Date: 29 May 1979
• Docket Number: 2594,4350 and 5200 (LFM).,2554,No. 76 Civ. 2375,3210,2571,2648,76 Civ. 2375
• Citation: 470 F. Supp. 1256
• Parties: NATIONAL SUPER SPUDS, INC., et al., Plaintiffs, v. NEW YORK MERCANTILE EXCHANGE et al., Defendants. INCOMCO, Plaintiff, v. NEW YORK MERCANTILE EXCHANGE et al., Defendants. Howard BERENSON, Plaintiff, v. John Richard SIMPLOT et al., Defendants. Neil LEIST et al., Plaintiffs, v. John Richard SIMPLOT et al., Defendants. Dexter RICHARDS, Plaintiff, v. NEW YORK MERCANTILE EXCHANGE et al., Defendants.
• Court: U.S. District Court — Southern District of New York

470 F. Supp. 1256

NATIONAL SUPER SPUDS, INC., et al., Plaintiffs, v. NEW YORK MERCANTILE EXCHANGE et al., Defendants.

INCOMCO, Plaintiff, v. NEW YORK MERCANTILE EXCHANGE et al., Defendants.

Howard BERENSON, Plaintiff, v. John Richard SIMPLOT et al., Defendants.

Neil LEIST et al., Plaintiffs, v. John Richard SIMPLOT et al., Defendants.

Dexter RICHARDS, Plaintiff, v. NEW YORK MERCANTILE EXCHANGE et al., Defendants.

Nos. 76 Civ. 2375, 2554, 2571, 2594, 2648, 3210, 4350 and 5200 (LFM).

United States District Court, S. D. New York.

May 29, 1979.

Rein, Mound & Cotton by Maurice Mound, New York City, and Cahill, Gordon & Reindel by William E. Hegarty, Charles Platto, Ruth D. MacNaughton, and Peter Leight, New York City, for defendant New York Mercantile Exchange.

Thompson & Mitchell by W. Stanley Walch, Gerard K. Sandweg, Jr., and Kenton E. Knickmeyer, St. Louis, Mo., and Barrett, Smith, Schapiro, Simon & Armstrong, New York City, for defendant Clayton Brokerage Co. of St. Louis, Inc.

Dewey Ballantine, Bushby, Palmer & Wood by Hugh N. Fryer and Ira G. Greenberg, New York City, and Sidley & Austin by Stuart S. Ball, Lawrence H. Hunt, Jr., Thomas F. Ryan and Michael W. Davis, Chicago, Ill., for defendant Heinold Commodities, Inc.

Hall, McNicol, Hamilton & Clark by Donald G. McCabe, New York City, for defendant Thomson & McKinnon Auchincloss Kohlmeyer, Inc.

Pomerantz, Levy, Haudek & Block by William E. Haudek, Richard M. Meyer and Roger W. Haudek, New York City, for class plaintiffs.

Howard Berenson, plaintiff pro se.

Robson & Toboroff by Leonard Toboroff and Kenneth N. Miller, New York City, for plaintiffs Neil Leist, Philip M. Smith and Incomco.

Jay W. Kaufmann, New York City, for plaintiff Dexter Richards.

MacMAHON, District Judge.

Defendants, the New York Mercantile Exchange (the "Exchange"), Richard Levine ("Levine"), Howard Gabler ("Gabler"), Alfred Pennisi ("Pennisi"), Clayton Brokerage Co. of St. Louis, Inc. ("Clayton"), Heinold Commodities, Inc. ("Heinold") and Thomson & McKinnon Auchincloss Kohlmeyer, Inc. ("Thomson"), move under Rule 12(c), Fed.R.Civ.P., for judgment on the pleadings, or, in the alternative, under Rule 56(b), Fed.R.Civ.P., for partial summary judgment dismissing all or part of the complaints against them in these related actions.¹ Since all parties have submitted factual material outside the pleadings, we treat the motions as motions for partial summary judgment.

These actions arise out of the much publicized default in May 1976 of Maine potato futures contracts,² when the sellers of almost 1,000 contracts failed to deliver approximately 50,000,000 pounds of potatoes, resulting in the largest default in the history of commodities futures trading in this country. The primary claim in these actions is that the default was caused by certain defendants' price manipulation.

In order to understand these motions, a basic understanding of the commodities futures industry is essential. A commodity future is a contract for the future delivery of a certain commodity. Except for price, all the terms of the contracts for a given commodity traded on an exchange are standardized and, thus, the contracts are fungible. The actual trading of futures is done by futures commission merchants and floor brokers, both of whom must be registered with the Commodities Futures Trading Commission (the "CFTC").³ Additionally, trading may take place only on exchanges which have complied with certain statutory requirements and have been designated as "contract markets" by the CFTC.⁴

A seller of a futures contract is, in the language of the trade, in a "short" position, that is, he is obligated to deliver the commodity at a future date in return for the right to receive the purchase price. Conversely, a buyer of a futures contract is said to be in a "long" position, that is, he is obligated to pay the purchase price in return for the right to receive the commodity. As a practical matter, however, physical delivery of the commodity is made on only a small fraction of the futures contracts traded on the nation's exchanges. Most of the trades are made by speculators who have no intention of delivering or receiving the actual commodity. As the last day of trading in a particular contract approaches, a speculator in a short position (a seller) will cover his obligation to deliver by buying a contract. Similarly, a speculator in a long position (a buyer) will cover his obligation to pay by selling a contract.⁵

Plaintiffs, traders and a dealer in potatoes, were buyers holding long positions in May 1976 Maine potato futures contracts. They allege that Clayton, Heinold and Thomson, futures commission merchants, conspired with certain of their customers to manipulate and depress the price of the May contract by selling an illegally large number of May contracts, thereby causing plaintiffs to sell their contracts and potatoes at an artificially depressed price.

Plaintiffs contend that the actions of Clayton, Heinold and Thomson violated the Commodities Exchange Act⁶ (the "Act"), various regulations promulgated thereunder,⁷ and Sections 1 and 2 of the Sherman Act.⁸ Plaintiffs also contend that the Exchange, a designated contract market, and its officers, Levine, Gabler and Pennisi, are liable to them for failure to take steps to prevent the downward price manipulation by the other defendants, and that the Exchange conspired with the other defendants to manipulate the price.

Specifically, plaintiffs allege that the Exchange and its officers failed to report and concealed violations of the Act and the regulations promulgated thereunder; that the Exchange and its officers violated the Act by failing to enforce its own rules, the Act and the CFTC's regulations; and that the Exchange violated Sections 1 and 2 of the Sherman Act.

IMPLIED RIGHT OF ACTION

All moving defendants contend that they are entitled to partial summary judgment because there is no private right of action against them under the Act. Concededly, such a right of action existed prior to 1974,⁹ but, in that year, the Act was amended extensively,¹⁰ and the question before us is whether the private right of action has survived the 1974 amendments to the Act.

Although a number of other district courts have considered this question, there is no clear consensus on the answer.¹¹ This difference of opinion and the importance of the question to the future course of these actions compel us to resolve the question ourselves.

Under Cort v. Ash,¹² four factors are relevant in determining whether a private right of action may be implied under a federal statute which does not expressly provide for one:

"First, is the plaintiff `one of the class for whose especial benefit the statute was enacted,' . . . that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? . . . Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? . . . And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law? . . ."¹³

There can be no question that plaintiffs, investors in the commodities market and a dealer in potatoes, are within the class "for whose especial benefit the statute was enacted." As Senator Dole stated, the primary purposes of the 1974 amendments to the Act were "to protect against manipulation of markets and to protect any individual who desires to participate in futures market trading."¹⁴ Additionally, the Act itself states that price manipulation and unreasonable fluctuations in price "are detrimental to . . . persons handling commodities."¹⁵

Thus, we find that the first element of the Cort test is satisfied.

The second element of the Cort test, congressional intent, is more troublesome. The 1974 amendments to the Act established an administrative procedure under which "any person complaining of any violation of any provision of this chapter or any rule, regulation, or order thereunder by any person who is registered or required to be registered under . . . this title may"¹⁶ commence an administrative proceeding before the CFTC to recover reparations. Judgments resulting from these reparation proceedings are subject to judicial review by the courts of appeal¹⁷ and may be enforced in the district courts.¹⁸

The 1974 amendments also give the CFTC plenary power over futures commission merchants and contract markets. The CFTC may suspend or revoke the registration of a futures commission merchant or the designation of a contract market.¹⁹ The CFTC is also authorized to issue cease and desist orders against contract markets²⁰ and to assess civil penalties of up to $100,000 against futures commission merchants and contract markets.²¹ Finally, the CFTC or the Attorney General, at the request of the CFTC, is authorized to bring an action in the district courts against futures commission merchants and contract markets for a restraining order, an injunction or a writ of mandamus to compel compliance with the Act and the regulations thereunder.²²

We believe that under the maxim of "expressio unius est exclusio alterius,"²³ the establishment of administrative reparation proceedings and the plenary grant of disciplinary and regulatory power to the CFTC evidences a congressional intent to deny a private right of action under the Act. This conclusion is reinforced by the fact that Congress was informed of the need for a private right of action under the Act²⁴ but rejected a bill which would have expressly established such a right of action.²⁵

Thus, we conclude that Congress did not intend that there be a private right of action under the Act.

The third element of the Cort test, whether the implication of a private right...