Stone v. Saxon & Windsor Group Ltd.

• Decision Date: 08 January 1980
• Docket Number: No. 79 C 2082.,79 C 2082.
• Parties: Ronald STONE and All Other Persons Similarly Situated, Plaintiffs, v. SAXON & WINDSOR GROUP LTD. and Carter, Rodgers & Whitehead, a whollyowned subsidiary thereof, Defendants.
• Court: U.S. District Court — Northern District of Illinois

485 F. Supp. 1212

Ronald STONE and All Other Persons Similarly Situated, Plaintiffs, v. SAXON & WINDSOR GROUP LTD. and Carter, Rodgers & Whitehead, a whollyowned subsidiary thereof, Defendants.

No. 79 C 2082.

United States District Court, N. D. Illinois, E. D.

January 8, 1980.

Fred I. Shandling, Ardell & Shandling, Ltd., Chicago, Ill., for plaintiffs.

Charles J. Hecht, New York City, Joseph H. Spiegel, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

ASPEN, District Judge:

The named plaintiff in this case, Ronald Stone, has brought this action to enforce certain provisions of the Commodity Exchange Act, as amended, 7 U.S.C. § 1 et seq. (1978) ("the Act").¹ The complaint alleges that the defendants herein entered into option contracts with the plaintiff for the sale of gold or silver bullion or Kruggerands in violation of sections 4c(b) and 4c(c) of the Act, 7 U.S.C. §§ 6c(b), 6c(c).² The defendants have moved to dismiss the complaint on the ground that private parties lack standing to sue for violations of the Act. For the reasons that follow, the Court agrees that there is no implied private right of action to enforce these particular provisions of the Act. Accordingly, this action must be dismissed pursuant to Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction.³

The History of Commodities Regulation

Federal regulation of the commodities futures market began in 1922 as the result of discontent by farmers about the adverse impact of speculative activity on the price of agricultural products.⁴ The Grain Futures Act of 1922 licensed "contract markets," the exchanges in which future delivery of commodities are transacted, and required these markets to promulgate rules to prevent price manipulation.⁵ The 1936 amendments to the statute retitled the legislation the Commodity Exchange Act, and extended the coverage of the Act to include futures trading of foodstuffs other than grains. The Act's provisions also were extended to cover traders in commodities as well as members of contract markets. In addition, price manipulation was made a criminal offense for the first time. Although authority to enforce the Act's provisions was vested in the Department of Agriculture, the essential philosophy of the legislation was one of self-regulation by the contract markets.⁶

By the early 1970's, however, the inability of the markets to satisfactorily regulate themselves became apparent. By 1974, the annual value of futures traded had reached $500 billion,⁷ thereby magnifying the potential impact that excessive speculation could have on the price of commodities. In light of the increased trading contract markets lacked the capability, as well as the will, to enforce vigorously the provisions of the Act. H.R.Rep. No. 975, 93d Cong., 2d Sess. 46 (1974). Thus, Congress deemed it necessary to strengthen federal regulation so as

to further the fundamental purpose of the Commodity Exchange Act in insuring fair practice and honest dealing on the commodity exchanges and providing a measure of control over those forms of speculative activity which often demoralize the markets to the injury of producers, consumers, and the exchanges themselves.

S.Rep. No. 1131, 93d Cong., 2d Sess. 1 (1974), U.S.Code Cong. & Admin.News 1974, p. 5844. To achieve this goal, the Commodity Futures Trading Commission Act of 1974 significantly altered the statutory scheme of commodities regulation. First, a new federal commission — the Commodity Futures Trading Commission (CFTC) — was created and vested with exclusive jurisdiction over commodities futures trading. 7 U.S.C. § 2.⁸ While contract markets still possessed certain regulatory responsibility, that responsibility was rendered subject to CFTC review and modification.⁹

Second, the scope of the Act was extended to include trading in commodities which theretofore had been unregulated, including gold and silver. Although Congress continued the pre-existing ban on options trading in certain designated commodities, it allowed continued trading in the newly-regulated commodities, subject to administrative rules that would be promulgated by the CFTC. 7 U.S.C. § 6c(a), (b).

Third, the 1974 amendments created an elaborate enforcement scheme for the Act. The CFTC was authorized to bring administrative proceedings against any contract market that failed to enforce its rules, Commission regulations, or the statute's provisions, under which a civil penalty of up to $100,000 could be assessed.¹⁰ 7 U.S.C. § 13a. The CFTC also may file suit in federal district court to enjoin improper behavior by contract markets, and may suspend or revoke an exchange's designation as a contract market, subject to review by the Court of Appeals. 7 U.S.C. § 13a-1, 7b, 8. Similar sanctions, including indictment and criminal prosecution, are available to the CFTC in policing abuses by individual traders.

As part of this enforcement scheme, Congress also created mechanisms through which customers injured by violations of the Act could obtain redress. The Act requires that contract markets devise arbitration procedures which may be used to resolve disputes involving less than $15,000. 7 U.S.C. § 7a(11). Moreover, the 1974 amendments provide for administrative reparations proceedings. 7 U.S.C. § 18. Complaints against registered traders may be filed with the CFTC within two years of the alleged improper conduct. The CFTC then will conduct an investigation and, if the facts developed warrant further action, designate an administrative law judge to hear the claim.¹¹ The administrative law judge is empowered to determine the merits of the claim, and to order payment of damages to the aggrieved customer. 7 U.S.C. § 18(e). Such an order is enforceable in the federal district court, and may be reviewed on petition to the court of appeals. 7 U.S.C. §§ 18(f), (g).

Experience with administering the Act as amended in 1974 led to several additional amendments to the Act in 1978, two of which are of particular significance to the issue raised in this case. The Congress added a provision to the Act authorizing the States to bring actions in federal district court to enjoin violations of the Act or CFTC regulations. 7 U.S.C. § 13a-2. The senate report on the amendments noted that "the intent of the section is to provide states with the tools to combat fraudulent and other unlawful behavior directed at their residents." S.Rep. No. 405, 95th Cong., 2d Sess. 25 (1978). The report also observed that utilization of the investigative and prosecutorial capabilities of the States would ease the burden of the CFTC. Id. at 26.

The Congress also amended the Act to prohibit options trading in those commodities newly-regulated by the 1974 amendments. 7 U.S.C. § 6c(c). The CFTC already had imposed an administrative ban on such trading based on the finding that "the offer and sale of commodity options in the United States is at present fraught with fraud and other illegal and unsound practices and represents substantial risks to members of the general public." S.Rep. No. 405, 95th Cong., 2d Sess. 24 (1978). This statutory amendment reaffirmed the CFTC ban, and provided a procedure by which the Commission could lift the ban at some point in the future. By giving the CFTC this measure of control, "the congressionally-imposed ban on options trading . . . will give the Commission time to get its house in order on futures transactions and make the necessary managerial changes to ensure successful Commission operations." Id. at 25.¹²

It is in light of this scheme of commodities regulation that the Court must consider whether an implied private right of action to enforce the ban on options trading may be engrafted upon the statute.

Implied Private Right of Action

Prior to the 1974 amendments, the Seventh Circuit had held that private individuals could sue to enforce the antifraud provisions of the Act. Deaktor v. L. D. Schreiber & Co., 479 F.2d 529, 534 (7th Cir.), rev'd on other grounds sub nom., Chicago Mercantile Exchange v. Deaktor, 414 U.S. 113, 94 S.Ct. 466, 38 L.Ed.2d 344 (1973); see also Goodman v. H. Hentz & Co., 265 F.Supp. 440, 447 (N.D.Ill.1967). The Seventh Circuit in two post-1974 decisions has reaffirmed this conclusion. Hirk v. Agri-Research Council, Inc., 561 F.2d 96, 103 (7th Cir. 1977); Case & Co. v. Board of Trade, 523 F.2d 355, 360 (7th Cir. 1975).

The Court, however, believes that these precedents are not controlling. These decisions all addressed the private enforcement of the anti-fraud provisions of the Act; none reached the question of private enforcement of the ban on options trading. "The source of plaintiff's right must be found, if at all, in the substantive provisions of the . . . Act which they seek to enforce," and not solely by reference to other provisions contained in the statute. Touche Ross & Co. v. Redington, 442 U.S. 560, 577, 99 S.Ct. 2479, 2490, 61 L.Ed.2d 82 (1979) (Supreme Court denies a private right of action to enforce § 17(a) of the 1934 Securities Act despite the past implication of private rights of action under §§ 10(b) and 14(a) of the 1934 Act). Thus, Touche Ross requires that the Court conduct an independent inquiry into the validity of an implied private right of action under Sections 4c(b) and 4c(c).¹³

The starting point for any such inquiry, of course, is Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). In that case, the Court outlined the various factors relevant to determining whether a private right of action is implicit in a statutory scheme:

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

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