Moody v. Bache & Co., Inc.

• Citation: 570 F.2d 523
• Decision Date: 30 March 1978
• Docket Number: No. 76-2266,76-2266
• Parties: Fed. Sec. L. Rep. P 96,368 Joe G. MOODY, Plaintiff-Appellant, v. BACHE & CO., INCORPORATED and Bob Peters, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 523

570 F.2d 523

Fed. Sec. L. Rep. P 96,368

Joe G. MOODY, Plaintiff-Appellant, v. BACHE & CO., INCORPORATED and Bob Peters, Defendants-Appellees.

No. 76-2266.

United States Court of Appeals, Fifth Circuit.

March 30, 1978.

Patrick F. McGowan, Dallas, Tex., for plaintiff-appellant.

John Andrew Martin, Dallas, Tex., for defendants-appellees.

Appeal from the United States District Court for the Northern District of Texas.

Before INGRAHAM, GEE and TJOFLAT, Circuit Judges.

GEE, Circuit Judge:

The present case involves a broker's liability for a customer's losses on transactions in the commodities market. It raises issues of the applicability both of the securities acts of 1933 and 1934, 15 U.S.C. §§ 77a et seq. and 15 U.S.C. §§ 78a et seq., and of the Commodities Exchange Act, 7 U.S.C. §§ 1 et seq.

In March 1973, plaintiff Joe G. Moody opened a commodities account with defendant Bache & Co. on the urging of Bache's representative, Robert Peters. Peters told Moody that he would invest for Moody according to the recommendations of Bache's research department. In fact, however, Peters did not do this, or did not do so uniformly, but rather invested according to a method of his own. He had considerable success during March and April, but in May this success soured dramatically. On May 2, Peters made on Moody's behalf the trades that ultimately led to this lawsuit: he "shorted" twenty contracts for September wheat. His trade on the "short" side reflected his hope that the price of wheat would decline; but instead, no doubt due to the market's reaction to the Soviet wheat deal, the price of wheat rose. Peters continued to keep Moody's account in the short position and did so for a time even after Bache's research analysts began to advise that short positions be "covered." When Moody's wheat position was liquidated on June 1, the account had suffered a net loss of over $86,000 due to the wheat trades. Coincidentally, Moody also suffered a net loss of over $5,000 in a Bache securities account due to trading in certain bonds. To recoup his losses, plaintiff brought this action under the securities acts and the Commodities Exchange Act, concentrating his arguments on section 10(b) of the 1934 Securities Exchange Act and Rule 10b-5 promulgated under that Act. According to this well-known rule (17 C.F.R. § 240.10b-5), it is unlawful for any person to make untrue statements or omissions of material fact in connection with the purchase or sale of any security. ¹

After trial, the jury answered several specific questions as to Peters' commodity trading in Moody's behalf; as will appear below, these findings are the basis of the present appeal. The jury also made several findings exonerating Bache and Peters with respect both to the bond transactions and to charges of malice. The district court held that the jury findings resolved all issues of liability in favor of defendants and awarded judgment accordingly. Plaintiff Moody now appeals.

Before reaching the substance of Moody's contentions on appeal, we must note some preliminary points. Courts have widely agreed that a particular commodities futures contract is not in itself a security under the securities acts. SEC v. Continental Commodities Corp., 497 F.2d 516, 520 n. 9 (5th Cir. 1974), and cases cited therein; cf. Booth v. Peavey Company Commodity Services, 430 F.2d 132 (8th Cir. 1970), but see Marshall v. Lamson Brothers & Co., 368 F.Supp. 486 (S.D.Iowa 1974). According to the definitions of these acts, the term "security" embraces investment contracts; and according to the Supreme Court in SEC v. W. J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946), "an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." ² In SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 477 (5th Cir. 1974), this court noted that the Howey test "subsumes within it three elements: first the existence of an investment of money; second, that the scheme functions as a common enterprise; and third, that the profits of the enterprise are derived solely from the efforts of others." Continental Commodities, supra at 521, citing Koscot at 477. ³ It has often been held that futures contracts fail to meet this test because, as Judge Rubin said in McCurnin v. Kohlmeyer & Co., 340 F.Supp. 1338, 1341 (E.D.La.1972), aff'd per curiam, 477 F.2d 113 (5 Cir. 1973):

A commodity future contract is no more or less than an option; the purchaser agrees to take delivery, or the seller agrees to make delivery, of a specified quantity of a specified commodity at a specified future time at a specified price. Unless the investor reverses his position timely by selling what he has bought or buying what he has sold, he must accept delivery of the commodity and pay the full purchase price as set by the contract (or deliver the commodity against the full payment, if he has sold). He is in no way investing his money in a common enterprise, nor is he led to expect profits solely from the efforts of any third party. The "enterprise" is an individual one. The expectation of profit arises solely from the speculative hope that the market price of the underlying commodity will vary in his favor, permitting purchase or sale at a profit.

See Sinva Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 253 F.Supp. 359, 366-67 (S.D.N.Y.1966); accord Continental Commodities Corp., supra at 520 n. 9, and cases cited therein. Hence the courts have generally rejected the "novel contention that the regulatory features of the securities acts be extended into the vast domain of the commodities markets." Sinva, supra at 365.

On the other hand, some courts, including this one, have recognized that discretionary accounts in commodities futures contracts as opposed to the futures contracts themselves may be "investment contracts" and thus "securities" for purposes of the securities acts. This is because such discretionary accounts may contain the Howey elements of investment, common enterprise, and dependence solely on the efforts of others. Continental Commodities, supra. ⁴ Plaintiff in the present case argues as if the commodities futures contracts themselves were securities. We reject this line of argument; if any "security" subject to the securities acts was involved in this case, it must be the Bache commodity account itself, on the theory that this was a discretionary account such as to be considered an "investment contract" and thus a security subject to the acts. ⁵ In answers to specific questions the jury found that plaintiff Moody gave Peters discretion to make the transactions in Moody's account and that the ill-starred May transactions were so made; but it also found that plaintiff authorized or consented to these transactions. Supposing that these findings are sufficient to render the commodities account a "discretionary account," we must still bear in mind that only the account itself not the individual commodities futures traded can be a "security" subject to the securities acts.

This analysis disposes of several portions of plaintiff's argument, namely those that seek to impose liability on Bache as a broker or dealer. Bache was of course a broker or dealer in commodities futures, but since these are not securities, Bache's brokerage activities in commodities futures do not in themselves entail liability under the securities acts. And with respect to the account itself the only arguable "security" at issue Bache was not a broker or dealer but was rather at most in the position of an issuer or seller. ⁶

With the issues thus narrowed, we reach the main focus of plaintiff's argument. In the jury's answers to specific interrogatories about the commodities account, it found that Peters did represent that he would act in accordance with the Bache recommendations, that this representation was false and misleading, that Peters knew it to be so, that Moody relied on this representation in making his investment, and that the representation was "material" in the sense that a reasonable person would have regarded it as important and relied on it. However, the jury also found that the representation was not the cause of Moody's loss.

Plaintiff contends that the last of these findings is inconsistent with the previous findings, and he urges that causation follows as a matter of law where reliance and materiality are found. This contention relates to the requirements for a private cause of action under Rule 10b-5. That such a private cause of action exists is now "well established," Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), and this court recognized such a cause of action in Hooper v. Mountain States Securities Corp., 282 F.2d 195 (5th Cir.), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1960). But such an action is essentially a tort claim. See Kardon v. National Gypsum Co., 69 F.Supp. 512 (E.D.Pa.1946). Thus, the private complainant must show not only a violation of the rule, i. e., an untrue statement or material omission in connection with the sale of a security, but must also show that the omission or untrue statement resulted in or caused the complainant's damage. See Sargent v. Genesco, Inc., 492 F.2d 750, 759 (5th Cir. 1974). In some contexts, however, it has been held that where reliance and materiality or even materiality alone are shown, this is a sufficient showing of cause of harm, and no further proof of causation need be adduced. E. g., Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 154, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); Chasins v. Smith Barney & Co., Inc., 438 F.2d 1167 (2d Cir. 1970). In view of these cases, plaintiff argues that the jury's finding of "no causation" must have been based on an erroneous understanding of the...