757 F.2d 163 (7th Cir. 1985), 83-3172, United States v. Dial
|Docket Nº:||83-3172, 84-1339.|
|Citation:||757 F.2d 163|
|Party Name:||UNITED STATES of America, Plaintiff-Appellee, v. Donald D. DIAL and Horace G. Salmon, Defendants-Appellants.|
|Case Date:||March 19, 1985|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued Nov. 8, 1984.
Rehearing and Rehearing En Banc Denied April 12, 1985.
Daniel W. Gillogly, Asst. U.S. Atty., Dan K. Webb, U.S. Atty., Chicago, Ill., for plaintiff-appellee.
David P. Schippers, Chicago, Ill., for defendants-appellants.
Before WOOD and POSNER, Circuit Judges, and DUMBAULD, Senior District Judge. [*]
POSNER, Circuit Judge.
Donald Dial and Horace Salmon were found guilty by a jury of mail and wire fraud (18 U.S.C. Secs. 1341 and 1343) in connection with the trading of silver futures on the Chicago Board of Trade. Dial was sentenced to 18 months in prison to be followed by 5 years on probation, and was fined $16,000. Salmon was sentenced to 5 years on probation with 30 days of this period to be spent in work release (meaning that he will work during the day but sleep in jail), and was fined $15,000 and ordered to do 500 hours of community service.
The main argument of the appeals is that the conduct in which the defendants engaged was not fraudulent. To understand this argument you must know something about commodity futures. For background see Carlton, Futures Markets: Their Purpose, Their History, Their Growth, Their Successes and Failures, 4 J. Futures Mkts. 237 (1984); Chicago Board of Trade, Commodity Trading Manual (1982); Chicago Board of Trade, Silver Futures: Another New Dimension (1969); Leist v. Simplot, 638 F.2d 283, 286-88 (2d Cir.1980), aff'd under the name of Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982). A futures contract is a contract for the sale of a commodity at a future date; but unlike a forward contract, which it otherwise resembles, a futures contract rarely results in actual delivery of the commodity. Suppose that today, a day in March, the price of silver for delivery in June is $4 an ounce, but you think the price will go up to $5 by the time June rolls around. You would then buy June silver at $4. The person on the other side of the contract, the seller, presumably thinks differently--that the price in June will be $4 or lower. You are "long" on the contract; you expect the price to rise. He is "short"; he expects it to fall. As the months go by, the price of June silver will change as more and more information becomes available on the likely demand and supply of silver in June. Suppose in May the price hits $5 and you want
to take your profit. All you have to do is sell the contract for $5; you don't have to worry about ending up with a pile of silver to dispose of. Nor need the person who sold you the silver for $4, and who probably never had any silver, have to worry about getting some and delivering it in June to the person to whom you sold your contract. All he has to do in order to take his loss and get out of the market is buy (at $5) the same amount of June silver that he had agreed to sell; the two contracts cancel, and he is out of the market.
What we have described is speculation but not, as the defendants contend, gambling. Commodity futures trading serves a social function other than to gratify the taste for taking risks--two other social functions in fact. It increases the amount of information that the actual consumers of the commodity (mainly, in the case of silver, manufacturers of film, electronics, and jewelry) have about future price trends, by creating incentives for investors and their advisers to study and forecast demand and supply conditions in the commodity. And it enables the risk-averse to hedge against future uncertainties. Suppose a jewelry manufacturer knows that it will need a certain amount of silver in June and is worried that the price might be very high by then. By buying June silver futures at $4 it can place a ceiling on what the silver will cost it (sellers can hedge similarly, by selling futures). Suppose that by June the price has risen to $5. When the manufacturer buys silver then, it will have to pay $5; but by selling its futures contract (to someone who had gone short on June silver) just before delivery is due, for $5, which is to say at a profit of $1, the manufacturer ends up paying a net of only $4 for the silver. The manufacturer could have hedged by means of a forward instead of a futures contract, that is, by signing a contract with a silver company for delivery in June at $4. But then it would have to locate and negotiate with a particular seller in advance, rather than wait till June when it will actually want the silver and buy then at the current price ($5). Since futures contracts are standard contracts--for example, the Chicago Board of Trade's silver futures contract in the period relevant to this case was a contract for 5,000 troy ounces of silver of a specified grade and quality--there is no negotiation over terms; and since the transaction is guaranteed by the clearing members of the exchange, see Bernstein v. Lind-Waldock & Co., 738 F.2d 179, 181 (7th Cir.1984), the buyer does not have to worry about whom he is dealing with.
Traders on a commodity futures exchange will, however, want some assurance that there are no people in the market who have preferential access to information. If there are known to be such people, the other traders will tend to leave the exchange for other exchanges that do not have such people--and several commodity exchanges besides the Board of Trade offer trading in silver futures contracts. If trading is "rigged" on all commodity futures exchanges, there will be less commodity futures trading, period, and the social benefits of such trading, outlined above, will be reduced. The greatest danger of preferential access comes from the brokers, who often trade on their own account as well as for their customers. Brokers have more information than any of their customers because they know all their customers' orders. Suppose a customer directs his broker to buy a large number of silver futures contracts. The broker knows that when he puts this order in for execution the price will rise, and he can make it rise further if he waits to execute the order until he can combine it with other buy orders from his customers into a "block" order that will be perceived in the market as a big surge in silver demand. If, hoping to profit from this knowledge, the broker buys silver futures on his own...
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