Katara v. D.E. Jones Commodities, Inc.

• Decision Date: 14 December 1987
• Docket Number: D,No. 1046,1046
• Citation: 835 F.2d 966
• Parties: Shiv B. KATARA, as Administrator of Manisha Sportswear, Inc. Defined Pension Trust, Plaintiff-Appellee, v. D.E. JONES COMMODITIES, INC., and Alpha O. Nickelberry, Defendants-Appellants. ocket 87-7027.
• Court: U.S. Court of Appeals — Second Circuit

Page 966

835 F.2d 966

56 USLW 2392

Shiv B. KATARA, as Administrator of Manisha Sportswear, Inc.

Defined Pension Trust, Plaintiff-Appellee, v. D.E. JONES COMMODITIES, INC., and Alpha O. Nickelberry,

Defendants-Appellants.

No. 1046, Docket 87-7027.

United States Court of Appeals, Second Circuit.

Argued April 22, 1987.

Decided Dec. 14, 1987.

Howard Goldstein, New York City (Baratta & Goldstein, New York City, Linda Mary Anov, of counsel), for plaintiff-appellee.

John J. Walsh, New York City (Cadwalader, Wickersham & Taft, New York City, H. Peter Haveles, Jr., Leslie R. Caldwell, of counsel), for defendants-appellants.

Before KAUFMAN, MESKILL and MAHONEY, Circuit Judges.

MAHONEY, Circuit Judge.

This appeal is taken from a judgment entered upon a jury verdict in the United States District Court for the Southern District of New York, Kevin T. Duffy, Judge, awarding $296,195 in compensatory damages and $150,000 in punitive damages to plaintiff in a diversity case based upon common law fraud and breach of contract and dismissing defendants' counterclaims and third party claims against plaintiff, and from an order denying defendants' motion for judgment notwithstanding the verdict or for a new trial. We affirm in part, reverse in part, and reverse and remand in part.

Background

On May 11, 1983, Shiv B. Katara came to the offices of D.E. Jones Commodities, Inc. ("Jones") to discuss opening an account. Katara apparently had been heavily recruited by Jones personnel. He returned the next day and opened an account for the Manisha Sportswear, Inc. Defined Pension Trust (the "Trust"), of which he was administrator.

Katara opened the account to allow him to trade Standard & Poor's 500 Index Futures Contracts. Each such contract (an "S & P") is a "bet" on the future of the Standard & Poor's 500 composite stock price index, which is based upon the market value of the common stock of 500 different companies. Chicago Mercantile Exchange, S & P 500, at 4 (1986). S & P's are traded on the Chicago Mercantile Exchange (the "Exchange"). In theory, one who sells an S & P undertakes to deliver, and one who buys to accept delivery of, a portfolio of stocks represented by the Standard & Poor's 500 Index at a specified date for a specified price. Delivery, however, takes the form of a cash settlement of the difference between the original transaction price and the final price of the index at the termination of the contract. A "long" position holder, who has bought an S & P, profits from a rising futures price and contract value. Id. at 6. The value of an S & P is determined by multiplying the futures price by $500 (e.g., a contract with a price of 185.50 would have a value of $492,750). Id. at 5. A trader can use a position in S & P's to hedge his position in the stock market or for speculation. See N. Dunnan, Dun & Bradstreet's Guide to Your Investments: 1986, at 183, 186-88 (1986); The Almanac of Investments 423, 425 (A. Crittendan ed. 1984).

Persons investing in S & P's are required to have cash or equivalent "margin" in their accounts as a guarantee of fulfillment of the contract. The initial margin required for each S & P is $6,000, a minimum amount set by the Exchange. Thereafter, if the market moves in the direction unfavorable to the investor's position, so that his equity falls to or below $2,500 (as a result, for example, of a decline in the market reducing the value of the "long" position of a purchaser of an S & P), ¹ a level denominated as maintenance margin, a deposit of cash or its equivalent must be made to restore the position to the level of original margin, $6,000. The process of notifying the customer to make the required additional deposit is a "margin call."

Under Jones' practice at all relevant times, if the value of an account fell below the maintenance margin, the customer was required to increase the value of the account to the initial margin. Katara claims, however, that he was told by his account manager, Alpha O. Nickelberry, that he would not have to meet initial margin requirements if his account fell below the maintenance margin.

When Katara opened his account with Jones, he signed a Customer's Agreement on May 12, 1983 which provided that margins must be maintained, authorized Jones to liquidate the customer's positions under stipulated circumstances, and gave notice of the risk involved in commodities trading. The agreement, signed by Katara for the Trust, provided in relevant part ("you" or "your" refers to Jones; "the undersigned" refers to Katara):

1. The undersigned acknowledges that commodity futures trading is speculative, involves a high degree of risk and is suitable only for persons who can assume the risk of substantial losses. The undersigned understands that because of the low margin normally required, commodity futures trading may result in losses substantially in excess of funds on deposit.

* * *

6. The undersigned will at all times maintain and keep its accounts fully margined (as to both original and maintenance margin) in accordance with your requirements as from time to time are in effect. Such margin requirements established by you, in your sole and absolute discretion, may exceed the margin set by any Exchange or Clearing House.

7. Whenever the undersigned has failed to make any payment to you when due, or has failed to maintain and keep its accounts with you fully margined, or at such other time as you, in your sole and complete discretion, deem it necessary or advisable for your protection, you are authorized in your sole discretion to cover any short position or liquidate any long position the undersigned may have with you through purchase or sale on any Exchange, and/or to sell as best you deem appropriate any collateral deposited by the undersigned with you, whether or not the undersigned received notice of your intention to effect either or both of the foregoing....

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20. This Agreement is not subject to oral modifications and the execution hereof revokes any and all other agreements made with you by the undersigned.

Thereafter, on September 12, 1983, Katara signed a Risk Disclosure Statement which provided in relevant part:

The risk of loss in trading commodity futures contracts can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade, you should be aware of the following:

(1) You may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain a position in the commodity futures market. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the required funds within the prescribed time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account.

(2) Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market makes a "limit move."

(3) Placing contingent orders such as "stop loss" or "stop limit" order [sic] will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.

(4) A "spread" position may not be less risky than a simple "long" or "short" position.

(5) The high degree of leverage that is often obtainable in futures trading because of the small margin requirements can work against you as well as for you. The use of leverage can lead to large losses as well as gains.

This brief statement cannot, of course, disclose all the risks and other significant aspects of the commodity markets. You should therefore carefully study futures trading before you trade.

IN OPENING A COMMODITY FUTURES ACCOUNT WITH D.E. JONES COMMODITIES, INC., AS THE BENEFICIAL HOLDER OF INTEREST IN THIS ACCOUNT (OR, AS AN AUTHORIZED REPRESENTATIVE OF A BUSINESS ENTITY WHICH IS THE BENEFICIAL HOLDER OF INTEREST THEREIN), ACKNOWLEDGE [sic] THAT I HAVE RECEIVED AND UNDERSTAND THE RISK DISCLOSURE STATEMENT.

See 17 C.F.R. Sec. 1.55 (1987) (requiring that risk disclosure statement be provided to customer opening a commodity futures account).

Early in February, 1984, Katara's "long" position in the S & P market went sour. The market in S & P's fell, and D.E. Jones made several margin calls on Katara's account. Katara failed to meet the full amount called, and the value of his account continued to drop. Throughout this period, Katara was dealing with Arnold Zisselman, a vice president of Jones, because Nickelberry, Katara's regular account manager, was in the hospital. Finally on February 8, 1984, Zisselman liquidated fifty of the seventy S & P's in Katara's account, and liquidated the other twenty accounts the next day on Katara's instructions. At some point in this ongoing dialogue, Katara allegedly contended that he had an agreement with Jones that the Trust was not required to meet initial margin requirements. Katara did not thereafter, between the date of liquidation and the date of maturity of the S & P's that had been liquidated (approximately five weeks later), reenter the market by purchasing S & P's in order to mitigate the Trust's damages.

Katara brought suit to recover the Trust's damages, alleging common law fraud and breach of contract. ² Defendants asserted both counterclaims and third party claims against Katara for indemnification, attorneys' fees and exemplary damages. After trial, the jury returned a verdict awarding plaintiff $296,195 in compensatory damages and $150,000 in punitive damages against both defendants, and dismissing defendants' claims against Katara. Judgment was entered thereon, and defendants moved for judgment notwithstanding the verdict or a new trial. The motion was denied, 652 F.Supp. 907 (S.D.N...