EF Hutton & Co., Inc. v. Lewis

• Decision Date: 18 February 1976
• Docket Number: Civ. A. No. 75-72288.
• Parties: E. F. HUTTON & COMPANY, INC., a Delaware Corporation, Individually and as assignee of Roy McKnight, Plaintiff, v. Gordon LEWIS, Defendant.
• Court: U.S. District Court — Western District of Michigan

410 F. Supp. 416

E. F. HUTTON & COMPANY, INC., a Delaware Corporation, Individually and as assignee of Roy McKnight, Plaintiff, v. Gordon LEWIS, Defendant.

Civ. A. No. 75-72288.

United States District Court, E. D. Michigan, S. D.

February 18, 1976.

Gerald C. Davis, Cummings, McClorey, Davis & Acho, P. C., Livonia, Mich., for plaintiff.

Benjamin Rosenthal, Southfield, Mich., for defendant.

OPINION

CORNELIA G. KENNEDY, District Judge.

The facts as alleged in the complaint are essentially as follows: One Roy McKnight had a commodities futures trading account with Plaintiff E. F. Hutton; Defendant Lewis was the account executive in charge of this account; on May 22, 1975, defendant sold short, for July 1975 delivery, a number of pork belly futures without authorization from McKnight. When McKnight learned of the transaction, he disaffirmed it; Lewis then covered with a long purchase of pork belly futures on July 15, 1975. However, he did so at a higher price, and as a result there was a net loss to the McKnight account of $43,131.37. Apparently E. F. Hutton compensated McKnight and took an assignment of his claim and/or was subrogated to it. The present suit is an action by E. F. Hutton to recover the amount of the loss to the McKnight account from Lewis.

Defendant states two bases for his motion to dismiss. First, he claims that plaintiff has inadequately pleaded jurisdiction. The jurisdictional allegations are contained in paragraph 1 of the complaint:

That this Honorable Court has jurisdiction of this cause of action pursuant to the Securities and Exchange Act, being 15 U.S.C. § 77Q(a), 15 U.S.C. § 77V(a) these sections are actually part of the Securities Act of 1933, not of the Securities Exchange Act of 1934, 15 U.S.C. § 78J(b), 15 U.S.C. § 78aa, and the Commodities Commodity Exchange Act, being Title 7, § 1 et seq.

Defendant argues that the securities laws do not provide jurisdiction among other reasons because commodity futures are not securities within the meaning of either 15 U.S.C. § 77b(1) Securities Act or 15 U.S.C. § 78c(a)(10) Securities Exchange Act. The courts treat the two sections as giving essentially the same meaning to the term "Security." See Tcherepnin v. Knight, 389 U.S. 332, 335-36, 88 S.Ct. 548, 552, 19 L.Ed.2d 564, 568 (1968); McClure v. First National Bank, 497 F.2d 490 (5th Cir. 1974).

The definition of "Security" in the Securities Exchange Act is as follows:

(10) The term "security" means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, or in general, any instrument commonly known as "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.

15 U.S.C. § 78c(a)(10).

Several cases have directly considered whether commodities futures are "securities" as that term is used in the federal securities laws. The conclusion has been that they are not. See Stevens v. Woodstock, Inc., 372 F.Supp. 654 (N.D.Ill. 1974); Sinva, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 253 F.Supp. 359 (S.D.N.Y.1966). Although there are several other decisions which have found transactions involving commodities futures to come within the federal securities laws, see, e. g., Maheu v. Reynolds & Co., 282 F.Supp. 423 (S.D.N. Y.1968); Berman v. Orimex Trading, Inc., 291 F.Supp. 701 (S.D.N.Y.1968), these cases were suits in which fraud was alleged in the inducement of plaintiffs to open commodity future trading accounts that would be managed by defendants. These decisions concluded that this arrangement constituted an "investment contract" within the definitional sections of the federal securities laws. The leading case defining "investment contracts" is S. E. C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). The Court said:

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, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise. . . . It embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.

328 U.S. at 298-99, 66 S.Ct. at 1103, 90 L.Ed. at 1249.

Thus, even where, in form, the investor was buying something like a warehouse receipt for a commodity, where the return he hoped to realize depended on the efforts of the promoters, an investment can be found to be the purchase of a security. See, e. g., Glen Arden Commodities, Inc. v. Constantino, 493 F.2d 1027 (2d Cir. 1974).

However, most such decisions expressly distinguish the transactions involved in those cases from trades in specific commodities futures. See, e. g., Glen Arden Commodities, Inc. v. Constantino, 493 F.2d 1027, 1034 (2d Cir. 1974); Berman v. Orimex Trading, Inc., 291 F.Supp. 701, 702 (S.D.N.Y.1968). This complaint does not allege any fraud inducing McKnight to open this trading account, which might have been a transaction within the securities laws. Rather, the facts alleged in the complaint show pure trade in commodity futures, bringing the case squarely within the rule stated in Stevens v. Woodstock, Inc., 372 F.Supp. 654 (N.D.Ill.1974), and Sinva, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 253 F.Supp. 359 (S.D.N.Y. 1966).

The other basis for jurisdiction stated in the complaint is the Commodity Exchange Act, 7 U.S.C. §§ 1-22. This statute certainly covers transactions in pork bellies, which are within the definition of "commodities," but, as defendant notes, there is no section of the Act which gives the Court jurisdiction over private actions.

While the complaint thus does not plead jurisdiction properly, it appears from the allegations of the complaint that the Court in fact has jurisdiction under several statutes.

First, while the Commodity Exchange Act does not directly confer jurisdiction, the courts have implied a private right of action for violations of that statute. See, e. g., Booth v. Peavey Company Commodity Services, 430 F.2d 132 (8th Cir. 1970); Goodman v. H. Hentz & Co., 265 F.Supp. 440 (N.D.Ill.1967); Gould v. Barnes Brokerage Co., 345 F.Supp. 294 (N.D.Tex.1972). Because of this the Court would have jurisdiction under 28 U.S.C. § 1337 which provides:

The district courts shall have original jurisdiction of any civil action or proceeding arising under any Act of Congress regulating commerce or protecting trade and commerce against restraints and monopolies.

The Commodity Exchange Act is clearly an Act of Congress regulating commerce. Gould v. Barnes Brokerage Co., 345 F.Supp. 294 (N.D.Tex.1972). In addition, there would be general federal question jurisdiction under 28 U.S.C. § 1331 since more than $10,000 is in controversy.

Even if there was no violation of federal securities statutes, the complaint states facts which would constitute a number of perfectly good state law claims, perhaps including fraud, breach of contract, breach of fiduciary duty, and conversion. The Court would have jurisdiction over these claims under 28 U.S.C. § 1332, by virtue of the diversity of citizenship of the parties (HUTTON and LEWIS).

Accordingly, the Court will permit plaintiff to file an amended complaint properly alleging the basis of the Court's jurisdiction. However, in the event that an amended complaint is not filed on or before March 12, 1976, the defendant may present an order granting the motion to dismiss. If an amended complaint is filed, it should, in accord with the spirit of Federal Rule of Civil Procedure 10(b), state the various theories of recovery in separate counts.

As a second basis for the motion to dismiss, defendant claims that the complaint does not adequately allege fraud, citing Federal Rule of Civil Procedure 9(b), which requires that the circumstances be pleaded specifically. The case cited by defendant expresses the purpose of the rule:

Rule 9(b)'s specificity requirement stems not only from the desire to minimize the number of strike suits but also more particularly from the desire to protect defendants from the harm that comes to their reputations or to their goodwill when they are charged with serious wrongdoing: "It is a serious matter to charge a person with fraud and hence no one is permitted to do so unless he is in a position and is willing to put himself on record as to what the alleged fraud consists of specifically."

Segal v. Gordon & Coburn Corp., 467 F.2d 602, 607 (2d Cir. 1972).

While defendant is correct that paragraphs 11-17, which refer to fraud, are general, the earlier paragraphs set out with considerable detail the circumstances constituting the alleged fraud, see ¶¶ 6-10, achieving the purposes of notifying the defendant of the claim and putting plaintiff on record regarding what he claims defendant has done. Whether the circumstances alleged state a fraud claim is not presently ripe for decision, but if they do fail to state a claim, it is not for lack of specificity.

Defendant alternatively requests that certain allegations of the complaint be stricken. It would be possible to postpone a...