POPLAR GROVE PLTG. & REF. v. Bache Halsey Stuart Inc.

• Decision Date: 12 February 1979
• Docket Number: Civ. No. 77-83.
• Parties: POPLAR GROVE PLANTING AND REFINING CO., INC. v. BACHE HALSEY STUART INC.
• Court: U.S. District Court — Middle District of Louisiana

465 F. Supp. 585

POPLAR GROVE PLANTING AND REFINING CO., INC. v. BACHE HALSEY STUART INC.

Civ. No. 77-83.

United States District Court, M. D. Louisiana.

February 12, 1979.

COPYRIGHT MATERIAL OMITTED

John V. Parker, Sanders, Downing, Kean & Cazedessus, Baton Rouge, La., for plaintiff.

Phillip A. Wittmann, Susan R. Stockstill, Stone, Pigman, Walther, Wittmann & Hutchinson, New Orleans, La., for defendant.

E. GORDON WEST, District Judge:

In 1974, the plaintiff, Poplar Grove Planting and Refining Co., Inc. (hereinafter referred to as Poplar Grove), opened a sugar commodities trading account with Bache Halsey Stuart Inc. (hereinafter referred to as Bache), out of Bache's Houston office. In its first year in the commodities market, Poplar Grove lost approximately $220,000. The following year the account was transferred to Bache's New Orleans office, where it was assigned to Account Executive James Ghio, for handling. This apparently proved to be an advantageous decision, as Poplar Grove earned approximately $540,000 in 1975. However, during the summer of 1976, alleged unauthorized trades began to appear in the account which caused large losses for Poplar Grove.

The first of these unauthorized trades occurred on July 8, 1976. Poplar Grove had authorized the purchase of 10 contracts of October sugar, but 30 were actually purchased for the account. These 20 extra contracts were eventually sold on September 15th. On July 9th, 5 unauthorized contracts of London sugar were purchased for the Poplar Grove account. These were transferred, also without authority, to the private account of Carter Wilkinson, Poplar Grove's representative and officer authorized to deal in commodities. The third unauthorized trade occurred on July 30th, when Bache "sold short" 25 March sugar contracts and covered itself by purchasing 40 March sugar contracts three days later. The net result was that 15 extra, unauthorized contracts then existed in the account, which were ultimately sold on September 23, 1976. A fourth transaction, occurring on August 6th, was the "selling short" and subsequent cancellation of the sale of 15 contracts of September sugar which did not result in a loss to Poplar Grove. A fifth unauthorized transaction occurred on August 10th, when Bache "sold short" 20 September sugar contracts which were later offset by purchases one day later. On September 16th, the last unauthorized trade occurred when Bache sold 10 contracts of October sugar and corrected this mistake on September 21st with the purchase of a like number of contracts.

On two separate occasions Bache wrongfully credited funds wired to it from Poplar Grove to the private account of Carter Wilkinson. On August 3rd, a variation margin call went out to Poplar Grove for $57,000. Poplar Grove wired $57,000 to Bache through the Whitney National Bank in New Orleans, but Bache only credited $34,000 to the account of Poplar Grove, and credited the other $23,000 to Wilkinson's private account. On August 12th, a similar incident occurred when $12,100 of $62,205 sent by Poplar Grove in response to a margin call was wrongfully credited to Wilkinson's private account.

The testimony at the trial revealed that without exception, Poplar Grove notified James Ghio, either by telephone or in person, of the unauthorized nature of the trades and credits. Defendant contests the sufficiency of this notification. As a result of the actions of Bache and James Ghio, the plaintiff alleges a civil cause of action under the theories of implied civil remedies emanating from the Securities Act of 1933, 15 U.S.C. § 77a, et seq., the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq., and the Commodities Exchange Act, 7 U.S.C. § 6b and § 6d; and Louisiana law of mandate, Civil Code Articles 3003 and 3010.

The plaintiff urges that the actions of Ghio and Bache were violative of the Securities Act of 1933, 15 U.S.C. § 77a, et seq., and the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq. As developed by prior jurisprudence, these claims are without merit. To be a violation of either Act the alleged transactions must first be shown to be "securities" as contemplated by the Acts. SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943); Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967); McCurnin v. Kohlmeyer & Co., 340 F.Supp. 1338 (E.D.La.—1972). The definitions of "security" as set out in Section 2(1) of the Securities Act, 15 U.S.C. § 77b(1), and Section 3(a)(10) of the Securities Exchange Act, 15 U.S.C. § 78c(a)(10), are substantially the same. Neither definition makes any reference to a commodity futures contract nor does it contain "any term that can be fairly understood to embrace such a contract." McCurnin, supra, at 1340.

The United States Supreme Court in SEC v. C. M. Joiner Leasing Corp., supra, established the test of determining a "security":

"The test . . . is what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducement held out to the prospect." 64 S.Ct. at 124.

This was further refined in Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 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 . . ." 66 S.Ct. at 1103.

"The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." 66 S.Ct. at 1104.

A commodity contract, particularly one involving a non-discretionary account, is not a security. In the present case the only one with authority to trade in the account was Carter Wilkinson. James Ghio was only to act on the order of Wilkinson. The present situation does not fulfill the "common enterprise" requirement, nor is the expected gain "solely from the efforts of others." A similar conclusion has been reached in numerous other cases. See McCurnin, supra; Moody v. Bache & Co., Inc., 570 F.2d 523 (CA 5—1978); Arnold v. Bache & Co., Inc., 377 F.Supp. 61 (M.D.Penn.—1973); Securities and Exchange Commission v. Continental Commodities Corp., 497 F.2d 516 (CA 5—1974); Sinva, Inc. v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 253 F.Supp. 359 (S.D.N.Y.—1966); Bromberg, Securities Law, § 4.6 at p. 352 (1969). Therefore, this Court holds that the Securities Act of 1933, 15 U.S.C. § 77a, et seq., and the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq., are inapplicable to this case. But plaintiff also invokes the Commodities Exchange Act, 7 U.S.C. § 6b and § 6d, as a basis for its claim. In pertinent part, that statute provides:

"It shall be unlawful (1) for any member of a contract market, or for any correspondent, agent, or employee of any member, . . . in connection with . . . any contract of sale of any commodity for future delivery . . .

(A) to cheat or defraud or attempt to cheat or defraud such other person;

(B) willfully to make or cause to be made to such other person any false report or statement thereof, or willfully to enter or cause to be entered for such person any false record thereof;

(C) willfully to deceive or attempt to deceive such other person by any means whatsoever in regard to any such order or contract or the disposition or execution of any such order or contract, or in regard to any act of agency performed with respect to such order or contract for such person; or

(D) to bucket such order, or to fill such order by offset against the order or orders of any other person, or willfully and knowingly and without the prior consent of such person to become the buyer in respect to any selling order of such person, or become the seller in respect to any buying order of such person."

The applicability of this statute depends upon the determination of two preliminary matters, i. e., is sugar a "commodity" within the meaning of the Act, and are the actions of Ghio attributable to Bache. We find no reported decisions dealing directly with the question of whether or not, under the Act, sugar is a commodity. Prior to the 1974 amendment to the Act, the term "commodity" was specifically defined by an exclusive listing of various products which did not include sugar. That section, 7 U.S.C. § 2, was amended in 1974 by adding the phrase: "and all other goods and articles, except onions, as provided in section 13-1 of this title, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in . ." Admittedly this phrase was put in to substantially enlarge the definition of commodities. Senate Report 93-1131, 74 U.S.Cong. and Admin.News, 1974, p. 5843 at p. 5870. We therefore hold that sugar is now a "commodity" under the Act.

The Court further concludes that under the provisions of 7 U.S.C. § 4, commonly known as the "Commodity Exchange Act," which provides:

"For the purpose of this Chapter the act, omission or failure of any official, agent, or other person acting for any individual, association, partnership, corporation, or trust within the scope of his employment or office shall be deemed the act, omission, or failure of such individual, association, partnership, corporation, or trust as well as of such official, agent or other person,"

the actions of Ghio involved in these transactions must be attributable to his employer, Bache Halsey Stuart Inc.

Even though the Commodity Exchange Act does not specifically mention a civil remedy for violations of the standard of conduct set forth in Section 6b thereof, such a remedy is implied by the nature and terms of the Act. Plaintiff alleges that it was defrauded while investing in commodities regulated by the Act. Thus it falls within the class of persons which Congress sought to protect. In the case of Goodman...