Bennett v. EF Hutton Co., Inc.

• Decision Date: 28 November 1984
• Docket Number: Civ. A. No. C83-1502A.
• Citation: 597 F. Supp. 1547
• Parties: Lyn BENNETT, et al., Plaintiffs, v. E.F. HUTTON COMPANY, INC., Defendant.
• Court: U.S. District Court — Northern District of Ohio

597 F. Supp. 1547

Lyn BENNETT, et al., Plaintiffs, v. E.F. HUTTON COMPANY, INC., Defendant.

Civ. A. No. C83-1502A.

United States District Court, N.D. Ohio, E.D.

November 28, 1984.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Carl M. Layman, III, Martin, Stimler, Layman & Stamm, Stow, Ohio, Jerry E. Kugelman, Cleveland, Ohio, for plaintiffs.

Robert N. Rapp, Mitchell G. Blair, Calfee, Halter & Griswold, Cleveland, Ohio, for defendant.

MEMORANDUM AND ORDER

ANN ALDRICH, District Judge.

This commercial litigation, rooted in criminal commodity fraud and grand theft committed by an individual who is not a party to this case, is before this Court for a ruling on defendant E.F. Hutton Company, Inc.'s ("Hutton") motion to dismiss portions of the plaintiffs' second amended complaint. For the reasons set forth below, this Court dismisses all claims brought under the Commodity Exchange Act of 1936, as amended ("CEA" or "Commodity Act"), 7 U.S.C. §§ 1-26, and the Racketeer Influenced and Corrupt Organizations Act of 1970 ("RICO"), 18 U.S.C. §§ 1961-68. The remainder of the motion to dismiss is denied.

Jurisdiction is invoked under the CEA and RICO private right of action provisions, 7 U.S.C. § 25 and 18 U.S.C. § 1964(c) respectively, and three other federal question and diversity jurisdiction provisions, 28 U.S.C. §§ 1331, 1332, and 1337.

I. PRIOR OPINION AND FACTUAL BACKGROUND

The factual history of this action is summarized in this Court's Memorandum and Order of July 11, 1984 ("Memorandum and Order"). In that opinion, this Court dismissed those claims in plaintiffs' first amended complaint which arose under the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77a et seq., and the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a et seq., after concluding that the CEA provided the exclusive remedy for all causes of action relating to commodities futures. It then ordered the plaintiffs to file a second amended complaint, and directed the parties to submit pleadings discussing whether plaintiffs possess a cause of action under Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982), which governs private actions under the CEA arising prior to January 11, 1983,¹ and under RICO.

Like the prior complaints, the second amended complaint states that from 1977 until 1982 Thomas L. Troyer managed an entity known as Commodity Concepts Managed Commodity Fund ("Commodity Concepts" or "the Fund"). Troyer solicited funds from investors, deposited them in a pooled account at Hutton's Akron, Ohio office, and contracted to buy and sell commodities for future delivery. Troyer violated the investment agreements and embezzled the funds. He later pleaded guilty to grand theft and to criminal violations of the Commodity Act. In a civil action, he consented to a permanent injunction ordering him and Commodity Concepts to disgorge their ill-gotten funds to an equity receiver.

The second amended complaint is brought by plaintiffs who purchased from one to almost eighty-five "units" in Commodity Concepts at a price of $1,000 per unit. Although not a Hutton employee, Troyer was provided with "office space, a desk, a computer terminal, direct telephone lines to the Chicago Board of Trade, and other office facilities customary in the commodities, and/or securities business." Troyer used the office daily until early 1982. Paragraphs 13-16 set forth the following additional factual allegations concerning the relationship between Troyer and Hutton:

13. By providing Lyn Troyer with the aforementioned office facilities, the Defendant made an implied representation to the Plaintiffs that Troyer was employed by or was an agent of the Defendant and rendered Troyer's statements to that effect credible. The Plaintiffs had little experience or sophistication in investment. They reasonably relied upon the implied representation made by the Defendant and upon the express representations of Troyer, and they reasonably believed that Troyer was employed by or was an agent of the Defendant, and that he was knowledgeable on the subject of investing in commodities. The Plaintiffs provided Troyer with funds to invest on their behalf in justifiable reliance upon such belief.

14. The Defendant, and Defendant's agents, had actual knowledge, or in the exercise of reasonable care should have known, that Lyn Troyer was unemployed and that he was not investing his own money, but was instead investing other people's money.

15. The Defendant, and Defendant's agents, further had actual knowledge that Lyn Troyer was incurring large losses on the commodities transactions which he made through the use of Defendant's facilities.

16. The Defendant profited from Troyer's fraudulent activities through the receipt of brokerage commissions on the transactions which Troyer executed through the use of the Defendant's facilities.

Counts 41 and 42 further allege that the investment agreements provided that Troyer would invest plaintiffs' funds in commodities futures, would return all funds to them if the Fund were discontinued, and would provide monthly account statements. Troyer "did not intend to, and did not," carry out the agreements, and instead "embezzled the Plaintiffs' funds and either converted them to his own use or used them to pay others what they expected as their own earnings." The plaintiffs never recovered the funds they invested.

Count One alleges that Hutton or its agents "aided and abetted" Troyer in defrauding the plaintiffs, in violation of 7 U.S.C. §§ 6b and 13c. Count Two alleges that Hutton "bestowed upon Troyer the apparent or ostensible authority of one of its agents or employees" and is subject to respondeat superior liability for his violations of 7 U.S.C. §§ 6b and 6d. Count Three states that by willfully aiding and abetting Troyer, Hutton violated 7 U.S.C. § 25. Count Four, which does not resemble any count in the earlier complaints, states that Hutton knew or should have known that Troyer was not a registered futures commission merchant or introducing broker, or an associate of one, and therefore that it aided and abetted Troyer's violation of 7 U.S.C. §§ 6d and 6k. Count Five repeats the same charge with respect to Troyer's actions as a commodity pool operator, alleging a violation of 7 U.S.C. § 6k. Count Six repeats Count Five and alleges a violation of 7 U.S.C. § 6o. Count Seven claims that the failure of Hutton, a commission registrant, "to diligently investigate, inquire, or supervise the handling of Troyer's commodity account" violated 17 C.F.R. § 166.3. Count Eight, brought pursuant to RICO, alleges that Troyer's activity was a fraud in the sale of securities, that Troyer's use of commodity wires constituted wire fraud and his use of the mails constituted mail fraud, and that Hutton's "fraudulent activities and participation in the fraudulent activities of Troyer" constitute acts of racketeering and a pattern of racketeering. Count Nine, styled "Respondeat Superior — Common Law," repeats the earlier allegations that Troyer was Hutton's agent or employee and that Hutton is therefore liable for plaintiff's losses. And Count Ten alleges that Hutton committed common law fraud.

The plaintiffs seek compensatory damages in the amount of their lost investments, plus treble damages under RICO, $500,000 in punitive damages under Count Ten, interest from the date of investment, and other costs and fees.

II. COMMODITY ACT CLAIMS

Hutton contends that the CEA claims of the second amended complaint fall into three categories: (1) the respondeat superior claim of Count Two, under 7 U.S.C. §§ 4, 6b and 6d; (2) the "aiding and abetting" claims of Count One, under 7 U.S.C. §§ 6b and 13c, Count Three, under 7 U.S.C. § 25, Count Four, under 7 U.S.C. §§ 6d and 6k, Count Five, under 7 U.S.C. § 6k, and Count Six, under 7 U.S.C. § 6o; and (3) the "failure to supervise" claim of Count Seven, under 17 C.F.R. § 166.3. Plaintiffs largely accept this categorization of their pleading, but maintain that Counts Five and Six also involve Hutton's liability for failure to use reasonable care.

A. Respondeat Superior

Initially, Hutton argues that nothing in 7 U.S.C. §§ 4, 6b and 6d provides any basis for respondeat superior liability. In particular, § 4 states:

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.

Section 6b prohibits certain actions by "any member of a contract market, or ... any correspondent, agent, or employee of any member" or by "any person, in or in connection with any order"; § 6d imposes additional substantive requirements and prohibitions on persons, including certain corporate entities.

The crux of Count Two is that Hutton "bestowed upon Troyer the apparent or ostensible authority of one of its agents or employees." But, while § 4 attributes to commodity-trading entities acts by "any official, agent or other persons acting for them," such liability is limited to acts "within the scope of his employment or office...." Consequently, it would appear to violate the explicit parameters of the statute to deem an "apparent agent", who was neither an employee nor an officer, to be Hutton's actor for purposes of § 4. Moreover, since the reference to "this chapter" in § 4 refers to Chapter 1 of the CEA, 7 U.S.C. §§ 1 et seq., this Court must apply the same standard to the reference to "correspondent, agent or employee" in § 6b and "person" in § 6d. Accordingly, concluding that there is no sweeping respondeat superior liability in the CEA superceding the explicit terms of § 4, this Court dismisses Count Two of the complaint.

B. Aiding...