Evanston Bank v. Conticommodity Services, Inc.

Decision Date10 December 1985
Docket NumberNo. 83 C 2980.,83 C 2980.
Citation623 F. Supp. 1014
PartiesThe EVANSTON BANK, Plaintiff, v. CONTICOMMODITY SERVICES, INC., and Ted Thomas, Defendants.
CourtU.S. District Court — Northern District of Illinois

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Ray G. Rezner, Gerald M. Miller, W. Scott Porterfield, Fishman, Merrick & Perlman, P.C., Chicago, Ill., for plaintiff.

Geraldine M. Alexis, William J. Nissen, Thomas K. Cauley, Sidley & Austin, Chicago, Ill., for defendant ContiCommodity Services, Inc.

James R. Streicker, Cotsirilos & Crowley, Chicago, Ill., for defendant Ted Thomas.

MEMORANDUM AND ORDER

MORAN, District Judge.

In late May of 1982 the board of directors of the Evanston Bank discovered that the bank had lost over $1,200,000 in about one year of trading in commodities, while paying over $270,000 in commissions. The bank now brings this action for commodities fraud against ContiCommodity Services, Inc. (Conti), the futures commission merchant through which it traded in commodity futures, and Ted Thomas, the broker who handled its account.1

The bank's version of how the loss occurred appears in the six counts of its complaint. Counts I and II allege violations of the Commodity Exchange Act (CEA), 7 U.S.C. § 1 et seq., specifically that Conti and Thomas used the bank's account for unauthorized trading and "churned" it (traded it excessively) to generate unnecessary commissions. The bank maintains that it intended only to hedge in commodities as a protection against rising interest rates, a conservative investment strategy. It says that it got speculative trading instead. Since Conti and Thomas used the mails and the telephone in connection with the trading, count IV alleges mail and wire fraud in violation of 18 U.S.C. § 1961 et seq., the Racketeer Influenced and Corrupt Organization Act (RICO). The remaining counts are pendent claims under Illinois law. Count III, for common law fraudulent misrepresentation and concealment, and count V, for fraudulent or deceptive business practices under Ill.Rev.Stat. ch. 121½ ¶ 262, rest on Thomas' alleged assurances that the bank's account would be traded in accordance with appropriate banking regulations and Federal Deposit Insurance Corporation (FDIC) policies, and that the bank would be charged commissions at the same rate as other banks. Since an FDIC policy statement in effect then and now allows hedging in commodities but strongly discourages banks from speculative trading, and the bank was charged $94 per "round turn" (per transaction) while other Conti customers with similar account activity were charged $30 to $35 (and apparently some banks with other firms had a rate of only $11 to $20), the bank claims fraud and deception. Finally, count VI, apparently in the alternative, alleges negligence in the handling of the bank's account.

Conti, however, presents a different version of how the loss occurred and moves for summary judgment in its favor. The board of directors of the bank fully authorized Richard Christiansen, at that time both the chairman of the bank's board of directors and the bank's chief executive officer, to handle commodities trading for the bank. Conti maintains that all of the trades followed Christiansen's instructions on the bank's objectives and the overwhelming majority of them were either specifically approved or later ratified by him. Christiansen also executed a power of attorney to Thomas to make trades on behalf of the bank. The bank may now regret its choice of Christiansen as its agent (he was fired in June 1982, after the rest of the board discovered the extent of his trading), but nevertheless it chose him and so must bear the loss from his acts. And, if any further authority is needed, Conti points out that it strictly complied with the bank's instructions to send daily written confirmation of each trade to the cashier of the bank, Hindrek Ott. Neither Ott nor any other representative of the bank disavowed any trade until May 28, 1982. Since the bank was fully informed, both through its agent Christiansen and through the notice to the cashier, Conti argues, its silence ratified the trades. Therefore, Conti is not liable for the bank's losses as a matter of law. Defendant Thomas has moved to adopt Conti's motion.

This court finds to the contrary that, at least on the evidence now before us, this case needs a trial to resolve a host of unanswered questions. The primary purpose of summary judgment is to avoid the expenditure of time and money on a trial in cases where a trial would serve no real function. Mintz v. Mathers Fund, Inc., 463 F.2d 495 (7th Cir.1972). Summary judgment should not be granted when facts or the inferences to be derived from facts are in dispute, because finding facts and drawing inferences are tasks for a trier of fact. United States v. Diebold, Inc., 369 U.S. 654, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962); Wang v. Lake Maxinhall Estates, Inc., 531 F.2d 832 (7th Cir.1976). Some inquiries by their very nature are fact-intensive. Fraud, for example, involves questions of intent and knowledge, which are normally questions for a trier of fact. If a reasonable person could draw more than one inference from the known facts, summary judgment is not appropriate. Rock Island Bank v. Aetna Casualty and Surety Co., 706 F.2d 219 (7th Cir.1983). Agency questions also tend to be fact intensive. A third party dealing with an agent has a legal obligation to verify both the fact and the extent of the agent's authority. Malcak v. Westchester Park District, 754 F.2d 239, 245 (7th Cir.1985). The inquiry will usually focus on whether reliance on the indications of authority which were present was reasonable under all the facts and circumstances. Such questions of reasonableness also in most cases must go to triers of fact. See e.g., Borg-Warner Leasing v. Doyle Electric Co., 733 F.2d 833, 836 (11th Cir. 1984); Moreau v. James River-Otis, Inc., 767 F.2d 6, 9 (1st Cir.1985). This case involves both allegations of fraud and questions of agency. It cannot be cut off at this point.

I. FACTS

The complexity of the case requires that the facts be set out in considerable detail. In March 1981 Conti conducted a seminar on commodities trading especially tailored for financial institutions. Thomas, then head of Conti's broker training program and soon to be an account executive in Conti's Chicago office, participated. Christiansen, accompanied by Michael McGreal, the Evanston Bank's president, attended the seminar. Neither had any previous experience in trading commodities but Christiansen, who had read an article on the subject, wanted the bank to consider trading futures contracts in order to hedge the bank's assets against interest rate fluctuations.2

Thomas contacted Christiansen and McGreal soon after the seminar. There is some dispute as to the exact characterization Thomas gave of himself at that point in his effort to win the bank's business. McGreal says that Thomas held himself out as a specialist in hedging for financial institutions. Thomas maintains that he represented himself merely as "knowledgeable" and "attempting to specialize." His knowledge came from one seminar on banks and commodities trading held the year before, and Thomas now admits that he was not familiar with the language of specific regulations and FDIC policy statements. During the next year the Evanston Bank was in fact his only bank client, although he had previously handled the account of one other bank. What Thomas felt he understood at that time was that banks could not open speculative accounts but could have hedge and arbitrage accounts.3 An FDIC policy statement of November 20, 1979, permits banks to hedge on financial futures to protect against interest rate fluctuations, but describes other transactions "such as taking futures positions to speculate on future interest rate movements" as "inappropriate futures transactions for banks." 44 Fed.Reg. 66673; amended at 45 Fed.Reg. 18116 (March 20, 1980) and at 46 Fed.Reg. 51302 (Oct. 19, 1981). Under 12 U.S.C. § 1818, conduct contrary to FDIC policy can result eventually in a bank's losing its insured status with the FDIC, which in turn would mean loss of federal insurance protection for its depositors and loss of membership in the Federal Reserve System.

The bank opened a commodity futures hedge account with Conti on May 19, 1981. The board had endorsed a corporate authorization, a standard form furnished by Conti. By its terms, the bank authorized Christiansen and McGreal to buy and sell commodities for the bank, with written confirmations to go to the cashier, Ott, "who is hereby authorized to receive and acquiesce in the correctness of such confirmations, statements and other records and documents." Christiansen then completed a standard customer's agreement and a risk disclosure statement, a new account work-sheet and a hedging account designation form. According to the latter, "Any and all positions in the above-mentioned account will be bona fide hedges as defined in Regulation 1.3(2) of the Commodity Futures Trading Commission (CFTC)." McGreal asserts, and Thomas apparently does not deny, that at the time the account was opened Thomas said that the bank's account would be traded in such a fashion that there would be no problem with any relevant regulations for banks, including FDIC policies, and that Evanston Bank would be charged the same commissions that other banks trading through Conti were charged. McGreal and Christiansen told Thomas at that time that the bank's investment objective was to hedge the bank's assets against rising interest rates—a very conservative strategy of acquiring futures contracts to sell ("shorts") corresponding to assets held by the bank— and that the bank would "rather be safe than sorry."4 The first activity in the account was on June 2, 1981.

From July 1981 through December 1981 all parties agree that trading in the bank's account was consistent with...

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