Farmland Industries v. Frazier-Parrott Commodities, Inc., FRAZIER-PARROTT

CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)
Writing for the CourtBefore JOHN R. GIBSON, WOLLMAN and BEAM; JOHN R. GIBSON
Citation871 F.2d 1402
PartiesFARMLAND INDUSTRIES, Appellant, v.COMMODITIES, INC. a/k/a Parrott Corporation and/or d/b/a Parrott Corporation; Heinold Commodities, Inc.; DEKALB Corporation, formerly known as DEKALB Agresearch, Inc.; Christopher R. Parrott; Horace Seixas; John Dunn; Robert Wakefield; John Fenley; Charles Waters; Ernest Pierce, Appellees.
Docket NumberNo. 87-2653,FRAZIER-PARROTT,87-2653
Decision Date05 May 1989

Page 1402

871 F.2d 1402
and/or d/b/a Parrott Corporation; Heinold Commodities,
Inc.; DEKALB Corporation, formerly known as DEKALB
Agresearch, Inc.; Christopher R. Parrott; Horace Seixas;
John Dunn; Robert Wakefield; John Fenley; Charles Waters;
Ernest Pierce, Appellees.
No. 87-2653.
United States Court of Appeals,
Eighth Circuit.
Submitted Sept. 19, 1988.
Decided April 13, 1989.
Rehearing Denied May 5, 1989.

Page 1403

Alvin D. Shapiro, Kansas City, Mo., for appellant.

Thomas Deacy, Kansas City, Mo., for Frazier-Parrott.

Dan K. Webb, Chicago, Ill., for Seixas and Dunn.

William Nissen, Chicago, Ill., for Heinold and DEKALB.

Before JOHN R. GIBSON, WOLLMAN and BEAM, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

Farmland Industries, Inc. brought this suit claiming that several commodity brokerage houses and their agents conspired to defraud it by trading in crude oil futures contracts without Farmland's authorization. Farmland appeals from directed verdicts granted to Heinold Commodities, Inc., a licensed commodities futures broker, and to DEKALB AgResearch, Inc., Heinold's parent corporation, arguing that evidence

Page 1404

which Farmland presented at trial supported its theory that both Heinold and DEKALB actively participated in a scheme to defraud Farmland. Farmland also appeals from a judgment entered upon a jury verdict for Frazier-Parrott Commodities, Inc., Frazier-Parrott president Christopher Parrott, Frazier-Parrott account executive Horace Seixas, and Seixas' brother John Dunn. Farmland contends that with respect to these appellees the district court 1 erred in excluding certain expert testimony concerning agency rules and in framing various jury instructions on commodities fraud. We affirm the judgment of the district court.

Farmland is an agricultural cooperative whose petroleum division in 1985 refined over 2 million barrels of oil per month and had annual sales of $1.2 billion. Its ongoing crude oil inventory averaged 6,300,000 barrels, which in mid-1985 was worth some $170,000,000. In 1983 Farmland's board of directors adopted a futures trading policy which provided for hedging in the oil market to protect against excessive losses in the value of this substantial inventory. 2 In 1985 Farmland gave control over all aspects of its petroleum futures trading program to its employee Ernest Pierce, who with virtually no oversight was responsible for placing trades, generating internal records of each trade, and paying margins and fees to brokers. Pierce could make trades without the approval of any Farmland officer or employee, and it is Pierce's unchecked trading that gives rise to this lawsuit.

Upon his 1985 arrival at Farmland, Pierce searched for an additional brokerage firm to handle Farmland's petroleum futures trading. He had previously dealt with Horace Seixas, a broker associated with Frazier-Parrott, and he therefore selected Frazier-Parrott as Farmland's commodity futures broker. Pierce and Seixas negotiated a commission of $20 per round turn, an amount substantially lower than the rate that Farmland had been paying to other brokers. According to Seixas, after this rate had been agreed upon Pierce demanded that he share $3 of the commission as a "finder's fee," and that because of a divorce and bankruptcy he did not want to receive the money directly. Seixas arranged through his stepbrother, John Dunn, to use a dormant corporation, JES International, to effect payments of the "finder's fee." At trial and on appeal Farmland has insistently characterized these payments as the "secret bribery" of Pierce, intended to sway his loyalty away from Farmland. Pierce, on the other hand, testified that the $2,600 in checks made payable to him and which he cashed, were not "finder's fees" but payment for consulting services rendered to a client of Seixas. Pierce admitted that he never met with or consulted with representatives of JES, but further testified that his trading for Farmland was uninfluenced by any payment.

The history of trading undertaken by Pierce on Farmland's behalf is complex, but for the purposes of this opinion we need not delve into excessive detail. Initially, Farmland's board of directors expressly authorized Pierce to make trades on behalf of Farmland and notified Frazier-Parrott that it had given Pierce this power. 3 During the summer of 1985,

Page 1405

Pierce opened four nondiscretionary commodity trading accounts for Farmland at Frazier-Parrott. Pierce made all decisions as to what trades should be made, and implemented these decisions by telephoning his orders to Seixas, who in turn executed the trades. Heinold, under contract with Frazier-Parrott to act as its clearing broker, facilitated the trades by processing orders, maintaining access to the mercantile exchange, and arranging for the transfer of funds. Other traders at Farmland, along with Farmland's management, were not informed of the trading occurring in these accounts. Pierce had arranged affairs so that confirmation slips were diverted so as to escape the attention of Farmland management.

In arguing that the brokerage houses joined with Pierce in a fraudulent scheme, Farmland points to evidence that the brokerages tolerated numerous irregularities in the accounts which Pierce established. Farmland maintains that in opening one account, designated the "JES" account after JES International, an improper tax identification number was used and required papers were never submitted, that trades were switched after the fact from one account to another, and that Frazier-Parrott destroyed order tickets which it was required to maintain by federal regulations.

Through August and September of 1985, the oil market moved up against Farmland's short positions, creating large margin calls in the accounts opened by Pierce. Brokers at Frazier-Parrott spoke to Pierce daily, and, for some time, Pierce was able to make margin payments. On August 22, 1985 Farmland made a margin payment of $350,000 to Frazier-Parrott. On September 6, Farmland transferred an additional $1,000,000 in Treasury bills. On September 23, Christopher Parrott, Frazier-Parrott's president, reviewed Farmland's positions with Pierce and demanded payment on existing margins, which at that time had reached $3.8 million. Pierce, for the first time, disavowed his trades and told Parrott, "This is a matter for the lawyers." The next day Farmland executives learned the full extent of the activity in the Frazier-Parrott accounts when Parrott and Seixas travelled to Kansas City, demanding that Farmland make a margin payment on 2,500 petroleum contracts and saying that if these payments were not made the contracts would be liquidated immediately. Farmland made the payment as requested, and continued to trade actively in accounts opened by Pierce until November 20, 1985.

Farmland proceeded to sue all involved, essentially claiming that Frazier-Parrott and Heinold carried out a scheme to defraud Farmland by bribing its trader Ernest Pierce. At trial, the district court limited testimony from Farmland's expert witness regarding the rules of the Commodity Futures Trading Commission (CFTC); rules Farmland argued the brokerage houses had repeatedly violated. At the close of Farmland's case, the district court directed a verdict in favor of DEKALB on all claims, and in favor of all defendants on Farmland's RICO claim. At the close of all evidence, the district court directed a verdict in favor Heinold. The district court then charged the jury. Although it gave rather broad instructions regarding fraud, the court did not specifically instruct the jury, as Farmland requested, on Farmland's claims for unauthorized trading, bribery, and conspiracy. The jury later returned verdicts in favor of the defendants on all of Farmland's claims. This appeal ensued.


Farmland contends that the district court erred in granting Heinold a directed verdict, arguing that it presented extensive evidence in support of its theory that Heinold actively participated in a scheme to defraud it. Farmland points to evidence that all opening account documents bore Heinold's name only, that confirmation slips subsequently received by Farmland bore Heinold's name as well as that of Frazier-Parrott, that Heinold facilitated trading in Farmland's accounts by furnishing a Frazier-Parrott broker with an exchange seat, booth and floor space, and that Heinold received and retained Farmland's account payments. According to

Page 1406

Farmland, Heinold improperly opened the JES account without requiring an initial deposit, used a fictitious tax identification number on account forms, and switched trades among Farmland's various accounts. Heinold is further said to have breached its fiduciary duties in mishandling Farmland's margin payments and in failing to investigate the trades initiated by Pierce. Farmland contends that because these acts were contrary to Heinold's own procedures manual, CFTC regulations, and common industry practice, they are sufficient to hold Heinold liable for fraud.

In reviewing the district court's decision to grant a directed verdict against Farmland, we must consider the evidence in a light most favorable to Farmland. See Loudermill v. Dow Chem. Co., 863 F.2d 566, 570 (8th Cir.1988). We may find for Heinold only if "all the evidence points one way and is susceptible of no reasonable inferences sustaining the postion" of Farmland. See Craft v. Metromedia, Inc., 766 F.2d 1205, 1218 (8th Cir.1985) (citations omitted), cert. denied, 475 U.S. 1058, 106 S.Ct. 1285, 89 L.Ed.2d 592 (1986).

From the record before us, we conclude that Farmland failed to establish a submissible case against Heinold. The sole evidence offered was that custom and procedure required Heinold only to inform Frazier-Parrott, as a nonclearing broker, of margin deficiencies in customers' accounts, and...

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