Ghouth v. Conticommodity Services, Inc.

• Decision Date: 06 August 1986
• Docket Number: No. 85 C 10005.,85 C 10005.
• Citation: 642 F. Supp. 1325
• Court: U.S. District Court — Northern District of Illinois
• Parties: Saad H. GHOUTH, Plaintiff, v. CONTICOMMODITY SERVICES, INC., Conticommodity Services, Limited, Refco, Inc. and Feroz Dinshaw, Defendants.

642 F. Supp. 1325

Saad H. GHOUTH, Plaintiff, v. CONTICOMMODITY SERVICES, INC., Conticommodity Services, Limited, Refco, Inc. and Feroz Dinshaw, Defendants.

No. 85 C 10005.

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

August 6, 1986.

COPYRIGHT MATERIAL OMITTED

William R. Carney, P. Andrew Fleming, Bell, Boyd & Lloyd, Chicago, Ill., for plaintiff.

William F. Conlon, Thomas K. Cauley, Jr., Richard B. Lapp, Sidley & Austin, James R. Streiker, Matthew F. Kennelly, Cotsirilos & Crowley, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

ASPEN, District Judge:

This is essentially a commodities fraud suit, alleging violations of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 1 et seq., and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., as well as various pendent common law claims. The defendants ground motions to dismiss on a number of issues, including an issue of great contention in this district, the meaning of "pattern of racketeering activity" in the wake of Sedima, S.P.R.L. v. Imrex Co., Inc., ___ U.S. ___, ___, n. 14, 105 S.Ct. 3275, 3285, n. 14, 87 L.Ed.2d 346 (1985). For the reasons that follow, their motions are granted in part and denied in part.

A. Facts

We will assume the truth of the well-pleaded allegations of the complaint, but only those allegations. Plaintiff's brief in response to the motions to dismiss is laden with unsupported factual assertions, which we will ignore in assessing the sufficiency of his complaint. See, e.g., Rodgers v. Lincoln Towing Service, Inc., 771 F.2d 194, 198 (7th Cir.1985). Ironically, defendants rightly complain about plaintiff's reliance on unalleged facts, yet their briefs contain many bald assertions as well. We must ignore those also.

Plaintiff Saad H. Ghouth ("Ghouth") is a Saudi Arabian merchant who earns part of his living by trading commodities and securities in world markets. On September 7, 1982, he was in Los Angeles and met defendant Feroz Dinshaw,¹ a broker for defendant Conticommodity ("Conti"), a Delaware Corporation with offices in, among other places, Los Angeles and Chicago. Ghouth signed a "Customer Agreement," which provided that Conti would act as his broker in buying and selling commodities, futures and options. The Agreement specified that Conti was authorized only "to make transactions for Customer's Account in accordance with customer's oral or written instructions." On September 30, 1982, Ghouth deposited $100,000 in a customer account at Conti's Los Angeles office.

Ghouth alleges that four times between December 1, 1982 and November 1, 1983 "Dinshaw and Conti" stole money from his account by withdrawing money in checks made payable to him and then forging his endorsement. Specifically, he alleges a withdrawn check and forged endorsement (1) for $600 on December 1, 1982, (2) for $16,775 on March 7, 1983, (3) for $41,200 on March 8, 1983, and (4) for $1,500 on November 1, 1983. The first and fourth checks were payable to Ghouth "c/o Feroz Dinshaw"; the other two were simply payable to Ghouth. Copies of three of the four checks are attached to the complaint. Dinshaw and Conti allegedly converted the money to their own and/or joint use.

Ghouth also alleges that between February 15 and March 3, 1983, Dinshaw made at least 100 unauthorized trades on Ghouth's account. They ultimately debited his account $5,019.00 as commission charges for these unauthorized transactions.

On February 16, 1983, Ghouth authorized Dinshaw to obtain six silver contracts. However, without further authorization from Ghouth, Dinshaw liquidated these contracts a week later, yielding a profit on $37,375.00, but did so in order to cover the losses of another trader. Because of this unauthorized transaction, Ghouth failed to realize $93,125 in profits he would have received because of later favorable movement in the market.

Dinshaw also failed to follow instructions in January 1983 to limit losses to $7,000 on certain contracts. Instead, he let losses add up to $34,782.85.

All through the period from September 1982 to December 1983, Conti did not send Ghouth daily activity statements. Thus, he did not know about the above forgeries, thefts and unauthorized transactions and losses. He first discovered the shenanigans on December 13, 1983, when he was in Los Angeles and reviewed his account statements. He filed this suit just under two years later, on November 27, 1983.

B. The Claims for Relief

Ghouth's complaint contains fourteen claims. Counts I and II allege commodities fraud under 7 U.S.C. § 6(b) and 7 U.S.C. § 6o(1)(A), respectively. Counts III-V purport to state claims under RICO, 18 U.S.C. §§ 1962(c), 1962(a) and 1962(d), respectively. Counts VI-IX are pendent common law claims in the nature of fraud. There are also claims for breach of fiduciary duty, conversion, breach of contract and negligence. Ghouth alleges that his losses total $186,000, and he requests that amount as compensatory damages, as well as $1 million in punitive damages.

C. The Motion

1. Defendant Refco

In our summary of the complaint we did not mention defendant Refco. That is because Ghouth hardly mentions it at all. A commodities broker, it concededly played no role in injuring Ghouth. Ghouth joins Refco because "upon information and belief" it became the "successor-in-interest" to Conti in September 1984 pursuant to an "asset purchase agreement." Nothing more is said about the purchase agreement or about Refco.

It is not easy for a corporation to be considered a "successor-in-interest" under common law such that it can be held liable for the acts of its predecessor. Generally a purchaser of assets is not liable for the debts or obligations of its predecessor. See, e.g., Goldstein v. Gardner, 444 F.Supp. 581, 583 (N.D.Ill.1978) (Flaum, J.). However, liability may attach if one of four exceptions is met: (1) the purchaser agreed to assume the seller's liability; (2) the sale amounts to a consolidation or merger; (3) the purchaser is merely a continuation of the seller; or (4) the transaction is fraudulent, done to escape liability. Id. Ghouth does not dispute these legal standards.

We agree with Refco that the complaint fails to adequately allege that it is Conti's successor-in-interest. Only one fact is alleged, namely, that Refco purchased some of Conti's assets. We do not know how many. There is absolutely no fact from which we can reasonably infer that Refco meets one of the above four exceptions. Because a plaintiff cannot merely plead legal conclusions (even in federal court), but rather must allege a few facts which outline the claim for relief, see, e.g., Sutliff, Inc. v. Donovan Companies, Inc., 727 F.2d 648, 654 (7th Cir.1984), we must dismiss Refco from this suit.²

2. Conti Ltd.

We also did not specifically mention defendant Conticommodity Services, Ltd. ("Conti Ltd.") in our factual summary. Ghouth only refers to it once in the complaint, alleging that it is a British corporation, with its principal place of business in London, and that it is a wholly-owned subsidiary of Conti. Ghouth then says that he will refer to both Conti's collectively in the complaint as "Conti," and thereafter he makes no distinction between the two. Conti says in its brief that Conti Ltd. trades only in London, and that it did not employ Dinshaw, although in saying so it falls prey to the same disease it diagnosed in Ghouth — making factual assertions without support. While Ghouth says in his brief that evidence from discovery shows Conti Ltd. was involved in his fraud, he does not substantiate his assertion.

Looking only to the complaint and ignoring Ghouth's unsubstantiated assertions, see Rodgers cited above at 2, we find that the complaint simply alleges nothing to implicate Conti Ltd. in addition to Conti. By simply collapsing the two, Ghouth cannot escape his obligation to allege some facts outlining a claim for relief against Conti Ltd. The only thing presently in the complaint which might involve Conti Ltd. is Exhibit C, a check apparently drawn on a London account. But we do not know that that is Conti Ltd.'s account. Facing a complete absence of facts alleged in the complaint which point to Conti Ltd., we must grant its motion to dismiss it from the case. In light of this result, we need not address its argument that as a foreign entity trading on foreign exchanges, it cannot be held liable under the CEA.

3. Count II—§ 205(a) of the Commodity Futures Trading Commission Act

Section 205(a) of the CFTCA, 7 U.S.C. § 6o(1)(A), (B), makes it unlawful for certain commodity traders to use the mails or other means of interstate commerce to defraud a client.³ The section specifically applies to a "commodity trading advisor" ("cta"), a "commodity pool operator" ("cpo") or "associated person" of a cta or a cpo. A cta is defined in 7 U.S.C. § 2 as essentially someone who advises others as to the value or advisability of trading commodity futures, but it exempts "any floor broker or futures commission merchant." Conti argues that it is not a cta, and it has never registered with the Commodity Futures Trading Commission ("CFTC") as a cta; instead, it says it is a "futures commission merchant" and is registered with the CFTC as such. It concludes that it falls within the exemption in the definition of cta found in 7 U.S.C. § 2.

Once again Conti is guilty of the crime it accuses Ghouth of, namely, the making of unsubstantiated factual assertions. Without support, its contradictions of the complaint are irrelevant to a motion to dismiss. The complaint reasonably implies that Conti acted as an "advisor" within the meaning of 7 U.S.C. § 2. Paragraph 7 of the contract attached to the complaint contemplates that Conti might give "recommendations ... as to proposed transactions," which clearly suggests that it is a company which advises others "as to the value of commodities or as to the advisability of trading." 7 U.S.C. § 2. Although the...