Grosser v. Commodity Exchange, Inc., 84 Civ. 412(MEL).

Citation639 F. Supp. 1293
Decision Date11 September 1986
Docket NumberNo. 84 Civ. 412(MEL).,84 Civ. 412(MEL).
PartiesRochelle GROSSER, Plaintiff, v. COMMODITY EXCHANGE, INC., Comex Clearing Association, Inc., the Board of Trade of the City of Chicago, the Board of Trade of the City of Chicago Clearing Corporation, Mid-America Commodity Exchange, Mid-America Clearing Corporation, Nelson Bunker Hunt, William Herbert Hunt, Lamar Hunt, International Metals Investment Co., Ltd., Prudential-Bache Securities, Inc., Bache Halsey Stuart Shields, Inc., Bache Group, Inc., Alvin Brodsky, Merrill Lynch Pierce Fenner & Smith Incorporated, Conticommodity Services, Inc., Norton Waltuch, Melvin Schnell, Gilion Financial, Conticapital Management, Inc., Conticapital Ltd., Naji Robert Nahas, Sheik Mohammed Aboud Al-Amoudi, Sheik Ali Bin Mussalem, and Banque Populaire Suisse, Defendants.
CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York

COPYRIGHT MATERIAL OMITTED

Cole, Raywid & Braverman, Washington, D.C., Mailman & Gigante, New York City, for plaintiff; Alan Raywid, Margaret E. Haering, Frances J. Chetwynd, Washington, D.C., Gary Mailman, New York City, of counsel.

Paul Weiss, Rifkind, Wharton & Garrison, Sheldon L. Berens, New York City, Glen F. Hackmann, Chicago, Ill., for ContiCommodity Services, Inc., ContiCapital Management Inc. and Norton Waltuch; Mark H. Alcott, Richard A. Rosen, William P. Farley, Peter W. Schneider, New York City, of counsel.

Sullivan & Cromwell, New York City, for Bache Group Inc. and Prudential-Bache Securities, Inc. (formerly known as Bache Halsey Stuart Shields Inc.); Marvin Schwartz, Richard H. Klapper, Marcy Engel, of counsel.

Seyfarth, Shaw, Fairweather & Geraldson, New York City, Shank, Irwin & Conant, Dallas, Tex., for Lamar Hunt, Nelson Bunker Hunt and W. Herbert Hunt; Daniel S. Greenfeld, New York City, Roger Goldburg, Rederick G. Steakley, Robert F. Wolin, Dallas, Tex., of counsel.

Rogers & Wells, New York City, for Merrill Lynch, Pierce, Fenner & Smith Inc.; William R. Glendon, Guy C. Quinlan, Susan A. Garcia, of counsel.

Skadden Arps Slate Meagher & Flom, New York City, for Melvin Schnell; Michael Diamond, Erskine D. Henderson, of counsel.

Perito, Duerk, Carlson & Pinco, P.C., Washington, D.C., for International Metals Inv. Co., Ltd.; John P. Wintrol, Robert L. Pokusa, of counsel.

Baer Marks & Upham, New York City, for Commodity Exchange, Inc. and Comex Clearing Ass'n, Inc.; Barry J. Mandel, Thomas E. Albright, William A. Brandt, Jr., of counsel.

Kirkland & Ellis, Chicago, Ill., for Board of Trade of the City of Chicago; John E. Angle, T. Webster Brenner, of counsel.

Murphy & Boyle Chartered, Chicago, Ill., for Board of Trade Clearing Corp.; Robert D. Boyle, Jay L. Statland, of counsel.

Townley & Updike, New York City, for Board of Trade of the City of Chicago and Bd. of Trade Clearing Corp.; James K. Leader, of counsel.

Cohn & Blau, Edward J. Swan, New York City, for MidAmerica Commodity Exchange; James L. Fox, Donald P. Colleton, Abramson & Fox, Chicago, Ill., of counsel.

Louis F. Burke & Associates, New York City, for Alvin Brodsky; Jeffrey N. Levy, Amy M. Slifka, of counsel.

LASKER, District Judge.

This lawsuit arises out of the events in the silver market during the 1970s and early 1980, including the dramatic rise in the price of silver in 1979 and the collapse of the market in March 1980, which have been the subject of detailed press coverage, books, congressional investigations, and much litigation. Rochelle Grosser, on behalf of herself and each person who held a long silver futures position between January 8, 1980 and March 27, 1980 (and who suffered a loss therefrom)1 sues several commodities exchanges and clearinghouses as well as numerous firms and individuals for violations of various provisions of the Commodities Exchange Act ("CEA"), the antitrust laws, and the Racketeer Influenced and Corrupt Organizations Act ("RICO").

The defendants, all but five of whom move to dismiss the claims against them in whole or in part, are: Commodity Exchange, Inc. ("Comex"), Comex Clearing Association, Inc. ("Comex Clearing"), Board of Trade of the City of Chicago ("CBOT"), Board of Trade of the City of Chicago Clearing Corporation ("CBOT Clearing") (collectively referred to as "the exchange defendants"); MidAmerica Commodity Exchange ("MACE");2 Nelson Bunker Hunt, William Herbert Hunt, Lamar Hunt, International Metals Investment Co., Ltd., Bache Group, Inc., Prudential-Bache Securities, Inc., Alvin Brodsky, Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), Melvin Schnell (collectively referred to as "the non-exchange defendants"); Sheik Mohammed Al Amoudi, Sheik Ali Bin Mussalem, Naji Nahas, Gilion Financial, Inc., and Banque Populaire Suisse.3

The allegations of the amended complaint are accepted as true for the purposes of considering these motions to dismiss. See Cruz v. Beto, 405 U.S. 319, 322, 92 S.Ct. 1079, 1081, 31 L.Ed.2d 263 (1972) (per curiam). The amended complaint asserts that the defendants, other than the exchanges and clearinghouses named in the complaint, engaged in a conspiracy to artificially increase the price of refined silver and silver futures contracts by

purchasing large amounts of silver futures contracts in the United States market, ... seizing control of suppliers of refined silver in the United States and of vault receipts relating to triple nine bars in the licensed depositories of the Comex and CBOT and thereby ... preventing persons needing to liquidate silver futures contracts from doing so except at artificially inflated prices.

Compl. ¶ 38(c). According to the amended complaint, as a result of actions and transactions engaged in by these defendants, who held substantial "long positions" — or commitments to take delivery — and therefore stood to benefit from increases in the price of silver, the price of physical silver rose from $11 per ounce in September 1979 to $50 per ounce in mid-January 1980. Compl. ¶¶ 42-45.

The amended complaint also alleges that the named exchanges

negligently, willfully or in bad faith, and in concert, failed to take effective action to control rapidly rising silver prices even though they knew or recklessly ignored the fact that these prices were not the result of natural market forces, but were being caused by the unlawful scheme and conspiracy of the other Defendants.
... The Exchanges continued to allow these other Defendants to use the facilities of the Exchanges without effecting regulatory controls, even though they were under a statutory duty to Plaintiff and other members of the investing public to prevent the manipulation.

Compl. ¶¶ 63-64. The governing boards of the exchanges, according to the amended complaint, did not take decisive action until January 1980, when they instituted position limits and "liquidation only" rules which had the effect of causing the price of silver to fall precipitously, destroying the liquidity of the market, and allowing those holding "short positions" — or commitments to make delivery — to dictate the price of silver futures contracts. Compl. ¶¶ 67-69. It is alleged that certain members of the governing boards of the exchanges

held short positions at times relevant to this action, and having been damaged by the rise in the price of silver futures contracts through January 20, 1980, individually and in concert, acting through the Exchanges, by participating in and/or influencing such rule changes sought to reverse such rise and cause the price of silver futures contracts to drop, to allow them to realize substantial profits and prevent them from facing impending bankruptcy.
Compl. ¶¶ 70-71. The clearinghouses named as defendants in the complaint are alleged to have participated, individually and in concert, with the exchanges both in the failure to take action to maintain an orderly market prior to January 1980 and in the institution of the manipulative rule changes adopted in January 1980. Compl. ¶ 77.

Grosser, the representative of the proposed class and a resident of New Jersey, purchased two futures contracts on the MACE through her broker, Merrill Lynch: one contract of April 1980 silver on January 8, 1980, and one contract of June 1980 silver on January 28, 1980. Compl. ¶ 37. Grosser's long silver positions were liquidated at losses of $16,030 and $23,870 on March 17 and May 14, 1980 respectively. Compl. ¶¶ 83-84.

The amended complaint presents six claims. Compl. ¶¶ 85-99. The first asserts that all defendants other than the exchanges and clearinghouses named in the complaint conspired to manipulate and manipulated silver contract prices in violation of Section 9(b) of the CEA, 7 U.S.C. § 13(b) (1982). The second alleges that all defendants, acting in concert, defrauded plaintiff and the silver and silver futures markets and deceived plaintiff in connection with the making of silver futures contracts in violation of Sections 4b and 4c of the CEA, 7 U.S.C. §§ 6b (1982) & 6c (1976 & Supp. V 1981). The third claim charges all defendants with engaging in a conspiracy to unreasonably restrain interstate trade in silver and silver futures contracts with the intention and effect of raising and fixing the price of silver in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1 (1982). The fourth charges all defendants with attempting to monopolize trade in silver in violation of Section 2 of the Sherman Antitrust Act, 15 U.S.C. § 2. The fifth claim alleges that the exchanges and clearinghouses named as defendants in the complaint willfully in bad faith and/or recklessly violated Sections 5(d) and 5a(8) of the CEA, 7 U.S.C. §§ 7(d) (1982) & 7a(8) (1976), which concern the requirement that the governing board of an exchange provide for the prevention of the manipulation of prices and the cornering of any commodity, and the obligation of an exchange to properly enforce trading rules. The sixth asserts that all defendants other than the exchanges and clearinghouses engaged in a...

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