In re ContiCommodity Services, Inc. Securities Lit.
| Citation | 733 F. Supp. 1555 |
| Decision Date | 07 February 1990 |
| Docket Number | MDL No. 644. |
| Parties | In re CONTICOMMODITY SERVICES, INC., SECURITIES LITIGATION. |
| Court | U.S. District Court — Northern District of Illinois |
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David T. Pritikin and Geraldine M. Alexis, Sidley & Austin, Chicago, Ill., for Conti-Commodity Services, Inc., Continental Grain Co. and certain current or former officers.
Carla Powers Dykes, Chamberlain, Hrdlicka, White, Johnson & Williams, Houston, Tex., Ray G. Rezner and Wendi Sloane Weitman, Barack, Ferrazzano, Kirschbaum & Perlman and David B. Levine, Levin & Ginsburg, Ltd., Chicago, Ill., for certain customer parties.
Charles W. Boand, Robert F. Forrer and Quinton F. Seamons, Burke, Wilson & McIlvaine, Chicago, Ill., for Arthur Andersen & Co.
Brice A. Tondre, Madden and Strate, P.C., Wheat Ridge, Colo., for Harvey Herberman & Herberman Corp.
Ron L. Futterman, Hartunian, Futterman & Howard, Chtd., Chicago, Ill., for Joe O. Ragan and Owen & Cynthia Frakes.
Randall Marmor and Harvey Herman, Clausen, Miller, Gorman, Caffrey & Witous, P.C., Chicago, Ill., for Reliance Ins. Co.
Bruce M. Rose, Herbert Beigel and Leigh R. Lasky, Beigel & Sandler, Chicago, Ill., for David J. Ragan.
Charles C. Hileman and Clinton A. Stuntebeck, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., and John L. McConn, Jr., McConn & Hardy, Houston, Tex., for Carroll McEntee McGinley, Inc.
Stanley A. Walton, Seyfarth, Shaw, Fairweather & Geraldson, Chicago, Ill., for Prescott, Ball & Turben and J. Luikart.
Kenneth E. Johns, Jr., Vinson & Elkins, Dallas, Tex., and Peter R. Sonderby and Janet L. Reali, Keck, Mahin & Cate, Chicago, Ill., for Merrill Lynch, Pierce, Fenner & Smith, Inc.
Seth Heald, Office of Special Litigation, U.S. Dept. of Justice, Tax Div., Washington, D.C., for U.S.
Sheldon M. Neider, Neider Financial Consultants, and James Motley, Motley Investments Venture No. 4, Houston, Gerald F. Cerce, Accessories Assoc., Inc., N. Providence, R.I., and Donald Davies, Houston Land Investment Corp., and Bryant P. Jensen, Houston, Tex., pro se.
This multidistrict litigation is presently before the court on various motions for summary judgment. Motions have been filed in 13 of the remaining 15 cases.1 The motions have been fully briefed and the court heard oral argument on the motions on October 27, 1989. This opinion will discuss all the pending motions and will be referred to as the "Summary Judgment Opinion" or "SJO". The discussion in this case is generally organized by parties. A separate order will be issued in each case making reference to the SJO and specifically stating the ruling as to the individual case.
This litigation centers around trading activity at the ContiArbitrage-Houston office ("CAH") of ContiCommodity Services, Inc. ("Conti"). Conti is a fully owned subsidiary of Continental Grain Company ("Continental"). David Ragan was a vice president of Conti and the manager of CAH. CAH was open from August 1981 until May 1984. Conti was a futures commission merchant registered with the Commodity Futures Trading Commission ("CFTC"). During the relevant time period, I.C. Hemmings; C.P. Brown; B & H Investment Services, Ltd. ("B & H"); H & B Investment Services, Ltd. ("H & B"); W. Paul Harris; Richard Sanborn; Grayson Whitehurst; Paul Sarpi; SSJ Associates, Inc.; Marc Enright; Floyd Bender; Dorothy Bender; Joe Ragan; Cynthia Frakes; and Owen Frakes maintained accounts at Conti and authorized David Ragan to trade for their accounts.2
David Ragan was to conduct arbitrage trading for the customers. Arbitrage trading is the simultaneous purchase and sale of the same or equivalent securities or commodities in different markets or on different exchanges at different prices, in order to profit from the price differences between markets. The arbitrage trading relevant to this case primarily involved playing the cash market against the futures market in United States government securities. Purchase of the cash government securities (treasury bills, bonds, notes) were financed by repurchase agreements ("repos") and reverse repos. A repo is a short term collateralized loan. The seller of the security agrees that, after a negotiated period of time, the seller will repurchase the security from the original buyer for a different price which includes interest. A reverse repo is a purchase/resale agreement whereby a buyer agrees to resell a purchased security to the original seller at a price which also reflects interest. Trading of this type involved a large amount of debt that had to be reflected in the financial statements of Conti and Continental.
Certain customer parties complain that David Ragan acted improperly in that he did not conduct the type of trading promised, made intercustomer trades, made prearranged trades, made block trades, and failed to timely and properly allocate to specific customers the trades he was making. They seek to hold Conti, Continental, and certain officers of Continental and Conti3 liable on theories of agency, piercing the corporate veil, and personal involvement. Certain customer parties also complain that Continental required Conti to close out accounts in a short period of time resulting in large losses and lost profits. Certain customer parties claim they were damaged in that they had actual losses and interest expenses, lost profits, and lost tax advantages. The Frakes and Joe Ragan claim that Conti did not distribute the entire balances remaining in their accounts when CAH was closed down. The Frakes and Joe Ragan do not accuse David Ragan of any wrongdoing. Conti, on the other hand, claims the customer parties conspired with David Ragan to have profitable trades allocated to them and that this resulted in Conti having to reimburse customers who received the loss side of the trades. Conti has also brought suit against David Ragan for the damages he allegedly caused, including to customers not parties to this suit. Ragan has countersued Conti for breach of contract, interference with contractual relations, and other claims.
A number of other parties are also involved in this litigation. Arthur Andersen & Company ("Andersen") audited the books of Continental and Conti. Certain customers claim Andersen is liable to them for failing to reveal to them the improprieties Andersen allegedly found at Conti. Prescott, Ball & Turben, Inc. ("PBT") and its former employee John Luikart allegedly conducted prearranged trades with Conti for which PBT received a certain percentage of profit that was in essence a commission. PBT claims it did not know the trades were for Conti customers, not Conti itself. Certain customers claim PBT is responsible for some of their damages in that some of the prearranged trades were assigned to them. Conti claims PBT improperly conspired with David Ragan and obtained commissions it was not entitled to. After CAH was closed, David Ragan was employed by Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") and certain customers transferred their accounts there. Improper practices allegedly continued and certain customers also brought suit against Merrill Lynch. Conti purchased a fidelity bond from Reliance Insurance Company ("Reliance") in 1984. Conti has brought suit to collect on the bond based on liabilities it has incurred as a result of trading at CAH. Also joined in this litigation are tax refund suits brought by certain customers and which involve the deductibility of losses claimed from trading at CAH.
In resolving each motion for summary judgment, the entire record is considered with all reasonable inferences drawn in favor of the nonmovant and all factual disputes resolved in favor of the nonmovant. Mid-State Fertilizer Co. v. Exchange National Bank of Chicago, 693 F.Supp. 666, 669 (N.D.Ill.1988), aff'd, 877 F.2d 1333 (7th Cir.1989). As regards choice of law issues, where the parties have not made any argument as to which state's law applies, it is assumed that the law of the state of the district where the case was filed applies. However, where there is no citation to that state's law, it is further assumed that the state's law is the same as Illinois. Similarly, where no law is cited from other circuits where cases are filed, it will be assumed that the applicable law is the same as that in the Seventh Circuit.
The Conti parties have moved for summary judgment dismissing all the claims of the customer parties on the ground they have shown no damages. Continental also moves to dismiss all claims on the ground its corporate veil cannot be pierced. Conti individual defendants also move to dismiss all claims on the ground their personal involvement has not been shown. All the Conti parties also argue that certain specific claims cannot be proven. Conti has not moved for summary judgment on any of its claims against the customer parties. The customer parties generally oppose the motions of the Conti parties, but do concede certain claims should be dismissed. The customer parties also move for summary judgment on some of their claims against Conti and move to dismiss some of Conti's claims against them. All the cases involving claims between the customers and Conti parties were brought in Texas except for Conti's suit against the Brown & Hemmings parties and the claims between Conti and the Frakes. The latter are Illinois cases.
The customer parties have conceded that certain of the following claims should be dismissed: (1) 1933 Securities Act; (2) California Securities Act; (3) Implied Covenant of Good Faith; (4) Tortious Interference with Customer Contracts; (5) Commodity Exchange Act § 4d(2); (6) Commodity Exchange Act Control Person; (7) Acquiescence in Fraud; and (8...
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