Index Futures Group, Inc. v. Ross

• Decision Date: 22 May 1990
• Docket Number: No. 1-88-3737,1-88-3737
• Citation: 145 Ill.Dec. 574,557 N.E.2d 344,199 Ill.App.3d 468
• Court: United States Appellate Court of Illinois
• Parties: , 145 Ill.Dec. 574 INDEX FUTURES GROUP, INC., Plaintiff-Appellee, v. Harry ROSS, Defendant-Appellant.

Page 344

557 N.E.2d 344

199 Ill.App.3d 468, 145 Ill.Dec. 574

INDEX FUTURES GROUP, INC., Plaintiff-Appellee, v. Harry ROSS, Defendant-Appellant.

No. 1-88-3737.

Appellate Court of Illinois First District, Second Division.

May 22, 1990.

Rehearing Denied July 11, 1990.

John E. Dolkart, Chicago (Tenney & Bentley, Michael J. Childress, of counsel), for defendant-appellant.

W. Scott Porterfield, Fishman & Merrick, P.C., Chicago, for plaintiff-appellee.

Justice SCARIANO delivered the opinion of the court:

This action was brought to recover a deficit in defendant's commodity trading account by plaintiff broker. Defendant filed an answer and an amended answer containing affirmative defenses and counterclaims which admitted that there was a deficit in his account, but denied liability and sought additional damages based on allegations that plaintiff was grossly negligent, had engaged in willful misconduct, committed fraud, and breached its fiduciary duty owed to defendant. The trial court struck and dismissed defendant's affirmative defenses and counterclaims, and granted summary judgment to plaintiff. We affirm.

Plaintiff Index Futures Group, Inc. (Index), is a commodities brokerage firm located in Chicago and a member of the principal commodities exchanges in the United States. Defendant Harry Ross, a resident of California, maintained a commodity trading account with Index from April 1985 through January 1986. Ross granted a power of attorney to James Reed and Symanco, Inc., an investment advisory firm located in California in which Reed was the principal, to trade his account. ¹

The rights and duties of both Index and Ross are governed by their contractual agreement, which Ross executed on April 6, 1985, and which contained the following provisions:

"1. Governing Rules and Regulations.

All transactions executed under this Agreement for the Accounts shall be governed by applicable laws and rules enacted by the exchange and clearing organization, if any, where such transactions are executed, by the applicable self-regulatory organization and by applicable federal and state law and regulations. * * *

2. Customer's Orders and Delegation of Responsibilities.

* * * * * *

The Company [Index] shall not be responsible for any losses related to the Accounts and incurred as a result of other than its own gross negligence or willful musconduct.

Accordingly, the Company shall not be responsible for any loss or delay in execution arising from, but not limited to, faulty order transmission and communication, fluctuations in currency values, inability to communicate with Customer, or other causes beyond the Company's control. Except as required by applicable law or regulation, the Company shall not be required to inquire into the circumstances surrounding a transaction it may have with Customer. Any inquiry undertaken by the Company will not result in the imposition of additional responsibilities not expressly agreed to by the Company in this Agreement.

* * * * * *

7. Indemnification

Customer acknowledges and agrees that the Company shall not be responsible to Customer for any losses resulting from conduct or advice (including, but not limited to, errors and negligence) of any broker-dealer, futures commission merchant, introducing broker, commodity trading advisor or other person or entity that introduces Customer to the Company or has authority over trading in the Accounts. Customer acknowledges that the Company has no responsibility to supervise the activities of any such person or entity, and agrees to indemnify the Company for any loss, liability, or damage (including attorneys' fees) incurred by the Company as a result of actions taken or not taken by such person or entity."

Pursuant to this last clause, any daily losses accruing in a commodities trading account are paid initially to the futures exchange clearing house by the brokerage firm, which then seeks compensation from its customer based on the indemnification provisions set forth above, as limited by the terms of paragraph 2, also set forth above.

As previously noted, Ross engaged the services of Symanco, Inc., headed by James Reed, as his commodity trading advisor, and signed an agreement giving it the authority to trade for his account. Throughout the time period relevant to this case, Symanco traded for only four customers (including Ross), all of whom executed customer agreements with Index and granted Symanco trading authority over their accounts. At the request of Symanco, Index made arrangements which permitted Reed to have direct telephone access to order clerks employed by Great American Trading Company located on the floor of Commodity Exchange, Inc. (Comex), a New York commodity exchange. Reed was not required to place his orders first with Index personnel who would then transmit them to Comex, as was normally the practice; moreover, Reed always placed them as block orders, which did not distinguish whom the order was for, nor did it list individual customer account numbers. After the close of the market each day, he would direct Index to assign newly-acquired futures contracts to a customer's account number based on the equity in that customer's account as of the prior day's close of business.

In April 1985, Ross placed a $30,500.00 initial investment in his trading account, which then earned over 24% profit by the end of the year. At the close of trading on January 8, 1986, defendant's account showed 14 open futures contracts, was fully margined, and had a total equity balance of $26,646.00. On January 9, pursuant to his trading system, Reed purchased a total of 400 short silver futures contracts for his four customers. The market refused to cooperate, and moved drastically higher. Reed then called in an order to purchase 1000 long futures contracts, attempting to take advantage of the rising prices for his clients, but the order was rejected by the Great American telephone clerk on the floor of the exchange. After the clerk also rejected his request to purchase 500 long futures contracts, Reed ordered him to liquidate the entire Symanco position, and this was done the same day at a loss of nearly $500,000. The record does not indicate why the orders were rejected, although Reed testified at his deposition that his orders had always been accepted in the past.

Based on the equity in Ross' account as of the prior day, $119,400 of the total loss was allocated against him, resulting in a net deficit in his account of $92,754. Because Reed was distraught over the loss, and was unable to calculate manually how many contracts should have been apportioned to each of his four customers, as had been his past practice, he advised Index of his system and had them perform the computation.

After Ross refused its demands for payment, Index filed its complaint for breach of contract. In response, Ross pleaded affirmative defenses and counterclaims charging Index with breach of contract, gross negligence and willful misconduct, common law fraud, and breach of fiduciary duty. These allegations were based on his assertions that Index accepted block orders from Reed, that Index permitted Reed to trade Ross' account despite the lack of sufficient funds for margin, and that Index permitted Reed to place orders directly to the floor of Comex and allocated a portion of the trades placed in the block orders to Ross' account.

The trial judge rejected Ross' arguments, struck and dismissed his "amended answer and counterclaim [sic ]," and entered summary judgment in favor of Index, holding that Ross had not demonstrated that Index had breached any duty owed to Ross. The judge reasoned that Index did not owe Ross a duty to refrain from accepting block orders so long as the trades were fairly allocated, and that Index did not owe Ross a duty to refuse Reed's orders without requiring additional margin or to otherwise supervise Symanco or Reed. This appeal followed.

We affirm.

I.

On appeal, Ross argues that Index breached a duty emanating from three distinct sources: a contractual duty, a duty based on negligence concepts, and a duty to refrain from fraud and self-dealing. Ross' contractual duty argument relies on paragraph 1 of the Index customer agreement, more fully set forth above, which requires the parties to abide by all applicable laws, agency regulations, and other industry rules. Ross contends that Index violated regulations promulgated by the Commodity Futures Trading Commission (CFTC), exchange rules, and rules of the National Futures Association (NFA). More specifically, he asserts that block orders such as those placed here by Reed violated CFTC Regulation 1.35 (17 C.F.R. § 1.35 (1989)), Comex Rules 4.88 and 5.13, and NFA Compliance Rule 2-4. He further alleges that Index violated Comex Rule 6.05(a), which prohibits members from carrying undermargined accounts. Since paragraph 1 bound Index to comply with all applicable rules, laws, and regulations, Ross argues that these violations constitute a breach of contract sufficient to relieve Ross of his obligation to indemnify Index and sufficient to support his counterclaims.

We agree that paragraph 1 imposes additional contractual duties on Index (Keehner v. A.E. Staley Manufacturing Co. (1977), 50 Ill.App.3d 258, 8 Ill.Dec. 37, 365 N.E.2d 275; see also Iowa Grain v. Farmers Grain and Feed Co. (Iowa 1980), 293 N.W.2d 22); however, we do not find Index has breached any of these duties. CFTC Regulation 1.35 provides, "Each futures commission merchant and each introducing broker receiving a customer's or option customer's order shall immediately upon receipt thereof prepare a written record of such order, including the account identification and order number." (17 C.F.R. § 1.35(a-1) (1989).) Ross relies heavily on a CFTC decision in which the administrative law judge imposed liability upon a futures commission merchant for permitting block trading in violation of Regulation 1.35, despite the...