Johnson v. Chilcott, Civ. A. No. 82-C-889.

• Decision Date: 10 July 1984
• Docket Number: Civ. A. No. 82-C-889.
• Citation: 590 F. Supp. 204
• Parties: James P. JOHNSON, as Equity Receiver for the Chilcott Futures Fund, Plaintiff, v. Thomas D. CHILCOTT, et al., Defendants.
• Court: U.S. District Court — District of Colorado

590 F. Supp. 204

James P. JOHNSON, as Equity Receiver for the Chilcott Futures Fund, Plaintiff, v. Thomas D. CHILCOTT, et al., Defendants.

Civ. A. No. 82-C-889.

United States District Court, D. Colorado.

July 10, 1984.

Kenneth C. Groves, Denver, Colo., Rodney R. Patula, Pryor, Carney & Johnson, Englewood, Colo., Arthur E. March, Jr., March, March, Myatt & Korb, Fort Collins, Colo., for plaintiff.

Richard P. Slivka, Bosworth & Slivka, P.C., Denver, Colo., Perry L. Taylor, Jr., Kattan, Muchin, Zavis, Pearl & Haller, Chicago, Ill., Charles F. Brega, Roath & Brega, Denver, Colo., John R. Dutt, Wilkie, Farr & Gallagher, New York City, John S. Lutz, David G. Palmer, Holland & Hart, David M. Ebel, Michael Gallagher, Richard P. Holme, Davis Graham & Stubbs, Denver, Colo., for defendants.

Sid Anders pro se.

Thomas Chilcott, pro se.

ORDER

CARRIGAN, District Judge.

Defendants Shearson Lehman/American Express, Inc. ("Shearson"), Donald Cunningham and Boettcher & Company ("Boettcher") have filed motions to dismiss part or all of the plaintiff's second amended complaint. The issues have been thoroughly briefed and argued.

I. General Background.

From the mid-1970's through June 1981, Thomas D. Chilcott obtained tens of millions of dollars from hundreds of investors by representing that the funds were being invested in a highly profitable commodities pool. Chilcott further represented that his trading was restricted to securities, later to securities and commodity futures, and finally to commodity futures only.

A federal investigation begun in June 1981 revealed that Chilcott had not made the promised investments, nor had he earned the profits he had reported. Chilcott's actual investments included partnerships and joint ventures for trading in securities, investment contracts, commodity futures contracts, real estate, race horses, dental clinics, oil and gas leases, computer software businesses, advertising, and various other enterprises. The investigation found that he had lost most of the investors' money.

Chilcott's devices took the form of a socalled "ponzi scheme." Through false and misleading statements and omissions concerning the past performance and current profitability of the Chilcott Futures Fund ("the fund"), investors were induced to part with their money. From time to time, some investors purchased additional interests in the fund, or withdrew some or all of their investments or shares of "profits." Since the fund actually had no profits, it had to cover these withdrawals while continuing to lose money. Chilcott, therefore, had to obtain ever-increasing sources of new money to pay those who wanted to "cash-out." These payments were essential to maintain investor confidence, and Chilcott continued misrepresenting the facts in order to keep the fund alive with continual infusions of new capital.

After Chilcott's fraudulent scheme collapsed, the Commodity Futures Trading Commission (CFTC) sued in this court seeking appointment of an equity receiver to administer Chilcott's assets. CFTC v. Chilcott Commodities Corp., et al., (Civil Action No. 81-F-999). In that action Chief Judge Finesilver appointed James P. Johnson as receiver. Johnson, in his capacity as receiver, instituted the present action.

In this case, the receiver sues on behalf of the "Chilcott Futures Fund." An evidentiary hearing is scheduled July 16, 1984 to determine whether the named fund actually exists as an entity with standing and capacity to sue. For purposes of the instant motions to dismiss only, the defendants have conceded that the fund is, as alleged, an investment entity with a legal status separate from its investors.

Six defendants have been named in the complaint. The first, Chilcott, was convicted of wire fraud and is in prison. He has been served all pleadings and motions, but has not appeared by counsel or otherwise. In any event, he has already surrendered his assets to the receiver.

Defendants Shearson and Boettcher are brokerage firms through whom Chilcott traded commodities during his fraudulent activity. The three remaining individual defendants were at various times employed by Shearson or Boettcher.

The complaint contains seven claims for relief. The first three are federal claims based on the Commodities Exchange Act and the Securities Exchange Act of 1934. The receiver alleges that Chilcott directly violated, and that the remaining defendants aided and abetted him in violating, these federal anti-fraud provisions. The remaining claims, all state law claims, are for common law fraud, conversion, negligence, negligent supervision, and breaches of fiduciary duties. It is undisputed for purposes of this motion that Chilcott defrauded investors through representations and omissions, and that he misappropriated much of the money entrusted to him.

II. Aiding and Abetting Liability Under the Commodity Exchange Act.

The first issue raised by the defendants' motions to dismiss is whether there existed at the times in question a private right of action for aiding and abetting violations of the Commodity Exchange Act (CEA). At the June 22, 1984 hearing on these motions, I held that the plain language of CEA § 13c(a), in the form in which it existed when the facts of this case occurred, limits remedies for aiding and abetting to administrative proceedings.¹ Section 13c(a) then provided:

"Any person who commits, or who willfully aids, abets, counsels, commands, induces, or procures the commission of, a violation of any of the provisions of this Act, or who acts in combination or concert with any other person in any such violation, or who willfully causes an act to be done or omitted which if directly performed or omitted by him or another would be a violation of the provisions of this Act or any of such rules, regulations, or orders may be held responsible in administrative proceedings under this Act for such violation as a principal." (Emphasis added)

Plaintiff argues, however, that the first and second claims, the federal "aiding and abetting" claims, are not premised on § 13c(a) but are founded on private rights of action implied by CEA §§ 4b and 4o. Section 4b makes it unlawful for any person "in or in connection with any order to make, or the making of, any contract of sale of any commodity for future delivery ...

(A) to cheat or defraud ... another person;

(B) willfully to make or cause to be made to such other person any false report or statement thereof ...;

(C) willfully to deceive or attempt to deceive such other person ...."

Section 4o makes it "unlawful for any commodity trading advisor or commodity pool operator ...

(A) to employ any device, scheme or artifice to defraud any client or participant or prospective client or participant; or

(B) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant."

Plaintiff claims that Chilcott's acts violated these sections and that the defendants aided and abetted his violations. In order to have a remedy, the plaintiff must assert that a private right of action for aiding and abetting is implied by §§ 4b and 4o, and he has so asserted.

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982) is the seminal case on implied private judicial remedies under the CEA. There the Supreme Court clearly reaffirmed adherence to the approach taken in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975) to determine whether a statute implies a private remedy. Moreover the Court there reiterated that discerning Congressional intent is the key to determining whether a private right of action is implied. The Curran Court declared that "in determining whether a private cause of action is implicit in a federal statutory scheme when the statute by its terms is silent on that issue, the initial focus must be on the state of the law at the time the legislation was enacted." 456 U.S. at 378, 102 S.Ct. at 1839. (Emphasis added).

The issue in Curran was whether there existed a private right of action for direct violations of the CEA. When Congress amended the CEA in 1974, keeping intact the provisions courts had interpreted as implying private judicial remedies, and not adding language either affirming or derogating judicially inferred remedies, Congress was presumed to have acted with knowledge of then existing case law. Said the court: "The fact that a comprehensive reexamination and significant amendment of the CEA left intact the statutory provisions under which the federal courts had implied a cause of action is itself evidence that Congress affirmatively intended to preserve that remedy." Curran, 456 U.S. at 381-82, 102 S.Ct. at 1840-41.

In contrast to the determinative factor in Curran, i.e., the CEA's silence on private judicial remedies for direct violations, stands the obvious fact that the act is not silent on aiding and abetting liability. In § 13c(a) Congress clearly indicated its intent that there be no private judicial remedy for aiding and abetting violations of any CEA provision. Section 13c(a) states that "any person who ... aids ... and abets ... a violation of any of the provisions of this Act ... may be responsible in administrative proceedings ... as a principal." (Emphasis added).

Again in contrast to Curran, no federal court, before the 1974 amendments, had ever found a private judicial remedy for aiding and abetting liability. Despite the state of the law in 1974, Congress chose not to remove the administrative remedy language from § 13c(a). Not surprisingly, no court after the 1974 amendments found a private judicial remedy for aiding and abetting liability. Only since 1983, when Congress removed the express limitation of remedy, has there existed a private judicial remedy for aiding and abetting CEA violations.² The inquiry whether Congress intended to imply, in §§ 4b and 4o, private...