Jones v. BC Christopher & Co., 78-4192.

• Decision Date: 14 February 1979
• Docket Number: No. 78-4192.,78-4192.
• Parties: George C. JONES, Plaintiff, v. B. C. CHRISTOPHER & COMPANY et al., Defendants.
• Court: U.S. District Court — District of Kansas

466 F. Supp. 213

George C. JONES, Plaintiff, v. B. C. CHRISTOPHER & COMPANY et al., Defendants.

No. 78-4192.

United States District Court, D. Kansas.

February 14, 1979.

COPYRIGHT MATERIAL OMITTED

Dale M. Sprague, Topeka, Kan., William M. Phelan, Chicago, Ill., for plaintiff.

James W. Sargent, Sargent & Klenda, Wichita, Kan., Lawrence R. Brown, Stinson, Mag, Thomson, McEvers & Fizzell, Kansas City, Mo., for defendants.

MEMORANDUM AND ORDER

ROGERS, District Judge.

This is an action for damages arising from plaintiff's participation in certain commodity futures transactions. Defendants have moved to dismiss. Plaintiff has responded to the motion, and a hearing thereon was held February 7, 1978. Having considered the questions presented and heard the arguments of the parties, the court enters the following order.

Plaintiff is the former president of a small bank and of various other business entities. The complaint alleges that he engaged in massive commodities trading on his own behalf and on behalf of others. It appears that these transactions went ur, and that plaintiff lost significant sums both of his own money and of that with which he had been entrusted. Apparently these transactions were consummated through defendant B. C. Christopher, a commodities trading firm with an office in Wichita, Kansas. Defendant Baldwin is the employee of Christopher with whom plaintiff apparently dealt. Defendant Glickman was at the time the manager of Christopher's Wichita office. The remaining individual defendants are partners of the firm.

The complaint tracks closely the language of the anti-fraud provision of the Commodity Exchange Act, whose authority it invokes, 7 U.S.C. § 6b. It appears to be plaintiff's contention that defendants knew or should have known that plaintiff was "unsuitable" for the trading in which he was engaging, and that Baldwin (with the condonation of Glickman) encouraged overtrading in order to secure large commissions.

As a result of plaintiff's losses, he has become a party defendant in a score of civil actions brought, presumably, by persons whose money was lost in the transactions. He has also been named a defendant in three criminal actions arising from the same transactions. All remain pending, although in different stages of progress.¹ We proceed to consider the arguments of defendants in favor of dismissal of the present case.

I. JURISDICTION OF THE COURT; PRIVATE ACTIONS UNDER THE COMMODITY EXCHANGE ACT

Initially, defendants argue that this court lacks subject-matter jurisdiction over plaintiff's claims under the Commodity Exchange Act, 7 U.S.C. § 1 et seq. Their argument is in essence that the Act makes no provision for a private action for damages, and that the 1974 amendments to the Act, P.L. 93-463 (October 23, 1974), vested exclusive jurisdiction over commodity-related grievances in the Commodity Futures Trading Commission established therein.

Defendants concede that prior to the 1974 amendments to the Act, courts implied a private right of action thereunder. The seminal case of this type was Goodman v. H. Hentz & Co., 265 F.Supp. 440 (N.D.Ill. 1967). In Goodman the court relied by analogy upon those cases implying a private right of action under Section 10(b) of the Securities Exchange Act of 1934.

Goodman and similar cases² were relied upon by the Seventh Circuit Court of Appeals in the case of Deaktor v. L. D. Schreiber & Co., 7 Cir., 479 F.2d 529 (1973). Since defendants' argument commences with the fate of the Deaktor case in the Supreme Court, we believe the procedural history of the case is worthy of some note. Plaintiffs had brought private actions under the Commodity Exchange Act and federal antitrust statutes against defendants subject to the regulation of the Commodity Exchange Commission, which at that time was charged with the regulation of commodity markets under the Act. Defendants moved the trial court to stay the actions pending presentation of the matters to the Commission. The motion was denied, and defendants took interlocutory appeals. The Court of Appeals held that the questions presented were not so difficult that the special expertise of the Commission was needed, and affirmed the trial court. The Supreme Court granted certiorari and reversed.

Chicago Mercantile Exchange v. Deaktor, 414 U.S. 113, 94 S.Ct. 466, 38 L.Ed.2d 344 (1973). The Court held that the claims:

should be routed in the first instance to the agency whose administrative functions appear to encompass adjudication of the kind of substantive claims made against the defendant. . . .

Id., 414 U.S. at 115, 94 S.Ct. at 467.

The Deaktor case, of course, does not command the dismissal of this action. The Court merely held that there had been an abuse of discretion under the circumstances in the refusal to invoke the doctrine of "primary jurisdiction" and stay the action pending evaluation of the "intricate and technical" facts of the case by the Commission, which has special expertise in the area. The applicability of this doctrine to the case at hand will be discussed below. For our present purposes, however, it suffices to note that:

When exhaustion is statutorily mandated, the exhaustion requirement is jurisdictional and the district court must dismiss the action. But when there is no statutory exhaustion requirement, courts must resort to a balancing test to determine whether exhaustion is necessary in a given case.

Eluska v. Andrus, 587 F.2d 996, 999 (9th Cir. 1978). It is evident from defendants' brief that they recognize the Deaktor case does not command dismissal of this action. They contend, however, that Deaktor was a "prelude" to the 1974 amendments which now have withdrawn from the federal district courts subject matter jurisdiction over actions such as that before us.

Defendants' argument is grounded upon the 1974 amendments to 7 U.S.C. § 4a, which created the Commodity Futures Trading Commission (CFTC), and to § 2, which vested the new Commission with "exclusive jurisdiction" with regard to regulation of the commodities market. The 1974 amendments created an administrative reparations procedure for those injured by violations of the Commodity Exchange Act, and vested the CFTC with authority to promulgate regulations, hold hearings, and make and enforce (in the Courts of Appeals) orders of all sorts. Generally speaking, the CFTC is a fully autonomous regulatory agency whose duties and powers are modeled after those of the Securities Exchange Commission and similar agencies.

Defendants cite two cases, Bartels v. International Commodities Corp., 435 F.Supp. 865 (D.Conn.1977), and Consolo v. Hornblower & Weeks-Hemphill, Noyes, Inc., 436 F.Supp. 447 (N.D.Ohio 1976), to support their position that one claiming rights under the Commodity Exchange Act has no immediate right of recourse to a federal district court. In Bartels it was indeed stated that there is no implied private cause of action under the Act, Id., 435 F.Supp. at 870. In Consolo the court dismissed a private action under the Act on two grounds: first, that Deaktor commanded plaintiff to first "exhaust" Commission remedies; and second, that no provision for a private cause of action is made in the Act although the CFTC itself is authorized to initiate action. The court has discovered three other cases which inferentially support defendants' position. In Rosenthal & Co., Inc. v. Bagley, 581 F.2d 1258 (7th Cir. 1978), it was declared that the statutory entrustment of reparations claims against registered commodities brokers and others to the CFTC administrative procedure does not violate any right to have such claims determined exclusively in a judicial forum.³ Although the existence of a private right of action was not in issue, the case helps establish the possibility that private suit could be precluded without infringement upon constitutional rights. In Arkoosh v. Dean Witter & Co., Inc., 415 F.Supp. 535 (D.Neb.1976), the court appeared to conceive of administrative procedures as exclusive for actions under the Act, although the matter was not really in dispute since the real question presented was the propriety of arbitration of a futures contract. In Bache Halsey Stuart Inc. v. Hunsucker, 38 N.C.App. 414, 248 S.E.2d 567 (1978), the court refused to entertain claims that a broker's practices violated state unfair trade practice statutes. The court noted the 1974 amendments to the Act created a regulatory commission with broad powers, whose determinations were appealable directly to a Court of Appeals, and stated in passing that:

The exclusive nature of that procedure for redress against market members resulting from a violation of the Act is apparent from the cases dismissing actions for failure to exhaust administrative remedies.

Id. at 569, citing Bartels, supra, and Consolo, supra.

This court has considered at some length the question whether a private action may be brought directly in this court claiming violations of the Commodity Exchange Act. We have determined that there is a private right of action under the Act, and that dismissal of this case is not commanded by the "exclusive jurisdiction" provision of 7 U.S.C. § 2.

Prior to the 1974 amendments to the Act, resolution of most grievances alleged to involve violations of the Act was accomplished by private action, as noted above, and by actions instituted by the Securities Exchange Commission (which would exercise its power in cases where a commodities contract could be said to constitute a "security"). Cases complaining of such violations were also brought under state statutes relating to securities transactions or upon common-law tort theories. The Commodity Exchange Authority, formerly charged with oversight of the commodities markets, simply had inadequate regulatory powers to curb abusive practices. The 1974 creation of the CFTC was in part a reaction to the inadequacy of the CEA, Levinson, Abuses in the Commodity Markets: The Need for...