Karasyk v. Marc Commodities Corp., 90 Civ. 2498 (CSH).

• Decision Date: 24 June 1991
• Docket Number: No. 90 Civ. 2498 (CSH).,90 Civ. 2498 (CSH).
• Parties: Philip KARASYK, Plaintiff, v. MARC COMMODITIES CORP., Defendant.
• Court: U.S. District Court — Southern District of New York

770 F. Supp. 824

Philip KARASYK, Plaintiff, v. MARC COMMODITIES CORP., Defendant.

No. 90 Civ. 2498 (CSH).

United States District Court, S.D. New York.

June 24, 1991.

COPYRIGHT MATERIAL OMITTED

Conway & Conway, New York City (Thomas D. Conway, of counsel), for plaintiff.

Stumpp & Mandaville, New York City (Gary D. Stumpp, of counsel), for defendant.

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge:

In this action arising under the Commodity Exchange Act, 7 U.S.C. §§ 1 et seq., defendant moves under the Federal Arbitration Act, 9 U.S.C. §§ 1, 4 to stay the action and compel arbitration; or, in the alternative, to dismiss the complaint for failure to allege fraud with the particularity required by Rule 9(b), Fed.R.Civ.P., and to direct the joinder of an additional party defendant under Rule 19(a).

Background

The amended complaint¹ alleges that plaintiff Philip Karasyk is an individual engaged primarily in the business of the purchase and sale of commodity futures contracts on behalf of himself and others. Defendant Marc Commodities Corp. is a corporation registered pursuant to the Commodity Exchange Act as a futures commission merchant, and is also a clearing member and member firm of the New York Mercantile Exchange (the "NYMEX"). NYMEX is registered with the Commodities Futures Commission, pursuant to 7 U.S.C. § 7(a), as a contract market for the trading of futures contracts. It is located at 4 World Trade Center, New York City.

The complaint further alleges that the Chicago Corporation ("Chicago Corp.") is registered under the Commodity Exchange Act as a futures commission merchant, and is also a clearing member and member firm of NYMEX. Chicago Corp. maintains a business office at 71 Broadway, New York, New York. It carries a customer futures account on behalf of plaintiff.

The complaint's factual allegations are as follows:

9. Upon information and belief, on or about March 1, 1990, person or persons unknown to plaintiff entered into futures transactions executed on NYMEX for the purchase of certain crude oil futures contracts. In accordance with the by-laws and rules of NYMEX, said contracts were obligated to be cleared in a customer segregated or house account carried by a clearing member of NYMEX.

10. Upon information and belief, on or about March 1, 1990, person or persons unknown to plaintiff caused the above mentioned futures transaction to be placed into plaintiff's customer futures account carried by Chicago Corp.

11. Upon information and belief, on or about March 2, 1990, Chicago Corp. transferred such futures transactions as instructed by defendant to a segregated account maintained by defendant on behalf of a customer.

12. Defendant accepted such futures transactions and cleared such trades in its normal course of business and further maintained this position up to March 6, 1990.

13. On March 6, 1990 defendant, acting in contravention of NYMEX rules and applicable laws, began to transfer said trades back to the account of plaintiff at Chicago Corp.

14. On or about March 7, 1990, defendant, after having accepted and cleared said trades as of March 1, 1990, without the authority or the consent of the plaintiff, transferred the remaining trades to Chicago Corp. for the account of the plaintiff.

15. As a result of defendant's refusal to accept responsibility for said trades, plaintiff's clearing agent, Chicago Corp. was required to clear such trades on behalf of plaintiff. Thereafter, plaintiff liquidated the trades and suffered a serious financial loss in his futures trading account.

On the basis of these allegations, Karasyk asserts three causes of action against defendant Marc Commodities Corp. The first alleges that Marc "knowingly, deliberately and with an attempt to deceive, ... transferred trades previously carried in segregated accounts for the account of its customers to the plaintiff's account without the plaintiff's knowledge or consent," in violation of § 4b of the Commodity Exchange Act. Amended complaint, ¶ 17. Defendant is alleged to have acted in this manner "for the purposes of generating commissions while rejecting other transactions and transferring them to the plaintiff's account." ¶ 18.

The second cause of action alleges that defendant "falsely and fraudulently represented to plaintiff's clearing agent, the Chicago Corp., that the futures transactions previously cleared by defendant as of March 1, 1990 were owned by the plaintiff;" and further represented to Chicago Corp. that "transactions were to be transferred and given up to Chicago Corp. on behalf of plaintiff." ¶ 22. Those representations are alleged to have been "false and fraudulent," in that defendant "knew that said futures contracts did not belong to plaintiff but rather were owned and executed by person or persons unknown to plaintiff but who were customers of the defendant." ¶ 23. The amended complaint further alleges that these representations "were known by the defendant to be false when made and were made with the intent to deceive the plaintiff and induce the plaintiff's clearing agent, Chicago Corp., to accept the transfer of said futures contracts." Chicago Corp. is alleged to have "believed said representations and in reliance thereupon, was induced to accept the transfer of said futures transactions from the defendant." ¶ 24. Plaintiff's second cause of action further alleges that defendant cleared and retained futures transactions in its own account or accounts maintained by defendant for its customers "for a period of time in excess of that which was permitted to the by-laws and rules of NYMEX." ¶ 21.

Plaintiff's third cause of action sounds in negligence and is pleaded on the basis of pendent and ancillary jurisdiction.

Defendant moves to stay these proceedings and to compel arbitration, relying upon provisions of the National Futures Association Code of Arbitration. Judging by the motion papers, the parties agree that this Code applies to the conduct in which they were engaged. They dispute whether, in the circumstances of the case, arbitration is mandatory. In that regard, it is pertinent to note that plaintiff is an Associate Member of the National Futures Association ("NFA"). The parties do not appear to dispute that status.

If arbitration is not compelled, defendant argues that the claim must be dismissed for failure to plead fraud with the specificity required by Rule 9(b). Defendant also contends that, if the litigation goes forward, Chicago Corp. must be joined as a party defendant under Rule 19(a).

Discussion

Arbitration

Arbitration is a matter of contract. A party cannot be compelled to submit a dispute to arbitration unless it has agreed to do so in writing. The function of the Federal Arbitration Act is to render "valid, irrevocable, and enforceable" any "written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ..." 9 U.S.C. § 2.

Membership or participation in a commercial body such as the NFA may bind individuals or companies to arbitration provided for the by-laws or rules of such an organization. The parties at bar do not dispute that general principle. The question is whether the NFA Code mandates arbitration of Karasyk's claims against Marc.

Marc relies upon § 2(a) of the NFA manual, which provides in pertinent part as follows:

(a) Mandatory Arbitration.

(1) Claims. Except as provided in Sections 5 and 6 of this Code with respect to timeliness requirements, the following disputes shall be arbitrated under this Code if the dispute involves commodity futures contracts and does not require for its adjudication the presence of witnesses or other third parties over whom NFA lacks jurisdiction and who are not otherwise available:

(i) a dispute for which arbitration is sought by a customer against a Member or employee thereof; or Associate, provided that —

(A) the customer is not a future commission merchant, floor broker, Member or Associate;

(B) the dispute does not solely involve cash market transactions that are not part of or directly connected with a commodity futures transactions; and

(C) if brought against a Member or employee thereof, the Member is a futures commission merchant, an introducing broker, a commodity pool operator or a commodity trading advisor.

(ii) a customer claim that is required to be arbitrated by NFA under a lawful agreement that complies with Commission Rule 180.3.

(iii) a customer claim whose resolution has been delegated to NFA by a contract market under Section 5a(11) of the Commodity Exchange Act.

(iv) a dispute for which arbitration is sought between Members in the categories listed in Section 2(a)(1)(D) sic; should be "C" of this Code, or employees thereof or Associates, where at least one such Member or employer of such employee or Associate is not a member of a contract market.

This language is not a model of clarity. However, it seems clear enough if Karasyk were a "customer" of Marc Commodities Corp. and not a "futures commission merchant, floor broker, Member, or Associate," Marc could compel arbitration of Karasyk's claim against it under Section 2(a)(1)(i)(A). But Karasyk, as noted, is an Associate Member of the NFA. Accordingly, the case falls to be decided under Section 2(a)(1)(iv), which provides for mandatory arbitration of "a dispute for which arbitration is sought between Members ..."

Marc says that under a proper construction of that provision, either party may demand and compel arbitration. Karasyk says that whether or not "arbitration is sought" depends on the option of the Member (Associate or otherwise) asserting the claim. If the claimant opts for arbitration (that is, seeks it), arbitration is mandatory, but not otherwise. Arbitration is not mandatory in the instant case, Karasyk concludes, because he has not sought it.

In aid of that interpretation, plaintiff offers a letter written by Kathryn...