Katara v. DE Jones Commodities, Inc.

• Decision Date: 09 December 1986
• Docket Number: No. 85 Civ. 4604 (KTD).,85 Civ. 4604 (KTD).
• Citation: 652 F. Supp. 907
• Parties: Shiv B. KATARA, as Administrator of Manisha Sportswear, Inc.'s Defined Pension Trust, Plaintiff, v. D.E. JONES COMMODITIES, INC. and Alpha O. Nickelberry, Defendants and Third-Party Plaintiffs, v. Shiv B. KATARA, in his individual capacity, Third-Party Defendant.
• Court: U.S. District Court — Southern District of New York

652 F. Supp. 907

Shiv B. KATARA, as Administrator of Manisha Sportswear, Inc.'s Defined Pension Trust, Plaintiff, v. D.E. JONES COMMODITIES, INC. and Alpha O. Nickelberry, Defendants and Third-Party Plaintiffs, v. Shiv B. KATARA, in his individual capacity, Third-Party Defendant.

No. 85 Civ. 4604 (KTD).

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

December 9, 1986.

COPYRIGHT MATERIAL OMITTED

Baratta & Goldstein, New York City, for plaintiff and third-party defendant; Howard J. Goldstein, of counsel.

Cadwalader, Wickersham & Taft, New York City, for defendants and third-party plaintiffs; John J. Walsh, H. Peter Haveles, Leslie R. Caldwell, of counsel.

KEVIN THOMAS DUFFY, District Judge:

D.E. Jones Commodities, Inc. ("Jones") is made up of people who defraud their clients. The jury so found. Jones defrauded Shiv B. Katara, the plaintiff, here. The jury so found. Indeed, the jury found that in this case, Jones was guilty of a gross and wanton fraud evincing a "high degree of moral turpitude and absolutely wanton dishonesty." Tr. 401. The jury similarly held against the defendant Alpha O. Nickelberry. The jury made these findings in a relatively short period of deliberations because the evidence in this case compelled them.

By ignoring these findings and acting as if the defendant's case had been totally accepted by the jury, the defendants now move to set aside the verdict herein and to have the court enter a judgment n.o.v.

This case involves an old fashioned fraud committed by the defendants in the sale of commodity futures contracts. Jones is a commodity futures brokerage house or a futures commissioned merchant registered with the Commodities Futures Trading Commission ("CFTC") and located in New York City. At all relevant times, Alpha O. Nickelberry ("Nickelberry") was an account executive and manager at Jones and was registered with the CFTC as an associated person of Jones. At the time of trial the fast talking Nickelberry had no connection with Jones. Katara was the administrator of the Manisha Sportswear Defined Pension Trust Plan and a fiduciary as that term is defined in the Employment Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. (1979). See Findings of Fact in Consent Pretrial Order.

Apparently Jones solicited Katara on a number of occasions to open a commodities account with Jones. Finally, Katara drove two hours from the Manisha plant in New Jersey to the offices of Jones in New York. At the time, Katara had an account at Merrill Lynch, both in his own name and as administrator of the Manisha Sportswear Pension Trust. When Katara entered the Jones office he met a Mr. Rutherford who immediately took him to meet the defendant Alpha O. Nickelberry. A discussion ensued at which Nickelberry advised Katara that he could not as the administrator of the Pension Trust invest in gold or silver since that would be too speculative. Nickelberry suggested that because Katara was interested in stocks and bonds that he could purchase the Standard and Poors ("S & P") 500 Index. He explained to Katara that the S & P 500 Index futures contract was made up of composite stock prices.

Nickelberry also told Katara that normally they charged a $20 commission but said that he would try to have the commissions reduced to $17 for every round turn. In fact, a $20 commission was charged for every round turn.

The following day, Katara met with Nickelberry at the Jones office. Certain form agreements were given to Katara which he signed and at trial he testified that he believed Mr. Rutherford was there when the forms were signed.

Among the agreements which Katara signed in connection with the opening of the Manisha Sportswear account was a customer agreement. The customer agreement was prepared totally and completely by Jones, printed up and given to Katara to sign. That agreement stated among other things that "the undersigned acknowledges that Commodities Future Trading is speculative, involves a high degree of risk and is suitable for persons who can assume the risk of substantial losses." At some point, Katara also received Jones' Risk Disclosure Statement. That document was also a form prepared by and printed for Jones to give to its customers. The Risk Disclosure Statement contained a similar rubric concerning the risks of commodities trading.

Apparently, these statements did not bear much weight with the jury particularly in view of the fact that Katara and Nickelberry had discussed the possibility of trading conventional commodities such as gold and silver but that had been swept aside by Katara as being too speculative for the Pension Plan. It is clear that the S & P 500 Index futures contracts have absolutely nothing to do with ordinary commodities contracts or commodities futures contracts. Tr. 174. Indeed, since Katara testified that the gold and silver deals were out because they were too speculative, the jury could have concluded that the forms Katara signed were thought by him as a reasonable person to deal with general commodities and not with such noncommodity items as the S & P 500 Index futures contract. In any event the Risk Disclosure Statement somehow was dated four months after the opening of the account. Tr. 358.

Both the day before and during the meeting at which these form agreements were signed Katara also told Nickelberry that the fund of which he was trustee had $800,000 to invest. He advised Nickelberry that the fund was in its first year and the $800,000 had been put into the fund as an initial down payment for prior service as required by some actuary. The form shows the $800,000 entry for both net worth and annual income. Neither Nickelberry, Rutherford nor anyone else at Jones ever asked to see the trust agreement under which Katara was operating until the account was closed. Nickelberry, Rutherford and Jones knew that the entire $800,000 was not intended to go for S & P 500 Index futures contracts if not from common sense then from Katara's disclosure that the Manisha Defined Pension Trust had a stock investment account at Merrill Lynch.

Discussions were also had, apparently on both days concerning margins; Katara told both Nickelberry and Rutherford that he would not be able to trade if he had to pay an initial margin of $6,000 per contract. Tr. 54. Mr. Nickelberry assured Katara that if he had enough in the maintenance margins, the initial margin would not be charged by Jones. It appears that maintenance margin was explained to Katara as an amount put into the account from time to time to cover possible losses in the fluctuations of the market. Tr. 56. It is unclear as to the exact words spoken to Katara that day.

In any event, Katara entered an order for two S & P 500 Index futures contracts that day. He also deposited with Jones a $10,000 check which he claimed was intended for maintenance margin only. It cannot be disputed that if the two contracts were ordered at the same time and Jones was charging the plaintiff initial margin, the transaction could not be completed ($6,000 initial margin times 2 contracts equals $12,000, $2,000 more than plaintiff admittedly paid in to the account that day).

From this alone the jury could reasonably have concluded that Katara was telling the truth when he testified that Jones and its representatives had agreed to waive initial margin on the Manisha account. The defendants contended that Katara did not order the two contracts at one time but rather ordered one contract in the morning, hung around the Jones office all day and ordered the other contract in the latter part of the day. This testimony was palpably false. It seems silly to argue, as the defendants seemingly still do, that Katara, a busy importing executive with a place of business in New Jersey, two hours from Jones' office in Manhattan, spent long periods of time over many days hanging around the Jones' board room. It is even more incredible when Jones' counsel brought out that Katara had a machine at his place of business in New Jersey to get up to the minute quotes from the financial markets. The jury could easily have concluded from what appear to be deliberate falsehoods that the Jones' representatives were trying to "con" the jury the same way that Jones "conned" Katara.

The defendants raise another interesting argument which they apparently believe mandates a finding that Nickelberry and Jones never waived initial margin. The defendants assert that the waiver of initial margin would violate the rules of the Chicago Mercantile Exchange and possibly the Commodities Futures Trading Act and that therefore Nickelberry never said that there would be such a waiver. I have seen it argued that a violation of Exchange Rules does not give rise to a cause of action but this is the first time I have seen the chutzpah of the argument that a potential violation of such rules precludes good old fashioned fraud.

In passing I should note that I believe Nickelberry and Rutherford, acting for Jones, did violate such rules and did so wilfully, unlawfully, and intentionally. Indeed, Arnold Zisselman, the Comptroller and Vice-President of Jones and its margin expert, admitted to other Exchange Rules violations. Tr. 277.

In any event over the ensuing months, with one minor exception when the account was closed, the plaintiff bought and sold S & P 500 Index futures contracts apparently without any difficulties and apparently in accord with his version of the margin requirements given him by Jones. No new account papers were ever signed and it seems there was never any further discussion as to margin or to the way the account was to be handled.

By February 2, 1984 the Manisha account at Jones had thirty-five March, 1984 S & P 500 Index futures contracts. Tr. 207. Katara had deposited about $160,000 into the account to support the trading. Tr. 92-94, 207-8. About this time the market apparently turned against the plaintiff. On February 3, 1984, on...