Khalid Bin Alwaleed Foundation v. EF Hutton & Co., Inc.

• Decision Date: 13 March 1989
• Docket Number: No. 88 C 5074.,88 C 5074.
• Citation: 709 F. Supp. 815
• Court: U.S. District Court — Northern District of Illinois
• Parties: KHALID BIN ALWALEED FOUNDATION, a Trust under the laws of Liechtenstein, Plaintiff, v. E.F. HUTTON & COMPANY, INC., E.F. Hutton & Company (Securities), Ltd., Sharif Serageldin and Sami Beydoun, Defendants.

709 F. Supp. 815

KHALID BIN ALWALEED FOUNDATION, a Trust under the laws of Liechtenstein, Plaintiff, v. E.F. HUTTON & COMPANY, INC., E.F. Hutton & Company (Securities), Ltd., Sharif Serageldin and Sami Beydoun, Defendants.

No. 88 C 5074.

United States District Court, N.D. Illinois.

March 13, 1989.

MEMORANDUM OPINION AND ORDER

LEINENWEBER, District Judge.

This cause comes before the court on the motion of defendants to dismiss Counts 1 through 12. For the reasons herein stated, the motion is granted.

FACTS

In June of 1988 plaintiff, Khalid Bin Alwaleed Foundation ("Foundation"), filed suit against defendants seeking $21,959,000 in compensatory damages for alleged violation of Sections 4b and 4o of the Commodity Exchange Act ("CEA"), 7 U.S.C.A. §§ 6b, 6o (West 1980) and Rules 1.55 and 166.3 of the Commodity Futures Trading Commission ("CFTC" or "Commission"), 17 C.F.R. §§ 1.55, 166.3. The Foundation also asserts pendent state claims of fraudulent concealment, fraudulent misrepresentation, constructive fraud, negligence, negligent misrepresentation, breach of contract and civil conspiracy, seeking $21,959,000 in actual damages and $50,000,000 in punitive damages. The Foundation also seeks rescission of its contract with defendant E.F. Hutton & Company, Ltd.

DISCUSSION

I. Capacity to Sue

In its complaint the Foundation states that it is a "trust organized under the laws of the Principality of Liechtenstein" (cmplt., ¶ 4). Under Illinois law a trust cannot sue on its own behalf; instead the trustee is statutorily empowered to "compromise, contest, prosecute or abandon claims or other charges in favor of or against the trust estate." Ill.Rev.Stat., ch. 17, ¶ 1665 (1981). Defendants argue that because under Fed.R.Civ.P. 17(b) the court is obliged to determine capacity to sue by the law of the state in which the district court is held (except in the case of certain individuals, corporations, partnerships and receivers) the court should apply Illinois law and find that the Foundation as a "trust" lacks the capacity to sue.

Plaintiff replies that the Foundation, although created by a deed of trust, is actually a corporate form of association under Liechtenstein law. Under Fed.R.Civ.P. 17(b) the capacity to sue a corporation is determined by the law of the state under which it was organized. Plaintiff argues that because under Liechtenstein law a foundation, as a corporate entity, can sue and be sued the court should accord it the same right. It is true, as defendants contend, that the Foundation differs in several respects from a corporation as commonly defined in this country. Nevertheless, because the Foundation is a juridical entity under the laws where it was created, there is no reason to deny it access to the federal courts. Compare Joseph Muller Corp. Zurich v. Societe Anonyme de Gerance et D'Armement, 451 F.2d 727 (2nd Cir.1971) (because corporations had capacity to sue where they were incorporated — France and Switzerland, respectively — they had capacity to sue in federal courts for purposes of Rule 17(b), despite Franco-Swiss treaty requiring suit to be brought in France), with Alosio v. Iranian Shipping Lines, S.A., 426 F.Supp. 687 (S.D.N.Y.1976), aff'd, 573 F.2d 1287 (2nd Cir.1977) (where corporation is dissolved under Iranian law it lacks capacity to sue in federal court).

II. Counts 1 and 2

A. Churning

Defendants contend that plaintiff has failed to adequately allege its claims in Counts 1 and 2 that defendants are liable for excessive churning in violation of Sections 4b and 4o of the CEA, 7 U.S.C. §§ 6b, 6o (West Supp.1988) (cmplt., ¶¶ 32, 43, 47(C)). The court agrees. The CFTC has defined churning as the excessive trading of an account by a broker with control of the account for the purpose of generating commissions without regard for the investment or trading objectives of the customer. In re Lincolnwood Commodities, Inc. of Calif., (1982-84 Transfer Binder) Comm. Fut.L.Rep. (CCH) ¶ 21,986 at p.28,246 (CFTC 1984). Thus to state a claim for churning a customer must allege excessive trading and excessive billing. Proetz v. Dean Witter Reynolds, Inc., 2 Comm.Fut. L.Rep. (CCH) ¶ 24,178 at p.34,915 (N.D.Ill. 1988). In order to establish excessive trading courts have generally held that the plaintiff must identify the commodity involved, the nature, amounts and dates of transactions at issue, as well as sufficient facts to allow for a determination of either the turnover ratio or the commission-to-equity ratio in the account. Proetz at p.34,915 (citing Bieganek v. Wilson, 642 F.Supp. 768, 771 (N.D.Ill.), vacated in part, 801 F.2d 879 (7th Cir.1986)); Shelley v. Noffsinger, 511 F.Supp. 687, 692 (N.D.Ill. 1981). Because churning is a species of fraud these allegations must be made with specificity. Fed.R.Civ.P. 9(b).

Plaintiff contends that these ratios are not useful criteria of churning and that the court ought to consider other factors such as the trader's rationale and the goals of the investor. While we note that the CFTC has stated that the turnover ratio "as applied in securities churning cases, is inherently inappropriate in determining whether excessive trading has been established in futures churning cases," Lincolnwood Commodities at p.28,247, it has also expressly endorsed the commission-to-equity ratio for this purpose, stating

"The amount of commissions directly reflects the volume of trades entered and liquidated in the market over a given period of time, which is highly relevant in determining whether trading was conducted merely to earn commissions for the broker."

Id. at p.28,248 (emphasis added). Plaintiff fails to allege sufficient facts to determine either of these ratios. While it is true that evidence of both day-trading and a departure from a previously agreed-upon trading strategy can be probative of churning, id. at p.28,250; Proetz at p.34,915, the facts that plaintiff has alleged in these regards are not sufficient to state a claim. See cmplt. at ¶¶ 43, 47. Thus to the extent that Counts 1 and 2 of the complaint attempt to state a claim for churning, they are dismissed.

B. Statutory Fraud

Defendants argue that because plaintiff's fraud claims do not give each defendant notice of the particular wrongs with which he is charged these claims violate Rule 9(b). The court agrees. For example, plaintiff alleges "defendants, and each of them, cheated, defrauded and attempted to cheat and defraud the Foundation by making material misrepresentations to the Foundation, including ..." (cmplt., ¶ 48). It is unclear from this language how the corporate defendants are alleged to have made these representations. While it is possible to construe the complaint as implying that the corporate defendants committed these and the other alleged fraudulent acts only through their co-defendant employees, the pleading is sufficiently general as to admit other explanations. Consequently, the corporate defendants are left without any understanding of the specific frauds alleged against them and thereby have no means of offering a cogent defense. Thus insofar as Counts 1 and 2 attempt to state a cause of action for fraud other than churning under Sections 4b and 4o, they are dismissed. If plaintiff seeks to file an amended complaint it should refrain from making generalized allegations of fraud such as it made against "defendants, and each of them," and instead explicitly state with respect to each claim the specific alleged culpable conduct of each defendant and the theory of recovery sought.

III. Counts 3 and 4

In Count 3 of the complaint plaintiff alleges that defendants violated rule 166.3¹ of the CFTC, 17 C.F.R. § 166.3, which directs all commission registrants to diligently supervise their employees' handling of commodity interest accounts. In Count 4 plaintiff alleges that defendants violated Rule 1.55², 17 C.F.R. § 1.55, which requires futures commission merchants to provide Public Disclosure Statements to customers upon opening a commodity trading account. Defendants contend that Rules 1.55 and 166.3 do not give rise to a private cause of action and therefore should be dismissed. The court agrees.

The Supreme Court has stated that "the fact that a federal statute has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person." Cannon v. University of Chgo., 441 U.S. 677, 688, 99 S.Ct. 1946, 1953, 60 L.Ed.2d 560 (1979). In Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), the court set forth several factors that are relevant to the determination of whether a private remedy is implicit in a statute not expressly providing one:

"First, is the plaintiff `one of the class for whose especial benefit the statute was enacted,' — that is does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or deny one? Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law?"

Id. at 78, 95 S.Ct. at 2088 (emphasis in original) (citations omitted). Subsequently, in Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979), the court explained the proper application of the Cort factors:

"It is true that in Cort v. Ash, the court set forth four factors it considered `relevant' in determining whether a private remedy is implicit in a statute not expressly providing one. But the court did not decide that each of these factors is entitled to equal weight. The central inquiry remains whether Congress intended to create, either expressly or by implication, a private cause of action. Indeed, the first three factors

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