Kohen v. Pacific Inv. Management Co. LLC
| Decision Date | 07 July 2009 |
| Docket Number | No. 08-1075.,08-1075. |
| Citation | 571 F.3d 672 |
| Parties | Josef A. KOHEN, et al., on their own behalf and that of all others similarly situated, Plaintiffs-Appellees, v. PACIFIC INVESTMENT MANAGEMENT COMPANY LLC and PIMCO Funds, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Before POSNER, EVANS, and TINDER, Circuit Judges.
The defendants in this class action suit have appealed from the district court's certification of a plaintiff class. Fed.R.Civ.P. 23(f). The suit, based on section 22(a) of the Commodity Exchange Act, 7 U.S.C. § 25(a), accuses the defendants, collectively "PIMCO," of having violated section 9(a) of the Act, 7 U.S.C. § 13(a), by cornering a futures market. A corner is a form of monopolization. See United States v. Patten, 226 U.S. 525, 539-42, 33 S.Ct. 141, 57 L.Ed. 333 (1913); Great Western Food Distributors, Inc. v. Brannan, 201 F.2d 476, 478-79 (7th Cir.1953); Peto v. Howell, 101 F.2d 353, 358-59 (7th Cir.1939); Robert W. Kolb & James A. Overdahl, Understanding Futures Markets 80 (6th ed.2006) ("a successful effort by a trader or group of traders to influence the price of a futures contract by intentionally acquiring market power in the deliverable supply of the underlying good while simultaneously acquiring a large long futures position").
The class consists of persons who between May 9 and June 30, 2005, bought a futures contract on the Chicago Board of Trade in 10-year U.S. Treasury notes. Earlier they had sold such notes short, and the purchases they made between May 9 and June 30 were pursuant to contracts they had with other investors, including PIMCO, to deliver to a commodity clearinghouse, for those investors' accounts, on June 30, a specified quantity of the notes at the price specified in the futures contracts. With rare exceptions, however, futures speculations are completed not by delivery of the underlying commodity (such as milk, or pork bellies, or in this case Treasury notes) to the clearinghouse, though that is an option, but by the making of offsetting futures contracts, as described in Kolb & Overdahl, supra, at 17; Mark J. Powers & Mark G. Castelino, Inside the Financial Futures Markets 20 (3d ed.1991); Jeffrey Williams, The Economic Function of Futures Markets 9-10 (1989); James M. Falvey & Andrew N. Kleit, "Commodity Exchanges and Anti-trust," 4 Berkeley Bus. L.J. 123, 127-28 (2007); see also C.B. Reehl, The Mathematics of Options Trading 15 (2005). The following table illustrates the process.
Futures Contracting
---------------------------------------------------------------------------
Day Price Trade SS's position B's position
---------------------------------------------------------------------------
1 $1,000 SS sells SS deposits B deposits
contract $100 (10% of $100 in his
(to the value of account
deliver the contract) acquires the
pork in his account right to require
bellies) with clearinghouse delivery
to B. (required of pork bellies
margin); from clearinghouse
acquires
the obligation
to deliver
pork bellies to
clearinghouse
---------------------------------------------------------------------------
2 $1,500 None SS's account B's account
falls to—$400, increases to
so SS must $600; B still
deposit $500 has the right
in his account to require delivery
to maintain of pork
his 10% margin; bellies from
SS is the clearinghouse
still obligated
to deliver
pork bellies to
the clearinghouse
---------------------------------------------------------------------------
3 $1,500 SS caps SS's trade B's trade
his losses extinguishes extinguishes
and his original his original
buys contract: his contract: his
contract obligation to right to require
(to deliver to the delivery
deliver clearinghouse from the
pork is offset by clearinghouse
bellies) his right to is offset by
from B. require delivery his obligation
from the to deliver to
clearinghouse. the clearinghouse.
---------------------------------------------------------------------------
In the example in the table, a short seller, SS, sells a specified quantity of pork bellies to B (buyer) at a price of $1,000 for delivery in June (hence a "June Contract"). SS hopes the price will fall by then. But before the delivery date arrives the price rises to $1,500, and SS decides to cap his losses. The simplest way to do this, as in the table, is for SS to buy from B the same quantity of pork bellies as SS had sold to B, paying $1,500. SS now has offsetting contracts to sell and to buy the same number of pork bellies, and B now has offsetting contracts to buy and sell the same number of pork bellies, so neither has a delivery obligation. Neither wants to have such an obligation, because both are speculators rather than farmers or meat packers.
Changes in the demand for or the supply of the underlying commodity will make the price of a futures contract change over the period in which the contract is in force. If the price rises, the "long" (the buyer) benefits, as in our example, and if it falls the "short" (the seller) benefits. But a buyer may be able to force up the price by "cornering" the market—in this case by buying so many June contracts for 10-year Treasury notes that sellers can fulfill their contractual obligations only by dealing with that buyer. United States v. Patten, supra, 226 U.S. at 539-41, 33 S.Ct. 141; Zimmerman v. Chicago Board of Trade, 360 F.3d 612, 616 (7th Cir.2004); Board of Trade v. SEC, 187 F.3d 713, 724 (7th Cir. 1999) ( ); Roberta Romano, "A Thumbnail Sketch of Derivative Securities and Their Regulation," 55 Md. L.Rev. 1, 29-30 (1996); "United States Commodity Futures Trading Com-mission Glossary," www. cftc.gov/educationcenter/glossary/glossary_co.html (visited June 10, 2009).
Board of Trade v. SEC, supra, 187 F.3d at 725, remarks that since the possibility of manipulation "comes from the potential imbalance between the deliverable supply and investors' contract rights near the expiration date[,] . . . [f]inancial futures contracts, which are settled in cash, have no `deliverable supply'; there can never be a mismatch between demand and supply near the expiration, or at any other time." But while it is correct that most financial futures contracts are settled in cash, CFTC v. Zelener, 373 F.3d 861, 865 (7th Cir. 2004); Kolb, supra, at 16, and that if a cash option exists there is no market to corner (no one can corner the U.S. money supply!), futures contracts traded on the Chicago Board of Trade for ten-year U.S. Treasury notes are an exception; they are not "cash settled." Short sellers who make delivery must do so with approved U.S. Treasury notes; otherwise they must execute offsetting futures contracts. Chicago Board of Trade Rulebook, "Chapter 19: Long-Term U.S. Treasury Note Futures (6½ to 10-Year)," www.cmegroup. com/rulebook/CBOT/V/19/19.pdf (visited June 22, 2009); CME Group, "U.S. Treasury Futures Delivery Process," (4th ed.2008), w ww.cmegroup.com/trading/interest-rates/files/CL-100_TFDPBrochure-FINAL.pdf (visited June 22, 2009).
The note approved for delivery in this case was the "2/12 Treasury Note" (a Treasury note that expires in February 2012). The plaintiffs claim that PIMCO increased the percentage of these notes that it owned from 12 to 42 percent over a two-week span, with the result that they would have had to pay a monopoly price to get enough notes to close out their...
To continue reading
Request your trial
-
Koss v. Norwood
...great many persons who have suffered no injury at the hands of the defendant." Messner , 669 F.3d at 825 (citing Kohen v. Pac. Inv. Mgmt. Co. , 571 F.3d 672, 677 (7th Cir. 2009) ) (explaining that this the proper test of definitional overbreadth).C. Numerosity On numerosity, defendants reit......
-
Senne v. Kan. City Royals Baseball Corp.
...it contains a great many persons who have suffered no injury at the hands of the defendant.'" Id. (quoting Kohen v. Pac. Inv. Mgmt. Co. LLC, 571 F.3d 672, 677 (7th Cir. 2009) (collecting cases)). The Court finds Judge Tigar's reasoning to bepersuasive and therefore concludes that while a cl......
-
In re EpiPen Marketing, Sales Practices & Antitrust Litig.
...conduct. . . . Such a possibility or indeed inevitability does not preclude class certification.'" Id. (quoting Kohen v. Pac. Inv. Mgmt. Co., 571 F.3d 672, 677 (7th Cir. 2009)). But, as Mylan posits, Devaughn is different because it was an injunction class case under Rule 23(b)(2), and thus......
-
In re Libor-Based Fin. Instruments Antitrust Litig.
...Exchange plaintiffs is properly evaluated against a concern regarding the in terrorem effect that a certified class may have. Cf. Kohen II, 571 F.3d at 677–78 ("A related point is that a class should not be certified if it is apparent that it contains a great many persons who have suffered ......
-
Risto V. Screen Actors Guild: A Look At Article III Standing Of Absent Class Members In The Ninth Circuit
...F.3d 9, 32 (1st. Circ. 2015); Neale v. Volvo Cars of N. Am., LLC, 794 F.3d 353, 363 (3d Cir. 2015); Kohen v. Pacific Inv. Mgmt Co., LLC, 571 F.3d 672, 676 (7th Cir. Whether a class can be defined to include members who potentially lack standing has been a contested topic in the Ninth Circui......
-
Table of Cases
...444 F.3d 312 (4th Cir. 2006), 68 Knight v. Alabama, 469 F. Supp. 2d 1016 (N.D. Ala. 2006), 241, 247 Kohen v. Pac. Inv. Mgmt. Co. LLC, 571 F.3d 672 (7th Cir. 2009), 185 Kohler v. Apotex, 2015 ABQB 610 (Can.), 284 Kone. v ÖBB-Infrastruktur AG . 5 . Recital 38, Case C-557/12, 362 Korean Airlin......
-
Class Action Assertion of Indirect Purchaser Claims
...precluded simply because a class may include persons who have not been injured by the defendant’s conduct.”); Kohen v. Pac. Inv. Mgm t., 571 F.3d 672, 677 (7th Cir. 2009) (“[A] class will often include persons who have not been injured by the defendant’s conduct; indeed this is almost inevi......
-
Antitrust Class Certification Standards
...re Whirlpool Corp. Front-Loading Washer Prods. Liability Litig., 722 F.3d 838, 853-55 (6th Cir. 2013); Kohen v. Pac. Inv. Mgmt. Co. LLC, 571 F.3d 672, 677 (7th Cir. 2009); Jimenez v. Allstate Ins. Co., 765 F.3d 1161, 1164 (9th Cir. 2014); DG ex rel. Stricklin v. Devaughn, 594 F.3d 1188, 120......
-
Table of Cases
...633 (N.D. Ind. 1996), 189 428 Econometrics In re K-Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012), 246 Kohen v. Pacific Inv. Mgmt., 571 F.3d 672 (7th Cir. 2009), 343 Krisa v. Equitable Life Assurance Soc’y, 196 F.R.D. 254 (M.D. Pa. 2000), 189-190 Kumho Tire Co. v. Carmichael, 526 U.S. 13......