Leist v. Simplot

Decision Date23 February 1981
Docket NumberNos. 402-404,D,s. 402-404
Citation638 F.2d 283
PartiesNeil LEIST, Philip Smith and Incomco, Plaintiffs-Appellants, v. John Richard SIMPLOT, J. R. Simplot & Co., Simplot Products Co., Inc., Simplot Industries, Inc., Simtag Farms, Inc., Peter J. Taggares, P. J. Taggares & Co., Henry A. Pollack, Harvey B. Pollack, Harvey B. Pollack Company, Gerald Rafferty, Pressner Trading Corp., Benjamin Pressner, Stephen Sundheimer, Jules Nordlight, Edelstein & Co., Inc., Charles Edelstein, Robert Edelstein, Murial Edelstein, Meierfeld & Company, Inc., Gilbert Meierfeld, David Meierfeld, Robert Reardon, F. J. Reardon, Inc., Harold Collins, Caspar Mayerson, Lynnewood Exporting Company, Alex Sinclair, Manning Stoller, Hornblower & Weeks-Hemphill, Noyes Inc., MFX Commodities, Inc., Donald Silver, Duane South, Kenneth Ramm, A & B Farming Inc., Hugh Glenn, Gearheart Farming, Inc., Edward McKay, "John" Humphreys, Frank Fullmer, Defendants, Clayton Brokerage Co. of St. Louis, Inc., Heinold Commodities, Inc., Thomson & McKinnon, Auchincloss, Kohlmeyer, Inc., New York Mercantile Exchange, Richard B. Levine, Howard Gabler, Alfred Pennisi, Defendants-Appellees. INCOMCO, Plaintiff-Appellant, v. WAYNE COUNTY PRODUCE CO., and Harold Collins, Defendants, New York Mercantile Exchange, Defendant-Appellee. NATIONAL SUPER SPUDS, INC., William R. Buster, Jr., Willard C. Chiner, Eugene P. Weismen, Richard Welts, Raymond Rothberg, Arthur S. Armstrong, Theodore Brinek, Capgain Holdings, Inc., and Heiz Romminger, individually and on behalf of all persons similarly situated, Plaintiffs-Appellants, v. NEW YORK MERCANTILE EXCHANGE, Clayton Brokerage Co. of St. Louis, Inc., Pressner Trading Corp., Jack Richard Simplot, J. R. Simplot Co., Simplot Industries, Inc., Peter J. Taggares, P. J. Taggares Co., C. L. Otter, Simtag Farms, Kenneth Ramm, A & B Farms, Inc., Hugh V. Glenn, Gearheart Farming, Inc. and Ed McKay, Defendants, Heinold Commodities, Inc., Thompson & McKinnon, Auchincloss, Kohlmeyer, Inc., Defendants-Appellees. ockets 79-7402, 79-7464 and 79-7482.
CourtU.S. Court of Appeals — Second Circuit

Leonard Toboroff, Robson & Toboroff, New York City, for plaintiffs-appellants Neil Leist, Philip Smith and Incomco.

Pomerantz, Levy, Haudek & Block, New York City, Hollinshead & Mendelson, Pittsburgh, Pa., for class plaintiffs-appellants.

William E. Hegarty, New York City (Cahill Gordon & Reindel, Charles Platto and Peter Leight, New York City, of counsel), and Rein, Mound & Cotton, New York City (Maurice Mound, New York City, of counsel), for defendants-appellees New York Mercantile Exchange, Richard B. Levine, Howard Gabler and Alfred Pennisi.

Lawrence H. Hunt, Jr., Sidley & Austin, Chicago, Ill., and Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for defendant-appellee Heinold Commodities, Inc.

W. Stanley Walch, St. Louis, Mo. (Thompson & Mitchell, Gerard K. Sandweg, Jr., and Kenton E. Knickmeyer, St. Louis, Mo., of counsel), for defendant-appellee Clayton Brokerage Co. of St. Louis, Inc.

Hall, McNicol, Hamilton, Clark & Murray, New York City, for defendant-appellee Thomson & McKinnon, Auchincloss, Kohlmeyer, Inc.

Mark D. Young, Washington, D. C. (John G. Gaine, Gen. Counsel, Pat G. Nicolette, Deputy Gen. Counsel, and Gregory C. Glynn, Associate Gen. Counsel, Washington, D. C., of counsel), for amicus curiae Commodity Futures Trading Commission.

Before FRIENDLY, MANSFIELD and KEARSE, Circuit Judges.

FRIENDLY, Circuit Judge:

Plaintiffs in three consolidated actions in the District Court for the Southern District of New York appeal from an order of Judge, now Chief Judge, MacMahon, 470 F.Supp. 1256 (1979), granting appellees' motions for partial summary judgment. The court struck from the complaints all claims based on the Commodity Exchange Act, (CEA), 7 U.S.C. §§ 1-19, as amended in 1974, as distinguished from other claims under the antitrust laws. The actions were to recover damages allegedly suffered by the plaintiffs as a result of what Judge MacMahon characterized as

the much publicized default in May 1976 of Maine potato futures contracts, when the sellers of almost 1,000 contracts failed to deliver approximately 50,000,000 pounds of potatoes, resulting in the largest default in the history of commodities futures trading in this country. 470 F.Supp. at 1258 (footnote omitted).

The basis for the court's order was that no private cause of action exists for breach of the CEA. Since this important issue has divided the district courts, including those within our circuit, we feel constrained to discuss it in some detail. 1 We think it desirable as did the district court, to begin with an explanation of the nature of the commodity futures markets.

I. COMMODITY FUTURES MARKETS

A commodity futures contract is simply a bilateral executory agreement for the purchase and sale of a particular commodity. The seller of the contract commits himself to deliver the commodity at a fixed date in the future, while the buyer commits himself then to accept delivery and pay the agreed price. 1 Bromberg & Lowenfels, Securities Fraud & Commodities Fraud § 4.6(421) (1979); H.R.Rep.No.93-975, 93d Cong., 2d Sess. 130 (1974), U.S.Code Cong. & Admin. News 1974, p. 5843. Every aspect of the futures contract is standardized except price. For example, the contract involved in this case, the May 1976 Maine potato futures contract, is for 50,000 pounds of Maine grown potatoes of a specified quality to be delivered at specified points in cars of the Bangor & Aroostook Railroad, between May 7 and May 25, 1976. Since price is the only variable, negotiations can readily proceed and the agreed prices can be speedily disseminated to other traders. Standardization also makes the contracts fungible. Original sellers and buyers can therefore offset their positions by acquiring opposite contracts, either paying or gaining any price differential. H.R.Rep.No.93-975, supra, at 130.

The person who has sold a futures contract, i. e., someone committed to deliver the commodity in the future, is said to be in a "short" position. Conversely, someone committed to accept delivery is "long". It is a rare case, however, in which actual delivery takes place pursuant to a futures contract. 2 Save in these rare instances, the short and the long must liquidate their positions prior to the close of trading in the particular futures contract. Although the means by which this is done is routinely referred to as futures trading, futures contracts are not "traded" in the normal sense of that word. Rather they are formed and discharged. Clark, Genealogy and Genetics of "Contract of Sale of a Commodity for Future Delivery" in the Commodity Exchange Act, 27 Emory L.J. 1175, 1176 (1978). A person seeking to liquidate his futures position must form an opposite contract for the same quantity, so that his obligations under the two contracts will offset each other. Thus, a short who does not intend to deliver the commodity must purchase an equal number of long contracts; a long must sell an equal number of short contracts. Money is made or lost in the price different between the original contract and the offsetting transaction. If the price of the future has declined, usually because of market information indicating a drop in the price of the commodity, the short will realize a profit; if the futures price has risen, the long will realize a profit. See Cargill, Inc. v. Hardin, 452 F.2d 1154, 1157 (8 Cir. 1971), cert. denied, 406 U.S. 932, 92 S.Ct. 1770, 32 L.Ed.2d 135 (1972). Futures trading is a zero-sum game. Since money is made from the change in futures contract prices, and every contract has a long and a short, every gain can be matched with a corresponding loss. See Melamed, The Mechanics of a Commodity Futures Exchange: A Critique of Automation of the Transaction Process, 6 Hofstra L.Rev. 149, 166 & n.39 (1977).

The mechanics of the commodity futures market, and the roles of the various participants, can be illustrated by tracing a typical transaction. An individual wishing to invest in the futures market approaches a "futures commission merchant" (FCM). FCM's are defined in the Commodity Exchange Act as individuals or associations "engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery ... on ... any contract market ...," § 2(a)(1), 7 U.S.C. § 2, and they are registered with the Commodity Futures Trading Commission (CFTC). The FCM will demand a "margin" payment from the customer, which is simply a security deposit designed to protect against adverse price movements. The amount of the margin is based upon the amount which the customer can lose in a day or two; when the margin is exhausted the FCM will call the customer for additional payment. The margin is generally only a small percentage of the value of the contract. See Melamed, supra, 6 Hofstra L.Rev. at 167 & n.41. FCM's are paid a commission on their customer's business.

The FCM relays its customer's order to one of its "floor brokers" trading on the exchange. The broker stands on the outside of a "pit" or "ring" around which are gathered other persons trading in the same contract. Some of the traders are brokers acting on behalf of customers, while others trade on their own account. Contracts are made by "open outcry". The broker with an order will indicate his position at the pit by shouting and gesticulating with standardized hand signals. Someone willing to enter the contract responds across the pit in similar fashion, and the deal is made. Observers on raised pulpits alongside the pit record the transaction and feed the information into a communications system, publicizing it to other traders who, in any event, had an opportunity to witness the transaction in the pit. The broker relays the particulars of the deal to the FCM, who informs the customer.

When two traders have reached an...

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