Maloley v. R.J. O'Brien & Associates, Inc.

• Decision Date: 13 August 1987
• Docket Number: No. 86-1533,86-1533
• Parties: Zickie Z. MALOLEY, Petitioner, v. R.J. O'BRIEN & ASSOCIATES, INC.; Robert Gottsch; Clifford Spencer Roberts; and Commodity Futures Trading Commission, Respondents.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1435

819 F.2d 1435

Zickie Z. MALOLEY, Petitioner, v. R.J. O'BRIEN & ASSOCIATES, INC.; Robert Gottsch; Clifford Spencer Roberts; and Commodity Futures Trading Commission, Respondents.

No. 86-1533.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 12, 1986.

Decided May 19, 1987.

Judgment June 12, 1987.

Rehearing and Rehearing En Banc Denied Aug. 13, 1987.

Robert L. Nefsky, Lincoln, Neb., for petitioner.

Edward S. Geldermann, Washington, D.C., for respondents and the Commodity Futures Trading Com'n.

Before HEANEY, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and HUNTER, ^* Senior District Judge.

HEANEY, Circuit Judge.

This case presents the question whether certain reparations claims before the Commodity Futures Trading Commission (CFTC) were brought within the applicable statute of limitations period. We affirm in part, reverse in part, and remand the case to the CFTC for further consideration.

I. BACKGROUND.

In April of 1978, appellant, Zickie Maloley, opened a nondiscretionary commodity account with Clifford Roberts, an associate with the Lexington, Nebraska, office of R. J. O'Brien & Associates (RJOB), a family owned and operated futures commission merchant with its principal offices in Chicago, Illinois. Roberts was in charge of the day-to-day operations of the Lexington office. He reported to Robert Gottsch, another RJOB associate, who was some 300 miles away in Elkhorn, Nebraska. At the time Maloley opened the account, he ran a grocery store and a meat store which together grossed in excess of $2.7 million annually. Maloley has a high school education and, prior to his commodity trading activity, had made a few stock investments and had read various financial publications.

Shortly after Maloley opened the account, Karen Jeffrey, an associate with Peavey Company, a competing commodities futures merchant with whom Maloley also had an account, informed him that Roberts was not registered with the CFTC as required by law. In fact, Roberts did not become registered until January of 1979. It is undisputed that Maloley did not actually learn Roberts was unregistered until September of 1979. It is also undisputed that, at some point, Maloley inquired of Roberts as to his registration and that Roberts informed Maloley he was registered but had not yet received his registration card from the CFTC. There is disagreement as to the date Maloley made this inquiry.

In June of 1978, Maloley became aware of an unauthorized trade in his account and brought it to Roberts' attention. Roberts responded that the trade was a mistake and would be rectified. Later in June and July of 1978, Maloley noticed more unauthorized trades, and losses in his account began to mount. Throughout the life of the account, however, Roberts continually assured Maloley that he would be "taken care of" provided he continued to meet margin calls and to allow Roberts and Gottsch to manage the account as they wished. Maloley did not complain to Gottsch or RJOB about the unauthorized trades and, during July and August, deposited some $105,000 into the account to meet margin calls.

In July of 1978, Maloley and Roberts opened a joint commodity trading account under the name of Mr. Z's Meats. Each contributed $1,200 to the account and agreed that they would place one trade per day. Roberts was soon making up to ten trades a day in the account, telling Maloley that this was necessary to make up the losses being incurred. During the life of the Mr. Z's Meats account, Maloley deposited or transferred $42,584.50 into the account and Roberts tendered $12,700 as his share of its losses. Thus, Maloley's total out-of-pocket losses on Mr. Z's Meats account were $29,884.50.

By mid-January, 1979, Maloley's personal account showed a deficit of $15,000 and he ceased trading until mid-April when Roberts On May 5, 1981, Maloley filed a complaint with the CFTC pursuant to section 14(a) of the Commodity Exchange Act (CEA), as amended, 7 U.S.C. Sec. 18(a), against Roberts, Gottsch, Kremke (an RJOB account executive who worked with Roberts), and RJOB (collectively the appellees). The complaint alleged, inter alia, that Roberts fraudulently induced Maloley to open a commodity futures account by failing to disclose and misrepresenting his registration status in violation of sections 4b(A) and 4b(B) of the CEA, 7 U.S.C. Secs. 6b(A), 6b(B) and that Roberts falsely assured Maloley account losses would be rectified, in violation of sections 4b(A), 4b(B), and 4b(C) of the CEA, 7 U.S.C. Secs. 6b(A), 6b(B), 6b(C). ¹ The appellees responded that the applicable two-year statute of limitations barred Maloley's claims. A hearing on the matter was held before an ALJ on April 27-29, 1983, and on September 12, 1983.

credited the account in the amount of $15,293.50. Maloley then resumed trading and sustained losses until he closed his account in June, 1979. All told, Maloley's out-of-pocket losses on his personal account amounted to $167,815.50. Combined with his out-of-pocket losses in the Mr. Z's Meats account, Maloley lost some $197,700.

On September 24, 1984, the ALJ issued a decision finding that as to the fraudulent inducement claim, although Maloley had no duty to inquire as to Roberts' registration at the time he opened his account, he had a duty to make such an inquiry after being warned by Jeffrey. The ALJ further found that Maloley made such an inquiry, that Roberts stated he was registered, and that Maloley had a right to rely on Roberts' statement. Thus, the ALJ held that the statute of limitations on Maloley's claim did not begin to run until Maloley actually learned of Roberts' nonregistration in September of 1979 and that Maloley's claim was filed well within the two-year limitations period.

As to Maloley's fraudulent assurances claim, the ALJ found that although the bulk of the losses sustained by Maloley occurred outside of the two-year period preceding the filing of the complaint, the fraud alleged was the assurances given by Roberts that losses would be covered. Thus, the ALJ found that Maloley could not be reasonably expected to discover the fraud during the period in which the assurances were made. This period ended at the time Maloley closed his account in June of 1979. Therefore, the ALJ held that Maloley brought his claim for fraudulent assurances within the statute of limitations.

The appellees then appealed the ALJ's decision to the CFTC. On review of Maloley's fraudulent inducement claim, the CFTC agreed with the ALJ that Maloley had no duty to inquire about Roberts' registration until he was warned by Jeffrey. The CFTC, however, further found that Maloley did not exercise reasonable diligence in ascertaining whether Roberts was registered because he may not have inquired until January of 1979, some eight months after he was warned and even then, asked only Roberts--the subject of the warning. Thus, the CFTC concluded that the statute of limitations barred Maloley's claim for fraudulent inducement because he failed to show he exercised reasonable diligence in discovering the claim.

With respect to Maloley's claim for fraudulent assurances, the CFTC held that it was unreasonable for Maloley to believe, despite substantial and mounting losses, Roberts' continued assurances that the losses would be taken care of by RJOB. The CFTC also found that Maloley was not reasonably diligent in his inquiry to those who were supposed to rectify his losses. Thus, the CFTC held that Maloley's claim for fraudulent assurances was barred by the statute of limitations because he failed to show that he exercised reasonable diligence in discovering the claim.

II. ANALYSIS.

It is settled law that in cases involving fraud, the cause of action does not accrue and the statute of limitations does not begin to run until the fraud is discovered or, upon reasonably diligent inquiry, should have been discovered. See Harris v. Union Electric Co., 787 F.2d 355, 360 (8th Cir.1986); Buder v. Merrill Lynch, Pierce, Fenner & Smith, 644 F.2d 690, 692 (8th Cir.1981); see also Graves v. Futures Investment Company, p 21,457 Fut.L.Rep. 26,158, 26,165 (CCH 1982). Maloley filed his complaint in this action on May 5, 1981. The relevant statute of limitations is two years. See CEA Sec. 14(a), 7 U.S.C. Sec. 18(a); 17 C.F.R. Sec. 12.13 (1986). Thus, the question presented in this case is whether upon reasonable inquiry Maloley should have discovered, prior to May 5, 1979, that Roberts was unregistered and that his assurances were false.

A. Fraudulent Inducement.

Accepting the CFTC's findings (1) that shortly after he began trading with Roberts, one of Roberts' competitors informed Maloley that Roberts was unregistered; (2) that Maloley did not inquire as to Roberts' registration for some eight months after being informed; and (3) that Maloley inquired only of Roberts, we must determine whether, in light of these findings, the CFTC erred in concluding that Maloley failed to exercise reasonable diligence in discovering the fraud he alleges. ²

In answering this question, we must first determine the deference to be accorded the CFTC's conclusion that a reasonable inquiry, for purposes of tolling the statute of limitations, required Maloley to inquire as to Roberts' registration within a reasonable time after receiving information that he was not registered and to inquire of someone other than Roberts. The CFTC argues that, "where, as here, the inferences to be drawn from the record relate to standards of diligence applicable to commodity customers--matters particularly within the agency's expertise, they are entitled to special deference by the reviewing court." Brief of CFTC at 14. We disagree.

Although according to section 6 of the CEA, 7 U.S.C. Sec. 9, the CFTC's factual findings are conclusive in this Court if supported by the weight of the evidence, the section is of little help because, for purposes of this appeal, we have accepted the CFTC's factual...