Martin v. Heinold Commodities, Inc., No. 75013

• Court: Supreme Court of Illinois
• Writing for the Court: NICKELS
• Citation: 205 Ill.Dec. 443,163 Ill.2d 33,643 N.E.2d 734
• Parties: , 205 Ill.Dec. 443 John R. MARTIN, On His Own Behalf and On Behalf of All Others Similarly Situated, Appellee, v. HEINOLD COMMODITIES, INC., Appellant.
• Decision Date: 22 September 1994
• Docket Number: No. 75013

Page 734

643 N.E.2d 734 163 Ill.2d 33, 205 Ill.Dec. 443 John R. MARTIN, On His Own Behalf and On Behalf of All
Others Similarly Situated, Appellee,
v.
HEINOLD COMMODITIES, INC., Appellant. No. 75013. Supreme Court of Illinois. Sept. 22, 1994.
Rehearing Denied Dec. 5, 1994.

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[163 Ill.2d 37] [205 Ill.Dec. 445] William J. Nissen, Thomas K. Cauley, Jr., Joseph D. Kearney and Robert M. Hatch, Sidley & Austin, Chicago, for appellant.

William J. Harte, Ltd., and Plotkin & Jacobs, Ltd., Chicago (William J. Harte, John G. Jacobs, Jonah Orlofsky and Joshua Karsh, of counsel), for appellee.

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[205 Ill.Dec. 446] Justice NICKELS delivered the opinion of the court:

Defendant, Heinold Commodities, Inc., appeals from an appellate court decision affirming in part and reversing in part a judgment entered for plaintiffs and [163 Ill.2d 38] against defendant. Plaintiff filed a four-count complaint against Heinold for breach of fiduciary duty and violation of the Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act) (Ill.Rev.Stat.1979, ch. 121 1/2, par. 261 et seq.). Plaintiff's suit alleged that Heinold had misrepresentated the nature of a "foreign service fee" in the sale of London Commodity Options (LCO's) to class members from September 12, 1977, through May 31, 1978. On remand from this court in a previous appeal, the trial court found for the plaintiff class (hereinafter, plaintiffs) on both the breach of fiduciary counts and Consumer Fraud Act counts. The trial court also awarded plaintiffs punitive damages and prejudgment interest under both claims. The appellate court affirmed the award of compensatory damages, but reversed the award of punitive damages under both claims. The appellate court also reversed the award of prejudgment interest under the Consumer Fraud Act. We granted leave to appeal (134 Ill.2d R. 315).

BACKGROUND

This is the second time this case has reached this court. Plaintiff, John Martin, originally filed a four-count complaint against Heinold for breach of fiduciary duty and for violation of the Consumer Fraud Act in 1980. Plaintiff alleged that Heinold had intentionally misrepresented the nature of a "foreign service fee" charged in connection with the sale of LCO's. The action was subsequently certified as a class action. After initial discovery, plaintiff moved for summary judgment on the fiduciary duty counts. The trial court granted plaintiffs' motion, finding a fiduciary relationship between Heinold and plaintiffs as a matter of law and that Heinold had breached its fiduciary duties to plaintiffs.

The appellate court reversed the trial court's decision finding a fiduciary relationship as a matter of law. [163 Ill.2d 39] On appeal from the appellate court, this court affirmed on that matter, and found a material question of fact to exist as to whether, at the time Heinold discussed its compensation with plaintiffs, a fiduciary duty existed for Heinold to breach. This court remanded for a factual determination as to whether a preagency fiduciary relationship existed between Heinold and plaintiffs at the time Heinold's compensation was discussed. Martin v. Heinold Commodities, Inc. (1987), 117 Ill.2d 67, 109 Ill.Dec. 772, 510 N.E.2d 840.

Trial Court's Findings on Remand

On remand, the trial court made the following findings of fact and law.

Findings of Fact

LCO's were commodity option contracts obtained in London, England. The purchaser of such option had the right, but not the obligation, to buy or sell a commodity futures contract at a certain price. This right to either purchase or sell a futures contract was of limited duration, after which time the option would expire and become worthless. Purchasers of such options would only profit if the market moved favorably in their direction, enough to offset the price of the option plus any transaction costs. At that time, purchasers could buy or sell a futures commodity contract at a profit.

The Commodity Futures Trading Commission (Commission), a Federal commission established to regulate commodity and futures trading, banned the sale of LCO's effective June 1, 1978. The Commission's ban was necessitated by the fact that an overwhelming majority of firms engaged in the sale of LCO's at that time were employing fraudulent or unlawful practices. One of the specific practices cited by the Commission in banning the sale of LCO's was the use of terms such as "foreign service fee" to conceal markups. The Commission noted:

"The fact most scrupulously concealed by the vast majority[163 Ill.2d 40] of firms is the full extent of fees and mark-ups. * * * [The firms' confirmation statements] uniformly avoid disclosure and in fact conceal such fact by using various explanations or definitions. Mark-ups frequently are defined in promotional materials and customer confirmations

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[205 Ill.Dec. 447] as * * * [inter alia ] 'foreign service fees' * * *." 43 Fed.Reg. 16162 (1978).

The trial court made the following specific findings concerning the trading of LCO's:

"[Trading was] an extremely complex undertaking for investors, with little or no information available to American purchasers from any source other than from their brokers. The mechanics of the options themselves, the workings of the various London exchanges, the impact of currency conversion rates, the lack of information concerning the underlying commodities and other factors all made LCO investing exceedingly complicated. Investing in LCOs * * * was more complicated and much less understood than the trading of securities.

During the relevant period, it was difficult for customers to compare potential transactions effected through different brokers. One of the problems causing such difficulty was that different brokers used differing terminology.

During the relevant period, potential customers were completely dependent upon the LCO broker for information about fees and commissions charged in connection with LCO transactions; during the relevant period, the investor was at the mercy of the broker to learn what the expenses charged in London were, and had to rely upon the broker to state very clearly what the compensation to the broker was, since the customer had no other source for such information.

During the relevant period, virtually no investor in America, regardless of how sophisticated, could truly understand London commodity options trading without the help of a broker. * * * During the relevant period, customers were uniquely dependent upon, and at the mercy of, their brokers in obtaining information relative to such transactions.

The Plaintiff class has established by clear and convincing[163 Ill.2d 41] evidence that during the relevant period the creation of the customer-broker relationship between Heinold and its LCO customers involved a special trust and confidence on the part of the customer in the subsequent fair dealing of Heinold."

In opening an LCO account, each class member executed a customer agreement and statement signifying that he or she had received and understood a summary disclosure statement from Heinold regarding LCO's. Two forms of summary disclosure statements were used by Heinold during the relevant time. The first was a typewritten form and the second was a printed form. Both forms indicated that the entire price of an LCO consisted of three components: (1) a premium for the option; (2) a commission; and (3) a foreign service fee. The typewritten version of the summary disclosure statement described the commission and foreign service fee as follows:

"[Heinold] adds a foreign service fee equivalent to 20% of the premium as well as 1/2 the commodity futures commission rate normally charged on futures transactions. These charges have the following purpose: to recover costs of telephone, telex, bookkeeping, floor brokerage, clearing fees, costs involved with the segregation of customer funds and use of Heinold funds to pay for London Commodity Options, and research costs involved with options transactions; as well as to compensate [Heinold] and the registered representative who services the options customer during the life of options for conducting such business."

The printed version was virtually identical to the typewritten disclosure form, except that the foreign service fee was changed from 20% of the premium to $1,200. The printed form also noted that the foreign service fee for options with shorter lives would be smaller.

The trial court further found that Heinold could operate profitably on LCO transactions by charging only the price of a standard commission. The court arrived at [163 Ill.2d 42] this by noting that Heinold believed it could operate profitably by charging, and in fact only charged, a commission, and no foreign service fee, on London futures, the mechanics of which were indistinguishable from LCO's. Because Heinold had determined that it could pay all costs, compensate the registered

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[205 Ill.Dec. 448] representative who serviced the customer's account and still operate profitably by charging only a flat commission on a futures position, the trial court found the charging of a foreign service fee on LCO's a means by which to receive additional compensation for services already covered by the commission. The court further found that Heinold offered no credible explanation for the assessment of the foreign service fee. In fact, the foreign service fee was treated by Heinold internally as a commission.

The court further found that the word "commission" has a commonly understood meaning: a broker's compensation for a transaction as well as payment for the broker's general overhead. However, the term commission is not usually meant to include a broker's out-of-pocket expenses paid to third parties in connection with a particular transaction. In contrast to the understood meaning of commission, the court noted that the term foreign service fee has no common understanding. Thus,...