Matter of Lake States Commodities, Inc.

• Decision Date: 24 July 1996
• Docket Number: No. 96 C 0587.,96 C 0587.
• Parties: In the Matter of LAKE STATES COMMODITIES, INC., Consolidated Pretrial Proceeding.
• Court: U.S. District Court — Northern District of Illinois

936 F. Supp. 1461

In the Matter of LAKE STATES COMMODITIES, INC., Consolidated Pretrial Proceeding.

No. 96 C 0587.

United States District Court, N.D. Illinois, Eastern Division.

July 24, 1996.

COPYRIGHT MATERIAL OMITTED

Arthur W. Aufmann, Edward T Joyce & Assoc., Chicago, Illinois.

John S. Bishof, Chicago, IL.

Francis J. Marasa, Sweeney and Riman, Chicago, IL.

Richard B. Polony, Hinshaw & Culbertson, Chicago, IL David J. Philipps, Beeler, Schad & Diamond, Chicago, Illinois.

James P. Fitzgerald, James G. Powers, McGrath, North, Mullin & Kratz, Omaha, NE.

Charles M. Thompson, Querry & Harrow, Chicago, IL.

Ira N. Helfgot, Chicago, IL.

MEMORANDUM OPINION AND ORDER

ASPEN, Chief Judge:

The plaintiffs in these consolidated actions are a group of investors who allegedly lost large sums of money entrusted to Thomas Collins and Lake States Commodities. On January 25, 1996, we accepted reassignment of eleven of these actions in order to coordinate pretrial discovery and consider the merits of a single motion to dismiss that raised issues common to all the actions. Presently before us is Geldermann's motion to dismiss all counts against it. For the reasons set forth below, the motion is granted in part and denied in part, and the parties are directed to appear for a status hearing on August 9, 1996.

I. Background

To better understand the plaintiffs' claims, we begin with a brief sketch of the regulatory structure of the commodity futures market in America, and its two regulatory organizations: the Commodity Futures Trading Commission ("CFTC") and the National Futures Association ("NFA"). The CFTC is the federal agency entrusted with protecting the integrity and security of the commodities markets through the enforcement of the Commodities Exchange Act and its related rules and regulations. Although the CFTC does not place stringent requirements on those who trade their own funds in the market, the Commission does require anyone who handles customer funds for the purpose of trading in the commodity futures market to register with the NFA, the self-regulating body of the commodity futures market. Compl. ¶¶ 2-3.¹ Thus, anyone who accepts orders, money, or securities for the purpose of effectuating a purchase or sale of a commodity futures contract must register as a futures commission merchant ("FCM"). Similarly, anyone who operates a "commodity pool" of third-party funds in order to buy and sell commodity futures contracts is required to register with the NFA as a commodity pool operator ("CPO"). Direct participation in trading is not required to fall under the purview of the CFTC: those who advise others for a fee about trading futures contracts must register as commodity trading advisors ("CTA"), and a person who solicits orders or customers on behalf of a FCM, CPO, or CTA must register as an associated person ("AP"). Compl. ¶¶ 4-8.

Beginning in 1984, Thomas Collins began soliciting customers to invest money into a commodity pool ("Collins pool") which was used to trade commodity futures. Compl. ¶ 20. However, Collins was not registered with the CFTC or the NFA, and consequently, could not legally solicit, accept, or pool customer funds, and was prohibited from trading such funds on the commodities market. Compl. ¶ 22. Collins nonetheless pooled such funds in an omnibus account² at Heinold Commodities ("Heinold"), and was permitted to trade them on the market. Compl ¶¶ 12, 23. He then began using Lake States Commodities (an Illinois corporation that he controlled) and its selling agents to assist him in soliciting funds, collecting money from investors, and issuing account statements relating to the Collins pool. Compl. ¶¶ 11, 21. All of this was illegal, Plaintiffs claim, because neither Collins nor any Lake States employees (named as individual defendants in this action) were registered with the CFTC or NFA, and none of the risks associated with the commodities markets were explained to the investors. Compl. ¶ 22. Nonetheless, through the use of Lake States Commodities and Heinold, Collins portrayed the Collins pool as a legitimate, profitable enterprise. Compl. ¶ 23.

In 1986, Geldermann purchased all of Heinold's stock, thereby acquiring the firm's trading records, employees, and accounts — including those accounts operated by Collins. Compl. ¶ 24. Collins eventually closed his omnibus account, and along with the individual defendants opened several joint trading accounts at Geldermann, although he failed to complete the necessary opening documentation for these joint accounts. Compl. ¶ 25. At some point, the plaintiffs claim, Collins and the defendants began to solicit new investors not only to bolster the credibility of the Collins pool, but also to pay off prior investors with the "profits" obtained from new investments. In other words, Collins and the individual defendants are alleged to have utilized the pool as a vehicle for a Ponzi scheme.³ Compl. ¶¶ 26-27.

The plaintiffs contend that Geldermann, a registered FCM, received commissions on every trade Collins conducted, and thus had an incentive to perpetuate and assist his fraud. Compl. ¶ 41. They claim that Geldermann provided Collins with a desk and a phone at the Geldermann booth on the floor of the MidAmerica Commodity Exchange, thereby enhancing Collins' appearance of legitimacy. Compl. ¶ 30. Geldermann treated Collins' individual and joint accounts as one omnibus account, taking instructions to effect trades from Lake States employees not listed on the accounts. Compl. ¶ 31. Geldermann also permitted Collins to write his own orders on Geldermann order forms — a task which only Geldermann employees were authorized to perform. Compl. ¶ 31.

In August 1988, Geldermann's parent corporation, ConAgra, hired James Fuller as an audit supervisor. Fuller was aware that Collins had previously skirted various rules of the CFTC and NFA, and warned senior Geldermann officers of problems if they continued doing business with Collins. Fuller was allegedly told by these officers that Collins had plenty of money to trade, and that any potential rule violations would be ignored at that time. Compl. ¶ 32. Fuller continued his investigation of Collins and his commodity pool, and discovered that Geldermann was allowing Collins to improperly transfer trades and funds between accounts with different ownership, and to open joint accounts without proper documentation. Moreover, Fuller believed Geldermann was fostering the market's favorable image of Collins by allowing him to pool third-party funds in several joint accounts, and by providing him with a desk and phone on the exchange. When informed by Fuller of these problems, Geldermann's officers allegedly told their auditor to stop investigating Collins. Compl. ¶¶ 33-35.

The plaintiffs contend that in late 1989 Geldermann began taking a more active role in perpetrating the Lake States/Collins fraud. In October 1989, the CFTC began an investigation into Collins, and subpoenaed Geldermann's records regarding his trading accounts at the firm. The plaintiffs allege, however, that because Geldermann had improperly opened many joint accounts for Collins, Geldermann surreptitiously completed and back-dated much of the required documentation before providing it to the CFTC. Compl. ¶ 36. In addition, Geldermann's legal department began monitoring the CFTC investigation, and learned (1) that Collins had accepted large amounts of third-party funds to trade commodity futures without registering with the CFTC or NFA, (2) that Geldermann checks issued to Collins had been endorsed over to third-parties, (3) that Lake States had issued phoney trading account statements from Heinold — after Geldermann had purchased the company — indicating greatly inflated account balances, (4) that Lake States was operating a customer commodities business out of its offices, and (5) that the individual defendants — selling agents for Collins and Lake States — had asserted their Fifth Amendment privilege against self incrimination during depositions taken by the CFTC. Compl. ¶¶ 37-45.⁴ The plaintiffs maintain that despite all this information, Geldermann's officers still refused to close down Collins and Lake States, allegedly because his trading accounted for a large portion of Geldermann's business. Compl. ¶¶ 41, 46.

The plaintiffs claim they made most of their investments with Collins after May 1990, when Geldermann was aware of his fraudulent and illegal activities, and that they gave Collins their money because of the appearance of legitimacy and profitability fostered by Geldermann and the individual defendants. Compl. ¶¶ 47-48. They allege that the Ponzi scheme collapsed in June 1994 and Collins absconded with their stakes.⁵ Various investors filed these lawsuits against the individual defendants and Geldermann,⁶ bringing claims under the Commodity Exchange Act ("CEA"), 7 U.S.C. §§ 6d, 6b, 6o, 13(a), the Securities Act of 1933 ("1933 Act"), 15 U.S.C. §§ 77l(2), 77o, the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §§ 78j(b), 78t(a), Securities and Exchange Commission Rule 10b-5 ("Rule 10b-5"), 17 C.F.R. § 240.10b-5, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c), the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1-505/12, and common law fraud. Geldermann now moves under Federal Rules of Civil Procedure 12(b)(6) and 9(b) to dismiss all claims against it.

II. Motion to Dismiss Standard

Dismissal under Rule 12(b)(6) shall be granted only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Chaney v. Suburban Bus Div. of the Regional Transp. Auth., 52 F.3d 623, 627 (7th Cir. 1995). While at this stage in the proceedings we accept as true all well pleaded allegations in the complaint and any...