Merrill Lynch, Pierce Fenner Smith, Inc v. Curran New York Mercantile Exchange v. Leist Clayton Brokerage Co of St Louis, Inc v. Leist Heinhold Commodities, Inc v. Leist

Decision Date03 May 1982
Docket Number80-757,80-895 and 80-936,Nos. 80-203,s. 80-203
PartiesMERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Petitioner, v. J. J. CURRAN and Jacquelyn L. Curran. NEW YORK MERCANTILE EXCHANGE et al., Petitioners, v. Neil LEIST, Philip Smith and Incomco. CLAYTON BROKERAGE CO. OF ST. LOUIS, INC., Petitioner, v. Neil LEIST, Philip Smith and Incomco. HEINHOLD COMMODITIES, INC. et al., Petitioners, v. Neil LEIST et al
CourtU.S. Supreme Court

The Commodity Exchange Act (CEA), which regulates commodity futures trading, was substantially amended by the Commodity Futures Trading Commission Act of 1974. Among other things, the Commodity Futures Exchange Commission was created to assume the regulatory and enforcement powers previously exercised by the Secretary of Agriculture and certain additional powers, and that Commission was authorized to grant reparations to any person complaining of a violation of the CEA or its implementing regulations committed by any futures commission merchant, floor broker, commodity trading adviser, or commodity pool operator. But the 1974 Act, like the original legislation and other amendatory enactments, was silent on the subject of private judicial remedies for persons injured by a violation of the CEA. These cases involve an action by an investor in commodity futures contracts against his futures commission merchant or broker for violation of an antifraud provision of the CEA, and three actions by speculators in futures contracts against the New York Mercantile Exchange and its officials and against futures commission merchants, claiming damages resulting from unlawful price manipulation that allegedly could have been prevented by the Exchange's enforcement of its own rules. In each action, after the respective District Courts had ruled adversely to the plaintiffs, the respective Courts of Appeals held that the plaintiffs had implied rights of action under the CEA.

Held: A private party may maintain an action for damages caused by a violation of the CEA. Pp. 374-395.

(a) Where it is clear that an implied cause of action under the CEA was a part of the "contemporary legal context" in which Congress undertook a comprehensive reexamination and amendment of the CEA in 1974, the fact that the amendments left intact the provisions under which the federal courts had implied a cause of action is itself evidence that Congress affirmatively intended to preserve that remedy. Pp. 374-382.

(b) Moreover, a review of the legislative history of the 1974 enactment indicates that preservation of the remedy was indeed what Congress intended. Pp. 382-388.

(c) Purchasers and sellers of futures contracts have standing to assert both types of claims involved here—violation of the statutory prohibition against fraudulent and deceptive conduct and of the provisions designed to prevent price manipulation. The legislative history clearly indicates that Congress intended to protect all futures traders from price manipulation and other fraudulent conduct violative of the statute. Since actions by investors against exchanges were part of the contemporary legal context that Congress intended to preserve, exchanges can be held accountable for breaching their statutory duties to enforce their own rules prohibiting price manipulation. It follows that those persons who are participants in a conspiracy to manipulate the market in violation of those rules are also subject to suit by futures traders who can prove injury from such violations. Pp. 388-395

622 F.2d 216 and 638 F.2d 283, affirmed.

Richard P. Saslow, Detroit, Mich., for petitioner.

Robert A. Hudson, Detroit, Mich., for respondents.

Barry Sullivan, Washington, D.C., for the Commodity Futures Trading Commission as amicus curiae, by special leave of Court.

William E. Hegarty, New York City, for petitioners in 80-757.

Gerard K. Sandweg, Jr., St. Louis, Mo., for petitioners in 80-895 and 80-936.

Leonard Toboroff, New York City, for respondents in each case.

Justice STEVENS delivered the opinion of the Court.

The Commodity Exchange Act (CEA), 7 U.S.C. § 1 et seq. (1976 ed. and Supp.IV),1 has been aptly characterized as "a comprehensive regulatory structure to oversee the volatile and esoteric futures trading complex." 2 The central question presented by these cases is whether a private party may maintain an action for damages caused by a violation of the CEA. The United States Court of Appeals for the Sixth Circuit answered that question affirmatively, holding that an investor may maintain an action against his broker for violation of an antifraud provision of the CEA.3 The Court of Appeals for the Second Circuit gave the same answer to the question in actions brought by investors claiming damages resulting from unlawful price manipulation that allegedly could have been prevented by the New York Mercantile Exchange's enforcement of its own rules.4

We granted certiorari to resolve a conflict between these decisions and a subsequent decision of the Court of Appeals for the Fifth Circuit,5 and we now affirm. Prefatorily, we describe some aspects of the futures trading business, summarize the statutory scheme, and outline the essential facts of the separate cases.6


Prior to the advent of futures trading, agricultural products generally were sold at central markets. When an entire crop was harvested and marketed within a short time-span, dramatic price fluctuations sometimes created severe hardship for farmers or for processors. Some of these risks were alleviated by the adoption of quality standards, improvements in storage and transportation facilities, and the practice of "forward contracting"—the use of executory contracts fixing the terms of sale in advance of the time of delivery.7

When buyers and sellers entered into contracts for the future delivery of an agricultural product, they arrived at an agreed price on the basis of their judgment about expected market conditions at the time of delivery. Because the weather and other imponderables affected supply and demand, normally the market price would fluctuate before the contract was performed. A declining market meant that the executory agreement was more valuable to the seller than the commodity covered by the contract; conversely, in a rising market the executory contract had a special value for the buyer, who not only was assured of delivery of the commodity but also could derive a profit from the price increase.

The opportunity to make a profit as a result of fluctuations in the market price of commodities covered by contracts for future delivery motivated speculators to engage in the practice of buying and selling "futures contracts." A speculator who owned no present interest in a commodity but anticipated a price decline might agree to a future sale at the current market price, intending to purchase the commodity at a reduced price on or before the delivery date. A "short" sale of that kind would result in a loss if the price went up instead of down. On the other hand, a price increase would produce a gain for a "long" speculator who had acquired a contract to purchase the same commodity with no intent to take delivery but merely for the purpose of reselling the futures contract at an enhanced price.

In the 19th century the practice of trading in futures contracts led to the development of recognized exchanges or boards of trade. At such exchanges standardized agreements covering specific quantities of graded agricultural commodities to be delivered during specified months in the future were bought and sold pursuant to rules developed by the traders themselves. Necessarily the commodities subject to such contracts were fungible. For an active market in the contracts to develop, it also was essential that the contracts themselves be fungible. The exchanges therefore developed standard terms describing the quantity and quality of the commodity, the time and place of delivery, and the method of payment; the only variable was price. The purchase or sale of a futures contract on an exchange is therefore motivated by a single factor—the opportunity to make a profit (or to minimize the risk of loss) from a change in the market price.

The advent of speculation in futures markets produced well-recognized benefits for producers and processors of agricultural commodities. A farmer who takes a "short" position in the futures market is protected against a price decline; a processor who takes a "long" position is protected against a price increase. Such "hedging" is facilitated by the availability of speculators willing to assume the market risk that the hedging farmer or processor wants to avoid. The speculators' participation in the market substantially enlarges the number of potential buyers and sellers of executory contracts and therefore makes it easier for farmers and processors to make firm commitments for future delivery at a fixed price. The liquidity of a futures contract, upon which hedging depends, is directly related to the amount of speculation that takes place.8 Persons who actually produce or use the commodities that are covered by futures contracts are not the only beneficiaries of futures trading. The speculators, of course, have opportunities to profit from this trading. Moreover, futures trading must be regulated by an organized exchange. In addition to its regulatory responsibilities, the exchange must maintain detailed records and perform a clearing function to discharge the offsetting contracts that the short or long speculators have no desire to perform.9 The operation of the exchange creates employment opportunities for futures commission merchants, who solicit orders from individual traders, and for floor brokers, who make the actual trades on the floor of the exchange on behalf of futures commission merchants and their customers. The earnings of the persons who operate the futures market—the exchange itself, the...

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