Pollock v. CITRUS ASSOCIATES, ETC.
| Decision Date | 06 May 1981 |
| Docket Number | No. 78 Civ. 0178.,78 Civ. 0178. |
| Citation | 512 F. Supp. 711 |
| Parties | Nancy POLLOCK and Alexander Moskovits, Plaintiffs, v. CITRUS ASSOCIATES OF the NEW YORK COTTON EXCHANGE, INC., ContiCommodity, Inc., Norton Waltuch, and "John Does" Nos. 1-10, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Leonard Toboroff, Christopher Lovell, Toboroff, Gottesman & Lovell, New York City, for plaintiffs.
Maurice Mound, Edward McDermott, Rein, Mound & Cotton, New York City, for defendant Citrus Associates of the New York Cotton Exchange, Inc.
Daniel J. O'Neill, Thomas A. Dubbs, Michael C. Gilbert, Chadbourne, Parke, Whiteside & Wolff, New York City, for defendants ContiCommodity Services, Inc. and Norton Waltuch.
This action arises from the trading of November 1977 orange juice futures contracts ("November Contracts") on the Citrus Associates of the New York Cotton Exchange, Inc. (the "Exchange") during the period October 1, 1977 through November 16, 1977. The defendant Exchange is a contract market, designated by the Commodity Futures Trading Commission (the "Commission") pursuant to Section 5 of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 7, through which transactions in frozen orange juice concentrate futures are consumated. Defendant ContiCommodity Services, Inc. ("Conti") is a broker/dealer and a Class "A" member of the Exchange. Defendant Norton Waltuch ("Waltuch") is a sales representative for Conti, director of its financial capital unit, and manager of its New York branch. Conti and Waltuch allegedly trade futures contracts for their own accounts and the accounts of others. The plaintiffs, suing on behalf of an alleged class, are purportedly persons who sold November Contracts and did not liquidate their positions before November 16, 1977.1
Count I of the Second Amended Complaint (the "complaint") alleges that Conti, Waltuch, and others combined and conspired to manipulate the price of November Contracts in violation of the CEA, 7 U.S.C. §§ 1 et seq., and the rules and regulations promulgated thereunder. In essence, Count I alleges that Conti, Waltuch, and others effectuated a "squeeze" which drove the price of November Contracts to an artificially high level. Count II of the complaint alleges that Conti, Waltuch, and others conspired to restrain trade in the market for November Contracts in violation of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 & 2. Count III of the complaint alleges that the Exchange neglected to prevent the other defendants' manipulation of the November contracts market and failed to perform its regulatory duties, in violation of CEA, the rules and regulations of the Commission, and its own bylaws, rules, and regulations.
By notice of motion filed July 31, 1979, defendants Conti and Waltuch moved to dismiss the complaint pursuant to Fed.R. Civ.P. 12 or, alternatively, for summary judgment pursuant to Fed.R.Civ.P. 56. By notice of motion dated August 2, 1979, the Exchange moved for judgment on the pleadings, pursuant to Fed.R.Civ.P. 12(c). In a stipulation "so ordered" on November 27, 1979, the parties agreed to defer briefing and consideration of those motions until the Second Circuit's ruling in Leist v. Simplot and the other consolidated cases dealing with the issue of whether a private right of action existed under the CEA. On July 8, 1980, a divided panel ruled that a private right of action does exist under the CEA. Leist v. Simplot, 638 F.2d 283 (2d Cir. 1980).
At a pretrial conference held on October 7, 1980, the Court denied the plaintiffs' request that all the defendants' motions be dismissed without further submissions, and directed the plaintiffs to file responsive papers. Thereafter, the defendants filed reply papers and the plaintiffs, with leave of the Court, filed sur-reply papers on January 8, 1981.
On February 23, 1981, the Supreme Court granted petitions for certiorari in Leist v. Simplot, ___ U.S. ___, 101 S.Ct. 1346, 67 L.Ed.2d 332 (1981). By letter to the Court dated February 24, 1981, counsel for Conti and Waltuch suggested that the Court may wish to defer ruling on the pending motions until after the Supreme Court's decision. Plaintiffs' counsel expressed objections to any further delay in a letter to the Court dated February 27, 1981. Considering that the Supreme Court's decision will probably not be rendered until next fall; that the motions to dismiss involve antitrust claims in addition to CEA claims; that this action was filed on January 10, 1978; and that consideration of the defendants' motions has already been delayed for more than a year, the Court declines to further postpone its consideration of the defendants' motions.
Defendants Conti and Waltuch contend that Leist v. Simplot is not applicable to the instant action because the plaintiffs have failed to specify any particular provision of the CEA on which Count I is based. It is true that a private right of action cannot be implied under an entire Act which has more than one section. For example, under the Securities Exchange Act of 1934, a private right of action is specifically provided for in sections 9(e), 16(b), and 18; is implied under section 10(b), Superintendent of Insurance v. Bankers Life and Casualty Company, 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971); and is not implied under section 17(a), Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979).
Count I simply alleges a violation of 7 U.S.C. §§ 1-13. In its sur-reply memorandum of law, at 1 n.*, the plaintiffs argue that Count I states a manipulation claim under section 9(b) of the CEA, 7 U.S.C. § 13(b).
A fair reading of the complaint indicates that a Section 9(b) claim is stated in Count I. The majority in Leist v. Simplot ruled that a private right of action exists under section 9(b). Thus, insofar as the allegations of Count I are founded upon section 9(b), Conti's and Waltuch's motion to dismiss or for summary judgment with respect to Count I is denied. However, to the extent that Count I relies upon any other section of the CEA, the motion to dismiss by Conti and Waltuch is granted.
Similar to the other defendants, the Exchange contends that the failure of the plaintiffs to specify a specific statutory provision in Count III is fatal to their claims against the Exchange. However, as indicated in Paragraph 21(a) of the complaint, incorporated by reference into Count III, and in plaintiffs' sur-reply memorandum of law, at 43, the plaintiffs' claims against the Exchange are founded upon sections 5(d) and 5a(8) of the CEA, 7 U.S.C. §§ 7(d) and 7a(8). In Leist v. Simplot, supra, at 300-302, 322, the majority found that a private right of action could be implied under sections 5(d) and 5a(8) of the CEA.
However, the Exchange argues that assuming that this Court finds that sections 5(d) and 5a(8) are the foundation of plaintiffs' claims under Count III and that there is a private right of action under those sections — as it does find — the plaintiffs have failed to state a claim upon which relief can be granted.
Section 5(d) provides that in order for the Commission to designate a board of trade (i. e., exchange) a "contract market", the governing board of exchange must provide for the prevention of manipulation of prices. The defendant Exchange concedes that it promulgated a rule in conformance with this section prior to July 17, 1975. But, the defendant argues that section 5a(8) does not require the Exchange to enforce all its rules. That section states:
Thus, the only rules that must be enforced, according to the defendant, are those that (1) are made by the governing board or by a committee of the Exchange, (2) relate to the terms and conditions in contracts of sale executed on the Exchange or to other trading requirements, and (3) have been approved by the Commission.
The Exchange's anti-manipulation rule clearly meets the first two conditions. Regarding the third condition, the defendant argues that the Commission never approved the Exchange's anti-manipulation rule, and thus, the plaintiffs' claims based on a failure to enforce that rule must be dismissed.
On July 18, 1975, the Commission promulgated Rule 1.53, 17 C.F.R. 1.53, which states:
"Each contract market shall enforce each bylaw, rule, regulation, and resolution, made or issued by it or by the governing board thereof or any committee thereof, which is in effect as of July 18, 1975, and which relates to terms and conditions in contracts of sale to be executed on or subject to the rules of such contract market or relates to other trading requirements, unless such bylaw, rule, regulation, or resolution has been disapproved by the Commission pursuant to section 5a(12) of the Act, or the amendment or revocation of such bylaw, rule, regulation or resolution has been approved by the Commission pursuant to section 5a(12) of the Act.
The Commission also adopted Rule 1.54, 17 C.F.R. 1.54, which states:
"Notwithstanding any provision of these rules, any bylaw, rule, regulation, or resolution of a contract market that was submitted to the Secretary of Agriculture pursuant or §§ 1.38(a) of...
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