Salomon Forex, Inc. v. Tauber

• Decision Date: 18 October 1993
• Docket Number: No. 92-1406,92-1406
• Citation: 8 F.3d 966
• Parties: SALOMON FOREX, INCORPORATED, Plaintiff-Appellee, v. Laszlo N. TAUBER, M.D., Defendant and Third Party Plaintiff-Appellant, and Laszlo N. TAUBER, M.D. and Associates, Defendant, v. SALOMON BROTHERS, INCORPORATED; Salomon, Incorporated; Fred Gatling, Third Party Defendants-Appellees, and Paul Mozer, Third Party Defendant. The Board of Trade of the City of Chicago; Chicago Mercantile Exchange; United States of America; Futures Industry Association, Incorporated; Managed Futures Association; Foreign Exchange Committee; Commodity Futures Trading Commission; State of Idaho, Department of Finance; Nevada Securities Division of the Office of the Secretary of State, Amici Curiae.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 966

8 F.3d 966

62 USLW 2261

SALOMON FOREX, INCORPORATED, Plaintiff-Appellee, v. Laszlo N. TAUBER, M.D., Defendant and Third Party Plaintiff-Appellant, and Laszlo N. TAUBER, M.D. and Associates, Defendant, v. SALOMON BROTHERS, INCORPORATED; Salomon, Incorporated;

Fred Gatling, Third Party Defendants-Appellees,

and

Paul Mozer, Third Party Defendant.

The Board of Trade of the City of Chicago; Chicago

Mercantile Exchange; United States of America; Futures

Industry Association, Incorporated; Managed Futures

Association; Foreign Exchange Committee; Commodity Futures

Trading Commission; State of Idaho, Department of Finance;

Nevada Securities Division of the Office of the Secretary of

State, Amici Curiae.

No. 92-1406.

United States Court of Appeals Fourth Circuit.

Argued May 6, 1993.

Decided Oct. 18, 1993.

Joel I. Klein, Klein, Farr, Smith & Taranto, Washington, DC, argued (Richard G. Taranto, on brief), for defendant and third party plaintiff-appellant.

Eugene D. Gulland, Covington & Burling, Washington, DC, argued (William D. Iverson, Marc S. Mayerson, Eric G. Lasker, Covington & Burling, Washington, DC, Edward J. Rosen, Cleary, Gottlieb, Steen & Hamilton, New York City, on brief), for plaintiff-appellee.

Mark D. Young, John H. Stassen, Maureen A. Donley-Hoopes, Kirkland & Ellis, Washington, DC, Jerrold E. Salzman, Freeman, Freeman & Salzman, Chicago, Illinois, for Amici Curiae Chicago Bd. of Trade and Chicago Mercantile Exchange.

Joanne T. Medero, Gen. Counsel, Jay L. Witkin, Deputy Gen. Counsel, Pat G. Nicolette, Deputy Gen. Counsel, David R. Merrill, Deputy Gen. Counsel, Gracemary Rizzo, Commodity Futures Trading Com'n, Washington, DC, for amicus curiae, CFTC, on brief.

David S. Mitchell, David F. Williams, Ralph Berman, Cadwalader, Wickersham & Taft, New York City, for amici curiae, Futures Industry Ass'n and Managed Futures Ass'n, on brief.

David B. Tulchin, David M. Huggin, Richard H. Klapper, Kenneth M. Raisler, Sullivan & Cromwell, New York City, for amicus curiae, Foreign Exchange Committee, on brief.

Stuart M. Gerson, Asst. Atty. Gen., Richard Cullen, U.S. Atty., Barbara C. Biddle, Edward R. Cohen, Civ. Div., U.S. Dept. of Justice, Washington, DC, for amicus curiae, U.S., Wayne Klein, Sp. Deputy Atty. Gen./Securities Bureau Chief, State of Idaho, Boise, ID, for amici curiae, State of Idaho and Nevada Securities Div., on brief.

Before PHILLIPS, NIEMEYER, and WILLIAMS, Circuit Judges.

OPINION

NIEMEYER, Circuit Judge:

This appeal, taken from the district court's enforcement of a trading debt, squarely presents the issue of whether professional traders may individually negotiate sales of foreign currency futures and options off organized exchanges without violating the Commodities Exchange Act, 7 U.S.C. § 1, et seq. Finding that the Act is inapplicable to such trading and that there are no other defenses to enforcement of the debt in question, we affirm the judgment of the district court.

I

Over the course of 2- 1/2 years Dr. Laszlo N. Tauber, a surgeon from northern Virginia, entered into 2,702 transactions with Salomon Forex, Inc. and related entities, each transaction involving the sale of foreign currency futures ¹ and options. Tauber's trading with Salomon Forex was just one aspect of his dealings in foreign currency, which were on a large scale. During the relevant period, Tauber traded with more than a dozen other companies besides Salomon Forex, exchanging billions of dollars worth of currency. He compared prices from various sources and bought currency at the most advantageous rate, often using one transaction to cover the risks of another. Tauber individually negotiated terms for these currency transactions, both with Salomon Forex and with other companies.

Tauber's wholly-owned foreign currency trading company, Westwood Options, Inc., holds a seat on the nation's largest foreign currency exchange, the Philadelphia Stock Exchange. Tauber himself is worth, by the estimate of the district court, over half a billion dollars, and he owns extensive real estate holdings as well as foreign currency investments. Tauber maintains foreign bank accounts which he uses to carry out foreign currency transactions and uses foreign currency mortgages in connection with his real estate ventures. While Tauber was trading with Salomon Forex, Salomon Forex did not conduct trading of this type with any other individual investor--all of Salomon Forex's other foreign currency investment clients were institutions. The district court found that Tauber is a "sophisticated foreign currency trader."

Tauber's dealings with Salomon Forex involved foreign currency solely as an investment; they were not aimed at the acquisition of actual foreign currency. Rather than take physical delivery of the actual currency he purchased from Salomon Forex, Tauber typically entered into counterbalancing transactions with Salomon Forex by the time the contract matured. Initially, Salomon Forex's staff would contact Tauber's staff to inquire as to where currency was to be delivered when a contract matured. Salomon Forex later began placing the legend "Always Nets to Zero" on the written confirmation notices for Tauber's transactions. Only four of the Tauber-Salomon Forex contracts resulted in delivery of actual currency.

In March 1991, Tauber's investments, particularly in Swiss francs, declined sharply in value and Salomon Forex demanded that Tauber cover his open positions. When Tauber failed to do so, Salomon Forex ceased trading with him. Just over $25 million became due and payable under 68 futures contracts that matured in July and August 1991, leaving Tauber with a total outstanding account balance of $30 million owing to Salomon Forex. After applying $4 million in collateral that it was holding to this balance, Salomon Forex billed Tauber for almost $26 million. When Tauber refused to pay, Salomon Forex brought this suit. Tauber responded with numerous defenses, contending that the transactions he negotiated with Salomon Forex were illegal under the Commodities Exchange Act and that therefore he should not be held responsible for them. Tauber also argued that his contracts are void as violating New York state law. With his answer, Tauber filed counterclaims for negligence and for breach of contract. On Salomon Forex's motion for summary judgment, the district court entered judgment in favor of Salomon Forex, finding that Tauber had not met his burden of presenting evidence that he had any viable counterclaim or defense to his debt. 795 F.Supp. 768. This appeal followed.

II

The central issue in this case is whether Congress intended transactions such as those between Salomon Forex and Tauber to be regulated by the Commodities Exchange Act ("CEA"). In order to resolve this issue, it is first necessary to understand the history and purpose of that Act.

Congress enacted the Futures Trading Act, Pub.L. No. 67-66, 42 Stat. 187, in 1921 to regulate boards of trade on which futures trading occurred, primarily to prevent price manipulation and what many perceived as excessive speculation in grains. See William L. Stein, The Exchange-Trading Requirement of the Commodity Exchange Act, 41 Vand.L.Rev. 473, 477 & n. 23 (1988) (collecting relevant legislative history). The Act also sought to eliminate "bucket shops," businesses that offered small investors the opportunity to speculate, and indeed even wager, on the price of commodities through unreported deals. While a bucket shop typically attempted to match a customer order exposing the shop to the risk of upward price movement with an order exposing it to the risk of a downward movement, it nevertheless purported to assume the risk of any net positions. When, however, the market prices moved adversely to the bucket shop's net position, it usually closed, leaving behind uncollectible debts.

One year after its passage, the Futures Trading Act was declared unconstitutional as an improper exercise of the taxing power. See Hill v. Wallace, 259 U.S. 44, 42 S.Ct. 453, 66 L.Ed. 822 (1922). Congress swiftly responded with the Grain Futures Act of 1922, Pub.L. No. 67-331, 42 Stat. 998, which derived its authority from the broad powers granted by the Commerce Clause. Numerous changes and amendments followed over the years, and the statutory framework established by the Grain Futures Act gradually developed into the Commodities Exchange Act in its present form. See 7 U.S.C. §§ 1-25.

Today the CEA establishes a comprehensive system for regulating futures contracts and options. It provides at its core that no person shall enter into, or offer to enter into, a transaction involving the sale of a "commodity for future delivery," unless it is conducted on or through a board of trade designated and regulated by the Commodity Futures Trading Commission ("CFTC") as an exchange ("contract market"). See 7 U.S.C. §§ 2, 6. The Act also regulates transactions of the character of an option. See 7 U.S.C. § 6c.

Because the Act was aimed at manipulation, speculation, and other abuses that could arise from the trading in futures contracts and options, as distinguished from the commodity itself, Congress never purported to regulate "spot" transactions (transactions for the immediate sale and delivery of a commodity) or "cash forward" transactions (in which the commodity is presently sold but its delivery is, by agreement, delayed or deferred). Thus § 2(a)(1)(A) of the Act, 7 U.S.C. § 2, provides that "futures" regulated by the Act do not include transactions involving actual physical delivery of the commodity, even on a deferred basis. Transactions in the commodity itself which anticipate actual delivery did not present the same opportunities for speculation, manipulation, and outright wagering that trading in futures and options presented. From the beginning, the CEA thus regulated transactions involving the purchase or sale of a commodity "for future delivery" but excluded transactions...