Salomon Forex Inc. v. Tauber

• Decision Date: 01 June 1992
• Docket Number: Civ. No. 91-1415-A.
• Citation: 795 F. Supp. 768
• Parties: SALOMON FOREX INC., Plaintiff, v. Laszlo N. TAUBER, Defendant. Laszlo N. TAUBER, M.D., Counter-Plaintiff and Third-Party Plaintiff, v. SALOMON FOREX INC., Counter-Defendant, v. SALOMON BROTHERS INC., et al., Third-Party Defendants.
• Court: U.S. District Court — Eastern District of Virginia

795 F. Supp. 768

SALOMON FOREX INC., Plaintiff, v. Laszlo N. TAUBER, Defendant.

Laszlo N. TAUBER, M.D., Counter-Plaintiff and Third-Party Plaintiff, v. SALOMON FOREX INC., Counter-Defendant, v. SALOMON BROTHERS INC., et al., Third-Party Defendants.

Civ. No. 91-1415-A.

United States District Court, E.D. Virginia, Alexandria Division.

June 1, 1992.

Eugene D. Gulland, William D. Iverson, Marc Mayerson, Eric Lasker, Laura M. Steeves, Covington & Burling, Washington, D.C., for plaintiff Salomon Forex, Inc. and third-party defendants Salomon Bros. Inc. and Salomon Inc., Gatling.

Wise, David Hilton Spriggs & Hollingsworth, Washington, D.C., for defendants.

MEMORANDUM OPINION

ELLIS, District Judge.

INTRODUCTION

This case presents a significant question concerning the scope of the Commodity Exchange Act, as amended, 7 U.S.C. §§ 1 et seq. (1980 & Supp.1992) ("CEA"). At issue specifically is whether certain foreign currency trading contracts are exempt from CEA regulation.

Salomon Forex Inc. ("Salomon Forex"), a foreign currency brokerage company, sued Dr. Laszlo Tauber, an individual foreign currency trader, for breach of sixty-eight foreign currency trading contracts. Tauber filed a counterclaim against Salomon Forex and certain third-party defendants¹ challenging the validity of over 2700 foreign currency trading contracts, including the sixty-eight disputed in the complaint. A host of issues came before the Court on the parties' motions for summary and partial summary judgment. Addressed here is the threshold question, novel in this circuit and others, whether the foreign currency transactions into which Salomon Forex and Tauber entered are exempt from CEA regulation. For the reasons elaborated below, the Court concludes that the foreign currency contracts at issue are not within the scope of the CEA. The consequence of this is that counterclaims and defenses to contract formation and enforceability based on CEA violations fail.²

FACTS

Salomon Forex is a prominent foreign currency trading company with offices in New York, London, Tokyo, and the world's principal foreign exchange markets. Tauber, a general surgeon practicing in Northern Virginia, is by all accounts an unusual person. The record indicates that he is a physician with an active medical practice who is also a major real estate investor³ and foreign currency trader. It is the latter incarnation that is relevant here. Evidence suggests his net worth exceeds half a billion dollars.

Since 1981, Tauber has engaged in extensive foreign currency trading involving billions of dollars worth of foreign currency, primarily Swiss francs and Australian dollars. Over the years, Tauber has traded large quantities of foreign currency with at least fourteen well-known brokerage companies. In addition, Tauber traded foreign currency through his wholly-owned foreign currency trading company, Westwood Options, Inc., holder of a seat on the Philadelphia Stock Exchange, the nation's largest foreign currency exchange. To facilitate his foreign currency trading, Tauber subscribed to "Telerate," a computerized Dow-Jones service providing current market quotations and related data. Using Telerate, Tauber monitored foreign currency markets from computer terminals in his home and elsewhere. Tauber also maintained foreign bank accounts, which he used on several occasions to effectuate foreign currency transactions. And Tauber occasionally used foreign currency mortgages in connection with his real estate holdings. Notwithstanding Tauber's self-serving assertions to the contrary, the record evidence persuasively establishes that Tauber was a sophisticated foreign currency trader during the time relevant to this action.

Tauber engaged in foreign currency transactions with Salomon Forex from 1987 to 1991. He was Salomon Forex' only non-institutional client during this period. Salomon Forex' complaint arises over sixty-eight foreign currency futures⁴ and options contracts that matured, and in the case of the options, were exercised in July and August of 1991. Tauber's counterclaim concerns 1,260 foreign currency futures contracts and 1,442 foreign currency options contracts. None of the contracts involved in the complaint or the counterclaim were executed on a board of trade or a formally organized exchange.⁵ They were, in other words, conducted "off-exchange."⁶

A futures contract is a contract for the purchase or sale on a specific date in the future (the "trade date") of a specified amount of foreign currency at an agreed value. When the trade date arrives, the parties are obligated to consummate the transaction by delivery or receipt of the currency at the agreed price. Tauber and Salomon Forex both acted as buyers and sellers in their futures contracts. Frequently, they arranged off-setting transactions involving exactly the same amount of foreign currency in lieu of actual delivery or receipt of currency. The precise form of the set-off varied depending on market conditions, the investment strategies of the parties, and the like. The futures contract inured to the benefit of the buyer if the agreed price turned out to be lower than the market price on the trade date and to the seller if the agreed price was higher.

Options contracts function differently. In an options contract, one party pays the other a fee for the right — or option — to purchase or sell a specific amount of foreign currency on a future date certain at an agreed price. At various times during the course of their dealings, both Tauber and Salomon Forex held purchase or sale options offered by the other. If on the agreed date the transaction benefitted the option holder, the option holder exercised it, and the offering party was then obligated to purchase or sell foreign currency as specified in the contract. Usually, but not always, Tauber supplanted actual delivery or receipt of the foreign currency with an off-setting transaction.⁷ If exercising the option would not be advantageous, the option holder did nothing and merely sacrificed the amount of the fee.

Tauber generally provided collateral, usually consisting of letters of credit or secured interests in other assets, for the foreign currency contracts made with Salomon Forex. In the event Tauber was unable to meet his contractual obligations, due to an inability to pay for currency he was obligated to purchase or to provide currency he was obligated to sell, Salomon Forex could look to the collateral to cover the resulting indebtedness. This case stems in part from Tauber's failure to post adequate security.

Specifically, by letter dated September 10, 1990, Tauber acknowledged his exposure to Salomon Forex to be approximately $24 million. He promised to provide additional security. By letter agreement dated February 21, 1991, the parties agreed to interim measures to protect Salomon Forex against losses incurred as a result of Tauber's foreign currency trading. These arrangements were to continue until August 31, 1991. Tauber failed to comply with the terms of this letter agreement, as well as with subsequent written and oral agreements to post additional collateral made as late as May 1991. Thus, when $25,831,453.01 became due and payable by Tauber under the sixty-eight contracts that matured in July and August 1991, Salomon Forex was inadequately secured. This lawsuit ensued.

ANALYSIS

The threshold issue raised by the parties' motions is whether the disputed foreign currency contracts violated the CEA. If so, the contracts would be unenforceable as a matter of law, and the controversy would cease in so far as the enforceability of the contracts is concerned. If, on the other hand, the contracts did not violate the CEA, the Court would then need to consider defendants' other defenses to contract formation and enforceability. For the purposes of this case, divining whether the contracts violated the CEA entails two steps. First is the question whether the contracts are exempt from the CEA under the so-called "Treasury Amendment," 7 U.S.C. § 2. If so, the inquiry under the CEA ends. If not exempt, the second question is whether the contracts are exempt under any other CEA provision apart from the Treasury Amendment.⁸

Congress enacted the CEA, as amended, 7 U.S.C. §§ 1 et seq. (1980 & Supp.1992), to combat excessive speculation and price manipulation in commodity trading involving future delivery as commonly conducted on a board of trade. See 7 U.S.C. § 5. The CEA established the Commodity Futures Trading Commission (the "CFTC"), see 7 U.S.C. § 4a, and empowered it to regulate commodity trading for future delivery conducted on boards of trade in accordance with the regulatory scheme embodied in the statute. See 7 U.S.C. §§ 1 et seq. See generally Statutory Interpretation Regarding Trading in Foreign Currencies For Future Delivery, 50 Fed.Reg. 42983, 1984-86 Transfer Binder Comm.Fut.Law Rep. ¶ 22,750, at 31,121 (Oct. 23, 1985) (the "CFTC Statement"). Prior to 1974, the CEA governed only certain enumerated, generally agricultural commodities. See 7 U.S.C. § 2 (1970). Over the years, Congress modified and expanded the CEA's definition of "commodity". Significantly, in 1974, Congress enlarged the definition effectively to include foreign currency and other financial instruments.⁹See Commodity Futures Trading Commission Act of 1974, Pub.L. No. 93-463, 88 Stat. 1389 (1974) (codified as amended at 7 U.S.C. § 2). The resulting definition of "commodity" is encyclopedic:

The word "commodity" shall mean wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions as provided in

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