Wasnowic v. Chicago Board of Trade
Decision Date | 17 November 1972 |
Docket Number | Civ. No. 69-328. |
Citation | 352 F. Supp. 1066 |
Parties | John J. WASNOWIC and Keystone Traders, Inc., Plaintiffs, v. CHICAGO BOARD OF TRADE et al., Defendants. |
Court | U.S. District Court — Middle District of Pennsylvania |
Levy, Preate & Purcell, Scranton, Pa., Warren, Hill, Henkelman & McMenamin, Scranton, Pa., Jenner & Block, Chicago, Ill., for plaintiffs.
James W. Scanlon, Scranton, Pa., Kirkland, Ellis, Hodson, Chaffetz & Masters, Chicago, Ill., for defendant Chicago Board of Trade.
Lee A. Freeman, Jr., Chicago, Ill., Albert H. Aston, Wilkes-Barre, Pa., for defendant Chicago Mercantile Exchange.
Joseph E. Gallagher, Scranton, Pa., for defendant J. Samuel Sicherman.
Defendants have requested the court to reconsider its memorandum of December 30, 1970, in which the court denied defendants' motion to dismiss for lack of jurisdiction under the Securities Exchange Act of 1934 and for invalid service of process pursuant to § 27 of that Act. Defendants' motion was denied on the grounds that, in taking the allegations of plaintiffs' complaint as true, jurisdiction was proper in that the discretionary trading account in commodities futures that the plaintiffs had with J. Samuel Sicherman, trading as J. Samuel Sicherman & Co. (hereafter Sicherman), was an "investment contract" and hence a "security" within Section 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(1) and Section 3 (a)(10) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(10). In so ruling, the court relied on two decisions of the Southern District of New York, Berman v. Orimex Trading, Inc., 291 F. Supp. 701 (S.D.N.Y.1968) and Maheu v. Reynolds & Co., 282 F.Supp. 423 (S.D. N.Y.1967); reargument denied 282 F. Supp. 428 (1968), both apparently holding that a joint account in commodities futures may constitute a "security" even if there was no pooling arrangement or finding of a "common enterprise" as part of the agreement alleged to be a security. See Maheu v. Reynolds & Co., supra at 429.1 See also, I Loss Securities Regulation 489 (2d Ed. 1961).
Defendants now raise for the first time2 their contention that the "commonality" aspect of the Maheu and Berman decisions conflicts with the Supreme Court's definition of a security as announced in S. E. C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) and Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). In support of their contention, they request the court to reconsider its prior memorandum in light of the recent Seventh Circuit opinion in Milnarik v. M-S Commodities, Inc., 457 F. 2d 274 (7th Cir. 1972); cert. denied 409 U.S. 887, 93 S.Ct. 113, 34 L.Ed.2d 144 (1972), which held, contrary to Berman and Maheu, that absent a finding of a common enterprise among investors, a discretionary account in commodities futures is not a security within the meaning of the federal securities laws. Thus, the above-cited cases represent two divergent lines of authority on this question. Inasmuch as I agree with defendants that the Milnarik court's requirement of finding a common enterprise is more consistent with the Supreme Court's definition of an "investment contract", a review of the facts and the analysis which that court used is in order.
S. E. C. v. Howey, supra, 328 U.S. at 298, 66 S.Ct. at 1103. And, in Tcherepnin v. Knight, supra, a case arising under the 1934 Act, the Court identified the existence of a common enterprise as an important aspect of their analysis:
Tcherepnin v. Knight, supra, 389 U.S. at 338-339, 88 S.Ct. at 554. In applying the Howey test in Milnarik, the court found the common enterprise element to be totally lacking:
Milnarik v. M-S Commodities, Inc. supra, 457 F.2d at 276.
Further, the court quoted with approval the following excerpts from the district court's opinion describing the arrangement:
Milnarik v. M-S Commodities, Inc., 320 F.Supp. supra at 1151-1153.
This characterization of the agreement between the parties in Milnarik could equally be used to describe the arrangement between plaintiffs and Sicherman here. As in Milnarik, nothing in the instant complaint suggests the type of common enterprise or pooling of funds for a common purpose required to convert the discretionary account plaintiffs had with Sicherman into a statutory security. The complaint simply alleges that plaintiff Keystone Traders, Inc. engaged in Plaintiffs' complaint, para. 1(d). Although, as in Milnarik, it is alleged that Sicherman had opened similar accounts with numerous customers, no claim is made that a joint enterprise existed comprised of a group of investors holding discretionary accounts with him. Indeed, the opposite appears to be the case. At various parts in the complaint, plaintiffs allege that Sicherman violated his duty to segregate and separately account for the funds in plaintiffs' account from other discretionary accounts. Plaintiffs' complaint, pars. 3, 10. And in plaintiffs' answer to defendants' renewed motion to dismiss, plaintiffs claimed that...
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