Westlake v. Abrams

• Citation: 504 F. Supp. 337
• Decision Date: 26 November 1980
• Docket Number: Civ. A. No. C78-555A.
• Parties: Robert G. WESTLAKE, Individually, and on behalf of all other persons similarly situated v. Alan ABRAMS, a/k/a James A. Carr and Charles P. LeMieux III, Individually and as Co-Partners doing business under the firm name of "Lloyd, Carr & Co.," James A. Brian, John Cosulich, Thomas LaBus, Charles J. Hecht, Noel A. Gage, and Robert Waldheim, Charles A. Wathen, Michael D. Shuster and Ralph R. Zolla, Individually and as representatives of all other persons similarly situated.
• Court: U.S. District Court — Northern District of Georgia

504 F. Supp. 337

Robert G. WESTLAKE, Individually, and on behalf of all other persons similarly situated v. Alan ABRAMS, a/k/a James A. Carr and Charles P. LeMieux III, Individually and as Co-Partners doing business under the firm name of "Lloyd, Carr & Co.," James A. Brian, John Cosulich, Thomas LaBus, Charles J. Hecht, Noel A. Gage, and Robert Waldheim, Charles A. Wathen, Michael D. Shuster and Ralph R. Zolla, Individually and as representatives of all other persons similarly situated.

Civ. A. No. C78-555A.

United States District Court, N. D. Georgia, Atlanta Division.

November 26, 1980.

Albert Sidney Johnson, Atlanta, Ga., Hoffman and Hertzig, Carl H. Hoffman, Coral Gables, Fla., for plaintiff.

Charles J. Hecht, New York City, pro se.

King & Spalding, Michael C. Russ, Atlanta, Ga., Robert E. McLaughlin, Sandra C. Steele, Boston, Mass., for defendants.

ORDER

MOYE, Chief Judge.

This action was brought by a purchaser of two commodity futures options from Lloyd, Carr & Co. (hereinafter Lloyd, Carr) under the Securities Act of 1933, 15 U.S.C. § 77a et seq. (hereinafter the Securities Act); the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (hereinafter the Exchange Act); the rules and regulations promulgated thereunder by the Securities and Exchange Commission (SEC); the Commodity Exchange Act, 7 U.S.C. § 1 et seq., as amended by the Commodity Futures Trading Commission (CFTC) Act of 1974; the rules and regulations promulgated thereunder by the CFTC; and the common law. The case is presently before the Court on defendant Noel A. Gage's motion for summary judgment.

The complaint, filed March 30, 1978, alleges that plaintiff purchased on October 14, 1977, and October 31, 1977, from defendant Lloyd, Carr, a commodity futures option broker, certain interests denominated "commodity futures options." Plaintiff contends that these interests constituted securities within the meaning of section 2(1) of the Securities Act¹ and section 3(a)(10) of the Exchange Act² and that Lloyd, Carr did not properly register these alleged securities with the SEC as required by section 5 of the Securities Act. It is further alleged that the sale of said securities involved fraudulent and misleading statements by Lloyd, Carr to investors within the meaning of sections 12 and 17(a) of the Securities Act and section 10(b) of the Exchange Act and Rule 10b-5 of the SEC promulgated thereunder.

In the alternative plaintiff argues that if the interests which he purchased are not considered securities, then Lloyd, Carr violated the Commodity Exchange Act, as amended, by selling interests in commodity futures options without being properly registered with the CFTC as a futures commission merchant as required by Rule 32.3 of the CFTC and by selling commodity futures options not preceded or accompanied by a disclosure statement meeting the requirements of Rule 32.5 of the CFTC. Plaintiff further alleges that the sale by defendants of said commodity futures options were in violation of section 405 of the CFTC Act of 1974 and Rule 32.9 of the CFTC.

Finally plaintiff alleges that the activities of the defendants herein amounted to common law fraud and deceit.

Plaintiff seeks to recover actual and punitive damages for himself³ and for a class of similarly situated purchasers⁴ for losses resulting from their purchases, with interest thereon, together with the costs of this suit and reasonable attorney's fees.

Defendant Noel A. Gage (Gage), whose motion for summary judgment is considered herein, was named as a defendant because the plaintiff alleges that Gage acted as general counsel for Lloyd, Carr and was, by virtue of and through his activities in that position, a "controlling person" of Lloyd, Carr within the meaning of section 15 of the Securities Act and section 20 of the Exchange Act, and in addition was an "aider and abettor" in the illegal acts, practices, and course of business allegedly pursued by Lloyd, Carr.

Defendant Gage originally moved to dismiss and for summary judgment on May 30, 1978. On July 18, 1979, the Court entered an order denying Gage's motion to dismiss but granting his motion for summary judgment. In denying Gage's motion to dismiss the Court held that the allegations contained in plaintiff's complaint were sufficient to withstand a motion to dismiss as to the questions of whether the plaintiff's interests in commodity futures options were securities and whether the complaint pled fraud with sufficient particularity. The Court reserved judgment on the issue of whether an implied private cause of action was created under the Commodity Exchange Act, as amended. In granting defendant's motion for summary judgment, the Court held that Gage could not be found legally culpable for the allegedly unlawful activity of Lloyd, Carr.

Subsequently, plaintiff moved the Court to vacate or reconsider its granting of summary judgment, urging that he had not had sufficient opportunity to conduct discovery in order to demonstrate Gage's involvement in the activities upon which liability could be based. On September 14, 1979, this Court vacated its order of July 18, 1979, in order to allow the plaintiff time for further discovery so that he might attempt to establish a factual basis to overcome Gage's motion for summary judgment.

Following the Court's order vacating summary judgment, both plaintiff and defendant Gage have conducted substantial discovery, including the depositions of Gage, plaintiff Westlake, and Frank J. Post, former staff counsel to Lloyd, Carr. In addition, documents in defendant Gage's law offices in Southfield, Michigan, have been examined. Plaintiff and defendant Gage have now briefed the issues in light of the additional discovery and the Clerk has resubmitted defendant Gage's motion for summary judgment to this Court for determination.

In his briefs in support of his motion for summary judgment defendant argues that summary judgment is appropriate here because first, no security was sold to the plaintiff by Lloyd, Carr, thus rendering the federal securities acts inapplicable, and second, no implied private cause of action arises out of the Commodities Exchange Act, as amended. The Court will consider defendant's motion with respect to the federal securities laws, but will again defer ruling on the motion to the extent it is based on the lack of an implied cause of action under the commodities laws. The Court is deferring ruling on that portion of defendant's motion because the Fifth Circuit Court of Appeals is currently considering the questions so presented, and already has heard argument in a case similar to this on June 4, 1980.⁵ Because this Court will be bound by the Fifth Circuit's decision concerning an implied cause of action under the Commodity Exchange Act, it would be a waste of judicial resources for this Court to consider defendant's motion with respect to that issue since a Fifth Circuit decision should be soon forthcoming. However, plaintiff's alternative avenue of recovery, the federal securities laws, is ripe for determination and is herein considered.

I.

In order for the interests purchased by plaintiff to constitute securities under section 2(1) of the Securities Act and section 3(a)(10) of the Exchange Act they must meet the definitional test prescribed in SEC v. W. J. Howey Co., 328 U.S. 293, 298-299, 66 S.Ct. 1100, 1102-1103, 90 L.Ed. 1244 (1946). There the Court stated that:

"An investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.

..."

As was noted in SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 477 (5th Cir. 1974), this test subsumes within it three elements: first, the existence of an investment of money; second, that the scheme functions as a common enterprise; and third, that profits of the enterprise are derived solely from the efforts of others. The Court will first determine whether the complaint, coupled with the depositions and documents presently before the Court, is sufficient to withstand a motion for summary judgment based on the ground that the Howey test has not been met, and will then decide whether a cause of action exists under the federal securities laws even if the commodity futures option is a security in light of the exclusive jurisdiction granted to the CFTC over such options by the 1974 amendments to the Commodity Exchange Act.

Plaintiff's amended complaint alleges in Count I, ¶ 18(a) that Lloyd, Carr recommended certain commodity futures contracts to him and, according to ¶ 18(c) of said Count undertook to advise him of the most opportune time either to sell or to exercise the option and specific commodity futures contracts. Plaintiff alleges in ¶ 18(d) of Count I that he paid money to Lloyd, Carr for the purchase of an investment in interests denominated "commodity futures options" with the expectation of receiving said recommendations, advice, and counselling and receiving profits or a return on the investment. Said profits were entirely dependent on the success of Lloyd, Carr in continuing to be able to render said advice, according to ¶ 18(e). Plaintiff further alleges that the inducement for his purchase of the options consisted of the representations and promises of Lloyd, Carr (¶ 18(g)), and that neither Lloyd, Carr nor its representatives owned the underlying commodity futures contracts, nor escrowed for the purpose of acquiring such contracts any portion of the payments made by named plaintiff (¶ 18b).

Plaintiff has therefore alleged that Lloyd, Carr sold him what the commodities industry has labeled "naked options." As explained in British American Commodity Options Corp. v. Bagley, 552 F.2d 482 (2d Cir. 1977):

The commodities business operates as a marketplace of contracts. The contracts traded are for the purchase, or sale, of specific

...