Source: http://il.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19960724_0000265.NIL.htm/qx
Timestamp: 2017-07-25 09:02:57
Document Index: 770326924

Matched Legal Cases: ['§ 6', '§ 771', '§ 78', '§ 240', '§ 1962', '§ 4', '§ 4', '§ 4', '§ 22', '§ 25', '§ 22', '§ 25', '§ 22', '§ 13', '§ 13', '§ 22', '§ 13', '§ 22', '§ 13', '§ 25', '§ 13', '§ 13', '§ 22', '§ 13', '§ 22', '§ 22', '§ 13', '§ 2', '§ 22', '§ 22', '§ 22', '§ 13', '§ 22', '§ 22', '§ 4']

| IN RE LAKE STATES COMMODITIES
IN RE LAKE STATES COMMODITIES
IN THE MATTER OF LAKE STATES COMMODITIES, INC., Consolidated Pretrial Proceeding.
MEMORANDUM OPINION AND ORDER MARVIN E. ASPEN, Chief Judge: The plaintiffs in these consolidated actions are a group of investors who allegedly lost large sums of money entrusted to Thomas Collins and Lake States Commodities. On January 25, 1996, we accepted reassignment of eleven of these actions in order to coordinate pretrial discovery and consider the merits of a single motion to dismiss that raised issues common to all the actions. Presently before us is Geldermann's motion to dismiss all counts against it. For the reasons set forth below, the motion is granted in part and denied in part, and the parties are directed to appear for a status hearing on August 9, 1996. I. Background To better understand the plaintiffs' claims, we begin with a brief sketch of the regulatory structure of the commodity futures market in America, and its two regulatory organizations: the Commodity Futures Trading Commission ("CFTC") and the National Futures Association ("NFA"). The CFTC is the federal agency entrusted with protecting the integrity and security of the commodities markets through the enforcement of the Commodities Exchange Act and its related rules and regulations. Although the CFTC does not place stringent requirements on those who trade their own funds in the market, the Commission does require anyone who handles customer funds for the purpose of trading in the commodity futures market to register with the NFA, the self-regulating body of the commodity futures market. Compl. PP 2-3.
Thus, anyone who accepts orders, money, or securities for the purpose of effectuating a purchase or sale of a commodity futures contract must register as a futures commission merchant ("FCM"). Similarly, anyone who operates a "commodity pool" of third-party funds in order to buy and sell commodity futures contracts is required to register with the NFA as a commodity pool operator ("CPO"). Direct participation in trading is not required to fall under the purview of the CFTC: those who advise others for a fee about trading futures contracts must register as commodity trading advisors ("CTA"), and a person who solicits orders or customers on behalf of a FCM, CPO, or CTA must register as an associated person ("AP"). Compl. PP 48. Beginning in 1984, Thomas Collins began soliciting customers to invest money into a commodity pool ("Collins pool") which was used to trade commodity futures. Compl. P 20. However, Collins was not registered with the CFTC or the NFA, and consequently, could not legally solicit, accept, or pool customer funds, and was prohibited from trading such funds on the commodities market. Compl. P 22. Collins nonetheless pooled such funds in an omnibus account
at Heinold Commodities ("Heinold"), and was permitted to trade them on the market. Compl PP 12, 23. He then began using Lake States Commodities (an Illinois corporation that he controlled) and its selling agents to assist him in soliciting funds, collecting money from investors, and issuing account statements relating to the Collins pool. Compl. PP 11, 21. All of this was illegal, Plaintiffs claim, because neither Collins nor any Lake States employees (named as individual defendants in this action) were registered with the CFTC or NFA, and none of the risks associated with the commodities markets were explained to the investors. Compl. P 22. Nonetheless, through the use of Lake States Commodities and Heinold, Collins portrayed the Collins pool as a legitimate, profitable enterprise. Compl. P 23. In 1986, Geldermann purchased all of Heinold's stock, thereby acquiring the firm's trading records, employees, and accounts--including those accounts operated by Collins. Compl. P 24. Collins eventually closed his omnibus account, and along with the individual defendants opened several joint trading accounts at Geldermann, although he failed to complete the necessary opening documentation for these joint accounts. Compl. P 25. At some point, the plaintiffs claim, Collins and the defendants began to solicit new investors not only to bolster the credibility of the Collins pool, but also to pay off prior investors with the "profits" obtained from new investments. In other words, Collins and the individual defendants are alleged to have utilized the pool as a vehicle for a Ponzi scheme.
Compl. PP 26-27. The plaintiffs contend that Geldermann, a registered FCM, received commissions on every trade Collins conducted, and thus had an incentive to perpetuate and assist his fraud. Compl. P 41. They claim that Geldermann provided Collins with a desk and a phone at the Geldermann booth on the floor of the MidAmerica Commodity Exchange, thereby enhancing Collins' appearance of legitimacy. Compl. P 30. Geldermann treated Collins' individual and joint accounts as one omnibus account, taking instructions to effect trades from Lake States employees not listed on the accounts. Compl. P 31. Geldermann also permitted Collins to write his own orders on Geldermann order forms--a task which only Geldermann employees were authorized to perform. Compl. P 31. In August 1988, Geldermann's parent corporation, ConAgra, hired James Fuller as an audit supervisor. Fuller was aware that Collins had previously skirted various rules of the CFTC and NFA, and warned senior Geldermann officers of problems if they continued doing business with Collins. Fuller was allegedly told by these officers that Collins had plenty of money to trade, and that any potential rule violations would be ignored at that time. Compl. P 32. Fuller continued his investigation of Collins and his commodity pool, and discovered that Geldermann was allowing Collins to improperly transfer trades and funds between accounts with different ownership, and to open joint accounts without proper documentation. Moreover, Fuller believed Geldermann was fostering the market's favorable image of Collins by allowing him to pool third-party funds in several joint accounts, and by providing him with a desk and phone on the exchange. When informed by Fuller of these problems, Geldermann's officers allegedly told their auditor to stop investigating Collins. Compl. PP 33-35. The plaintiffs contend that in late 1989 Geldermann began taking a more active role in perpetrating the Lake States/Collins fraud. In October 1989, the CFTC began an investigation into Collins, and subpoenaed Geldermann's records regarding his trading accounts at the firm. The plaintiffs allege, however, that because Geldermann had improperly opened many joint accounts for Collins, Geldermann surreptitiously completed and back-dated much of the required documentation before providing it to the CFTC. Compl. P 36. In addition, Geldermann's legal department began monitoring the CFTC investigation, and learned (1) that Collins had accepted large amounts of third-party funds to trade commodity futures without registering with the CFTC or NFA, (2) that Geldermann checks issued to Collins had been endorsed over to third-parties, (3) that Lake States had issued phoney trading account statements from Heinold--after Geldermann had purchased the company--indicating greatly inflated account balances, (4) that Lake States was operating a customer commodities business out of its offices, and (5) that the individual defendants--selling agents for Collins and Lake States--had asserted their Fifth Amendment privilege against self incrimination during depositions taken by the CFTC. Compl. PP 37-45.
The plaintiffs maintain that despite all this information, Geldermann's officers still refused to close down Collins and Lake States, allegedly because his trading accounted for a large portion of Geldermann's business. Compl. PP 41, 46. The plaintiffs claim they made most of their investments with Collins after May 1990, when Geldermann was aware of his fraudulent and illegal activities, and that they gave Collins their money because of the appearance of legitimacy and profitability fostered by Geldermann and the individual defendants. Compl. PP 47-48. They allege that the Ponzi scheme collapsed in June 1994 and Collins absconded with their stakes.
Various investors filed these lawsuits against the individual defendants and Geldermann,
bringing claims under the Commodities Exchange Act ("CEA"), 7 U.S.C. §§ 6d, 6b, 6o, 13(a), the Securities and Exchange Act of 1933 ("1933 Act"), 15 U.S.C. §§ 771(2), 77o, the Securities and Exchange Act of 1934("1934 Act"), 15 U.S.C. §§ 78j(b), 78t(a), Securities and Exchange Commission Rule 10b-5 ("Rule 10b-5"), 17 C.F.R. § 240. 10b-5, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c), the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1-505/12, and common law fraud. Geldermann now moves under Federal Rules of Civil Procedure 12(b)(6) and 9(b) to dismiss all claims against it. II. Motion to Dismiss Standard Dismissal under Rule 12(b)(6) shall be granted only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Chaney v. Suburban Bus Div. of the Regional Transp. Auth., 52 F.3d 623, 627 (7th Cir. 1995). While at this stage in the proceedings we accept as true all well pleaded allegations in the complaint and any reasonable inferences that may be drawn from them, "[a] complaint which consists of conclusory allegations unsupported by factual assertions fails even the liberal standard of Rule 12(b)(6)." Palda v. General Dynamics Corp., 47 F.3d 872, 874-75 (7th Cir. 1995). III. Discussion A. Aiding and Abetting Under the CEA (Counts II-IV) In Counts II, III, and IV, the plaintiffs seek to hold Geldermann liable for Collins' violations of § 4b, § 4o, and § 4d of the CEA.
In pertinent part, § 22 of the CEA provides: Any person ... who violates this chapter or who willfully aids, abets, counsels, induces, or procures the commission of a violation of this chapter shall be liable for actual damages resulting from one or more of the transactions referred to in subparagraphs (A) through (D) of this paragraph and caused by such violation to any other person . . . . . . . (C) who purchased from or sold to such person or placed through such person an order for the purchase or sale of . . . (iii) an interest or participation in a commodity pool . . . . 7 U.S.C. § 25(a)(1) (emphasis added). Section § 22(a)(2) states that, except under certain circumstances not relevant here, "the rights of action authorized by this subsection . . . shall be the exclusive remedies under this chapter available to any person who sustains loss as a result of any alleged violation of this chapter." 7 U.S.C. § 25(a)(2). Thus, under the plain language of these provisions, a plaintiff must demonstrate that a defendant is one of the "such persons" listed in § 22(a)(1)(A)-(D) in order to hold that defendant liable under the CEA. Damato v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 878 F. Supp. 1156, 1161 (N.D. Ill. 1995); Vildaver v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 1995 U.S. Dist. LEXIS 2870, No. 94 C 3041, 1995 WL 106396, at *4 (N.D. Ill. March 9, 1995); Davis v. Coopers & Lybrand, 787 F. Supp. 787, 794 (N.D. Ill. 1992); Grossman v. Citrus Assocs. of the N.Y. Cotton Exch., 706 F. Supp. 221, 230-31 (S.D.N.Y. 1989). Applying these provisions to the instant case leads to the conclusion that unless Geldermann sold interests in the Collins pool to the plaintiffs, or accepted orders for such purchases, no cause of action under the CEA will lie against this defendant. Plaintiffs concede that no such allegation against Geldermann is made in their complaints. Instead, they argue that despite the clear language of the statute, Geldermann may still be held liable under the CEA because it "aided and abetted" Collins in the commission of his fraud. In support, the plaintiffs point to § 13(a) of the CEA, which provides that "any person who commits, or who willfully aids, abets, counsels, induces, or procures the commission of, a violation of the provisions of this chapter . . . may be held responsible for such violation as a principal." 7 U.S.C. § 13c(a). One court in this district has accepted this argument, and permitted CEA claims against two defendants who were not alleged to fall under the "such persons" language of § 22(a)(1)(A)-(D). In Re ContiCommodity Servs., Inc. Sec. Litig., 733 F. Supp. 1555, 1567 (N.D. Ill. 1990). However, two other courts in this district have rejected the contention that private parties may proceed under § 13(a), reasoning that Congress expressly stated its intent to have § 22(a) constitute the sole private damage remedy under the CEA, and rejecting the notion that courts should nonetheless imply a private right of action under § 13(a) for aiding and abetting. Damato, 878 F. Supp. at 1161 n.3; Vildaver, 1995 WL 106396, at *4 n.3; Davis, 787 F. Supp. at 795 n.15. We are persuaded that this latter position is correct. Congress could not have more clearly pronounced its intention to create only one vehicle for private causes of action under the CEA, see 7 U.S.C. § 25(a)(2), and given recent Supreme Court teachings on statutory construction, we are loathe to imply a private right of action into § 13(a). Cf. Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 128 L. Ed. 2d 119, 114 S. Ct. 1439, 1447-48 (1994) (refusing to imply private cause of action for aiding and abetting Rule 10b-5 violation). Rather, we read § 13(a) to empower the CFTC, the public agency entrusted with enforcing the CEA, to bring actions against aiders and abettors of § 22(a) violations. To be sure, § 13(a) was amended in 1983 to remove language that limited its applicability to administrative proceedings,
but we do not believe this alteration justifies construing the statute in such a way as to eviscerate the exclusivity proviso in § 22(a)(2). Rather, the better interpretation of this amendment is that it granted additional power to the CFTC to bring judicial, as well as administrative, proceedings against those who aid and abet violations of § 22(a).
Plaintiffs argue that aiding and abetting liability under § 13(a) should be inferred into the statute in the same manner as respondeat superior liability has been imputed to principals through § 2(a)(1) of the CEA.
See Bosco v. Serhant, 836 F.2d 271, 280 (7th Cir. 1987) (recognizing respondeat superior liability), cert. denied, 486 U.S. 1056 (1988). However, this contention is flawed for three reasons. First, respondeat superior is merely a means of imputing the liability of an agent to its principal; in contrast, the plaintiffs here ask us to recognize a private cause of action that reaches all those who merely aid or abet a CEA violator. Second, because principals act through their agents (sometimes exclusively), an agent's commission of the acts prohibited by § 22(a)(1)(A)-(D) may properly be imputed to the principal simply by virtue of the relationship between the two parties. Thus, it is not inconsistent with the language of the statute to hold a principal liable for the § 22(a) violations of its agent. Third, while imputing liability to principals may be accomplished by reading the respondeat superior provision of the statute in conjunction with § 22(a), no implied cause of action under § 13(a) is necessary to reach aiders and abettors under the CEA, since § 22(a)(1) already provides for the liability of aiders and abettors who also commit one of the acts listed in § 22(a)(1)(A)-(D). As discussed by the district court in Kolbeck v. LIT America, Inc., 923 F. Supp. 557, 568 (S.D.N.Y. 1996): &nbsp; Section [22] contains its own aiding and abetting language that is both explicit, and, by its terms, exclusive . . . . Thus, not only is there no need to resort to the general aiding and abetting section, but such resort is explicitly barred. By contrast, § [22] contains no language imposing respondeat superior liability. Therefore, it is entirely permissible to rely on the general respondeat superior section of the statute, 7 U.S.C. § 4, as the basis for imposing such ...