Opinion ID: 741862
Heading Depth: 2
Heading Rank: 2

Heading: The In Pari Delicto Defense

Text: 45 Even if Peltz had not given Weingarten actual authority to make the trades, SHB should bear no responsibility for the margin call. Peltz was at least equally culpable with SHB for creating the short position. Thus, SHB is not liable because in pari delicto potior est conditio defendentis: when there is mutual wrongdoing, the law favors the defending party. See Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306, 105 S.Ct. 2622, 2626-27, 86 L.Ed.2d 215 (1985). 46 The in pari delicto defense is used sparingly, and is narrowly defined in litigation under federal regulatory statutes. See Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 145, 88 S.Ct. 1981, 1987-88, 20 L.Ed.2d 982 (1968) (not recognizing defense in antitrust action); Ross v. Bolton, 904 F.2d 819, 824 (2d Cir.1990) (recognizing defense in securities case). To ensure that the defense is narrowly applied in securities cases the Supreme Court in Bateman Eichler, Hill Richards, Inc. v. Berner, set forth a two-part test for the application of the defense in private causes of action under the securities law. Bateman Eichler, 472 U.S. at 310-11, 105 S.Ct. at 2628-29. The Bateman Eichler Court noted that the doctrine may bar an action where (1) as a direct result of his own actions, the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress, and (2) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public. Id. 47 The first prong of the test sets forth the essential elements of the doctrine. See Pinter v. Dahl, 486 U.S. 622, 633, 108 S.Ct. 2063, 2071, 100 L.Ed.2d 658 (1988). Courts apply the defense where the plaintiff has participated in some of the same sort of wrongdoing as the defendant, Bateman Eichler, 472 U.S. at 307, 105 S.Ct. at 2627, and should not allow the defense unless the degrees of fault are essentially indistinguishable or the plaintiff's responsibility is clearly greater. Pinter, 486 U.S. at 636, 108 S.Ct. at 2073. The second prong of the Bateman Eichler test instructs courts to consider the public policy implications of applying the defense. 48 Assuming SHB committed a wrong, Peltz's responsibility for creating the margin call is clearly greater. Under the CEA it is unlawful to attempt to manipulate or to manipulate the price of any commodity in interstate commerce. See 7 U.S.C. § 13b. As Weingarten testified, he and Peltz arranged to short sell copper contracts and then depress the price of copper contracts to reap a profit. The recorded telephone conversations between Peltz and Weingarten paint a clear picture of commodities price manipulation. The district court did not err when it concluded that the Peltz-Weingarten agreement was in violation of the CEA. Peltz's conduct thus falls within first prong of the Bateman Eichler test: his manipulation of the commodities market was far more reprehensible than SHB's violation of the regulations promulgated under the CEA. 49 Peltz seeks to evade the in pari delicto defense by noting that the wrongdoing of which he is accused (i.e., manipulating markets), is not the same wrongdoing he seeks to redress (i.e., SHB's clearing Weingarten's transactions through Peltz's account without proper authorization in violation of 17 C.F.R. § 166.2). 50 Peltz's hypertechnical interpretation of the in pari delicto doctrine is outdated. At one time this Court recognized that the in pari delicto defense was available only when the fault of the parties [is] 'clearly mutual, simultaneous, and relatively equal,'  Mallis v. Bankers Trust Co., 615 F.2d 68, 76 n. 6 (2d Cir.1980) (citation omitted), and that mutuality of fault meant that the parties had to have a related purpose, or act as confederates. Our limitation of the defense reflected the general tenor set by the Supreme Court in Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 88 S.Ct. 1981, 20 L.Ed.2d 982 (1968), modified, Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984), which we, as many other courts, saw as a signpost that the High Court had little enthusiasm for the in pari delicto defense. Ross, 904 F.2d at 825. 51 That message changed somewhat, however, when the Supreme Court decided Bateman Eichler, and we noted that change in tone when we decided Ross v. Bolton. Id. In Ross, the plaintiff agreed to purchase securities from R.E. Bolton & Co., Inc. (Bolton) and resell the securities instantaneously at a higher, agreed upon price. Id. at 821-22. Defendant Bear Stearns & Co. (Bear Stearns) acted as the clearing broker for the trades, but there was no evidence that it knew of the prearranged scheme. Id. at 820. When the plan did not work, Ross sued, among others, Bear Stearns, alleging that Bear Stearns fraudulently misled the plaintiffs into believing that Bolton was solvent. Id. at 822. 52 Ross declared that if he had known Bolton's true financial condition, he would not have involved himself in the scheme. We held that because Ross intentionally entered into the prearranged trade with [Bolton], with its supposed guaranteed profit, he rather than Bear Stearns must bear the responsibility for the risks of the transaction. Id. at 825. The in pari delicto defense, we concluded, served as a complete bar to the plaintiff's suit against Bear Stearns. 53 Ross illustrates that we now recognize a broader notion of mutuality of fault, and, consequently, how Peltz's argument misses the mark. The alleged wrong committed by Bear Stearns in Ross, misleading the plaintiff into believing that Bolton was solvent, was qualitatively different from the wrong in which Ross participated--a prearranged stock parking scheme. Yet, that did not stop us from allowing Bear Stearns to bar Ross's suit through the application of the in pari delicto defense. So too, although the alleged violation of the CEA by SHB in this case is of a different quality than the market manipulation in which Peltz participated, the lack of an identical nature does not destroy the defense. We conclude therefore, that the first prong of the Bateman Eichler test is satisfied. 54 So too, the second prong of the Bateman Eichler test is satisfied: preclusion of Peltz's suit will not significantly interfere with the effective enforcement of the laws and protection of the public. Au contraire, allowing his suit would significantly interfere with the enforcement of statutes designed to protect the investing public. Assuming SHB did violate the regulations promulgated under the CEA, we would overlook that ministerial wrong when to do otherwise would protect a market manipulator without any benefit to the public. 55 Accordingly, both prongs of the Bateman Eichler test having been satisfied, we hold that Peltz cannot pursue his claims.