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

Heading: The Play

Text: 4 On March 23, 1989, in the morning hours before the COMEX opened, Peltz and Weingarten met for coffee in Lord's Coffee Shop in lower Manhattan. Apparently, the two had never had prior business dealings. Despite their unfamiliarity, Peltz agreed to let Weingarten sell copper futures contracts from the floor of the COMEX that morning against Peltz's account at SHB. Peltz never gave Weingarten written authority to make trades against or otherwise control his account, and SHB never received any written authorization. 5 Weingarten and Peltz also agreed to short sell copper futures contracts, i.e., to sell contracts that one does not yet own. One who sells such a phantom contract is said to be in a short position. The short seller gambles that the market will decline and he thus expects to purchase a contract sometime in the future at a price lower than that at which he sold it. This will cover his short position, and he will realize a profit. 6 The profit potential is very high. There is, of course, the unhappy possibility that the price of copper will rise, resulting in serious economic loss. Weingarten testified that he and Peltz conspired to short sell copper contracts, and, to ensure a profit, also conspired to then depress the copper market with high volume offers to sell contracts. Once the price was depressed, Peltz was to buy these artificially reduced-price contracts to cover the short position created by Weingarten, and realize a great profit. 7 The two conspirators disagree as to how much authority Peltz gave Weingarten. Peltz says that the coffee shop agreement was that Weingarten would trade 500 contracts at prices no lower than $135.50. Peltz adds that he made clear that his position was to be flat at the end of the trading day (i.e., the short position was to be fully covered). Weingarten's version, on the other hand, was that Peltz gave him unfettered discretion to make whatever trades he thought would be profitable. 8 After the kaffeeklatsch, Peltz repaired to the SHB offices, and Weingarten to the copper pit on the floor of the COMEX. Peltz took a chair next to SHB's order clerk, in front of the commodities ticker, where he could observe the day's trade in commodities. During the morning, Weingarten phoned SHB and an employee named Eis answered. Weingarten explained that he would be doing paper for Peltz that day, to which Eis responded okay. As soon as the copper futures market opened, Weingarten began to sell huge amounts of copper contracts. 9 Throughout the fateful day, Peltz and Weingarten kept in telephonic contact. SHB recorded these conversations. While it is difficult to discern the precise conversations, it is clear that Peltz knew that Weingarten was selling more than 500 contracts, and was doing it at prices lower than $135.50. Indeed, just minutes after the market opened, Weingarten was selling copper contracts at $135.20 and $135.30. Peltz maintained a tally sheet throughout the trading day and he noted that at 10:02 AM most of Weingarten's trades were at prices below $135.50, and that by 10:55 AM Weingarten had already sold over 1000 contracts. 10 Weingarten, from the trading floor, repeatedly warned Peltz to start buying contracts to cover the mushrooming short position. In the middle of the trading day, the situation began to turn sour. A jittery Peltz warned Weingarten to be careful because people on the floor were beginning to realize that things ... [were] not normal. At 11:40 AM the two spoke. Weingarten said that he sold twelve--fourteen hundred contracts. Peltz responded that he bought only 675. Back and forth calls continued in this vein. The numbers were not adding up. 11 It was apparent by mid-afternoon that the short-selling plan was going awry. Weingarten told Peltz that COMEX officials threatened to remove him from the floor unless Weingarten could maintain $50,000 in his own personal trading account. Peltz immediately wrote Weingarten a personal check, keeping Weingarten on the trading floor, and breathing new life into the scheme. 12 At 2:30 PM, Buzzy Mayer, SHB's co-owner, first learned that SHB had acted as clearing agent for a significant amount of copper contracts. He also found out that Weingarten was the seller, and that the sales were against Peltz's account. Mayer went looking for Weingarten, who told Mayer that he had been selling all day for Peltz, and was now a few contracts short. 13 At 3:45 PM, COMEX officials summoned a representative of SHB to inform the company that, as the clearing member of the exchange involved in all these sales, it now faced a margin call for the short-selling of copper futures contracts. At 4:48 PM, Mayer called Peltz and asked him to describe the agreement with Weingarten. Peltz stated that he had agreed to only 500 or 600 contracts, but he would accept more from Weingarten so long as Peltz's position remained flat for the day. 14 By day's end, Weingarten had sold a total of 2667 contracts against Peltz's SHB account. Peltz, for his part, placed buy orders through SHB for 1165 contracts. In sum, Peltz failed to purchase the more than 1500 contracts necessary to cover fully the short position Weingarten had created. 15 Shortly after realizing that he had not fully covered his short position, Peltz telephoned SHB to protest that Weingarten had no authority to make trades against Peltz's account; and he disclaimed the short sales for which he had not purchased offsetting contracts. At 5:00 PM, SHB tried to disavow formally, or dk (literally, doesn't know), the trades with COMEX. COMEX officials rejected this effort.