Opinion ID: 386004
Heading Depth: 1
Heading Rank: 4

Heading: private causes of action under the commodity exchange

Text: ACT PRIOR TO THE 1974 AMENDMENT 45 During the late 1940's, the 1950's, the 1960's and the early 1970's there was widespread, indeed almost general, recognition of implied causes of action for damages under many provisions of the Securities Exchange Act, including not only the antifraud provisions, §§ 10 and 15(c)(1), see Kardon v. National Gypsum Co., 69 F.Supp. 512, 513-14 (E.D.Pa.1946); Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787 (2 Cir. 1951) (Frank, J.); Fratt v. Robinson, 203 F.2d 627, 631-33 (9 Cir. 1953), but many others. These included the provision, § 6(a)(1), requiring securities exchanges to enforce compliance with the Act and any rule or regulation made thereunder, see Baird v. Franklin, 141 F.2d 238, 239, 240, 244-45 (2 Cir.), cert. denied, 323 U.S. 737, 65 S.Ct. 38, 89 L.Ed. 591 (1944), 11 and provisions governing the solicitation of proxies, see J. I. Case Co. v. Borak, 377 U.S. 426, 431-35, 84 S.Ct. 1555, 1559-61, 12 L.Ed.2d 423 (1964). The Baird case is of special importance since the claim was of failure of the New York Stock Exchange to perform its duties-a claim paralleling that asserted here against NYME. Writing in 1961, Professor Loss remarked with respect to violations of the antifraud provisions that with one exception not a single judge has expressed himself to the contrary. 3 Securities Regulation 1763-64. See also Bromberg & Lowenfels, supra, § 2.2 (462) (describing 1946-1974 as the expansion era in implied causes of action under the securities laws). When damage actions for violation of § 10(b) and Rule 10b-5 reached the Supreme Court, the existence of an implied cause of action was not deemed worthy of extended discussion. Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971); Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). 12 Implied private causes of action under other statutes administered by the SEC were also widely recognized, see, e. g., Goldstein v. Groesbeck, 142 F.2d 422, 426-27 (2 Cir.), cert. denied, 323 U.S. 737, 65 S.Ct. 36, 89 L.Ed. 590 (1944) (Public Utility Holding Company Act); Cogan v. Johnston, 162 F.Supp. 907 (S.D.N.Y.1958); Schwartz v. Bowman, 156 F.Supp. 361 (S.D.N.Y.1957), appeal dismissed but holding on this point approved, Schwartz v. Eaton, 264 F.2d 195, 197-98 & n.5 (2 Cir. 1959); Brown v. Bullock, 194 F.Supp. 207, 220-21 (S.D.N.Y.), aff'd, with appellant conceding this point, 294 F.2d 415, 418 (2 Cir. 1961) (Investment Company Act); 13 see also Caplin v. Marine Midland Grace Trust Co., 439 F.2d 118, 123 n.5 (2 Cir. 1971) (dictum), aff'd, 406 U.S. 416, 426 n.17, 92 S.Ct. 1678, 1684 n.17, 32 L.Ed.2d 195 (1972) (Trust Indenture Act). These statutes contained a panoply of other remedies-enforcement by the SEC, suspension, civil fines, criminal penalties, and some express private actions-which, with the exception of the administrative reparations remedy against one type of violator, were every bit as or more extensive than those in the CEA, but arguments that such provisions negated an implied private cause of action were regularly and firmly rejected, see, e. g., Judge Clark's much cited opinion in Baird v. Franklin, supra, 141 F.2d at 244-45; Goldstein v. Groesbeck, supra, 142 F.2d at 426-27; Fratt v. Robinson, supra, 203 F.2d at 632; Dann v. Studebaker-Packard Corp., 288 F.2d 201, 208-09 (6 Cir. 1961). The question here is not whether all these decisions were wrong in the light of Supreme Court opinions of the past four years, as the dissent necessarily implies, but whether the 1974 Congress was not justified in assuming they would be followed with respect to the CEA. 46 Neither the generality and near unanimity of such interpretations of statutes regulating unfair securities practices, for which the CEA was the analogue with respect to futures trading, 14 nor similar decisions in other fields, e. g., Reitmeister v. Reitmeister, 162 F.2d 691 (2 Cir. 1947) (action for damages implied from statute making interception of telephone calls a crime) (L. Hand, J.); Fitzgerald v. Pan American World Airways, 229 F.2d 499 (2 Cir. 1956) (action for damages implied from anti-discrimination provision of Civil Aeronautics Act although express remedies were complaint to CAB and criminal sanctions), were at all novel. They rested on principles recognized in a line of Supreme Court decisions going back to Texas & Pacific R. Co. v. Rigsby, 241 U.S. 33, 36 S.Ct. 482, 60 L.Ed. 874 (1916). Rigsby sustained the right of a switchman to recover damages for violation of the Federal Safety Appliance Acts although the only express sanctions were penal. The Court there stated: 47 A disregard of the command of the statute is a wrongful act, and where it results in damage to one of the class for whose especial benefit the statute was enacted, the right to recover damages from the party in default is implied according to a doctrine of the common law expressed in 1 Com. Dig., tit. Action upon Statute (F), in these words: So, in every case, where a statute enacts, or prohibits a thing for the benefit of a person, he shall have a remedy upon the same statute for the thing enacted for his advantage, or for the recompense of a wrong done to him contrary to the said law. (Per Holt, C. J., Anon., 6 Mod. 26, 27.) 241 U.S. at 39, 36 S.Ct. at 484. 48 Following Rigsby the Supreme Court recognized implied causes of action on numerous occasions, see, e. g., Wyandotte Transportation Co. v. United States, 389 U.S. 191, 88 S.Ct. 379, 19 L.Ed.2d 407 (1967) (sustaining implied cause of action by United States for damages under Rivers and Harbors Act for removing negligently sunk vessel despite express remedies of in rem action and criminal penalties); United States v. Republic Steel Corp., 362 U.S. 482, 80 S.Ct. 884, 4 L.Ed.2d 903 (1960) (sustaining implied cause of action by United States for an injunction under the Rivers and Harbors Act); Tunstall v. Locomotive Firemen & Enginemen, 323 U.S. 210, 65 S.Ct. 235, 89 L.Ed. 187 (1944) (sustaining implied cause of action by union member against union for discrimination among members despite existence of Board of Mediation); Sullivan v. Little Hunting Park, Inc., 396 U.S. 229, 90 S.Ct. 400, 24 L.Ed.2d 336 (1969) (sustaining implied private cause of action under 42 U.S.C. § 1982); Allen v. State Board of Elections, 393 U.S. 544, 89 S.Ct. 817, 22 L.Ed.2d 1 (1969) (sustaining implied private cause of action under § 5 of the Voting Rights Act despite the existence of a complex regulatory scheme and explicit rights of action in the Attorney General); and, of course, the aforementioned decisions under the securities laws. As the Supreme Court itself has recognized, the period of the 1960's and early 1970's was one in which the Court had consistently found implied remedies. Cannon v. University of Chicago, 441 U.S. 677, 698, 99 S.Ct. 1946, 1958, 60 L.Ed.2d 560 (1979); id. at 718, 99 S.Ct. at 1968 (Rehnquist, J., concurring) (Cases such as J. I. Case Co. v. Borak ... and numerous cases from other federal courts, gave Congress good reason to think that the federal judiciary would undertake this task). See generally Note, Implying Civil Remedies from Federal Regulatory Statutes, 77 Harv.L.Rev. 285 (1963). 49 Given so many cases implying private rights of action under a broad range of statutes, both cognate (as in the instance of the securities legislation) and otherwise, supported by a goodly number of Supreme Court decisions and the reasoning behind them, 15 it was scarcely surprising that the courts that considered the question prior to the 1974 amendments unanimously upheld the implication of a private cause of action under the CEA. Indeed in the climate then prevailing it would have been almost unthinkable for the lower courts to have held that administrative and penal remedies were adequate for the enforcement of private claims for economic loss caused by violation of this important effort by Congress to regulate the commodity futures markets. And they did not. The first reported case, frequently cited in later decisions, was Goodman v. H. Hentz & Co., 265 F.Supp. 440 (N.D.Ill.1967). 16 The unbroken line of decisions upholding a private right of action under pre-1974 law includes cases from all of the major centers of activity in the commodity futures field. Anderson v. Francis I. duPont & Co., 291 F.Supp. 705, 710 (D.Minn.1968); Hecht v. Harris, Upham & Co., 283 F.Supp. 417, 437 (N.D.Cal.1968), modified, 430 F.2d 1202 (9 Cir. 1970); United Egg Producers v. Bauer International Corp., 311 F.Supp. 1375, 1384 (S.D.N.Y.1970); Booth v. Peavey Company Commodity Services, 430 F.2d 132, 133 (8 Cir. 1970); McCurnin v. Kohlmeyer & Co., 340 F.Supp. 1338, 1343 (E.D.La.1972), aff'd, 477 F.2d 113 (5 Cir. 1973); Gould v. Barnes Brokerage Co., Inc., 345 F.Supp. 294, 295 (N.D.Tex.1972); Johnson v. Arthur Epsey, Shearson, Hamill & Co., 341 F.Supp. 764, 766 (S.D.N.Y.1972); Arnold v. Bache & Co., 377 F.Supp. 61, 65 (M.D.Pa.1973); Deaktor v. L. D. Schreiber & Co., 479 F.2d 529, 534 (7 Cir.), rev'd on other grounds sub nom. Chicago Mercantile Exchange v. Deaktor, 414 U.S. 113, 94 S.Ct. 466, 38 L.Ed.2d 344 (1973) (per curiam); Seligson v. New York Produce Exchange, 378 F.Supp. 1076, 1084 (S.D.N.Y.1974), aff'd sub nom. Miller v. New York Produce Exchange, 550 F.2d 762 (2 Cir.), cert. denied, 434 U.S. 823, 98 S.Ct. 68, 54 L.Ed.2d 80 (1977). 50 It is true that most of these cases concerned fraud by a broker against his customers or churning of a customer's account, which was clearly within § 4b of the Act, but none stressed the broker-customer relation as either the basis or the limit of liability. And several did not involve fraud practiced by a broker on his customers. The most important of these is Deaktor v. L. D. Schreiber & Co., 479 F.2d 529 (7 Cir.), rev'd on other grounds sub nom. Chicago Mercantile Exchange v. Deaktor, 414 U.S. 113, 94 S.Ct. 466, 38 L.Ed.2d 344 (1973). Two cases were before the court. Plaintiffs in the first case sued the Exchange and various members alleging that the defendants manipulated the futures market for frozen pork bellies, a violation of CEA § 9(b), 7 U.S.C. § 13(b), artificially raising the price and thereby injuring those who, like the Deaktor plaintiffs, had sold short and were forced to liquidate their positions at higher prices (the converse of the situation of the plaintiffs in our case). The Exchange was also charged with violating CEA § 5a(8), 7 U.S.C. § 7a(8), the provision requiring an exchange to enforce all bylaws, rules, regulations, and resolutions. Plaintiffs in the second case charged the Exchange with monopolizing trading in the fresh egg futures market, causing the price to fall and forcing plaintiffs to sell at artificially depressed prices. This conduct was alleged to violate the notice and hearing provisions in Rule 217(D) of the Exchange, CEA §§ 5a(8) and 9(b) (the criminal penalty provision for manipulation), 7 U.S.C. §§ 7a(8), 13(b), and the Sherman Act. The case reached the Seventh Circuit on denials of motions by the Exchange and other defendants to stay district court action pending the exercise of primary jurisdiction by the Commodity Exchange Commission. Having declined to defer to the primary jurisdiction of the Commission, the court reached the question whether private damage actions were allowable under the CEA. Citing numerous cases, the Deaktor court stated that courts which have considered the question ... have apparently uniformly concluded that such an action exists. Id. at 534. The court noted that the purpose of the Act was, in the language of the congressional reports, to insure fair practice and honest dealing on the commodity exchanges and to provide a measure of control over those forms of speculative activity which too often demoralize the markets to the injury of producers and consumers and the exchanges themselves. The court further noted that § 9(b) of the Act made it a felony to manipulate prices, and concluded that in light of this provision and the general purpose of the Act, we think the enactment is at least in part intended to protect the interests of the plaintiffs-traders in these actions, and therefore held that plaintiffs had a cause of action. Id. Thus, immediately before consideration of the 1974 amendments began, and only one year prior to their enactment by the Congress, the Court of Appeals with jurisdiction over the center where approximately 80% of all futures contracts were traded in the United States had clearly held that a private cause of action existed under the CEA-not simply for fraud by a broker on his customer but for manipulation as well. The notion, strongly emphasized by the dissent, that such a decision escaped the knowledge of those framing the amendments, seriously underrates the expertise of our lawmakers and their staffs in subjects of particular concern to them. 51 Far from undermining the Seventh Circuit's recognition of an implied cause of action, the Supreme Court's reversal, 414 U.S. 113, 94 S.Ct. 466, 38 L.Ed.2d 344 (1973) (per curiam), on the ground that the court should have deferred to the primary jurisdiction of the Commission implicitly affirmed this recognition. Noting that  'Congress has established a specialized agency that would determine either that a ... rule of the Exchange has been violated or that it has been followed ...' , the Court emphasized that  'Either judgment would require determination of facts and the interpretation and application of the Act and Exchange rules ...'  and that  'either determination will be of great help to the ... court ....'  Id. at 115, 94 S.Ct. at 467, quoting Ricci v. Chicago Mercantile Exchange, 409 U.S. 289, 307, 93 S.Ct. 573, 583, 34 L.Ed.2d 525 (1973). Thus the Court's reason for insisting on a determination by the Commission in the first instance, 414 U.S. at 116, 94 S.Ct. at 467, was that it would assist a court in hearing plaintiff's claims in the second instance. The Court did not decline to reach the issue whether plaintiffs' claims were cognizable in federal court, as the dissent asserts (p. 343); it simply assumed that they were, as the Seventh Circuit had held. 16a 52 Other cases upholding an implied cause of action outside the broker-customer relationship were United Egg Producers v. Bauer International Corp., supra, 311 F.Supp. 1375, which recognized an implied cause of action under § 9(b) on behalf of various egg producers against an import-export firm, and Seligson v. New York Produce Exchange, supra, 378 F.Supp. 1076. Seligson arose out of the much-publicized Salad Oil Swindle, and recognized an implied cause of action on behalf of the trustee in bankruptcy of a brokerage firm against the exchange, exchange officials, and the clearinghouse. 17 53 While cases based on pre-1974 facts decided after the 1974 amendment, apparently under pre-1974 law, are of less pertinence since the 1974 Congress could not have known of the decisions, 18 they deserve mention as indicative of the uncontradicted view of the law prevailing when Congress acted. In Case & Co., Inc. v. Board of Trade, 523 F.2d 355 (7 Cir. 1975) (Cummings, Stevens, and Tone, JJ.), plaintiff sued the Board and its governors for violating §§ 5a(1) and 5a(8) of the CEA in suspending trading limits on soybean futures. The court began its discussion of liability by stating that (i)t is undisputed that a private cause of action may be maintained under the Commodity Exchange Act. See Deaktor .... Id. at 360. In Hirk v. Agri-Research Council, Inc., 561 F.2d 96, 103 n.8 (7 Cir. 1977), the same court flatly stated that (p)rivate damage actions are allowable under the CEA. See, e. g., Deaktor .... See also Bartley v. P. G. Commodities Associates, Inc., CCH Com.Fut.L.Rep. P 20,123 (1975-77 Transfer Binder) (S.D.N.Y.1975) (churning complaint under § 4b). 54 We see no need to burden this opinion with detailed examination of district court decisions concerning whether the 1974 amendments eliminated the private cause of action theretofore unanimously recognized. The courts have divided although the weight of authority is in favor of continued implication. 19 As noted, the only court of appeals to have considered the issue has held that a private cause of action should be implied. Curran v. Merrill Lynch, note 1 supra. 55