Opinion ID: 570443
Heading Depth: 1
Heading Rank: 2

Heading: The Commodities Exchange Act Count.

Text: 22 At the time the events in this case arose, section 9(b) of the Commodities Exchange Act made it illegal 23 for any person to manipulate or attempt to manipulate the price of any commodity in interstate commerce, or for future delivery on or subject to the rules of any contract market, or to corner or attempt to corner any such commodity, or knowingly to deliver or cause to be delivered for transmission through the mails or in interstate commerce ... false or misleading or knowingly inaccurate reports concerning crop or market information or conditions that affect or tend to affect the price of any commodity in interstate commerce.... 24 7 U.S.C. § 13(b) (1976). A private suit may be maintained for violations of this provision. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982). 25 The district court charged the jury that the plaintiffs could recover under their Commodities Act claim under alternative theories: (1) that the defendants manipulated the price of October 1979 live cattle futures or (2) that the defendants knowingly delivered or caused to be delivered in interstate commerce by telegraph, telephone, wireless, or other means of communication false or misleading or knowingly inaccurate reports concerning market information or conditions that affect the price of any commodity in interstate commerce. 26 The court further charged: to prove manipulation, the plaintiffs were required to prove that the defendants created an artificial price for October 1979 live cattle futures, and that they acted with the purpose or conscious object of causing or affecting a price or price trend in the market that did not reflect the legitimate forces of supply and demand influencing futures prices in the particular market at the time of the alleged manipulative activity. To prevail on the false information theory, the plaintiffs were required to prove that the defendants delivered false or misleading or knowingly inaccurate reports regarding the live cattle or live cattle futures markets, which affected the price of October 1979 live cattle futures. 27 Under either theory it was necessary for the plaintiffs to prove that Dittmer's and Refco's actions were intended to and did produce an artificially low price for the October 1979 live cattle futures contract, and that these actions were a proximate cause of their damages. The evidence before the jury was not sufficient to support the jury's special verdict that the defendants manipulate[d] the market for October 1979 live cattle futures. 28 A. The plaintiffs' claim that Dittmer and Refco created an artificially low price in the October 1979 futures contract had two elements: (1) That Dittmer's recommendations to Refco's brokers and customers from April to October 1979--that they go long in the futures market because he believed that futures prices would increase--in fact was false and designed to increase artificially the price of October futures to enable him to unload his open futures contracts in that month at higher prices and that those recommendations had the effect of increasing the price for October futures contracts; and (2) that Dittmer's delivery of a large amount of cattle on October 2 and 3 artificially lowered the futures price and unduly depressed cattle prices, which continued to fall thereafter. The plaintiffs contend that Dittmer first unloaded his cattle at high prices and then depressed the price by going short on a substantial number of contracts, and that as a result, the plaintiffs received lower than normal prices when they subsequently sold their cattle. 29 To support this theory, the plaintiffs introduced the following evidence: 30 1. The testimony in the Horn case. The plaintiffs read into the record the testimony of several former Refco brokers, given in the Horn case, about statements made over the  'Refco' hotline--a telephone line connecting Refco's headquarters in Chicago with its regional offices--urging Refco brokers and customers to go long in the October and December 1979 live cattle futures contracts. The plaintiffs state that this testimony established in detail the repeated exhortations on the Refco 'hotline'--by Dittmer and other Refco personnel--to get the firm's brokers and customers to 'go long in the cattle,' to 'load the boat,' and even to 'mortgage the farm.'  They assert that these statements were not even [Dittmer's] true opinion but worse, were part of a concerted effort to make false and misleading statements to affect the market price of live cattle futures, and that the defendants, creating an artificial demand for the contract through these extraordinary and unfounded efforts to jack up the futures market price, created an artificial price for the contract. 31 In support of the latter contention, the plaintiffs' point to the testimony of two witnesses, Ed Apel (a floor trader on the Exchange) and Roger Johnson (a former Refco broker). Apel testified that in a conversation with Dittmer on October 2, 1979 regarding the October 1979 live cattle futures market, Dittmer stated that he favored the long position and that it was news to me because up until the point of that phone call, he had always told me to get the heck out of my long cattle position. Johnson referred to a conversation he had with Dittmer in September 1979, in which Dittmer was very aggressive in making the statement that he was going to drive the cattle market low. Johnson stated that he was a little bit surprised because up to that point Refco had been very, very friendly or bullish to the cattle market and it seemed as though he had done an about turn and become quite bearish. 32 2. Trading activity in October 1979 by Dittmer and his affiliated entities. In the first three days of October 1979, Dittmer and Refco accounted for a significant portion of the total deliveries of cattle made under short positions in the October 1979 live cattle futures contract. On October 1, they made 55 percent (92 out of 166 deliveries); on October 2, 24 percent (103 out of 425); and on October 3, 57 percent (342 out of 602). For the remainder of the month, they made only three percent of total deliveries (23 out of 862). The total market deliveries in the first three days of the month (1193) constituted 58 percent of the total deliveries (2,055) for the entire month. 33 In his personal speculative account, Dittmer liquidated 300 long October futures contracts by purchasing 300 short contracts on October 2, 1979. Dittmer and his affiliates also liquidated several short positions in the October contract. The defendants allege in their brief that most of the short positions (90 in No. 192 and 150 in No. 214) in Dittmer's two personal hedge accounts were closed by buying the market on October 2. The defendants further claim that the hedge accounts of ABF/Financial Co. and Cactus Growers, Inc. (Dittmer's cattle feeding companies) held other short October live cattle positions which were closed by buying the market on October 2, 1979. The plaintiffs do not challenge these figures. 34 3. The Expert Testimony. The plaintiffs also presented, and rely upon, the testimony of two economic experts who had not testified in the Horn case; Professor Helmuth and Dr. Beyer. 35 Professor Helmuth described the operation of the cattle cash and futures markets and described a study he had made for a congressional committee about cattle futures trading. He concluded in that study that once the price of futures contracts approached the cost of feeding the cattle, the prices would drop, and that [e]vidence indicates that the predictable drops in live cattle futures prices are not reflective of fundamental supply/demand conditions and are, in fact, artificial price moves. 36 Dr. Beyer testified about trading in the October market. The plaintiffs retained Dr. Beyer to investigate two issues: (1) whether or not the futures price for live cattle in October 1979 caused the cash price for live cattle in that same month to decline, and (2) if so, the amount to which the decline in the cash price occurred because of the decline in the futures price. 37 Dr. Beyer testified that his investigation lead him to conclude (1) that the review of information on the behavior of the futures market in October 1979, ... provided to me a--an indication that there was some unusual behavior occurring in the futures market in that month for live cattle futures; (2) that the statistical test that was performed resulted in a rigorous conclusion ... that there was a causal relationship reflected in the statistical test between the futures prices and--and the cash price; and (3) that the review of the supply and demand factors in and around October 1979 suggested on balance that the behavior of the cash price in 1979, October 1979 specifically, should have been relatively stable rather than declining as it actually did. Dr. Beyer's fundamental conclusion was that there is a causal relationship between the futures price and its decline in October 1979 and decline in the cash price for live cattle in the same month. 38 Dr. Beyer did not examine or analyze Dittmer's trading activity in the October 1979 futures contract. In response to a hypothetical question based upon Dittmer's trading advice to Refco brokers and his trading activities on October 1 and 2 summarized above and assum[ing] [his] actions became known to other major traders in the marketplace, Dr. Beyer stated that a given trader could influence, could cause the price for the futures in live cattle to change. 39 The plaintiffs' theory is that they were injured because Dittmer's and Refco's trading activities depressed cattle prices after October 2, 1979, when the plaintiffs sold their cattle in the cash market. Dittmer's recommendations to Refco brokers that they go long in the futures market could not themselves have produced that result, since the effect of those purchases would have been to increase rather than to decrease the prices of the October futures contracts. The actions of Dittmer and Refco that allegedly were responsible for the decrease in cattle prices beginning in October 1979 must have been (1) their delivery of a large volume of cattle under short contract positions and (2) Dittmer's purchase of 300 short contracts on October 2. 40 There are no fixed standards or tests to apply in determining whether there has been manipulation of a commodities market. The Commodities Act does not define the term, and the test of manipulation must largely be a practical one.... The aim must be therefore to discover whether conduct has been intentionally engaged in which has resulted in a price which does not reflect basic forces of supply and demand.... Cargill, Inc. v. Hardin, 452 F.2d 1154, 1162 (8th Cir.1971), cert. denied, 406 U.S. 932, 92 S.Ct. 1770, 32 L.Ed.2d 135 (1972). 41 To establish manipulation that injured them, the plaintiffs were required to show that the post-October 2 prices in the October 1979 futures market were artificially low, i.e., lower than they would have been under the operation of normal supply and demand market forces, and that the decline in the futures price was a proximate cause of the decline in cash prices. The only theory upon which the earlier purchases by Refco brokers could have caused or contributed to that result would have been if the higher earlier prices on October futures caused a price drop beginning on October 2 that brought the futures price below what it would have been had there not been the prior purchases. As the plaintiffs stated at oral argument, the allegedly artificially-induced higher futures prices before October 1, produced a roller coaster downward effect on prices once they began to fall on October 2, and this brought prices below the level that otherwise would have prevailed. 42 There is no evidence in the record that would support a jury finding that Refco brokers' earlier purchases of the October futures contract would have had that effect, or that Dittmer knew they would do so. At most, the record would justify the conclusion that Dittmer's prior recommendations to go long increased the prices of the October contract and that the subsequent delivery of cattle and selling of October futures contracts on October 2 resulted in a decrease in prices. 43 Neither Johnson's testimony (given in the Horn case) that Dittmer told him in September 1979 that he (Dittmer) was going to drive the cattle market low or Dr. Beyer's opinion, given in response to a hypothetical question based on certain aspects of Dittmer's trading activities that may or may not have adequate record support, that such a trader could influence or could cause the price for the futures in live cattle to change, are sufficient to bridge this causal gap. They do not establish that the trading activities of Dittmer and Refco had that effect. 44 Even if Dittmer and Refco had the power and opportunity to do so, if they did not in fact cause an artificial price [they] cannot be guilty of manipulation. Cargill, 452 F.2d at 1167. Here the plaintiffs have not shown either that Dittmer and Refco were responsible for the decline in cattle prices beginning in October 1979 or that October futures prices in that month were below the level that normal market forces would have produced. Dr. Beyer did not testify that prices were below that level. He stated only that there was some unusual behavior occurring in the cattle futures market in October 1979 and that that market was unusual. This is a far cry from stating that prices in the market in that month were below the prices that normal market forces would have produced, and would not warrant the jury in so inferring. 45 Likewise, Dittmer's purchase of 300 short contracts on October 2 could not support a finding that it had any effect on the futures price. On October 2, 15,250 trades were made in the October contract. Dittmer's purchase of 300 short contracts was made to liquidate the long position in his speculative account, and represented less than two percent of the trading volume. Moreover, as noted above, Dittmer and his affiliates liquidated approximately the same number of short positions on that date. The effect of liquidating the short contracts presumably would be to support the October futures price, while the liquidation of the long contracts presumably would have the opposite effect on the price of that contract. The net effect of this trading activity on the October futures prices, if any, would have been insignificant. 46 B. The district court charged the jury that to recover on their false information claim, the plaintiff were required to show that the defendants knowingly delivered, or caused to be delivered, false or misleading or knowingly inaccurate reports regarding the live cattle or live cattle futures market, and that these reports affected the price of October 1979 live cattle futures. The plaintiffs assert that the Horn testimony made that showing. 47 Horn involved a claim under section 4b of the Commodities Act, 7 U.S.C. § 6b, that Dittmer had committed fraud in making certain statements. We reversed, holding that the evidence was insufficient to establish fraud. 48 One of the alleged fraudulent statements was that Dittmer misrepresented to Apel on October 2, 1979 that he expected the price of October and December cattle futures contracts to rise and that he believed a long position in those contracts was correct. Horn, 776 F.2d at 780. We held: 49 Dittmer's statement amounts to nothing more than the expression of his opinion concerning the cattle futures market. An expression of opinion may constitute fraud only if the actor knew when stating the opinion that it was false. 50 There is nothing in the record of this case to indicate that Dittmer thought or knew that the statement was false when made.... In view of the volatile nature of commodities futures markets, Dittmer's opinion concerning the market could very easily have changed shortly thereafter. Moreover, commodity traders take positions in the market for a variety of reasons, and thus, at any given time, a trader's market position may not reflect his opinion concerning long-term market trends.... 51 Horn, 776 F.2d at 780-81 (citation omitted). 52 The flaws we found in the plaintiff's proof of fraud in Horn are equally present in the Horn testimony upon which the plaintiffs rely in the present case to establish that Dittmer and Refco made false or misleading or knowingly inaccurate reports regarding the October 1979 live cattle futures market. Although the plaintiffs correctly point out that Horn involved a claim of fraud under section 4b of the Commodities Act and the present case involves a charge of manipulation under section 9(b) of that Act, that distinction is irrelevant in determining the sufficiency of the evidence to show the giving of false, misleading, or knowingly inaccurate reports concerning the cattle market. The evidence upon which the plaintiffs rely is insufficient to show that Dittmer's investment recommendations and other statements he made regarding the October futures cattle market were false, misleading or inaccurate, or that he knew or believed them to be so when he made them. 53