Court Opinion

ID: 9469329
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:37:45.049831+00
Date Added: 2024-06-11T17:41:20.183466
License: Public Domain

RUSSELL E. SMITH, District Judge,
dissenting.
I dissent.
In my opinion it was not proved that the defendants violated either Sections 4 or 4h (7 U.S.C. §§ 6 and 6h) of the Commodity Exchange Act (7 U.S.C. §§ 1-24) and are, under the facts shown, subject to the jurisdiction of the Commodity Futures Commission, which was established by the Act of October 23, 1974, Pub.L. 93-463, 88 Stat. 1389.
I turn first to that portion of Section 4 relating to boards of trade (7 U.S.C. § 6). Section 4 of the Act forbids the doing of certain acts in connection with “any contract of sale of commodity for future delivery on or subject to the rules of any board of trade in the United States.” Section 2(a)(1) of the Act (7 U.S.C. § 2) defines “board of trade” as follows: “The words ‘board of trade’ shall be held to include and mean any exchange or association, whether incorporated or unincorporated, of persons who shall be engaged in the business of buying or selling commodity or receiving the same for sale on consignment.” This definition, with the exception that the word “commodity” has been substituted for the word “grain,” is the exact definition appearing in the Futures Trading Act, ch. 86, § 2, 42 Stat. 187 (1921), and in the Grain Futures Act, ch. 369, § 2(a), 42 Stat. 998 (1922), and there is no reason to believe that the phrase meant anything different in 1974 than it did in 1921 and 1922.
I believe that the term “board of trade” means an organized board of trade or mercantile exchange, such as the Chicago Board of Trade, which is described in Hill v. Wallace, 259 U.S. 44, 42 S.Ct. 453, 66 L.Ed. 822 (1922), and which has members who are traders and rules which govern the details of trading. When the Futures Trading Act of 1921 was enacted, there were big markets through which substantial parts of the grain production of America was bought and sold. The practice of trading in futures developed on those markets because of the very practical values of such practice to producers and users of commodities in determination of price and in hedging, i.e., insuring against risk of loss by reason of price fluctuation. These values were specifically recognized by Congress in Section 3 of the Grain Futures Act of 1922 and in Section 3 of the Commodity Exchange Act (7 U.S.C. § 5). Speculators *585and manipulators, however, did get into the market and did cause rapid and widespread price fluctuations unrelated to the factors of supply and demand. Congress specifically articulated its concern about these evils in Section 8 of the Grain Futures Act. These evils arose out of what was being done on boards of trade and mercantile exchanges across the nation. In private contracts for future delivery differences in the necessary details obscured the price. On the organized exchanges standardized contracts supplied identical details to each buyer and seller, and the price named reflected the value of the grain and not the details of the trade. A farmer could hedge and insure the price of his grain by private treaty if he could find a buyer who would agree with him in all of the details of the trade and who was financially sound, but it was much simpler to hedge at the market where many buyers dealt in standardized contracts and where there was no solvency problem. The benefits and evils with which Congress was concerned in 1921, 1922, and 1974 were the benefits and evils growing out of organized exchanges — boards of trade. It was these organized exchanges which Congress sought to regulate. The Supreme Court thought so in 1922 when it decided Hill v. Wallace. The Court stated: “The act is in essence and on its face a complete regulation of boards of trade with a penalty of 20 cents a bushel on all ‘futures’ to coerce boards of trade and their members into compliance.” 259 U.S. at 66, 42 S.Ct. at 457. The Senate Committee which passed on the Commodity Exchange Act thought so in 1974 when it said the following:
The Grain Futures Act of 1922 was designed mainly to enable the Government to deal with the exchanges themselves, rather than with individual traders. To conduct futures trading lawfully, the grain exchanges were required to be federally licensed or “designated” as “contract markets.” A condition of such designation was that the exchanges themselves would take major responsibility for the prevention of price manipulation by their members. S.Rep.No.93-1131, 93d Cong., 2d Sess., reprinted in [1974] U.S.Code Cong. & Ad. News 5843, 5855 (emphasis added).
There is other evidence confirming the thought that Congress has used the term “board of trade” as the equivalent of “organized exchange.”
7 U.S.C. § 13-l(a) provides:
(a) No contract for the sale of onions for future delivery shall be made on or subject to the rules of any board of trade in the United States. The terms used in this section shall have the same meaning as when used in this chapter.
(Emphasis added.) It was the congressional intent to prohibit speculation in onion futures. In dealing with this subject the Senate and House used the terms “boards of trade” and “organized exchanges” interchangeably. Thus, the Committee report states as follows:
The Committee on Agriculture and Forestry, to whom was referred the bill (H.R 376) to amend the Commodity Exchange Act to prohibit trading in onion futures in commodity exchanges, having considered the same, report thereon with a recommendation that it do pass with amendments.
PURPOSE OF THE BILL
This bill would prohibit trading in onion futures on any board of trade in the ' United States.
S.Rep.No.1631, 85th Cong., 2d Sess., reprinted in [1958] U.S.Code Cong. & Ad.News 4210, 4210 (emphasis added). H.R.Rep.No. 1036, 85th Cong., 1st Sess., reprinted in [1958] U.S.Code Cong. & Ad.News 4212, doesn’t use the words “board of trade” at all. It speaks of “commodity exchanges” and lists the New York Mercantile Exchange and the Chicago Mercantile Exchange as the places in the United States where onion futures were traded.
Section 2(a)(1) of the Act (7 U.S.C. § 2) excludes from regulation certain foreign currencies and contracts “unless such transactions involve the sale thereof for future delivery conducted on a board of trade.” *586(Emphasis added.) S.Rep.No.93-1131, reprinted in [1974] U.S.Code Cong. & Ad. News 5843, 5863 reads:
Also, the Committee included an amendment to clarify that the provisions of the bill are not applicable to trading in foreign currencies and certain enumerated financial instruments unless such trading is conducted on a formally organized futures exchange. A great deal of the trading in foreign currency in the United States is carried out through an informal network of banks and tellers. The Committee believes that this market is more properly supervised by the bank regulatory agencies and that, therefore, regulation under this legislation is unnecessary.
(Emphasis added.) The only words used in the Act itself are “board of trade.” If, as indicated in the majority opinion, Co Petro and its officers and agents were an association and constituted a board of trade, then the “network of banks and tellers” trading in foreign currency must likewise have been an association, and, if an association, a “board of trade.” Obviously Congress gave no such meaning to the words “board of trade,” but equated those words with “formally organized futures exchange.”
Section 3 of the Act (7 U.S.C. § 5) reads as follows: “Transactions in commodity involving the sale thereof for future delivery as commonly conducted on boards of trade and known as ‘futures’ are affected with a national public interest.” Here Congress uses the words “board of trade” to embrace all of the exchanges on which futures are sold.
Not conclusive, but indicative that Congress, in defining “board of trade,” had in mind something different from a mere association of individuals, is the incorporation in the law of words suggestive of organized exchange. Thus Section 4g (7 U.S.C. § 6g) uses the terms “clearinghouse,” “floor brokers,” and “futures commission merchants.” The words “members” and “rules” appear throughout the Act. None of the wrords mentioned in this paragraph bear any relationship to persons operating as were the defendants here.
For these reasons I am of the opinion that the sales made in this case were not made “on or subject to the rules of any board of trade.”
I now turn to Section 4h(l) of the Act (7 U.S.C. § ehil)),1 which reads:
It shall be unlawful for any person— (1) to conduct any office or place of business ... for the purpose of soliciting or accepting any orders for the purchase or sale of any commodity for future delivery, or for making or offering to make any contracts for the purchase or sale of any commodity for future delivery, or for conducting any dealings in commodities for future delivery, that are or may be used for
(A) hedging any transaction in interstate commerce in such commodity or the products or by-products thereof, or
(B) determining the price basis of any such transaction in interstate commerce, or
(C) delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof,
if such orders, contracts, or dealings are executed or consummated otherwise than by or through a member of a contract market ....
Almost identical language is found in §§ 4,2 4b, and 4c of the Act (7 U.S.C. §§ 6, 6b, and 6e). This language indicates to me that there are three kinds of futures sales which are regulated:
1. Those conducted on a board of trade;
2. Those not conducted on a board of trade but made subject to the rules of a board of trade; and
3. Those conducted by bucket shops or other private traders which are or could *587be used for hedging or price determination.
If, as has been indicated, Congress regulated rather than abolished futures trading so as to preserve the valid economic uses of futures trading, i.e., price determination and hedging, then the foregoing interpretation makes some sense.
Sales made on a board of trade determine price. Sales made subject to the rules of a board of trade would probably be sales under a standardized contract, and any substantial volume of such sales could be used to determine price. It is conceivable that under some fact circumstances sales not related to boards of trade or the rules of such boards could be used to determine price. Any private sales could be used for hedging. In my opinion, sales which do not fall within classes 1, 2, or 3 above are not regulated.
Section 4h(l) refers to: orders for “future delivery”; contracts for the “purchase or sale of any commodity for future delivery”; and dealings in “commodities for future delivery.” The language is not entirely clear. For instance, the words “orders for the purchase or sale of any commodity for future delivery,” read literally, could describe every order made from a mail order catalog. I do not think Congress intended that meaning.
There is no indication in the entire legislative history of Section 4h(l) that Congress intended to regulate the kinds of fraud that might be involved in every private sale of goods to be delivered at a future date.3
There is an indication that Congress intended by Section 4h to regulate the sale of “futures” as that term is used in the trading markets of the nation. Thus, H.R.Rep. No.421, 74th Cong., 1st Sess. 6 (1935) states: “Section 4h(l) prohibits operation of a place of business where orders for futures contracts are solicited or accepted unless such orders are to be executed by or through a member of a contract market.” (Emphasis added.)
Next, as I see it, the words of Section 4h(l), “that are or may be used for,” limit the language of each of the disjunctive phrases in the section. The language as to orders is followed by a comma; the language as to contracts for future sales is followed by a comma; and the language as to dealings is followed by a comma. This suggests that it was the intent of Congress that the limiting language of Subsections (A) (relating to use for hedging) and (B) (relating to use for price determination) limits the language relating to each of the three kinds of acts mentioned in the section. This interpretation is almost compelled by an amendment of Section 4h(l) which was made on the floor of the House. That amendment4 did no more than place a comma after the word “delivery” and before the words “that are or may be used for.” It could serve no purpose other than to indicate that the words following the inserted comma did not modify only the phrase (immediately preceding it) relating to “dealings in commodities for future delivery,” but rather to each of the three preceding disjunctive phrases.
I am troubled by Subsection (C) of Section 4h(l). I note that, while Subsections (A) and (B) contain limitations, Subsection (C) is not limiting in character but rather expansive. The layout puzzles me. If Subsection (C) is read without any reference to Subsections (A) and (B), then any delivery made in accordance with an order for such delivery would violate the Act, even though the order itself, not being of the kind mentioned in the limiting language of Subsections (A) and (B), was lawful. I am inclined to think that the word “thereof” at the end of Subsection (C) refers to orders, contracts, and dealings (appearing in the body of Section 4h(l)) and that it refers to those acts as they are limited by Subsections (A) and (B). I think that Congress did not intend that the act of delivery of goods in fulfillment of a lawful order would be unlawful.
Finally, if by Section 4h Congress intended to regulate all dealing in commodities *588for future delivery, whatever the meaning of the words “for future delivery” may be, such could have been done in one simple sentence. The convoluted language and structure of Section 4h must mean something else.
In this case no contention is made that the sales of the defendant were or could be used to determine price, or that they were or could be used for hedging. The district court made no findings as to any relationship between defendants’ acts and price determination or hedging. In the absence of such fact-finding, I think no violation of Sections 4 or 4h of the Act was proved.
I would reverse and remand the case to the district court with instructions to dismiss the action or, if application is made by plaintiff to prove the defendants’ actions were or could be used for price determination or hedging, to make such orders permitting amendments and the introduction of new evidence as the district court should in its discretion deem proper.

. Section 4h was added by the Act of June 15, 1936, 49 Stat. 1496.

. The language of Section 4h is sufficiently similar to the language found in Section 4 so that what is said here disposes of the problems arising under that part of Section 4 which deals with persons rather than boards of trade.

. See 80 Cong.Rec. 491, 1451, 4391, 6159, 6612, 7051, 7710, 7845, 7857, 7905, 7907, 7916, 7918, 8010, 8288, 8293, 8824, 8825, 9286, and 9313 (1936).

. 80 Cong.Rec. 7916 (1936).