Petition — Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran

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80-203 AUG 91980

HAEL RODAK, JR., CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

—_ e——_

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.,

Petitioner,

Vv.

J. J. CURRAN and JACQUELYN L. CURRAN

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

—e——

Douglas G. Graham, counsel of record

Richard P. Saslow

Seymour M. Nayer

Butzel, Keidan, Simon,

Myers & Graham

1990 First National Building

Detroit, Michigan 48226

(313) 961-7900

Attorneys for Petitioner

Merrill Lynch, Pierce, Fenner,

& Smith, Inc.

Interstate Brief & Record Co. Wurlitzer Bidg . 1509 Broadway. Detroit, Mi 48226

962-8745 962-8746

TABLE OF CONTENTS

POE iv anc cesieendscuierceerae hese

DIE kkg die we aN kiko «ear ee ree

ee SN osc wcwaceen tee

Ses OF Ee Gee Ss ko ke cece dee

Reasons for Granting the Writ ...................

il.

Il.

Ill.

The Court of Appeals’ implication of a pri-

vate right of action for fraud under the

Commodity Exchange Act raises an impor-

tant question of federal law that should be

i A, a ee tee

A. Congress has enacted a comprehensive

scheme of commodities regulation

which should not be altered by the ad-

dition of judicially inferred remedies ..

B. Implication of a private judicial right of

action under the Commodity Exchange

Act is an issue that has divided the

Mower GOUGGE COMME 2... cos cc ceciesass

The Court of Appeals’ implication of a pri-

vate right of action for fraud under the

Commodity Exchange Act conflicts in prin-

ciple with the decisions of this Court in

Transamerica and Touche Ross ...........+.

The Court of Appeals’ retroactive applica-

tion of Commodity Futures Trading Com-

mission Reg. § 180.3 conflicts in principle

with controlling decisions of this Court ....

Eas ees s ee ee v.05 5600-0 5.6865 0000600 27

Appendix

Opinion of the Court of Appeals ............ A-l

Memorandum Opinion of the District Court .. A-39

Order of the District Court .................. A-50

Judgment of the Court of Appeals ........... A-51

Commodity Exchange Act

ee Se > ene A-52

oT eek oe | err er eee A-54

Beeman 26, 7 U.B.C. O18... cccccccceess A-55

Commodities Futures Trading Commission Reg.

SE AE MUG EU. cece ccccccccosecens A-58

TABLE OF AUTHORITIES

Page

Cases

Alkan v. Rosenthal & Co., [1977-80] Comm. Fut.

L. Rep. (CCH) { 20,797 (S.D. Ohio 1979) ..... 14

Ames v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 567 F.2d 1174 (2d Cir. 1977) ........ 15,26,27

Ashwander v. T.V.A., 297 U.S. 288 (1936) ...... 27

Bartels v. International Commodities Corp., 435

F. Supp. 865 (D. Conn. 1979) ............0.5- 14

ili

Page

Berenson v. Madda Trading Co., [1977-80]

Comm. Fut. L. Rep. (CCH) { 20,689 (D.D.C.

WOMEN 0s 4 dad NS50 os 600 b40ns mee ta Rass eseexe ks 14

Berman v. Bache, Halsey, Stuart, Shields, Inc.,

467 F. Supp. 311 (S.D. Ohio 1979) ........... 14

Blue Chip Stamps v. Manor Drug Stores, 421

SA CU UE EE ecu sekcsvchapvarineeseres 12,13,18

Bowles v. Seminole Rock & Sand Co., 325 U.S.

GPUNPEEE Canashecdsnscee tubers eueasahaneues 26

Bradley v. Richmond School Board, 416 U.S. 696

GUUMNT +0eGo0a bance vase eeawsipeobeeenstae ees 27

Cannon v. University of Chicago, 441 U.S. 677

GOONER ct ca wd esa wad cased eCens aa snarans 13,16,18,24

Chrysler Corp. v. Brown, 441 U.S. 281 (1979) .. 13,21

Comstock Investors, Inc. v. Rosenthal & Co.,

[1977-80] Comm. Fut. L. Rep. (CCH) {| 20,934

See MN UN 0:0 5 oo. 0's'a.0%s balsa cuedoonen cee 14

Consolo v. Hornblower & Weeks-Hemphill,

Noyes, Inc., 436 F. Supp 447 (N.D. Ohio 1976)

Consumer Product Safety Commission v. GTE

Sylvania, Inc.,.U.S.__, 48 U.S.L.W. 4658

OE Ss ar a Ly oe a ale wtlste aiaéea oe 17,21

Cort v. Ash, 422 U.S. 66 (1975)... cece cccncces 13,15

16,23,24

Croll v. Maduff & Sons, Inc., (slip opinion) No

CV79-466 RMT (C.D. Cal., April 3, 1980) ..... 14

Page

Deaktor v. L. D. Schreiber & Co., 479 F.2d 529

(7th Cir.), rev’d on other grounds sub nom.

Chicago Mercantile Exchange v. Deaktor, 414

Se SESE sieiee sche ri cesuskavuasiess) 13

Fischer v. Rosenthal & Co., 481 F. Supp. 53

et PENN “Jct yaveeics concn cuerenees exe 14

Goodman v. H. Hentz & Co., 265 F. Supp. 440

NCEE MUUED cnc pebkesessescdsueavweeseess 13

Greene v. United States, 376 U.S. 149 (1964) .... 27

Hensley v. Maduff & Sons, Inc., 2 Comm. Fut. L.

Rep. (CCH) % 21,017 (C.D. Cal. 1980) ........ 14

Hofmayer v. Dean Witter & Co., Inc., 459 F.

Supp. Fae CER Cal. IO7E) on cccccccccccvsces 14

Jones v. B. C. Christopher & Co., 466 F. Supp.

Pe OPEN se dekkoetevecvensvhuannnss 14

Leist v. Simplot, Nos. 79-7402, 7464, 7482 (2d

OO Ee eer re 5,11,14,21

Liang v. Hunt, [1977-80] Comm. Fut. L. Rep.

(CCH ) 4] 20,880 (N.D. Ill. 1979) ............. 14

Mullis v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., No. 79-172BRT (D. Nev., July 1, 1980) ... 14

National Railroad Passenger Corp. v. National

Assn. of Railroad Passengers, 414 U.S. 453

EE A Pre r rrr rrr Ter ore rer ye 13

National Super Spuds, Inc. v. New York Mercan-

tile Exchange, 470 F. Supp. 1256 (S.D.N.Y.

1979), rev'd sub nom. Leist v. Simplot, Nos.

79-7402, 7464, 7482 (2d Cir., July 8, 1980) ..... 14

Page

Navigator Group Funds v. Shearson Hayden

Stone, Inc., No. 77 Civ. 5350 (S.D.N.Y., March

Lida tanca ds cscs ¢oe'beessees sees 14

Piper v. Chris-Craft Industries, 430 U.S. 1

DE seOLSS WeeR Loe seee nes aOreeasceresss 13,18,21

Poplar Grove Planting & Refining Co. v. Bache

Halsey Stuart, Inc., 465 F. Supp. 585 (M.D. La.

TPA CE CaS ys ceCCbeSheveesessvecsseses 14

R. J. Herely & Son Co. v. Statler & Co., 466 F.

Supp. 345 (N.D. Ill. 1979) 22... eee 14

Securities Investor Protection Corp. v Barbour,

SR 13

Shearson Hayden Stone, Inc. v. Lumber Mer-

chants, Inc., 423 F. Supp. 559 (S.D. Fla. 1976) . 14

Smith v. Groover, 468 F. Supp. 105 (N.D. Ill.

SEE ea ee rere Ter rer rere 14

Stone v. Saxon & Windsor Group, Ltd., [1977-80]

Comm. Fut. L. Rep. (CCH) { 21,000 (N.D. Ill.

ET iKae Ses ty abe sexs ehessseneceverseenes 14

Touche Ross & Co. v. Redington, 442 U.S. 560

PET Selanne hbesbeetheesee es ys 13,15-18,22-26

Transamerica Mortgage Advisors, Inc. v. Lewis,

Sy ee 13,15-19,23,24,26

Wilko v. Swan, 346 U.S. 427 (1953) ............. 4

Witzel v. Chartered Service Corp. of New York,

Ltd., Civ. No. 4-79-610 (D. Minn., May 27,

PS NATRA MIN CACU Ged Oreeesteceeseesessaes 14

Page

Constitutional Provisions

gcc tux da vneb'a bas: 22,24

SP I ES a ia onc oben cncdeasevdveees 27

Statutes

Commodity Exchange Act, 7 U.S.C. §§ 1, et seq.

PERCE ees SURE e int chbebesaers ess passim

Decent 2 (000, 7 U.S.C. 62 ow wc cc ccaces 8,21,22

Section 2 (a)(2)-(11), 7 U.S.C. § 4(a)(a)-(j) ..... 8

wecenen SO, 7 U.S.C. OGD nnn cvcvcccene 2,3,6,9,13,18

pecten TAAt), 7 UG... § 7A(RT) nc cccccseees 12

NDF OPM ac ce ciecanccceceneaas 8,12

re GF We BOO occ occccccccccise 11

UN Ey F CPi BME acc iccceccceses 8,11

ES F Ba EOE - i wescccccsvesess 10,11

I OF GPs OO sic ccessaness 8,9,12,13

18,20,21

Section 14(b), 7 U.S.C. § 18(b) ............... 9

Section 1416), 7 U.S.C. S$ 1Gle) ... nc cvcsscccees y

Section Bale), 7 U.S.C. GIRO) 2... ccccccccces 9

oe eg Red 5!) eee ee 9,12

Section 14(QG(, 7% U.C. § Ye—(g) ............ 9,12

Federal Arbitration Act, 9 U.S.C. §3 ........... 4

Judicial Code (28 U.S.C.)

rr ke sah ede da aeak ee 2

vii

Page

De ety TO CAeTy eR PeTeT ET TTT e TTT eee 3

PE MOE eden sk ccrexes coeesveutes ss 3

Rea biti bit rdrdeckiccusessy ede. 3

Michigan Uniform Securities Act (Mich. Comp.

Laws Ann. §§ 451.501, et seq.) ..........005. 3

Packers and Stockyards Act, 7 U.S.C. §§ 308, 309,

7 Ee es Ns OO ake ccenccuwscsccneses ae

Securities Act of 1933 (15 U.S.C. §§ 77a, et seq.) . 3,4

A ae Py, rere errr yr errr 3

Section 2212), 15-U.S.C. § 77) 2... ccc ussccees 3

Section 17(a), 15 U.S.C. § 77ala) .......c06ees 3

Section 22(a), 15 U.S.C. § 77v(a) ............. 3

Securities Exchange Act of 1934 (15 U.S.C.

2. yt ENO ePeTEr EL ore ee Tye eer eee 3,4

Section 15(c)(1), 15 U.S.C. § 780(c)(1) ......... 3

GN 27, BO UG GE TORE occ cc cicsccccans 3

Rules and Regulations

Commodity Futures Trading Commission Rules

CFTC Reg. § 180.3, 17 C.F.R. § 180.3 ..... 2,4,26,27

Securities and Exchange Commission Rules

Rule 10b-5, 17 C.F.R. § 240.10b-5 ............ 3,25

Chicago Mercantile Exchange Rules ............ 3

National Association of Securities Dealers Rules . 3

New York Stock Exchange Rules ...............

viii

Page

Miscellaneous

S. Rep. No. 93-1131, 93d Cong., 2d Sess., re-

printed in [1974] U.S. Code Cong. & Ad.

f ROEEPEURT TAS PCr reer ay te Peter 5-7

S. Rep. No. 95-850, 95th Cong., 2d Sess., re-

printed in [1978] U.S. Code Cong. & Ad.

PORE, 5k.0b-os cuccpenedsabeckinetesr anes 8,11

H.R. 11195 (Smith Bill), 93d Cong., Ist Sess. § 17

GP ED sccescackss cer arvesnelenaerceeenee 10

S. 2578 (McGovern Bill), 93d Cong. 1st Sess., Part

Re fk Ey Reem reer rg ei 10

S. 2837 (Hart Bill), 93d Cong., Ist Sess. § 505, 119

Came, Ree. GaGee CNT vc ekcicciscceevasis 10,20

Remarks of Rep. Poage, 119 Cong. Rec. 41333

CRUE cacaritnvsedeuswotcssieeeas eee 19,20

Hearings on S. 2485, S. 2578, S. 2837 and H.R.

13113 Before the Senate Comm. on Agriculture

and Forestry, 93d Cong., 2d Sess. (1974) .... 20,21

Remarks of Philip F. Johnson, Chairman, ABA

Committee on Commodities Regulation, 35

Bus. Law. 691 (Special Issue) (March, 1980) ... 7

Remarks of Hon. James M. Stone, Chairman,

Commodity Futures Trading Commission, 35

Bus. Law. 691,692 (Special Issue) (March, 1980)

IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

—e——_

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.,

Petitioner,

Vv.

J. J. CURRAN and JACQUELYN L. CURRAN

Respondents.

—_e——_

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Petitioner, Merrill Lynch, Pierce, Fenner & Smith,

Inc. (“Merrill Lynch”) requests that a Writ of Certiorari

issue to review the judgment and opinion of the United

States Court of Appeals for the Sixth Circuit entered on

May 12, 1980.

OPINIONS BELOW

The opinion of the Court of Appeals (A1-A38)' is not

yet officially reported and is unofficially reported at

[Current Binder] Fed. Sec. L. Rep. (CCH) % 97,390. The

opinion of the District Court (A39-A49) is not officially

reported.

’ JURISDICTION

The judgment of the Court of Appeals was entered on

May 12, 1980. This Court's jurisdiction is invoked under

28 U.S.C. § 1254 (1).

STATUTES INVOLVED

Section 4b of the Commodity Exchange Act, as

amended, 88 Stat. 1413, 7 U.S.C. § 6b (1974);

Commodity Futures Trading Commission (‘CFTC’)

Reg. § 180.3, 17 C.F.R. § 180.3. Section 4b and other

pertinent sections of the Commodity Exchange Act

(“CEA”) are appended hereto (A52-A57). CFTC Reg.

§ 180.3 is appended at pages A58-A60.

STATEMENT OF THE CASE

In 1973, respondents J. J. Curran and Jacquelyn L.

Curran (the “Currans”) opened several commodity

trading accounts with Merrill Lynch, a_ broker of

securities and commodities. Upon opening the

accounts, the Currans signed agreements to submit to

' “A___" page references are to the Appendix of this Petition

arbitration disputes that might arise with Merrill Lynch.

The commodity trading in the Currans’ accounts

resulted in losses and the accounts were closed in April,

1974.

In April, 1976, the Currans brought suit for damages

in the United States District Court for the Eastern

District of Michigan. The Currans alleged violations of

sections 5 (failure to register), 12(2) (misleading

statements) and 17(a) (fraud) of the Securities Act of

1933 (1933 Act’), 15 U.S.C. §§ 77e, 771(2), 77q(a);

section 15(c)(1) (fraud and rulemaking powers) of the

“ecurities Exchange Act of 1934 (‘1934 Act’), 15 U.S.C.

§ 780(c)(1), and Rule 10b-5 promulgated thereunder, 17

C.F.R. § 240.10b-5; and section 4b (fraud) of the CEA, 7

U.S.C. § 6b. The Currans also alleged breaches of

duties owed under the Michigan Uniform Securities

Act, Rules and Regulations of the National Association

of Securities Dealers, the New York Stock Exchange and

the Chicago Mercantile Exchange and common law

principles of fraud, negligence and contract. Jurisdiction

was alleged pursuant to section 22(a) of the 1933 Act, 15

U.S.C. § 77v(a); section 27 of the 1934 Act, 15 U.S.C.

§ 78aa; sections 1331, 1332 and 1337 of Title 28 of the

United States Code; and by virtue of pendent

jurisdiction.

Upon Merrill Lynch’s motion, the District Court

dismissed the Currans’ claims under the 1933 and 1934

Acts, and directed the remaining claims to arbitration

in accordance with the parties’ agreement. In so ruling,

the District Court held that the Currans’ commodity

? The Complaint alleges activities (fraud) such as are made

unlawful by section 4b of the CEA, 7 U.S.C. § 6b. The Complaint

actually specifies violation of “Section 6 of the Commodity Exchange

Act.”’ Petitioner assumes, however, as did the Court of Appeals

(A37) that respondent seeks recovery under CEA section 4b

trading accounts did not constitute ‘securities’ within

the meaning of the 1933 and 1934 Acts and that, upon

dismissal of the federal securities claims, there was no

impediment to enforcement of the arbitration agreement

in accordance with the Federal Arbitration Act, 9 U.S.C.

§ 3.3

The Currans appealed from the District Court's ruling

that no cause of action had been stated under the

federal securities laws and also argued that the District

Court had erred in submitting the dispute to arbitration

because the arbitration agreement did not conform to

requirements set forth in CFTC Reg. § 180.3. That

regulation (A58), effective November 29, 1976, provides

that, to be enforceable, arbitration clauses must, inter

alia, be signed separately and must apprise the

customer, in bold-face type, that he may be waiving a

right to sue in court. The arbitration agreements signed

by the Currans in 1973 do not meet these requirements.

The Court of Appeals unanimously affirmed the

District Court’s ruling that the Currans’ federal

securities claims should be dismissed for the reason

that no security was involved, The Court also adopted

the Currans’ argument that CFTC Reg. § 180.3 should

be applied retroactively to invalidate the arbitration

agreement between the parties. The Court of Appeals

then raised, sua sponie, the issue of whether a private

cause of action exists under the anti-fraud provisions of

the CEA. Without benefit of briefing or argument by

the parties, a majority of the panel concluded that the

CEA provides an implied private right of action for

» Merrill Lynch conceded that Wilko v. Swan, 346 U.S. 427 (1953),

precluded enforcement of the arbitration agreement so long as the

federal securities claims remained at issue.

fraud. The Court accordingly reversed the District

Court's order staying the CEA claims pending

arbitration, remanding those claims for trial on the

merits.

Judge Phillips dissented, reasoning that Congress’

failure expressly to provide a private judicial remedy

under the CEA precludes implication of such a right.

Judge Phillips relied upon the restrictive approach to

implication of private remedies manifest in this Court's

recent decisions,

REASONS FOR GRANTING THE WRIT

1, The Court of Appeals’ implication of a private

right of action for fraud under the Commodity

Exchange Act raises an important question of

federal law that should be settled by this Court.

The commodities futures market is a risk-shifting

mechanism that provides a stabilizing influence on the

national economy. An orderly futures market is of

paramount importance to producers and commercial

users of commodities, to the exchanges, brokers and

speculators involved in the market itself, and to the

general population which profits by the stabilized

availability and price of goods that an orderly futures

market promotes,*

* §, Rep, No, 93-1131, 93d Cong. 2d Sess, 11-19, reprinted in

[1974] U.S. Code Cong. & Ad News 5843, 5852-60, See also, Leist v

Simplot, Nos. 79-7402, 7464, 7482 (2d Cir., July 8, 1980) (Slip op. at

4022-28).

The issue presented by this petition involves the

balance achieved by Congress in its regulation of the

market and the threat posed to that balance by the

interjection of judicially created remedies. Moreover,

the issue presented by this petition has left the lower

federal courts hopelessly divided and it would be

consistent with the role of this Court to provide

guidance on this question, thereby promoting

conservation of judicial resources and sparing those

associated with the commodities industry the costs and

delay of duplicative litigation.

A. Congress has enacted a comprehensive scheme of

commodities regulation which should not be altered

by the addition of judicially inferred remedies.

The federal government has been involved in

commodities regulation since passage of the Grain

Futures Act of 1922. The 1922 Act required grain

exchanges to be federally licensed and to assume

responsibility for price manipulation by their members.

The degree of regulation provided by the 1922 Act

proved inadequate and in 1936 Congress enacted the

CEA, broadening federal regulatory and enforcement

powers. The scope of coverage was extended to

commodities other than grains, to traders and brokers

as well as exchanges, and powers were granted to curb

excessive speculation by large operators and to

prosecute price manipulation as a criminal offense.

Section 4b was added to suppress cheating, fraud and

fictitious transactions which were impairing the

services of the market.*

* See, S. Rep. No, 93-1131, 93d Cong, 2d Sess. 14, reprinted in

[1974] U.S. Code Cong, & Ad. News 5843, 5855.

The commodities market has grown dramatically

since 1936. A recent report shows the regulated industry

now includes 12 existing or proposed exchanges, 329

brokerage firms, 555 money managers, 914 trading

advisors and over 31,000 salesmen,.* In ten years the

volume of commodity futures contracts traded has

expanded seven-fold and what was previously a

business primarily of interest to floor traders and

commercial hedgers nov involves hundreds of

thousands of individual investors’ and the trading of

futures contracts for commodities valued at an

estimated $1.5 trillion annually.*

Federal regulatory powers have also grown, In 1968

Congress added new commodities to those regulated,

increased penalties for certain violations, authorized

issuance of cease and desist orders, imposed minimum

financial standards on commission merchants and

required enforcement by contract markets of their

trading rules and contract terms.”

Still dissatisfied with the performance of the

commodities futures markets and the adequacy of

regulatory protection,’ Congress responded in 1974

* Remarks of Philip F. Johnson, Chairman, ABA Committee on

Commodities Regulation, 35 Bus. Law. 691 (Special Issue) (March,

1980).

* Remarks of Hon, James M. Stone, Chairman, Commodity

Futures Trading Commission, /d. at 692

* Wall St. J., Jan, 9, 1979, at 38, col, 5 (estimate for 1978)

* §. Rep, No, 93-1131, 93d cong. 2d Sess, 14, reprinted im [1974]

U.S, Code Cong. & Ad. News 5843, 5855

Id., [1974] U.S. Code Cong. & Ad. News at 5856

with sweeping revisions of the CEA. These

amendments, entitled the Commodity Futures Trading

Commission Act of 1974 (1974 Amendments’) created

the CFTC'! and explicitly vested this new agency with

“exclusive jurisdiction’ over regulation of commodity

futures trading. '?

The CFTC was created to assure that a single expert

agency would have responsibility for developing a

coherent regulatory program encompassing futures

trading and related activities.'> Fulfillment of the

CFTC's mandate was facilitated by other provisions of

the 1974 Amendments which further strengthened

regulatory control over the commodities markets. For

example, the CFTC was given authority to seek

injunctive relief restraining any person from violating

the CEA,'* and to impose against registered persons,

after hearing, a civil penalty of up to $100,000 for each

violation of the Act. "5

A prominent feature of the 1974 Amendments was

provis'on for reparation proceedings before the CFTC to

adjudicate customer complaints against registered

persons, including brokers such as Merrill Lynch.'® A

'' Section 2(aX2)-(11), 7 U.S.C. § 4a(a)-(j).

"2 Section 2(a)(1), 7 U.S.C. § 2 (emphasis added).

' S, Rep. No. 95-850, 95th Cong., 2d Sess. 13, reprinted in [1978]

U.S, Code Cong. & Ad. News 2087, 2101.

' Section 6c, 7 U.S.C. § 13a-1.

'§ Section 6(b), 7 U.S.C. § 9.

detailed procedure was established, providing for the

filing of customer complaints with the CFTC, and

investigation of such claims by that body.’ If the

investigation supports further action, an administrative

law judge is appointed to hear the claim. If a violation

of the CEA is found, the CFTC, by statute, ‘shall’

impose a damage award in favor of the aggrieved

customer,'* and such awards are enforceable in the

federal district courts,'? and reviewable in the courts of

appeals. 7°

During the 44 years that section 4b has been in effect,

and notwithstanding the extensive reconsideration and

revision that Congress has afforded the CEA during

that period (most notably in 1974), Congress has not

seen fit expressly to authorize a private judicial right of

action for violation of that section.

Several bills that would have expressly provided

private judicial remedies for violations of the CEA were

introduced in the 93d Congress but not enacted. One

proposed amendment would have provided a right of

action for restitution in the federal district courts for a

17 Id.

‘6 Section 14(b), (c) and (e), 7 U.S.C. § 18(b), (c) and (e).

'% Section 14(f), 7 U.S.C. § 18(f).

20 Section 14(g), 7 U.S.C. § 18(g).

non-willful violation of ‘any provision of this Act or

regulation or order issued thereunder,” with a treble

damage remedy for willful violations.2! This proposal

and several others like it were rejected by Congress. ??

Further amendment to the CEA occurred in 1978,

including the addition of a cause of action in favor of

the States, acting as parens patriae, to enjoin violations

of the Act, and original jurisdiction over such actions is

expressly granted to the federal district courts.?3

It is apparent that during consideration of the 1978

Amendments Congress was weil aware that no private

right of action was included within the regulatory

scheme. A comprehensive list of public and private

remedies provided customers under the CEA was set

forth in the authoritative Senate Report. Mention of a

private judicial remedy is conspicuous by its absence:

The Commodity Exchange Act provides many

customer protections and remedies. The Act

directs the Commission to promulgate and

administer a regulatory program that includes

registration of commodity professionals,

segregation of customers’ funds by futures

commission merchants, establishment of dual

trading guidelines, creation of a procedure for

the adjudication of reparation claims, monitoring

21S. 2837 (Hart Bill), 93d Cong., Ist Sess., § W5(a)-(b), 119 Cong.

Rec. 42688 (1973).

22 E.g., H.R. 11195 (Smith Bill), 93d Cong., Ist Sess. § 17 (1973)

(treble damages); S. 2578 (McGovern Bill), 93d Cong., Ist Sess., Part

I, § 20, 119 Cong. Rec. 33947-48 (1973) (treble damages).

23 Section 6d, 7 U.S.C. § 13a-2.

exchange arbitration procedures and disciplinary

actions, and licensing of industry self-regulatory

futures associations. Moreover, customers are

afforded protection through the Commission’s

power to sue directly for injunctive relief and to

invoke a full range of administrative remedies

where appropriate to curb unlawful behavior. *4

Aware that a private judicial damage remedy was not

afforded customers under the CEA, Congress, as before,

declined to authorize such a remedy.

The foregoing?> reveals the methodical development

over a 58 year period of a comprehensive scheme to

regulate the commodities industry. Congress carefully

identified the problems to be dealt with, balanced the

interests of those involved in the market and enacted

regulations and means of enforcement tailored to

achieve its goals. In so doing, Congress defined the role

to be played in the regulatory scheme by the federal

courts. The district courts are given original jurisdiction

in enforcement and injunctive actions by the CFTC,?°

and in injunctive actions by the States;?’ and are given

24S. Rep. No. 95-850, 95th Cong., 2d Sess. 12-13, reprinted in

[1978] U.S. Code Cong. & Ad. News 2087, 2100-01.

25 The discussion of legislative history in this petition is

necessarily abbreviated. A more complete analysis of that history, as

it specifically relates to legislative intent concerning private

remedies, is provided by the majority and dissenting opinions of

Judges Friendly and Mansfield in Leist v. Simplot, Nos. 79-7402,

7464, 7482 (2d Cir., July 8, 1980). See also, pp. 19-23, infra.

26 Sections 6b, 6c, 7 U.S.C. §§ 13a, 13a-1.

27 Section 6d, 7 U.S.C. § 13a-2.

enforcement jurisdiction in reparation awards.7* The

courts of appeals are given statutory jurisdiction to

review reparation awards and suspensions of trading

privileges. 9

The limited jurisdiction granted the federal courts is

an essential element of the balance achieved by

Congress in its regulatory scheme. By enactment of the

provisions for resolution of disputes, sections 5a(11)

and 14, 7 U.S.C. §§ 7a(11), 18, Congress chose not to

impose upon registered persons such as Merrill Lynch

the substantial expense and disruptive impact of federal

litigation of private damage claims, see Blue Chip Stamps

v. Manor Drug Stores, 421 U.S. 723, 740-43 (1975), the

burden of which would of necessity be passed on to the

overall market in the form of higher commissions and

diminished efficiency. Creation of a judicially inferred

right of action would alter the balance inherent in the

legislative scheme.

Implication of a private right of action would also

impose an unnecessary burden upon the federal judicial

system. The already massive and ever-increasing

volume of commodities trading, often based upon

verbal orders, gives rise to a significant number of

customer-broker disputes. Congress expressly enacted

the means by which such disputes are to be resolved,

and specified only a limited role for the federal

judiciary.*° The majority below would scuttle this

legislative plan, granting access to the federal courts for

28 Section 14(f), 7 U.S.C. § 18(f).

2% Sections 6(b), 14(g), 7 U.S.C. §§ 9, 18(g).

% Section 14(f), 7 U.S.C. § 18(f) (enforcement of awards); section

14(g), 7 U.S.C. § 18(g) (appellate review).

adjudication of all cases alleging breaches of duties

claimed to exist under section 4b. Such a burden on the

federal courts is unnecessary since actions such as this

one, alleging breach of fiduciary duty and fraud, rot

only are cognizable under section 14 reparation

proceedings, but are a mainstay of state court litigation.

B. Implication of a private judicial right of action for

fraud under the Commodity Exchange Act is an

issue that has divided the lower federal courts.

Whereas prior to the CEA’s substantial amendment in

1974, the few lower courts to treat the issue had

generally recognized an implied private remedy under

section 4b,3! such harmony no longer exists. Creation in

1974 of the CFTC and the express provision for

reparation proceedings to adjudicate customer

complaints against registered persons, together with

development of the restrictive approach to implication

of private remedies manifest in this Court’s recent

decisions,3? has left the lower federal courts sharply

divided on the issue of whether an additional judicial

remedy may be implied under section 4b.

3! See, e.g., Goodman v. H. Hentz & Co., 265 F. Supp. 440 (N.D.

Ill. 1967). Cf. Deaktor v. L.D. Schreiber & Co., 479 F. 2d 529 (7th

Cir.), rev'd on other grounds sub nom. Chicago Mercantile Exchange v.

Deaktor, 414 U.S. 113 (1973).

32 National Railroad Passenger Corp. v. National Assn. of Railroad

Passengers, 414 U.S. 453 (1974); Cort v. Ash, 422 U.S. 66 (1975);

Securities Investor Protection Corp. v. Barbour, 421 U.S. 412 (1975);

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975); Piper v.

Chris-Craft Industries, 430 U.S. 1 (1977); Chrysler Corp. v. Brown, 441

U.S. 281 (1979); Cannon v. University of Chicago, 441 U.S. 677 (1979);

Touche Ross & Co. v. Redington, 442 U.S. 560 (1979); Transamerica

Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (1979).

Several district court cases have reached the same

result as the majority opinion below, implying a private

right of action*’, while others support Judge Phillip’s

dissenting view that no implied private remedy exists.*4

The divided panel below is the first court of appeals

to address this issue. The Court of Appeals for the

Second Circuit, in Leist v. Simplot, Nos. 79-7402, 7464,

7482 (July 8, 1980), also by a divided panel, recently

reached a similar result, although Leist did not involve a

section 4b claim by a customer against his own broker.

33° Witzel v. Chartered Service Corp. of New York, Ltd., Civ. No.

4-79-610 (D. Minn, May 27, 1980); Navigator Group Funds v. Shearsen

Hayden Stone, Inc., No. 77 Civ. 5350 (S.D.N.Y., March 20, 1980);

Smith v. Groover, 468 F. Supp. 105 (N.D. Ill. 1979); R. J. Herely & Son

Co. v. Statler & Co., 466 F. Supp. 345 (N.D. Ill. 1979); Jones v. B. C.

Christopher & Co., 466 F. Supp. 213 (D. Kan. 1979); Poplar Grove

Planting & Refining Co. v. Bache Halsey Stuart Inc., 465 F. Supp. 585

(M.D. La. 1979); Hofmayer v. Dean Witter & Co., Inc., 459 F. Supp.

733 (N.D. Cal. 1978); Berenson v. Madda Trading Co., [1977-80]

Comm. Fut. L. Rep. (CCH) paragraph, 20,689 (D.D.C. 1978); Cf.

Croll v. Maduff & Sons, Inc., No. CV 79-466-RMT (C.D. Cal., April 3,

1980); Shearson Hayden Stone, Inc. v. Lumber Merchants, Inc., 423 F.

Supp. 559 (S.D. Fla. 1976).

34 Mullis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 79-172

BRT (D. Nev., July 1, 1980); Hensley v. Maduff & Sons, Inc., 2 Comm.

Fut. L. Rep. (CCH) paragraph 21,017 (C.D. Cal. 1980); Fischer v.

Rosenthal & Co., 481 F. Supp. 53 (N.D. Tex. 1979); National Super

Spuds, Inc. v. New York Mercantile Exchange, 470 F. Supp. 1256

(S.D.N.Y. 1979), rev'd sub nom. Leist v. Simplot, Nos. 79-7402, 7464,

7482 (2d Cir., July 8, 1980); Berman v. Bache, Halsey, Stuart, Shields,

Inc., 467 F. Supp. 311 (S.D. Ohio 1979) (overruled sub silentio by

Curran); Comstock Investors, Inc. v. Rosenthal & Co., [1977-80] Comm.

Fut. L. Rep. (CCH) paragraph 20,934 (C.D. Cal. 1979); Alkan v.

Kosenthal & Co., [1977-80] Comm. Fut. L. Rep. (CCH) paragraph

20,797 (S.D. Ohio 1979) (overruled sub silentio by Curran); Bartels v.

International Commodities Corp., 435 F. Supp. 865 (D. Conn. 1979);

Consolo v. Hornblower & Weeks-Hemphil], Noyes, Inc., 436 F. Supp.

447 (N.D. Ohio 1976) (overruled sub silentic by Curran). Cf. Stone v.

Saxon & Windsor Group, Ltd., [1977-80] Comm. Fut. L. Rep. (CCH)

paragraph 21,000 (N.D. Ill. 1980); Liang v. Hunt, [1977-80] Comm.

Fut. L. Rep. (CCH) paragraph 20,880 (N.D. Ill. 1979).

In addition to the foregoing, there are undoubtedly

many other federal court cases wherein the issue has

not yet been decided or the decisions are not reported.

Merrill Lynch is itself a party to several such pending

cases, *5

II. The Court of Appeals’ implication of a private

right of action for fraud under the Commodity

Exchange Act conflicts in principle with the

decisions of this Court in Transamerica and

Touche Ross.

The majority opinion below implied a private judicial:

right of action under the CEA notwithstanding the

absence of any persuasive evidence that Congress

intended that such a right exist, and despite substantial

evidence to the contrary. The majority's holding and

the analysis by which it was reached are both in sharp

conflict with guiding principles of statutory

construction set forth by this Court in Transamerica

Mortgage Advisors, Inc v. Lewis, 444 U.S. 11 (1979) and

Touche Ross & Co. v. Redington, 442 U.S. 560 (1979).

Rather than the sharp critical focus upon the narrow

question of legislative intent, and the incisive search for

“persuasive evidence” of intent that a private remedy

exists, as required by Touche Ross and Transamerica, the

majority below purported to follow the more diffuse

analysis of Cort v. Ash, 422 U.S. 66 (1975), and in so

doing, was drawn to render policy judgments beyond

the scope of its proper judicial function.

38 E.g., Dart Partnership v. Merrill Lynch, Pierce, Fenner & Smith

Inc., No. H80-1205 (D. Md.); Para v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., No. 80-667 (W.D. Wash.); Ames v. Merrill Lynch, Prerce,

Fenner & Smith, Inc., No. 76 Civ. 3085 (S.D.N.Y.); Wanty v. Merrill

Lynch, Pierce, Fenner & Smith, No. 77 Civ. 869 (RLC) (S.D.N.Y.);

Zeltser v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 80 Civ. 4009

(S.D.N.Y.).

Cort set forth four criteria to guide the courts in

deciding whether to imply a private cause of action”.

The majority below applied these four factors and found

that each supports implication of a private right of

action for fraud under the CEA (A30-A34). The breadth

of the four part Cort analysis has, however been sharply

criticized, Cannon v. University of Chicago, 441 U.S. 677,

730-49 (1979) (Powell, J., dissenting) and its focus has

since been sharpened by this Court:

It is true that in Cort v. Ash ... the Court set

forth four factors that it considered ‘relevant’ in

determining whether a private remedy is

implicit in a statute not expressly providing one.

But the Court did not decide that each of these

factors is entitled to equal weight. The central

inquiry remains whether Congress intended to

create, either expressly or by implication, a private

cause of action.

Touche Ross, supra, at 575 (emphasis added). The

holdings of this Court subsequent to Cort also

demonstrate the proper methodology of the ‘‘central

inquiry” into Congressional intent.

The question whether a statute creates a cause of

action, either expressly or by implication, is basically a

matter of statutory construction, Transamerica, supra, at

15, and analysis must begin with the language of the

statute itself. Touche Ross, supra, at 568. Further,

“[a]bsent a clearly expressed legislative intention to the

36 6“First, is the plaintiff ‘one of the class for whose especial

benefit the statute was enacted’ . . . that is, does the statute create a

federal right in favor of the plaintiff? Second, is there any indication

of legislative intent, explicit or implicit, either to create such a

remedy or to deny one? ... Third, is it consistent with the

underlying purposes of the legislative scheme to imply such a

remedy for the plaintiff? ... And finally, is the cause of action one

traditionally relegated to state law, in an area basically the concern

of the States, so that it would be inappropriate to infer a cause of

action based solely on federal law?’ 422 U.S. at 78.

contrary’’ the language of a statute ‘must ordinarily be

regarded as conclusive.”” Consumer Product Safety

Commission v. GTE Sylvania, Inc., — US. —, 48

U.S.L.W. 4658, 4659 (June 9, 1980) (emphasis added).

The language of the CEA contains no reference

whatever to a private judicial right of action for

violation of its anti-fraud provisions. Its language is,

nonetheless, instructive: most significantly, the CEA

provides a full panoply of criminal, civil and

administrative remedies to enforce its regulatory

function.

The majority below found this broad range of express

enforcement measures to be evidence of Congressional

intent to provide strong regulation of the commodities

markets and then leapt, impermissibly, to the further

conclusion that an additional remedy, a private right of

action, is compatible with this goal and should

therefore be judicially imp'ied. This conclusion is at

odds not only with the teachings of Transamerica and

Touche Ross, but with the doctrine of the separation of

powers.

The fact that a federal statute has been violated and

some person harmed does not automatically give rise to

a private cause of action in favor of that person. Touche

Ross, supra, at 568. Instead, the judicial task is “limited

solely to determining whether Congress intended to

create the private right of action asserted.’’ I/d.

Moreover, “it is an elemental canon of statutory

construction that where a statute expressly provides a

particular remedy or remedies, a court must be chary of

reading others into it. ‘When a statute limits a thing to

be done in a particular mode, it includes the negative of

any other mode.’ "’ Transamerica, supra, at 19-20.

The CEA provides an express remedy for the type of

violations asserted by the Currans. Section 14 provides

for hearing before an administrative law judge and for

damage awards enforceable and reviewable in the

federal courts. These express provisions compel “the

negative of any other mode,” including an implied

judicial remedy. They also render an implied remedy

unnecessary and, as this Court held in Piper v.

Chris-Craft Industries, Inc., 430 U.S. 1, 25-26 (1977),

creation by judicial implication of a private damage

remedy is proper only if it is necessary to effectuate

Congress’ goals. See also, Blue Chip Stamps v. Manor

Drug Stores, 421 U.S. 723, 734, 736 (1975).

The CEA’s express provision for private damage

awards arising out of statutory reparation proceedings

further compels the conclusion that ‘‘[o]bviously .. .

when Congress wished to provide a private damages

remedy, it knew how to do so and did so expressly.’’*’

Touche Ross, supra, at 572. In addition, the full panoply

of express provisions for enforcing duties imposed by

the CEA and section 4b in particular make it “highly

improbable that ‘Congress absentmindedly forgot to

mention an intended private action.’ ” Transamerica,

supra, at 20 (quoting Cannon, supra, at 742 (Powell, J.,

dissenting)).

Transamerica contains the clear admonition that when

a statute fails expressly to provide a private judicial

right of action while providing for other express

remedies, an additional right of action cannot be

implied by the courts absent “persuasive evidence of a

37 See also, sections 308, 309, Packers and Stockyards Act, 7

U.S.C. §§ 209, 210 (providing agency reparation proceedings

analogous to CEA section 14, while expressly providing an

alternative judicial right of action).

contrary legislative intent.” 444 U.S, at 20, The majority

below failed to heed this admonition, No persuasive

evidence of a congressional intent to provide a private

judicial right of action for fraud exists, Indeed, the only

support offered by the majority below for its holding

that Congress intended an implied private remedy to

exist is the fact that a few lower federal courts, using

the discredited “tort theory” for implying a private

right, had, previous to the 1974 Amendments,

recognized such a right and that in the hundreds of

pages of legislative history underlying the 1974

Amendments, one legislator had alluded to these

decisions, This is not the “persuasive evidence’

required by Transamerica, especially in light of the

considerable evidence in the legislative history that no

private judicial remedy was intended.

Moreover, the excerpts of legislative history offered

by the majority in support of its holding are

misconstrued, For example, the majority opinion states

that “Congress recognized that the ‘courts [had] implied

a private remedy for individual litigants in the

Commodity Exchange Act’ " (A31, n, 27), citing the

remarks of Representative Poage.* Representative

Poage was, in fact, citing such private litigation as a

threat to the self-regulatory activities of exchanges.

Representative Poage expressed the view that private

suits against exchanges for failure to enforce their rules

offered exchanges ‘solid reason for shrinking the

protection given the customer and the public through

self-regulation’”’.*’ In context, Representative Poage was

citing private litigation as a discordant note in the

119 Cong. Rec, 41333 (1973)

Id.

regulatory scheme and as further reason for “Congress

to act, and act expeditiously through meaningful,

thoughtful change that is well reasoned and sure’’” to

provide the comprehensive, coherent and balanced

regulatory scheme embodied in the 1974 Amendments.

Similarly misplaced is the majority's reliance (A31,n.

27) upon comments made during Senate hearings on

the 1974 Amendments.*' The testimony cited includes

that of Professor Schotland, who argued emphatically

for enactment of the private civil damage remedy

contained in the Hart bill.*? Professor Schotland also

argued against the broad private reparation proceedings

ultimately enacted as CEA section 14, The thrust of

Professor Schotland’s remarks was that adjudication of

private damage claims should be in the courts and not

in the CFTC, The Professor also argued that “[i]f you do

choose to retain such virtually unprecedented

responsibility and burden [section 14 reparation

proceedings] in this regulatory body, there should be

explicit language in the statute that Federal and State

courts are still open if a complainant prefers to go to

trial there.”’*? As the 1974 Amendments make clear,

Congress opted in favor of granting jurisdiction over

*' Hearings on S, 2485, S, 2578, S, 2837 and H.R, 13113 Before the

Senate Comm, on Agriculture and Forestry, 93d Cong., 2d Sess, pt. 1 at

205, pt, 3 at 737 (1974),

“2 §, 2837, 93d Cong., Ist Sess, § 905 (a), 119 Cong, Rec, 42688

(1973).

* Hearings on S, 2485, S, 2578, S. 2837 and H.R. 13113 Before the

Senate Comm, on Agriculture and Forestry, 93d Cong,, 2d Sess,, pt. 3

at 737 (1974),

private damage claims to the CFTC under section 14

and against an alternative private remedy in the federal

courts,

The majority below also places reliance (A3\, n. 27)

on the remark of Senator Clark that “section 201 of

(H.R, 13113) may prohibit all court actions’’** as

evidence that the proviso to section 2(a)(1),"7 U.S.C.

§ 2, was added to preserve a private right of action for

damages in the federal courts, The proviso states that

“[nJothing in this section shall supersede or limit the

jurisdiction conferred on courts of the United States or

any State.” The majority below, however, ignores the

statements of Representative Rodino, Chairman of the

House Committee on the Judiciary, who recommended

that the proviso be added to avoid an interpretation

that the jurisdictional provision eliminates the

jurisdiction of state courts over contract claims and the

jurisdiction of federal courts over anti-trust claims and

suits seeking review of administrative hearings. **

The remark of Senator Clark, a passing reference by

a single legislator, is a slim reed upon which to base a

finding that Congress approved a private right of

action, Consumer Product Safety Commission v. GTE

Sylvania, Inc., supra, 48 U.S.L.W. at 4662; Piper v.

Chris-Craft Industries, Inc., 430 U.S. 1, 31-32 (1977);

Chrysler Corp. v. Brown, 441 U.S, 281, 311 (1979); Leist

v. Simplot, supra, (Slip Op, at 4173) (Mansfield, J.,

dissenting). In view of the lengthy and authoritative

Hearings on S, 2485, S 2578, S, 2837 and H.R. 13113 Before the

Senate Comm, on Agriculture and Forestry, 93d Cong., 2d Sess, pt. 1 at

205 (1974).

48 Id, at 259-260, See also, Leist v. Simplot, supra (Slip Op. at

4170-4174) (Mansfield, J., dissenting).

House and Senate Reports on the 1974 Amendments,

both of which are silent as to the existence of any

private judicial right of action, the remarks of Senator

Clark and their bearing on the construction of section

2(a)(1) as the basis for a private judicial right of action

are entitled to little weight.

The language of section 2(a)(1) itself contradicts the

conclusion of the majority below. The proviso states

only that the 1974 legislation was not passed in

derogation of jurisdiction already “conferred” upon the

courts, Prior to 1974, Congress had enacted no

provision ‘conferring’ jurisdiction on the courts to

entertain private actions under the CEA. While a few

federal courts had found an implied right of action under

pre-1974 law, reliance on that factor is a bootstrap

argument. The courts cannot “confer” jurisdiction upon

themselves.4° Thus, only if the pre-1974 federal

commodity legislation had expressly conferred jurisdiction

on the courts to entertain actions thereunder would

section 2(a)(1) be of any value in explaining away

Congress’ conspicuous silence on that point when it

completely overhauled the CEA in 1974. Since no

pre-1974 provision existed, the implications of section

2(a)(1) (if any) are far outweighed by the

straightforward legislative history discussed above,

which is inconsistent with any intent to legislate a

private right of action.

Further, in Touche Ross, supra, at 577, this Court

declared that reliance upon the general jurisdictional

provision of a statute in attempting to imply a private

right of action is misplaced and that the source of a -

plaintiff's rights ‘must be found, if at all, in the

# U.S. Const. art. IIL.

substantive provisions’ of the act sought to be

enforced. There is no substantive provision in the CEA

for a private judicial right of action.

Finally, reliance by the majority below upon the

remarks of Senator Talmadge (A28) is also misplaced

The Senator’s statement that under the statutory

reparation proceedings “the entire appeal process and

the right of final determination by the courts are

expressly preserved” (emphasis added) plainly does not

support the inference that original jurisdiction over

private damage claims also exists.

It is apparent that the majurtty below, in implying a

private judicial remedy, gave little weight to the plain

language of the statute itself or to the great volume of

legislative history, neither of which supports implication

of such a right. The court below neither sought nor

found ‘persuasive evidence’ of Congressional intent

that a private judicial remedy be implied. The majority

below thus acted in direct contravention of the

teachings of Transamerica and Touche Ross.

Perhaps the gravest error of the majority opinion,

however, is its willingness to substitute its own

judgment for that of Congress. The majority's inquiry

under the third prong of the Cort analysis, and its

finding that implication of a private right of action is

“compatible” with the underlying purposes of the

legislative scheme, do not justify reading the CEA more

broadly than its language and the statutory scheme

reasonably permit. Touche Ross, supra, at 578. ‘‘The

ultimate question is one of Congressional intent, not

one of whether [the Court] thinks that it can improve

upon the statutory scheme that Congress enacted into

law.” Id.

In Cannon, supra at 718, Mr. Justice Rehnquist wrote

that “[nJot only is it ‘far better’ for Congress to so

specify when it intends private litigants to have a cause

of action, but for this very reason this Court in the

future should be extremely reluctant to imply a cause of

action absent such specificity on the part of the

Legislative Branch.’’ Sound justification for this

“extreme reluctance,” as set forth by the strong dissent

of Mr. Justice Powell in Cannon, is based upon Article

Ill of the United States Constitution and the doctrine of

the separation of powers. As presaged by the opinions

of Justices Rehnquist and Powell in Cannon, this Court,

in Touche Ross and Transamerica, has held that a private

right of action will be implied only when it is clear that

Congress so intended. The effect of Touche Ross and

Transamerica on the four part Cort analysis is to give

primacy to legislative intent and subordinate the

question of whether an implied remedy is ‘consistent

with the underlying purposes of the legislative scheme’

for the reason that,

the Cort analysis too easily may be used to

deflect inquiry away from the intent of

Congress, and to permit a court instead to

substitute its own views as to the desirability of

private enforcement .. .

. .. Determining whether a private action would

be consistent with the ‘underlying purposes’ of a

legislative scheme permits a court to decide for

itself what the goals of a scheme should be, and

how those goals should be advanced.

Cannon, supra at 740 (Powell, J. dissenting).

The inquiry of the majority below was thus

“deflected” from its proper purpose, the determination

of Congressional intent. Its deflection, and its error, are

apparent from its conclusion:

What we have done here, in our view, is to

preserve the general concept of a private right of

action and to provide for its continuing

development, not under the securities laws

generally, but under those laws of Congress

which are more particularly related to the

commodities market. This approach provides

greater sensitivity to the specialized concerns of

that area of commercial life, appears consistent

with congressional intent and also allows for the

development of a private right of action similar

to the valuable body of law that has grown

under Section 10 of the Securities Exchange Act

and Rule 10b-5. (A36).

The right to “preserve ... a private right of action

and to provide for its continuing development” is that of

Congress alone. Had Congress preferred a private right

of action and a “valuable body of law” analogous to

that which has grown under the federal securities laws,

Congress certainly knew how to so provide and would

have done so expressly. Touche Ross, supra, at 572.

Congress chose, however, not to do so and it is beyond

the province of the Judicial Branch to amend the

legislative scheme and thereby alter its balance

Implication by the majority below of a private

right of action for fraud under the CEA manifests an

arrogation of the constitutional powers of the

Legislative Branch and violates principles so recently

emphasized by this Court in Touche Ross and

Transamerica.

Ill. The Court of Appeals’ retroactive application of

Commodity Futures Trading Commission Reg.

§ 180.3 conflicts in principle with controlling

decisions of this Court.

The Court of Appeals retroactively applied a 1976

regulation to void a 1973 agreement that provided for

arbitration of a claim that had ripened in 1974. The

Court of Appeals so acted despite the fact that *he CFTC

itself has interpreted the regulation as not voiding

pre-existing agreements to arbitrate disputes that had

arisen prior to the effective date of the regulation. Ames

v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d

1174, 1182 n.2 (2d Cir. 1977) (Meskill, J., dissenting)

(quoting brief of CFTC, amicus curiae).

As pointed out by the cogent dissent of Judge Meskill

in Ames, such a ruling violates no less than three

canons of construction announced by this Court:

First, the CFTC’s interpretation of its own regulation

must be given “controlling weight unless it is plainly

erroneous or inconsistent with the regulation.’’ Bowles

v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945).

The Court below, relying on the Ames majority, gave no

weight to the CFTC’s interpretation.

Second, a new regulation should be interpreted in

such a way as to avoid interference with matured

antecedent rights. Greene v. United States, 376 U.S. 149,

160 (1964); Bradley v. Richmond School Board, 416 U.S.

696, 720 (1974). Prior to the effective date of the

regulation, Merrill Lynch had an accrued right to

arbitrate this dispute. The interpretation of the

regulation submitted by the CFTC as amicus in Ames

avoided interference with this antecedent right.

Third, a regulation should be construed, whenever

possible, so as to avoid constitutional issues. See,

Ashwander v. T.V.A., 297 U.S. 288, 348 (1936) (Brandeis,

J., concurring). The interpretation of the Court below

raises the substantial due process issue of whether the

right to arbitration thus abrogated is substantive or

procedural, and whether such abrogation results in

“manifest unfairness.” Ames, supra, at 1177, 1179.

CFTC Reg. § 180.3 should have been construed, as

recommended by the CFTC in Ames, so as not to void

arbitration agreements that pertained to disputes that

existed as of the effective date of the regulation.

CONCLUSION

For the foregoing reasons this petition for a writ of

certiorari should be granted.

Respectfully submitted,

Douglas G. Graham, counsel of record

Richard P. Saslow

Seymour M. Nayer

Butzel, Keidan, Simon, Myers & Graham

1990 First National Building

Detroit, Michigan 48226

Counsel for Petitioner,

Merrill Lynch, Pierce, Fenner & Smith, Inc.

Dated: August 5, 1980

QUESTIONS PRESENTED FOR REVIEW

Does the Commodity Exchange Act create an implied

private right of action for fraud in favor of a customer

against his broker?

Il.

Should Commodity Futures Trading Commission Reg.

§180.3 be given retroactive application to void

arbitration agreements entered into prior to the effective

date of that regulation in abrogation of the parties’ right

to arbitration of a dispute that arose prior to that

effective date?

APPENDIX

A-1

No. 77-1300

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

J. J. Curran and Jacguetyn L.

Curran, individually and as trus-

tees of the John J. Curran Living

Trust and Jacquelyn L. Curran

Living Trust,

Plaintiffs-Appellants,

APPEAL from. the

United States District

Court for the Eastern

v. District of Michigan.

Merritt Lyncu, Pierce, FENNER AND

Smitn, INc.,

Defendant-Appellee.

Decided and Filed May 12, 1980.

Before: Livery and Encer, Circuit Judges and Pius,

Senior Circuit Judge.

Encet, Circuit Judge, delivered the opinion of the Court,

in which Livecy, Circuit Judge, joined. Pinus, Senior Cir-

cuit Judge, (pp. 37-38) filed a separate opinion, concurring in

part and dissenting in part.

Encex, Circuit Judge. Plaintiffs appeal trom the district

court’s order granting partial summary judgment in favor of

the defendant Merrill Lynch, Pierce, Fenner & Smith (here-

inafter Merrill Lynch), and further granting Merrill Lynch's

motion for stay of the remaining claims pending arbitration."

‘An order staying a pending action until the case is submitted

to arbitration is appealable under 28 U.S.C. £1292(a) (1) if the under-

A-2

2 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

In their complaint, plaintiffs John J. Curran and Jacquelyn

L. Curran sought damages from Merrill Lynch for false repre-

sentations made by its agents which induced plaintiffs to open

discretionary commodity trading accounts with Merrill Lynch

and for the broker's subsequent mismanagement of those

accounts.

Specifically, plaintiffs allege that the accounts constitute

investment contracts under federal law, and that Merrill Lynch

violated Section 5 and Section 12(2) of the Securities Act by

failing to file a registration statement before making an offer

and sale of a security. Plaintiffs also assert that defendant

made untrue statements of material fact, omitted to state

material facts necessary to make the statements not mislead-

ing, and employed a device, scheme, or artifice which operated

as a fraud upon plaintiffs, all in violation of Rule 10b-5, § 17

(a) of the Securities Act, §6 of the Commodities Exchange

Act, § 410(a)(2) of the Michigan Uniform Securities Act, and

principles of common law. Plaintiffs further allege that de-

fendant breached the commodity account agreement by: (1)

failure to manage the accounts in a skillful and prudent man-

ner; (2) failure to observe certain safeguards and stop-loss

limits; and (3) failure to employ a scientific and comprehen-

sive investment plan and instead, engaging in reckless and

haphazard trading with the sole intention of generating large

commissions.

The district court ruling presents several issues of first

impression in this circuit. Initially, we must determine

whether a discretionary trading account in commodity futures

constitutes a “security” subject to the registration requirements

and enforcement provisions of the federal securities laws.

The court below determined the account was not a security

and entered partial summary judgment against plaintiffs’ se-

lying action, as here, is legal in nature. Sce Mansbach v. Prescott, Ball

& Turben, 598 F.2d 1017, 1022 (6th Cir. 1979); 9 Moore’s Federal

Practice § 110.20[3).

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No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 3

curities claims, relying primarily on Milnarik v. M-S Com-

modities, Inc., 457 F.2d 274 (7th Cir.), cert. denied, 409 U.S.

887 (1972). In Milinarik the Seventh Circuit, speaking

through Mr. Justice Stevens (then Judge Stevens), held that a

discretionary trading account in commodity futures is not a

security because such accounts lack the “common enterprise”

element required for an investment contract under Securities

Exchange Commission v. Howey, 328 U.S. 293 (1946). We

agree.

Further, we reject plaintiffs’ contention that the account

involved here, though not a security, should be treated as such

because it was fraudulently misrepresented to include the

essential elements of a common enterprise.

This appeal also presents substantial questions whether the

district court should have stayed plaintiffs’ other claims pend-

ing arbitration, and whethez in all events the lawsuit is barred

by a one-year limitation period provided for in the contract

in question. Finally, for reasons set forth later, we have been

obliged to consider, sua sponte, and have determined that an

implied private right of action exists under the Commodity

Exchange Act.?

I. FACTS

Plaintiffs, as customers of the broker-dealer defendant, Mer-

rill Lynch, lost a substantial sum of money in the highly

volatile and speculative futures market. These losses were

allegedly sustained due to Merrill Lynch's mismanagement of

plaintiffs’ discretionary commodity accounts in a manner con-

trary to representations made when the contracts were made.

2In Kelley v. Carr, —— F.2d —— (6th Cir. 1980) (decided March

——, 1980 File No. 78-1091/2), our court noted that the federal courts

are in conflict over the continuing validity of a private implied right

of action under the Commodity Exchange Act, following the 1974

amendments to the Act. The Kelley court, however, found it unneces-

sary “ F ig a the issue under the circumstances presented in that

case. .at—,

A-4

4 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

In 1973, plaintiffs opened several accounts for trading com-

modity futures in defendant's “Guided Commodities Account

Program.” In the written Customer Account Agreement, the

parties agreed to submit any dispute under the contract to

arbitration within one year after the accrual of such claim. As

Merrill Lynch interprets the program, a customer deposits

an amount he is prepared to risk in his own commodity trading

account. Merrill Lynch further claims that although specific

recommendations for purchase and sale are made by commodi-

ties specialists, the ultimate decision to act or not is made only

upon the customer's direct order. However, plaintiffs have

raised a question of fact with respect to that issue in the

pleadings and Merrill Lynch has acknowledged that, for the

purposes of this appeal only, the plaintiffs’ commodity trading

accounts must be deemed discretionary, with trading control

in the hands of Merrill Lynch.

Plaintiffs allege that Merrill Lynch fradulently misrepre-

sented how the account would be handled with respect to

other accounts in the same program. They insist that the

discretionary account was represented to involve several

unique elements in that: (1) the program involved a speci-

fied number of investors who could not withdraw their capital

for a minimum of 18 months; (2) the accounts were to he

controlled by an individual trader who could direct buy/sell

decisions on a broad basis and thereby control fluctuations in

the market; (3) the capital availability and buying power

generated by control over the group of accounts would create

a multibuyer effect allowing the trader to buy as though he

were buying five times greater the amount than if dealing

with a separate account.

To support these contentions, plaintiffs state that after they

opened the first account of $100,000 Merrill Lynch made all

trading decisions and exercised complete control over plain-

tiffs’ accounts. Initially, plaintiffs realized profits on the trad-

ing activity and at one point withdrew $101,007.80. Later, the

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No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 5

accounts declined in value and plaintiffs suffered excessive

trading losses which they blame upon improper and excessive

trading activities and a failure to observe the “stop loss” pro-

cedures represented to exist as part of the program. On sev-

eral occasions, plaintiff John J. Curran requested that the ac-

counts be closed and that plaintiffs be “cashed-out.” On each

occasion, except the final one (at which time plaintiffs’ capi-

tal had been reduced to approximately $6,000), defendant

either refused to follow his advice or convinced Curran that

he was required to stay in the program for 18 months. In

April, 1974, the defendants assented to plaintiffs’ demands to

“cash-out” the accounts. At that time plaintiffs assert that the

accounts had declined in value approximately $175,000. Sig-

nificantly, Merrill Lynch had in the meanwhile been paid

$44,500 in commissions.

A commodity future is a standardized contract for the pur-

chase and sale of a fixed quantity of a commodity to be

delivered in a specified future month at a price agreed upon

when the contract is entered into. See generally Bromberg,

Securities Laws § 4.6, at 82.181 (1975). Futures contracts

are traded by futures commission merchants and floor brokers

on national exchanges, or “contract markets,” which are regu-

lated by the Commodity Futures Trading Coimmission

(CFTC).

Generally, a futures contract seller is characterized as being

in a “short” position since he must deliver the commodity in

accordance with the contract in order to receive the purchase

price. The purchaser of a futures contract is labeled as holding

a “long” position in that he must pay the contract price before

receiving the commodity. Ordinarily, the number of trades

far excceds the number of actual deliveries since futures

contracts are the subject of speculation by traders sccking

to profit from their trading acumen, rather than from actually

A-6

6 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

delivering or receiving the commodity involved. As Judge

Kinneary stated in Berman v. Bache, Halsey, Stuart, Shields,

Inc., 467 F. Supp. 311, 315-16 (S$.D. Ohio 1979), “a commodi-

ties future contract is little more than a wager that the mar-

ket price of a given commodity will change in a given

direction by a specified future date.” Normally, the trader's

expectation of profit arises solely from speculative hope based

upon his expertise in the market.

Although bare commodities are generally not considered

securities, some courts have determined that an investment

contract is formed when commodity accounts are managed

by the seller or affiliate? Typically, a customer tradjng in a

discretionary commodity account gives the broker authority

to buy and sell at the broker's discretion, without prior con-

sultation with the customer. Discretionary accounts are more

common for commodities where fast trading is required due

to sharp movement in prices, a factor further magnified by

the high leverage that results from generally low margin

requirements.

While the underlying commodities themselves do not con-

stitute securities, whether a discretionary commodity account

constitutes an investment contract, and thus a security under

the federal securities laws, is a current topic of dispute in

the federal courts. The question is particularly difficult where

there is no actual pooling of the customer's funds with those

of other investors.

Whether a particular financial arrangement is considered

an “investment contract,”? and therefore subject to the filing

requirements of Section 5, Securities Act of 1933, and the

3 See, o.9.. Securities & Exchange Commission v. Continental Com-

modities Corp, 497 F.2d 516, 520 nO (Sth Cir, 1971); Glen-Arden

Commodities, lve, v. Constantino, 493 F.2d 1027 (2d Cir, 1974); Sinva,

lac, v. Merrill Lynch, Pierce, Fenner & Smith, Inc,, 253 F. Supp. 359

(S.D.N.Y. 1966).

4Section 2(1) of the Securities Act of 1933, 15 U.S.C. §77(b) (1),

and Section 3(a) (10) of the Securities Exchange Act of 1934, 15 U.S.C.

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No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 7

antifraud provisions of Section 10 and Rule 10b-5 of the

Securities Exchange Act of 1934, is usually determined by

measuring the arrangement against the requirements set forth

in Securities & Exchange Commission v. Howey, supra. In

Howey, the Supreme Court defined an investment contract

as “. . . a contract, transaction or scheme whereby a person

invests his money in a common enterprise and is led to expect

profits solely from the efforts of the promoter or third

party... .” Id. at 298-99. It is universally recognized that the

Howey test is comprised of three basic elements: (1) an

investment of money, (2) in a common enterprise, with (3)

profits to come solely from the efforts of others. Further,

although the Supreme Court offered little guidance in defining

these elements, it did note that the definition of a security,

[E]mbodies a flexible rather than static principle, one

that is capable of adaptation to mect the countless and

variable schemes devised by those who seck the use of

money by others on the promise of profits.

Id. at 351. See also United Housing Foundation, Inc. v.

Forman, 412 U.S. 837, 852 (1975).

The current debate usually focuses on whether a horizontal

or a vertical relationship satisfies the “common enterprise”

language of Howey. Plaintiffs assert that the common enter-

prise requirement is met by a vertical relationship, which

78c (10) include the term “investment contract” in the definition of

a security:

The term “security” means any note, stock, treasury stock,

bond, debenture, evidence of indebtedness, certificate of interest

or participation in any profit-sharing agreement, collateral-trust

certificate, preorganization certificate or subscription, transfer-

able share, investment contract, voting-trust certificate, certifi-

cate of deposit for a security, fractional undivided interest in

oil, gas, or other mineral rights, or, in general, any interest or

instrument commonly known as a “security,” or any certificate

of interest or participation in, temporary or interim certificates

for, receipt for, guarantee of, or warrant or right to subscribe

to or purchase, any of the foregoing. (Emphasis added.)

15 U.S.C. §77b(1).

A-8

8 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

essentially is a one-on-one arrangement between the customer

and broker. Horizontal relationships are those between an

individual investor and the pool of other investors. In rend-

ering summary judgment against plaintiffs’ securities claims

the district court applied the horizontal approach adopted in

Milnarik v. M-S Commodities, Inc., supra.

In Milnarik, Justice Stevens began his inquiry by observing

that, in searching for the meaning and scope of the word

“security,” courts should disregard form in favor of substance

and place the emphasis on economic reality. Tcherepnin v.

Knight, 389 U.S. 332 (1967). He observed that not “every

conceivable arrangement that would fit a dictionary definition

of an investment contract was intended to be included within

the statutory definition of a security.” Id. at 375-76. Justice

Stevens interpreted Securities & Exchange Commission v.

Howey, supra, as stressing the significance of the common

enterprise element in determining whether particular invest-

ment contracts are securities. The original complaint in

Milnarik alleged a discretionary arrangement remarkably

similar to the relationship here. The court noted, however,

that “the success or failure of those other [customer's] con-

tracts had no direct impact on the profitability of plaintiffs’

contract. [The broker's] various customers were represented

by a common agent, but they were not joint participants in the

same investment enterprise.” Id. at 276. The significance

of this finding is found in Milnarik’s adoption of the district

court's further determination that:

In essence, this contract creates an agency-for-hire

rather than constituting the sale of a unit of a larger en-

$ For cases adopting the horizontal commonality approach, see also,

Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977)

(reaffirms Milnarik); Wasnowic v. Chicago Board of Trade, 352 F.

Supp. 1066 (M.D. Pa. 1972), 7 without opinion, 491 F.2d 752 (3rd

Cir.), cert. denied, 416 U.S. 949 (1974); Berman v. Bache, Halsey,

Stuart, Shields Co., 467 F. 1% 311 (S.D. Ohio 1979); Arnold v. Bache

& Co., 377 F. Supp. 61 (M.D. Pa. 1973); Stuckey v. du Pont Glore

Forgan, Inc., 59 F.R.D. 129, 131 (N.D. Cal. 1973).

A-9

No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 9

terprise. No matter how many different persons Nelson

became an agent for under similar or even identical dis-

cretionary contracts, his relationship with each would

remain as that of agent and principal. Each contract

creating this relationship is unitary in nature and each

will be a success or failure without regard to the others.

Some may show a profit, some a loss, but they are inde-

pendent of each other. No matter how many discretion-

ary trading accounts Nelson may have had with other

principals, the “security” “issued” to the plaintiffs, their

discretionary trading account, could not be offered to

anyone else. Although this Court recognizes that the

registration requirements of Section 5 are for the pro-

tection of the public and that any exemption therefrom

must be strictly construed against one claiming it, Se-

curities and Exchange Commission v. Ralston Purine Co.,

[346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494]; Securities

and Exchange Commission v. Culpepper, 270 F.2d 241

(2d Cir. 1959), the unitary nature of the contract here

involved is not overcome even when the transaction is

viewed most strongly against the defendants.

Id. at 277.

We reject plaintiffs’ assertion that a pooling of investors’

interests is not essential to a finding of common enterprise

and hold that Justice Stevens’ reasoning in Milnarik best com-

ports with the language of J/owey since the agreement entercd

into here was solely between plaintiffs as investors, and Merrill

Lynch as broker, and it did not include a “common enterprise”

clement. Therefore, we conclude the district court had no

jurisdiction under the federal securitics laws and properly

dismissed those claims for failure to state a cause of action.

By adopting Milnarik, we necessarily reject the vertical

commonality approach primarily championed by the Fifth

Circuit’s decision in Securitics & Exchange Commission vy.

Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974).

A-10

10 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

In Continental Commodities, the district court followed the

Seventh Circuit's reasoning in Milnarik, supra, primarily be-

cause each individual invested in different accounts and the

investors had no expectation that they would share in a com-

mon fund comprised of the return on their investments.®

The Fifth Circuit, however, refused to adopt the Milnarik

approach and emphasized its view that a pro rata sharing of

profits is not critical to a finding of commonality. Rather,

the court preferred a resilient standard which would comport

with the remedial purposes of the Securities Act of 1933 and

the Securities Exchange Act of 1934. The court applied a

test which the Ninth Circuit formulated to deal with the

various pyramid-type investment schemes challenged in the

courts as securities: a “common enterprise is one in which

the fortunes of the investor are interwoven with and depen-

dent upon the efforts and success of those secking the invest-

ment or of third parties.” Securities & Exchange Commission

v. Koscot Interplanetary, Inc., 497 ¥.2d 473 (5th Cir. 1974),

quoting Securities & Exchange Commission v. Glen W. Turner

Enterprises, 474 F.2d 476, 482 n. 7 (9th Cir.), cert. denied,

414 U.S. 821 (1973).?_ Further, the court expressed the notion

6 it is interesting to note that the SEC had argued unsuccessfully

before the district court in Continental Commodities, supra, that

“trading in discretionary commodities accounts engaged in by Con-

tinental Commodities fell within the ambit of the term security, as

defined by the Sccurities Act of 1933 and the Securities Exchange

Act of 1934." 497 F.2d at 520.

71In Brodt v. Bache & Co., Inc., 595 F.2d 459 (9th Cir. 1979), the

Ninth Circuit recocnized its prevailing definition of “common enter-

prise” as one in which the fortunes of the investor are interwoven

with and dependent upon the efforts and success of those secking the

investment or of third persons. However, the court noted its incon-

sistency with Milnarik’s strict pooling requirement for discretionary

commodity accounts. The Brodt court then distinguished a discretion-

ary commodity account from its general test by stating:

["]In the instant case, the investor's return, while specifically

determined by the commodities market. is also clearly affected

by the expertise of the person doing the trading. .. . the success

or failure of Bache as a brokerage house docs not correlate with

individual investor profit or loss. On the contrary, Bache could

reap large commissions for itself and be characterized as suc-

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No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. ll

that “the critical factor is not the similitude or coincidence

of investor input, but rather the uniformity of impact of the

promoter’s efforts.” 497 F.2d at 478.

In Continental Commodities the Fifth Circuit vigorously

criticized Milnarik’s elevation of the pooling ingredient to

exalted status and held that “the critical inquiry is confined

to whether the fortuity of the investments collectively is

essentially dependent upon promoter expertise. . . . That it

may bear more productive fruits in the case of some options

than it does in others should not vitiate the essential fact that

the success of the trading enterprise as a whole and customer

investments individually is contingent upon the sagacious

investment counselling of Continental Commodities.” Id. at

522.8 Although this approach has attracted some si:port.?

we believe that no horizontal common enterprise can exist wn-

less there also exists between discretionary account customers

cessful, while the individual accounts could be wiped out. Here.

strong efforts by Bache will not guarantee a return nor will

Bache'’s success necessarily mean a corresponding success for

Brodt. Weak efforts or failure by Bache will deprive Brodt_of

potential gains but will not necessarily mean that he will suffer

serious losses. Thus, since there is no direct correlation on

cither the success or failure side, we ho!d that there is no

common enterprise between Bache and Brodt.

Id. at 461. Specifically, Brodt concluded that “merely furnishing in-

vestment counsel to another for a commission, even when done by wa

of a discretionary commodities account, does not amount to a common

enterprise.” Id. at

8 See also Merrill Lynch, Pierce, Fenner & Smith v. Goldman,

A F.%d 129 (Bth Cir.). cert. denied. Ss. —, 100 S.Ct. 76

(1979); Moody v. Bache & Co., 570 F.2d 523 (5th Cir. 1978); Booth

v. Peavey Co. Commodities Services, 430 F.2d 132 (8th Cir. 1970)

(without explanation the court found a cause of action lies for

churning a commodities account under the securities laws).

9See Commercial Iron & Metal Co. v. Bache & Co., 478 F.2d 29

(10th Cir. 1973), cert. denied, —— U.S. —, 99 S.Ct. 1229 (1979)

(dictum); Booth v. Peaven Co. Commorities Services, 430 F.%d 19°,

133 (8th Cir. 1970) (prior to Milnarik); Marshall v. Lamson Rrot. &

Co., 368 F.Supp. 486 (S.D. Iowa 1974) (emphasis on “pooling” of funds

in Milnarik-sense is too strict or literal limitation on definition of

“investment contract”); Johnson v. Arthur Esprey, Shearson, Hammell

& Co., 341 F. Supp. 764 (S.D.N.Y. 1972): Berman v. Orimer Trading,

Inc. 201 F. Supp. 701 (S.D.N.Y. 1968): Mahen v. Rewnolds & Co.,

282 F. Supp. 423 (S.D.N.Y. 1968). See also Consolo v. Hornblower &

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12 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

themselves some relationship which ties the fortunes of each

investor to the success of the overall venture. Thus in our

view the finding of a vertical common enterprise based solely

on the relationship between promoter and investor is incon-

sistent with Howey.

Further support for Milnarik’s rationale is found in ?erman

v. Bache, Halsey, Stuart, Shields, Inc., 467 V. Supp. 311, 315-

16 (S.D. Ohio 1979), where Judge Kinneary observed that:

a finding of a common enterprise based solely upon the

fact of entrustment by a single principal of money to

an agent effectively excises the common enterprise re-

quirement of Iowey. The test would simply require (1)

the investment of capital (2) with the expectation of

profit through the efforts of others, for nothing more is

involved in a single discretionary trading account. Al-

though the precise meaning of the phrase “common en-

terprise” is far from clear, nowhere in Jlowey or later

Supreme Court decisions is it intimated that that phrase

is somehow redundant of other elements of the definition

of a security.

Id. at 319.

Even though we conclude that a discretionary commodity

account is not a security, plaintiffs still claim the district

court erred in dismissing the securitics claims because while

a “common enterprise” was not shown to exist, it was none-

theless fraudulently promised. In short, plaintiffs make the

Wecks-Hemphill, Noves, Inc, 436 F. Supp. 447 (N.D. Ohio 1976),

where the court determined that a non-discretionary trading account

in a commodities future was not an investment contract under the

securities laws. However, in defining what is required to find an

investment contract the Consolo court stated that a contract situation

involving only two persons. ic., the investor and his stock broker,

docs not admit of the common cnterprise which is essential to the

existence of an investment contract. Id. at 452.

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No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 13

interesting argument that the unfulfilled and fraudulent prom-

ise of a “common enterprise” with other Merrill Lynch custo-

mers itself brings the actual agreement made within the

definition of a “security” and hence confers jurisdiction under

the federal securities laws. Under such a circumstance, they

urge it was improper for the district court to have entered

summary judgment under Rule 56 because the deposition and

affidavits submitted by the parties in connection with the

motion for summary judgment raise a fact question of whether

a “common enterprise” existed.'®

We have earlier noted that the facts here are virtually

identical to those in Milnarik, supra. One significant excep-

tion, however, is that the Milnarik court did not deal with the

situation where the account is claimed to involve a pooling

of funds, whereas in this case the plaintiffs allege that such

misrepresentation occurred. The Milnarik court stated:

This characteristic of common enterprise is completely

lacking in the present case. Even assuming that Nelson

in fact solicited and collected money from numerous

parties, no allegations are made that a common enterprise

existed comprised of all people possessing discretionary

account contracts with him. No claim is made that

Nelson traded in a uniform manner for cach of these

accounts. Even if he had so uniformly traded, no

pooling of funds for a common purpose is alleged. Nel-

son was apparently simply an agent for a number of

separate and distinct principals, the plaintiffs being one

such principal. The plaintiffs in no way can be viewed

as having invested in a common enterprise with other

suppliers of venture capital.

Id. at 278. (emphasis added).

10 Upon summary judgment the inferences to be drawn from the

underlying facts contained in supplemental materic!s must be viewed

in a light most favorable to the party opposing the motion, United

States v. Diebold, 369 U.S. 654, 655 (1962), and facts which are

A-14

l4 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

The evidentiary matter before the district court included

a deposition of Lawrence McMann, a Merrill Lynch customer

account executive, and a counter affidavit of James Olin,

Manager of a Detroit-area Merrill Lynch office. Olin stated

that regardless of what plaintifis may have been told, their

account was handled independently of others involved in the

program, and was never used in a manner that would suggest

a common enterprise with the companion accounts. McMann

testified, however, that although the account may have been

handled as suggested by Olin, the Currans were given a dif-

ferent description of the account. Essentially, McMann

stated that the account offered to the Currans was unique:

the trader acted as controller of a group of accounts thus

allowing him to make buy/sell decisions on a broader basis

and thereby control fluctuations in the market. This control

was represented as a trading capability five times greater than

for a separate account.

We do not view this tempting expectancy as elevating the

trading account to the full dignity of a security. Essentially

it remained an agency for hire. It is true that plaintiffs may

have hoped that defendant's control over a number of ac-

counts would increase the agent's clout in the market. The

fact remains, however, that the plaintiffs always understood

that their return would be based on a one-to-one vertical

relationship with the trader. They knew there was no con-

tractual tic to other accounts.

IV.

Merrill Lynch asserted in the district court that plaintiffs’

action was time-barred because the one year limitation per-

iod agreed upon in writing by the parties expired before the

complaint was filed. The “Commodity Account Agreement”

asserted, if supported by evidentiary material, must be accepted as

true. Day v. United Auto Aerospace Agric. Workers, 466 F.2d 83

(6th Cir, 1972).

A-15

No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 15

provided for submission of all disputes to arbitration within

one year after the cause of action accrued."'

The accounts were opened April 5, 1973, and August 20,

1973. Plaintiffs claimed that they could not reasonably have

known that defendant's representations were false until April,

1974. Judge Thornton, however, declined to rule on Merrill

Lynch’s claim that the action accrued more than one year

prior to the April 5, 1976 filing of the complaint.

Merrill Lynch argues that absent a controlling statute to

the contrary, a provision in a contract may validly limit the

time for bringing an action for breach of contract to a period

less than that prescribed in the general siatute of limitations,

at least if the shorter period is reasonable. See, ¢.g., Order

of United Commercial Travelers of America v. Wolfe, 331

U.S. 586, 608 (1947).

Plaintiffs, however, assert that the one year limitation pro-

vision is tied to the arbitration clause in their diserctionary

trading account agreement, and that if arbitration is imper-

missible, the one year limitation also dies with it.'2, We agree.

Vv.

Plaintiffs assert that arbitration is not a favored remedy

with respect to commodity futures brokerage transactions,

citing statutory and administrative limitations upon the en-

forcement of an agreement to arbitrate. Specifically, Section

1? “Arbitration must be commenced within one year after the cause

of action accrued by service upon the other of a written demand for

arbitration or a written notice of intention to arbitrate, naming

therein the arbitration tribunal.”

12 Plaintiffs’ also assert that the Supreme Court in Will:o v. Swan,

346 U.S. 427 (1953), determined that an agreement to arbitrate cannot

preclude an aggrieved purchaser of a “security” from secking a

— remedy under section 14 of the Securities Act of 1933.

‘urther, the Wilko principle has been held equally applicable to

claims under the Securitics Exchange Act of 1931. However. due

to our finding that the discretionary cornmodity account involved

in this case is not a security, this argument is inapplicable.

A-16

16 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

5a of the Commodity Exchange Act, 7 U.S.C. §7a(11), as

amended by the Commodity Futures Trading Commission

Act of 1974, P.L. 93463, 88 Stat. 1389, effective April 21, 1975,

provides that each contract market is required to:

(11) provide a fair and equitable procedure through

arbitration or otherwise (such as by delegation to a

registered futures association having rules providing for

such procedures) for the settlement of customers’ claims

and grievances against any member or employee thereof;

Provided, That (i) the use of such procedure by a cus-

tomer shall be voluntary, (ii) the procedure shall not

be applicable to any claim in excess of $15,000, (iii) the

procedure shall not result in any compulsory payment

except as agreed upon between the parties.

(Emphasis added).

In 1976, the CFTC adopted regulations under Section 7a

(11) providing that no pre-dispute arbitration agreement may

be enforced unless the agreement is contained in a separate

document executed by the customer and contains adequate

warnings in large print.'? 17 C.F.R. § 180.1 et seq. (1976).

1317 C.F.R. § 180.3 states:

Voluntary procedure and compulsory payments.

(a) The use by customers of the dispute settlement procedures

established by contract markcts pursuant to the Act or this Part

or of the arbitration or other dispute settlement procedures

specified in an agreement under paragraph (b) (3) of this sec-

tion shall be voluntary. The procedures so established shall

prohibit any agreement or understanding pursuant to which

customers of members of the contract market agree to submit

claims or grievances for settlement under said procedures prior

to the time when the claim or grievance arose, except in ac-

cordance with paragraph (b) of this section.

(b) No futures commission merchant, floor broker or arso-

ciated person shall enter into any agreement or understanding

with a customer in which the customer agrees, prior to the

time the claim or grievance arises, to submit such claim or

grievance to any settlement procedure except as follows:

(1) Signing the agreement must not be made a condition for

the customer to utilize the services offered by the future com-

mission merchant, floor broker or associated person;

A-17

No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 17

Although the cause of action here arose before the effective

date of the CFTC Act, plaintiffs argue that the Act's limita-

tion upon arbitration should be retroactively applied. Plain-

tiffs urge that retroactive application is justified because the

agreement here is an adhesion contract, forced upon plaintiffs

and other like customers through unequal bargaining power

and does not comply with the requirements of Section 180.3.

For its part, Merrill Lynch argues that the clause including

the agreed limitation period is enforceable and that therefore

the entire case should have been dismissed in the district

(2) If the agreement is contained as a clause or clauses of a

broader agreement, the customer must separately endorse the

clause or clauses containing the cautionary language and other

provisions specified in this section;

(3) The agreement may not require the customer to waive

the right to seek reparations under section 14 of the Act and

Part 12 of these regulations. Accordingly, the customer must be

advised in writing that he or she may seek reparations under

section 14 of the Act by an election made within 45 days after

the futures commission merchant, floor broker or associated per-

son notifies the customer that arbitration will be demanded

under the agreement. This notice must be given at the time

when the futures commission merchant, floor broker or asso-

ciated person notifies the customer of an intention to arbitrate.

The customer must also be advised that if he or she seeks

reparations under section 14 of the Act and the Commission

declines to institute reparation proceedings, the claim or griev-

ance will be subject to the preexisting arbitration agreement and

must also be advised that aspects of the claims or grievances

that are not subject to the reparations procedure (i.e. do not

constitute a violation of the Act or rules thereunder) may be

required to be submitted to the arbitration or other dispute

settlement procedure set forth in the preexisting arbitration

agreement.

(4) The customer agreement must contain cautionary lan-

guage, printed in large boldface type, to the following effect:

WHILE THE COMMODITY FUTURES TRADING COMMIS-

SION (CFTC) RECOGNIZES THE BENEFITS OF SETTLING

DISPUTES BY ARBITRATION. IT REQUIRES THAT YOUR

CONSENT TO SUCH AN AGREEMENT BE VOLUNTARY.

YOU NEED NOT SIGN THIS AGREEMENT TO OPEN AN

ACCOUNT WITH [name]. See 17 CFR 180.1-180.6.

BY SIGNING THIS AGREEMENT. YOU MAY BE WAIVING

YOUR RIGHT TO SUE IN A COURT OF LAW, BUT YOU ARE

NOT WAIVING YOUR RIGHT TO ELECT AT A LATER DATE

TO PROCEED PURSUANT TO SECTION 14 OF THE COM-

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18 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

court. Merrill Lynch contends that neither in their briefs nor

in their argument to the district court did plaintiffs argue that

CFTC Regulation § 180.3, 17 C.F.R. § 180.3, could or should

be applied retroactively. That regulation did not become

effective until November 29, 1976, months after the case had

been briefed and argued to the district court. Therefore, we

are urged to disregard this argument because it is raised for

the first time on appeal. See Bannert v. American Can Co.,

525 F.2d 104 (6th Cir.), cert. denied, 426 U.S. 942 (1975);

Schneider v. Electric Auto-Lite Co., 456 F.2d 366, 375 (6th

Cir. 1972); Cashner v. United States Steel Corp., 327 F.2d 533

(6th Cir, 1964) (court refused to consider issue not raised

until a supplemental appellate brief was filed). The Supreme

MODITY EXCHANGE ACT TO SEEK DAMAGES SUSTAINED

AS_A_ RESULT OF A VIOLATION OF THE ACT, IN THE

EVENT A_ DISPUTE ARISES, YOU WILL BE NOTIFIED IF

[name] INTENDS TO SUBMIT THE DISPUTE TO ARBITRA-

TION, IF YOU BELIEVE A VIOLATION OF THE COMMOD-

ITY EXCHANGE ACT IS INVOLVED AND IF YOU PREFER

TO REQUEST A SECTION 14 “REPARATIONS” PROCEEDING

BEFORE THE CFTC, YOU WILL STILL HAVE 45 DAYS IN

WHICH TO MAKE THAT ELECTION.

(5) If the agreement specifies a forum for settlement other

than a procedure established pursuant to section Sa(11) of the

Act or this Part, the procedures of such forum must comply

with the requirements of § 180.5.

to section Sa(11) of the Act or this Part may require partics

utilizing such procedure to agree, under applicable state law,

submission agreement or otherwise, to be bound by an award

rendered in the procedure, provided that the agreement to

submit the claim or grievance to the procedure was made in

accordance with paragraph (b) of this section or that the agree-

ment to submit the claim or grievance was made after the

claim or grievance arose. Any award so rendered shall be en-

forceabie in accordance with applicable law.

(d) The procedure established by a contract market pursuant

to the Act or this Part shall not establish any unreasonably

short limitation period foreclosing submission of customers’

claim or grievances or counterclaims (permitted by § 180.4 or

this Part) by contract markct members or employees thereof.

(7 U.S.C. 7a(11), 12a (Supp. V, 1975))

{41 FR 42946, Sept. 29, 1976, as amended at 42 FR 3433, Jan. 18,

1977]

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No, 77-1300 Curran, et al. v. Merrill Lynch, Inc. 19

Court, however, in Hormel vy. Helvering, 312 U.S. 552, 556

(1941), stated:

There may always be exceptional cases or particular

circumstances which will prompt a reviewing or appellate

court, where injustice might otherwise result, to consider

questions of law which were neither pressed nor passed

upon by the court or administrative agency below.

In their supplemental brief, plaintiffs assert that Ames v.

Merrill Lynch, Pierce, Fenner & Smith, 567 F.2d 1174 (2d

Cir. 1977), supports the retroactive application of CFTC

Reg. § 180.3 to bar arbitration here, and in so doing, also

negates the one year limitation period written into it. In

Ames, plaintiff signed the same standard form Merrill Lynch

agreement as involved in this case. The plaintiff opposed a

stay of arbitration on the ground that 17 C.F.R. § 180.3, which

became effective on November 29, 1976, after the agreement

was entered into, should be applied retroactively to render

the arbitration agreement null and void. The Second Circuit

agreed that the CFTC intended section 180.3 to be given

retroactive effect and further observed that:

A court must apply the law as it exists at the time of

its decision, even where the law has changed during the

pendency of the action, unless the statute or legislative

history reveals an intention of prospective application

only, or retroactive application would lead to “manifest

injustice.” Bradley v. Richmond School Board, AVG U.S.

696, 711, 94. S.Ct. 2006, 40 L.Ed.2d 476 (1974). In apply-

ing this principle to the instant case, we are called upon

to determine: (1) whether the Commission had the an-

thority to apply the provisions of $180.3 to all arbitra-

tion agreements; (2) whether the Commission intended

the application of the regulation to arbitration agree-

ments antedating the reaulation; and (3) whether, given

the authority and intention to make the regulation effec-

tive as to antedated agreements, the particular circum-

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20 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

stance that the dispute arose before the effective date of

the regulation nevertheless precludes its application.

Id. at 1177.

Before making its determination, the Ames court traced the

evolution of Section 180.3. The Commodity Exchange Act, 7

U.S.C. §7a(11), required only that each contract market

provide a “fair and equitable procedure through arbitration

or otherwise” for settlement of claims up to $15,000, and that

the use of such procedure be voluntary on the part of the

customer. Neither arbitration of claims over $15,000 nor arbi-

tration outside the contract market were mentioned in the

Act. The Commission, however, determined that arbitration

outside the literal scope of the Act should be regulated, and

under provisions in the Act giving the Commission authority

“to make and promulgate such rules and regulations as are

necessary to effectuate any of the provisions or to accomplish

any of the purposes of the act,” 7 U.S.C. § 12a(5), the Com-

mission promulgated section 180.3.

Initial proposals submitted by the Commission sought to bar

any agreement to arbitrate future disputes, but provided that

grievances arising out of agrecments actually entered into

prior to the adoption of the regulations should be exempted.

Later, the Commission decided that pre-dispute agreements

would be tolerated, but only under conditions designed to

insure that arbitration was truly voluntary. Also, the ex-

emption for agreements antedating the regulation was with-

drawn. As stated by the Ames court, “[i]nstead, the thrust was

to include even pre-existing arbitration agreements in the new

order of things.” Id. at 1178. Therefore, in making the final

regulation effective on November 29, 1976, the Commission

announced that “on the effective date of proposed § 180.3(b),

all pre-dispute arbitration agreements that do not satisfy the

conditions set forth in the proposed rule will be null and void,

including those heretofore signed by customers.” 41 Fed. Reg.

42,944 (Sept. 29, 1976). The announcement made no mention

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No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 21

of the treatment to be accorded disputes already in existence.

On this basis, the Ames court held that “§ 180.3 fairly read

should apply to all arbitration agreements existing at the effec-

tive date of the regulation.” Id. at 1179."* See also Tamari

v. Bache & Co. (Lebanon) S.A.L., 565 F.2d 1194 (7th Cir.

1977), cert. denied, 435 U.S. 905 (1978) (Swygert, J. dissent-

ing); Rothberg v. Loeb, Rhoades & Co., 445 F. Supp. 1336

(S.D.N.Y. 1978); Milani v. Conticommodity Services, Inc.,

462 F. Supp. 405, 406-07 (N.D. Cal. 1976).

The retroactive effect of an alteration in a regulatory scheme

generally depends upon whether it affects litigation at a point

which causes a result so unfair and inequitable that it is un-

constitutional. Plaintiffs here sought equitable relief from the

arbitration clause in their customer commodity account agrec-

ment at an early stage of the litigation, and no surprise or

other unfairness is apparent upon the record. Under these

circumstances we do not find that retroactive application of

Regulation § 180.3 would result in manifest injustice.

Further, we note that the plaintiff in Ames appealed from a

district court order compelling arbitration and staying trial of

his action, and therefore, sought equitable relief from the

effect of a similar arbitration agreement at the same stage

of the proceedings as the plaintiffs in the instant case."3 In

support of its result, the Ames court stated:

Shortly after its creation, in 1975, the Commission un-

dertook an examination of the use of arbitration in the

14 Judge Meskill issued a vigorous dissent to the Amcs majority,

noting in part that the Commodity Futures Troding Commission, as

amici, explained “that its intent to reach pre-cxisting agreements

did not extend to cases where a dispute had already arisen at the

time the regulation was adopted.” 567 F.2d at 1181. Apparently

Judge Meskill agreed with the basic portent of the regulation but

thought that application to disputes already in existence was ex-

tremely unfair, He perceived no problems in allowing retroactive

effect “to the extent necessary to bring about an immediate change

a ett | — without unnecessarily cutting off accrued rights.”

. at -83.

18 We note that in Arkoosh v. Dean Witter & Co. 571 F.2d 437

(8th Cir. 1978), plaintiff contended that section 180.3 rendered invalid

A-22

22 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

futures industry. It learned that arbitration was frequent-

ly conducted not under the auspices of the contract

markets regulated by the Commission but through arbi-

tration sponsored by the New York Stock Exchange or

other securities-oriented organizations. It also became

apparent that in many cases arbitration was not under-

taken voluntarily by customers, but that customers were

compelled to agree to pre-dispute arbitration clauses as

a precondition to doing business. Indeed, this practice

was found to be so prevalent that a customer might effec-

tively be frozen out of the futures market if he refused

to execute a predispute agreement. 41 Fed.Reg. 27,526

(July 2, 1976); 41 Fed.Reg. 42,945 (Sept. 29, 1976).

The Commission received written comments and took

oral testimony on March 5, 1976. At this hearing con-

dlucted by the Commission, representatives both of Mer-

rill Lynch and Shearson Hayden Stone conceded that a

customer could not do futures business with the firm if he

refused to sign a predispute arbitration agreement. Com-

modity Futures Trading Comm'n, Oral Hearing on Arbi-

tration and Other Dispute Settlement Procedures 32-34,

37, 82-98. (March 5, 1976); see generally 41 Fed.Reg.

42,945 (Sept. 29, 1976).

the arbitration clause in his customer agreement. The claim. how-

ever, was not made until after the district court had issued a stay

of arbitration, and an arbitration award in defendant's favor had

been granted. The Arkoosh court recognized the holding in Ames v.

Merrill Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d 1174, 1179 (2d

Cir. 1977), and in fact concurred by stating: “[tlhe regulation voided

all existing pre-dispute arbitration agreements in contracts for the

purchase of commodities unless certain conditions ore met.” Id, at

438. Further, the Arkoosh court recognized that generally “a court

is to apply the law in effect at the time it renders its decision, unless

doing so would result in manifest injustice... ." 571 F.2d at 438.

(citations deleted). Within this context, the Eighth Circuit noted the

district court's ruling that the chronological sequence demonstrated

that plaintiff had ample time after the effective date of Section 180.3,

and before the submission to arbitration, to urge the Court to recon-

sider its interpretation of the Customer Agreement. The defendant,

having obtained the arbitration award, would suffer substantial

injustice if the case was reopencd, since plaintiffs assertion of his

rights under the new regulation was untimely. Otherwise, the plain-

tiff could play it both ways, and seck relief to have arbitration sct

aside only if an unfavorable award is ordered.

A-23

No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 23

Id. at 1178. In response to its fact-finding, the Commission,

in announcing the effective date of the regulation, reiterated

the nullity of all pre-dispute arbitration agreements not com-

plying with the conditions of Section 180.3 but did not men-

tion any exemption for existing disputes. 41 Fed. Reg. 42,942-

44 (Sept. 29, 1976). As further noted in Ames, “any such

exemption would hardly conform to the notion, stated by the

Commission itself, that customers who had entered into agree-

ments before adoption of the regulation needed and were

entitled to the protections of the rule no less than those cus-

tomers who signed agreements after November 29, 1976.” Id.

at 1177.

Our determination that Section 180.3 should be retro-

actively applied to invalidate the arbitration agreement in

this case compels the further conclusion that the one year

limitation period provided for therein is also inapplicable. The

one year limitation was expressly contingent wpon the institu-

tion of arbitration proceedings and the language of the agree-

ment nowhere extends to any residual and underlying court

action which may otherwise exist.

Accordingly, the order compelling arbitration and staying

this action with respect to plaintiffs’ commodity claims must

be reversed and remanded to the district court.

VI.

Merrill Lynch has acknowledged that it did not consider

the partial summary judgment in its favor, from which this

appeal is taken, to have extended to or to have affected in

any way the plaintiffs’ claims under the Commodity Exchange

Act (CEA)."® Nevertheless, affirmance of the partial sum-

16 We construe the order of dismissal entered by the district court

to grant only the relief requested by defendant's motion to dismiss,

which related only to those allegations of the complaint purporting to

state claims under the Sccurities Act of 193% and the Securities Ex-

change Act of 1934. However, we view the pleadings and allegations

in plaintiffs’ complaint purporting to state a claim under the Com-

A-24

24 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

mary judgment and consequent remand to the district court

for proceedings on the balance of the case necessarily raises

the further question whether the federal district court has

jurisdiction to entertain the remaining claims arising under

the Commodity Exchange Act.'”

Although the CEA does not expressly provide for a private

right of action to recover damages, an implied right of action

was generally thought to exist prior to the 1974 amendment

of the Act.'® Consistent with this view, no issue concerning

the continuing validity of the implied right of action was

raised it, the court below, nor in this appeal.’* Nevertheless,

modities Exchange Act, 7 U.S.C. §1, et seq., as unimpaired by the

— court’s order of dismissal as, indeed, are the pendent state

claims.

17 In Alexander v. Aero Lodge No. 735, 565 F.2d 1364 (6th Cir. 1977),

cert. denied, ——— U.S. ——, 98 S.Ct. 2849 (1978), we recognized that

a court of appeals should ordinarily limit its review of an interlocu-

tory order to the narrow question of whether the district court abused

its discretion and refrain from intruding into the merits of the case

only to the extent necessary to decide that issue. We determined,

however, that the rule is one of orderly judicial administration and

not a limit on jurisdictional power. Therefore, it is generally recog-

nized that a court possesses the jurisdictional power on the appeal

of an interlocutory order under 28 11.S.C. §1292(a)(1) to reach and

decide other aspects of the order which would not be independently

reviewable by interlocutory appeal. Id. at 1370. See also Mansbach

v. Prescott, Ball & Turben, 598 F.2d 1017, 1022 (6th Cir. 1979) (inter-

locutory order staying a pending action submitted to arbitration is

oe, under section 1292(a) (1) if the underlying action is legal

n nature).

18 See, e.g., Deaktor v. L. D. Schreiber & Co.. 479 F.2d 529 (7th

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) (anti-

manipulation provision ef 7 U.S.C. $13b); Booth v. Pearey Co.

Commoditn Servicers, 430 F.2d 132 (8th Cir. 1970) (7 U.S.C. %6b

anti-fraud provision): Goodman v. WH. Ientz & Co., 265 F. Supp. 440

(N.D. I). 1967) (86b); United Egg Producers v. Baner International

Corp., 311 F. Supp. 1275 (S.D.N.Y. 1970) ($13b); MeCurnin v. Kohl-

meyer & Co., 340 F. Supp. 1338 (E.D. La. 1972) (86b); Johnson v.

Arthur Espey, Shearson, Hammill & Co.. 341 F. Supp. 764 (S.D.N.Y.

1972) ($6b); Arnold v. Bache & Co., Inc., 377 F. Supp. 61 (M.D.

Penn. 1973) (& Gb).

19 Plaintiffs allege that this cause of action arose in 1974, prior to

the amendment of the Commodity Exchange Act. At that time it

was generally held that a private cause of action existed under the

A-25

No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 25

to provide direction to the district court upon remand and to

avoid further delay in this already protracted litigation, we

review this issue and specifically agree that an implie:! private

right of action survived the 1974 amendments to the Act.?¢

The original Commodity Exchange Act of 1936 established

a scheme for regulating trading in agricultural commodities

futures based primarily on the concept of self-regulation. The

chief means of enforcement of the Act emanated from the

Commission’s regulations and the rules of each Exchange, to

which the courts added an implied private right of action.

The increasing effect of commodities trading on the nation’s

economy, and significant escalations in annual trading volume,

also gave rise to increased instances of fraud and manipula-

tion. By 1974, Congress became aware that the system of

Act. See note 18, supra. In 1974 Congress amended the Commodity

Exchange Act, 7 U.S.C. 41, et scq., effective in 1975, to create a

comprehensive regulatory procedure for the processing of complaints

within the newly-established Commodity Futures Trading Commission

(CFTC). This action was filed on April 5, 1976. Since the amend-

ment of the CEA the courts have adopted contrary views with regard

to the continuing validity of the pre-1974 implied right of action.

Although the parties have not raised this issue on appeal, it is well

established that “a court is to apply the law in effect at the time it

renders its decision, unless doing so would result in manifest iniustice

or there is statutory direction or a history to the contrary.”

Bradley v. Richmond School Board, 416 U.S. 696, 711 (1974). See

also Cort v. Ash, 422 U.S. 66, 74 (1975); Thorpe v. Housing Authority

of the City of Durham, 393 U.S. 268 (1969); Bush v. State Industries

Co., 599 F.2d 780 (6th Cir. 1979); Weisenberger v. Huecker, 593 F.2d

49 (6th Cir.), cert. denied, ———- U.S. ——, 100 S.Ct. 170 (1979).

20 In determining to proceed to the merits of this issue we recognize

that in Burks v. Lasker, —— U.S. ——, 99 S.Ct. 1831, 1826 n. 5 (1979).

the Supreme Court stated that “the question of whether a cause of

action exists is not a question of jurisdiction. and thereiore may be

assumed without being decided.” Under circumstances where peti-

tioners never disputed the existence of a private right of action and

the question had not been put to a test, the decision in Burks offers

a tempting invitation to bypass the issuc. That course. in fact, was

taken by the court in Chipser v. Kohlmener & Co., 690 F.2d 1061, 1067

& n. 14 (Sth Cir. 1979) when faced with the precise issue in this

case. In Chipser, however, plaintif? had filed his complaint prior to

the amendment of the Act and the court determined that the implied

right of action issue should be addressed in the first instance by the

district court. For purposes of this appeal, however, we find the

more expedient route is to apply the law in effect at the time of our

decision and to reach the implied right of action issue.

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26 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

self-regulation had decreased in effectiveness and sought to

buttress the enforcement of the CEA safeguards?"

In 1974 Congress amended the Commodity Exchange Act

to create the Commodity Futures Trading Commission and

established an administrative procedure under which viola-

tions of any rule, provision, or regulation of the Act could be

redressed by the commencement of an administrative proceed-

ing before the CFTC to recover reparations.?? 7 U.S.C. § 18

(e). Reparations procedures may be initiated against futures

commission merchants, floor brokers, commodity trading ad-

visers and commodity pool operators, but not against the con-

tract markets (exchanges). A judgment rendered in a repara-

tions proceeding remains subject to appeal in the courts of

appeal and is enforceable in the district courts. Additionally,

the 1974 amendments grant the CFTC plenary power over

futures commission merchants and contract markets.27 The

21 In Smith v. Groover, 468 F.Supp. 105 (N.D. Ill. 1979), the court

noted that Congress traced the inadequacies of the self-regulatory

scheme to a number of factors:

First, the enforcement staffs of commodities exchanges were

unable to handle the vastly increased trading volume. HLR.

Rep. No. 975, 93d Cong., 2d Sess. 46 (1974). Also, exchanges

faced “growing difficulties ... as a result of private plaintiffs

seeking damages against self-regulatory activities of the mar-

kets.” Id. at 48. ause an implied right of action could be

brought against an exchange for failure to enforce its own rules,

“attorneys to several boards of trade had been advising the

boards to reduce—not expand exchange regulations designed to

insure fair dealing.” Id. at 46. Finally, an exchange simply

lacked the necessary motivation and vigilance to effectively

police its own members.

Id. at 109-10.

22 Commodity Futures Trading Commission Act of 1974, Pub. L. No.

93-463, 88 Stat. 1389 (codificd at 7 U.S.C. $1 et seq.). The Act was

further amended in 1978. Futures Trading Act of 1978, Pub. L. No.

95-405, 92 Stat. 865 (codified at 7 U.S.C. $1 et seq.).

23 The CFTC may suspend or revoke the registration of a futures

commission merchant or the designation of a contract market. 7

U.S.C. §7b. 9. The CFTC is authorized to issue cease and desist

orders against contract markets, 7 U.S.C. § 13a, and may assess civil

penalties of up to $100,000 against futures commission merchants and

contract markets. 7 U.S.C. §9, 13a. Perhaps most significantly, the

CFTC or the Attorney General at the CFTC'’s request, may bring

an action in federal district court against futures commission mer-

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No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 27

creation of the CFTC was to provide a “strong Federal regula-

tory umbrella” to support the regulatory cflorts of the ex-

changes in curbing unfair trading practices by providing pub-

lic enforcement measures at both the exchange and individual

level. H.R. Rep. No. 975, 93d Cong., 2d Sess. 48 (1974).

Although the 1974 amendments represented a thorough re-

vision of congressional regulation over the commodities futures

trading industry, the Act did not speak to the continuing

validity of the pre-existing private right of action. We believe

the legislative history of the CFTC Act, however, indicates that

Congress intended to extend further protection to the ex-

change customer, rather than to extinguish existing forms of

protection. This observation is bolstered by the fact that

Congress recognized self-regulation as a “commendable and

noble concept and useful in such a complex atmosphere as

that which surrounds futures trading.” H.R. Rep. No. 975,

93d Cong., 2d Sess. 48 (1974).

In addition to providing a more comprehensive regulatory

scheme, it appears that Congress was motivated by a desire

to clarify the jurisdictional dispute developing between the

Commodity Exchange Commission and the Securities Exchange

Commission with regard to commodities regulation under sec-

tion 2 of the 1974 Act. Congress, therefore, vested exclusive

jurisdiction over commodities futures trading with the CFTC.

7 U.S.C. § 4a. See Smith v. Groover, 468 F. Supp. 105 (N.D.

Ill. 1979); R. J. Merely & Son Co. v. Stotler & Co., 466 F. Supp.

345 (N.D. Ill. 1979); Hofmayer v. Dean Witter & Co., 459

F. Supp. 733 (N.D. Cal. 1978). The exclusive jurisdiction

provision, however, should not be construed as extinguishing

the pre-existing private right of action by implication since the

thrust of the provision was to ensure that regulatory bodies

chants and contract markets for a restraining order, an injunction

or a writ of mandamus to compel compliance with the Act or its

regulations devised by the CFTC. 7 U.S.C. $13a-1. Further, the

1978 amendments to the CEA added a provision whereby a state

ay me an action under the CEA on behalf of its citizens. 7 U.S.C.

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28 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

other than the CFTC would not interfere with the orderly

development and enforcement of commodities regulation.

H.R. Rep. No. 93-975, 93 Cong., 2d Sess. 28 (1974). This

result is further shown by additional language in the Act in

which Congress provided that “nothing in this section shall

supersede or limit the jurisdiction conferred on the courts of

the United States or any State”. 7 U.S.C. §2. Further, it is

apparent from the following statement that Congress intended

to supplement existing remedies, rather than create a substi-

tute for them:

The vesting in the Commissicn of the authority to have

administrative law judges and apply a broad spectrum of

civil and criminal penalties is likewise not intended to

interfere with the courts in any way. It is hoped that

giving the Commission this authority will somewhat

lighten the burden upon the courts, but the entire appeal

process and the right of final determination by the courts

wre expressly preserved. (emphasis added).

Remarks of Senator Talmadge, 120 Cong. Rec. 30459

(1974).4

' The CFTC has interpreted the Act as implicitly authorizing

private actions, and asserts that the right must be presumed

to have survived the 1974 amendments unless Congress ex-

plicitly abolished the private remedy in enacting the amend-

ments. Statement of CFTC Concerning Referral of Private

Litigation Under the Doctrine of Primary Jurisdiction. 41

Fed. Reg. 18171 (May 5, 1976). See also Smith v. Groover,

468 F. Supp. 105 (N.D. Ill. 1979) (amicus brief submitted by

CFTC).

24In 1978. Congress further amended the CEA, P.L. 95-405 (Oct.

1, 1978), 7 USC. §1, et seq., to expressly allow the states, through

Attorneys General or security regulations, to initiate actions in federal

district court for CEA violations. This section docs not indicate that

Congress intended to extinguish private rights of action but rather,

was meant to buttress the regulatory power of the CFTC, which is

unable to regulate all aspects of commodities lag | effectively. Sce

also Jones v. B.C. Christopher & Co., 466 F. Supp. 213 (D. Kan. 1979).

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No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 29

The judicial canon of construction which allows the court

to grant considerable deference to the interpretation of a stat-

ute by an agency charged with its administration also supports

the conclusion that the 1974 act did not preclude a private

right of action. See United States v. Consumer Life Ins. Co.,

430 U.S. 725, 752 (1977); NLRB v. Boeing Co., 412 U.S. 67,

75 (1973). However, the Supreme Court indicated in Piper

v. Chris-Craft Industries, Inc., 430 U.S. 1, 41, n. 27 (1976),

that the administrative deference rule is not applicable where

the narrow legal issue is whether a cause of action should be

implied in favor of a particular class of litigants by judicial

interpretation. See also National Super Spuds, Inc. v. New

York Mercantile Exchange, 470 F. Supp. 1256 (S.D.N.Y.

1979).

We admit that a recognized private right of action need

not be re-examined every time the statutory scheme from

which it is implied is altered. Nevertheless case law since

the 1974 amendments has raised at least some uncertainty as

to the continued vitality of the implicd right, especially when

analyzed in light of Cort v. Ash, 422 U.S. 66 (1975).?5 See also

Smith v. Groover, 468 F. Supp. 105, 112 (N.D. TIL 1979).

The Supreme Court established a four-part test in Cort

to determine whether Congress intended a private remedy to

he implicd from legislation which created enforceable rights

but remained silent as to the form of remedy. Since the 1974

23 In response to these devclopments the courts have cither: (1)

presumed the continuing validity of the private remedy without

takingg into account Cort v. Ash, 422 U.S. 66 (1975), or the 1974

amendments. Sce Ames v. Merrill Lynch, Pierce, Fenner & Smith,

567 F.2d 1174, 1176 (2d Cir. 1977); Case & Co. v. Board of Trade of

Citu of Chicago, 523 F.2d 355 (7th Cir. 1975); Kelley v. Carr, 442

F. Supp. 346 (W.D. Mi. 1977) rev'd on other grounds, —- F.2d ——

(Gth Cir. 1980); E. F. Hutton & Co. v. Lewis, 410 F. Supp. 416 (E.D.

Mi. 1976); (2) determined that the 1974 amendments were intended

to serve as a supplemental rather than a substitutionary remedy, and?

therefore permit plaintiffs to bring a direct cause of action in federal

court without attempting to exhaust the administrative reparations

remedy provided by Congress. Sce, e.9., Smith v. Groover, 468 F.

Supp. 105 (N.D. Ul. 1979): Jones v. B.C. Christopher & Co., 466 F.

Supp. 213 (D. Kan. 1979); R. J. Hercely & Son Co. v. Stotler & Co., 466

F. Suse. 345 (N.D. Ill. 1979); (3) held that while the 1974 amend-

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30 Curran, et al. y. Merrill Lynch, Inc. No. 77-1300

amendments, the implied right of action inquiry has centered

primarily on the issues of Congress’ legislative intent in enact-

ing the 1974 amendments and the consistency of the statutory

scheme with the Commodity Exchange Act.

In Cort v. Ash, supra, the Court delineated four relevant

factors to determine whether a private right of action may

be implied under a federal statute:

First, is the plaintiff “one of the class for whose especial

benefit the statute was enacted,” . . . that is, does the

statute create a federal right in favor of the plaintiff?

Second, is there any indication of legislative intent, ex-

plicit or implicit, either to create such a remody or to

deny one? .. . Third, is it consistent with the under-

lying, purposes of the legislative scheme to imply such

a remedy for the plaintiff? ... And finally, is the cause

of action one traditionally relegated to state law, in an

area basically the concern of the States, so that it would

be inappropriate to infer a cause of action based solely

on federal law?

Id. at 78. See also Transamerica Mortgage Advisors, Inc. v.

Lewis, —— U.S. ——, 48 U.S.L:W. 4001, 4002 (November 15,

1979); Touche Ross & Co. vy. Redington, —— U.S. ——, 99 S. Ct.

2479 (1979); Cannon v. University of Chicago, 441 U.S. 677

(1979): Piper v. Chris-Craft Industries, 430 U.S. 1, 37 (1978).

The first clement is casily satisfied, Clearly investors in the

commodities markets are within the class “for whose especial

benefit the statute was enacted.” The legislative history of

ments did rot extinguish the implied right of action previously

recornized, a plaintifl must first exhaust his administrative remedics.

See Burtels v. International Commodities Corp.. 435 F. Supp. 865 (D.

Conn. 1977): Consolo v. Hornblower & Weelss-Hemphill, Noyes, Ive.,

436 F. Supp. 417 (NLD. Ohio 1976), or: (4) determined that the com-

bination of the 1974 amendments and the decision in Cort v. Ash,

supra, extinguished the private cause of action since the CEA as

amended did not mect the four-part test of Cort. See Berman v.

Bache, Halsey, Stuart, Shields, Inc., 467 F. Supp. 311 (S.D. Chio 1979);

National Super Spuds, Inc. v. New York Mercantile Exchanac, 470

a ore 1256 (S.D N.Y. 1979); Fischer v. Rosenthal & Co., 481 F. Supp.

(N.D.

Tex. 1979). ‘

A-31

No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 31

the 1974 amendments shows that the primary purpose was to

protect against manipulation of markets and to protect in-

dividuals who desire to participate in futures market trad-

ing.”* 7 U.S.C. § 6b. See, e.g., Smith v. Groover, 468 F. Supp.

105 (N.D. Ill. 1979); Berman v. Bache, Halsey, Stuart, Shields,

Inc., 467 F. Supp. 311, 322 ($.D. Ohio 1979); National Super

Spuds, Inc. v. New York Mercantile Exchange, 470 TV. Supp.

1256 (S.D.N.Y. 1979). Put see Liang v. Hunt, 477 F. Supp.

891 (N.D. Ill. 1979) (distinguished claims involving excessive

speculation and price manipulation in violation of statutory

limits from fraud actions).

The second factor, whether there is any explicit or implicit

inclication of legislative intent to grant or deny a private right

of action, also supports the implication of a private action

under the CEA. The legislative history of the 1974 amend-

ments indicates that Congress was aware of the fact that the

federal courts had implied the existence of a private right of

action under the CEA.?”_ Further, the “exclusive jurisdiction”

76 See 120 Cong. Rec. Senate 30466 (1974) (remarks of Sen. Dole):

120 Cong. Rec. Senate 24998-99 (1974) (remarks of Sen. Clark).

See also Ames v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 567

F.2d 1174, 1179 (2d Cir. 1977).

27 Congress recognized that the “courts [had] implied a private

remedy for individual liticants in the Commodity Exchance Act.” Re-

marks of Rep. Poage, 119 Cong. Ree. 41353 (1973). In fact, the

Senate Committee on Agriculture and Forestry inserted a proviso

into the exclusive jurisdiction section, 2(a) (1), that, “[nlothing in

this scction shall supersede or limit the jurisdiction conferred on

courts of the United States or any State.” The proviso resulted from

testimeny warning that the cumulative cffect of the reparation pro-

vision and the exclusive jurisdiction section might be interpreted

as repealing the jurisdiction of the courts to heur private damage

actions. Hearings or S. 2485, S. 9578, S. 2938 and IER. 13113. Before

the Senate Committce on Agriculture and Forestry, 93d Cong., 2d

Sees. pt. 1 at 205, pt. 3 at 737 (1974). See also Smith v. Groover,

468 F. Supp. 105, 114 (N.D. Ti. 1979).

Further, it is a rule of statutory construction that Congress 1s

presumed to have been aware of existing constru tions of statutes

ond doos not intend to overrule them if the provision is re-enacted

in substantially the same form. Alebama Ass'n. of Ins. Agents v

Roard of Governors of the Fedcrel Reserve System. 533 F.2d 224

= Satan vee Hofmayer v. Dean Witter & Co., 459 F. Supp. 733 (N.D

al. ).

A-32

32 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

provision of the CFTC, 7 U.S.C. §2 (amended),?® does not

indicate an intention to abolish the pre-1974 implied right of

action, as previously noted, particularly since Congress in-

cluded in Section 2(a)(1) that “nothing in this section shall

supersede or limit the jurisdiction conferred on the courts of

the United States or any State.” The Conference Committee

which adopted the language offered by the Senate explained

in its report that the purpose of the amendment was “to make

clear that nothing in the Act would supersede or limit the

jurisdiction presently conferred on courts of the United States

or any State.” 120 Cong. Rec. 34997 (October 10, 1974);

120 Cong. Rec. 34737 (October 9, 1974). Therefore, we be-

lieve that the reparations procedure established in the 1974

amendments, as construed by the relevant legislative history

shows that Congress intended the administrative remedy to

serve “as a supplement to, rather than a substitute for, the

existing private right of action.” Smith v. Groover, supra, 468

F. Supp. at 113-14. But see National Super Spuds, supra, 470

F. Supp. at 1260; Befman, supra, 467 F. Supp. at 322.2%

The third element of Cort, whether the implication of a pri-

vate right of action would be consistent with the underlying

287 U.S.C. §2 states, in part:

That except as hereinabove provided, nothing contained in

this section shall (i) supersede or limit the jurisdiction at

any time conferred on the Securities and Exchange Commission

or other regulatory authorities under the laws of the United

States or of any State, or (ii) restrict the Securities and Ex-

change Commission and such other authoritics from carrying

out their duties and responsibilities in accordance with such

laws. Nothing in this section shall supersede or limit the jur-

isdiction conferred on courts of the United States or any State.

29 National Super Spuds. Inc. v. New York Mercantile Exchange.

470 F. Supp. 1256 (S.D.N.Y. 1979), and Berman v. Bache, Halsey,

Stuart, Shields, Inc. 467 F. Supp. 311, 322 (S.D. Ohio 1979), also

held that the establishment of an extensive administrative reparations

process and the plenary grant of disciplinary and regulatory power

to the Commodity Futures Trading Commission evidenced a con-

fressional intent to deny a private right of action under the Act,

through application of the maxim “expressio unius est exclusio al-

terius”; the expression of one thing is the exclusion of another.

A-33

No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 33

purposes of the Act is also met in this case. As stated in

Smith v. Groover:

[T]he continued existence of a private right of action for

aggrieved investors is ery! compatible with the lan-

guage and purpose of the CFTCA. Affording injured

commodities futures buyers a multiplicity of remedies

against futures traders will deter the sort of :nanipulative

pricing practices alleged to have been committed by de-

fendants. As shown above, Congress intended the repara-

tions proceedings in the CFTC to constitute an alternative

to the more time-consuming, cumbersome, expensive and

formal adjudication of private claims in federal or state

courts. The availability of a variety of remedies thus

harmonizes well with the Congressional intent to protect

the public from fraud and price manipulation.

Recent administrative interpretations of the CFTCA

also demonstrate the compatibility of a private right of

action with the pu s of the Act. The CFTC has con-

sistently interpreted the reparations section as permitting

commodity customers an election of forums in which to

pursue their claims. Sce 41 Fed.Reg. 3994 (1976); 41

Fed. Reg. 18472 at n.5 (1976); Stucki v. American Options

Corp., CCH Comm.Fut.L. Rep. {| 20,559 at 22,283 (CFTC

1978). The CFTC will not even entertain a reparation

claim if civil court litigation involving the same facts and

parties has been instituted. 17 C.F.R. § 12.21(a)(7)

(1977). We recognize that “. . . the consistent construc-

tion of a statute ‘by the agency charged with its enforce-

ment is entitled to great deference by the courts.” United

States v. Consumer Life Insurance Co., 430 U.S, 725, 752,

97 S.Ct. 1440, 1154, 52 L.Ed.2d 4 (1977), quoting from

NLRB vy, Bocing Co., 412 US. 67, 75, 95 $.Ct. 1952, 36

L.Ed.2d 752 (1973); see also, Chemehuevi Tribe of In-

dians v. Federal Power Commission, 420 U.S. 395, 409.

10, 95 S.Ct, 1066, 43 L.Fd.2d 279 (1975).

468 F. Supp. at 115. But see National Super Spuds, supra, 470

F, Supp. at 1260; Berman, supra, 467 F. Supp. at 322-23.

A-34

3 Curran, et al. v. Merrill Lynch, Ine. No. 77-1300

The fourth factor, whether the implication of a private right

would! infringe on an area of state concern is not crucial here

since Cort v. Ash, supra, at 84-85, indicates that a court should

imply a private remedy when relegation to state law would

frustrate the purpose of the federal statute. This factor favors

the implication of a private right of action since the regulation

of commodity futures trading is essentially a matter of federal

concern.

Our analysis of the effect of the 1974 amendments to the

Commodity Exchange Act, within the framework of Cort v.

Ash, persuades us that the amendments did not impair the

validity of the pre-existing implied private right of action.

Rather, Congress appears to have armed aggrieved investors

with a supplementary remedy in creating the reparations pro-

cedures to be followed under CFTC authority.

Finally our research persuades us that the primary juris-

diction doctrine should not be invoked here to compel ex-

haustion of the administrative reparations procedures before

instituting a private action,?®

The primary jurisdiction doctrine is intended to ensure

that private suits will not interfere with the orderly develop-

ment of precedent or exercise of discretion by an ageney.

The principal reason for invoking the doctrine in an action

arising under the CEA would be to avoid interfering with

the CFTC’s administration of the regulatory scheme, ‘The

39 The primary jurisdiction doctrine is a rule of judicial construc-

tion which permits a court, in exercise of its sound discretion, to

defer to an administrative agency for the initial resolution of certain

disputes, This doctrine is usually invoked when resolution of a dis-

pute will require special skill or knowledge peculiar to a certain

acency, See United States v. Western Pac, R. Co., 352 U.S, 59 (1956);

Jones, supra, at 222; Hofmayer, supra, at 748; Shearson Hayden Stone,

Ine, v. Lunber Merchants, Inc,, 423 F. Supp, 559 (SD. Fla, 1976).

The courts have generally refused to annly the doctrine to fraud

claims under the Commodity Exchanue Act. See, CH. Smith v. Groov-

er, 468 F. Supp. 105 (N.D, Ill. 1979); Tlofmayer v. Deen Witter & Co.,

459 F. Supp. 733 (N.D. Cal, 1978), But See Bartels v. International

Commodities Corp., 495 F. Supp. 865 (D. Conn, 1977); Consolo vy,

ere ney & Weeks-Hemphill, Noyes, Inc., 436 F. Supp. 447 (N.D.

io :

A-35

No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 35

preservation of an implied right of action docs not, of course,

interfere with the rulemaking power conferred upon the

CFTC by Congress or with the opportunity of the Com-

mission to apply its expertise through that power to comple-

ment the orderly development of precedent and procedure.

In determining whether to invoke the primary jurisdic-

tion doctrine the courts must balance the need for special

expertise and the extent to which administrative relief is

available. Eluska v, Andrus, 587 F.2d 996, 999 (9th Cir.

1978). In a case where the primary issues involve allega-

tions of fraud rather than a complex manipulative scheme,

the special expertise of the CFTC is not a prerequisite to a

just resolution, The facts here are far different from those

which prompted reversal an! remand in Chicago Mercantile

Exchange v. Deaktor, 414 U.S. 113 (1973). There the dis-

trict court of appeals had refused a stay of an action against

the Chicago Mercantile Exchange charging antitrust and

Commodity Exchange Act violations through manipulation of

the futures market in fresh eggs. The stay was requested

to afford the Commodity Exchange Commission an opportun-

ity to determine whether the conduct under scrutiny violated

the CEA or its own rules. The Supreme Court in Deaktor

observed, as it had in Ricci v. Chicago Mercantile Exchanye,

409 U.S. 289 (1973), that the trial court “should avail itself

of the abilities of the Commission to woravel the intricate

amd technical facts of the commodity industry and to arrive

at some judgment as to whether the Exchange had con-

ducted itself in compliance with the law.” Id. at 115. It there-

fore observed that claims “should be routed in the first: in-

stance to the agency whose adminisivative fimetions appear

to encompass adjudication of the kind of substantive claims

made against the [defendant].” Id. at 115. See also Jones

v. B.C. Christopher & Co., 466 F. Supp. 218 0D. Kan, 1979),

No such intricate and technical facts ave involved here. On

the contrary, the CFTC has itself noted that the application

of primary jurisdiction is “rarely, if ever" appropriate for

A-36

36 Curran, et al. vy. Merrill Lynch, Inc. No. 77-1300

claims within “private litigation secking damages for alleged

violations of provisions of the Act,” and that “[tJhe issues

raised by a particular fraudulent scheme, however compli-

cated, are entirely within the conventional ability of the

courts.” Fed. Reg. Doc. 76-12906 (May 3, 1976). See also

Jones, supra, at 222-23; Shearson Hayden Sione, Inc. v. Lumber

Merchants, Inc., 423 F. Supp. 559 (S.D. Fla. 1976).

CONCLUSION

Judge Phillips’ dissent accurately calls attention to a

number of Supreme Court decisions which, we agree, indi-

cate a tendency to be more restrictive in implying a private

right of action. While we recognize potential merit in this

view, especially in light of the comprehensive administrative

scheme embodied in the 1974 amendments, we are not per-

suaded that Congress intended to extinguish the pre-exist-

ing private right of action which had been generally acknowl-

edged to exist under the Act. See note 18, supra. What we

have done here, in our view, is to preserve the general con-

cept of a private right of action and to provide for its con-

tinuing development, not under the securities laws general-

ly, but under those laws of Congress which are more par-

ticularly related to the commodities market. This approach

provides greater sensitivity to the specialized concerns of

that area of commercial life, appears consistent with con-

gressional intent and also allows for the development of a

private right of action similar to the valuable body of law

that has grown under Section 10 of the Securities Exchange

Act and Rule 10b-5. It is arguable, of course, that some par-

ticular actions or claims may require initial submission to the

Commodity Futures Trading Commission under the primary

jurisdiction doctrine. Suffice it to say, however, that such

problems do not exist here and can be properly addressed

as they arise, on a case-by-case basis.

Accordingly, the partial summary judgment entered by the

district court denying plaintiffs’ relief on their claims under

A-37

No. 77-1300 Curran, et al. v. Merrill Lynch, Inc. 37

federal securities law is affirmed. However, that part of the

order which stays plaintiffs’ fraud claims under the Com-

modity Exchange Act is reversed and remanded to the dis-

trict court for proceedings consistent with this opinion.

Prius, Senior Circuit Judge. (Concurring in part and

dissenting in part.) I respectfully dissent from the holding

of the majority that an implied private right of action exists

under the Commodity Exchange Act. With this exception, I

concur in the majority opinion.

My dissent on the implied right of action issue is based

on the failure of Congress, when it amended the Act in 1974,

to specify that it intended to continue to allow private dam-

age actions despite its creation of an elaborate administrative

reparations procedure. See Transamerica Mortgage Advisors,

Inc. v. Lewis, U.S. ——, 48 U.S.L.W. 4001 (Nov. 13,

1979) (Congress’ express provision of alternative means to

enforce § 206 of the Investment Advisors Act of 1940 pre-

cludes implication of a private damage remedy thereunder);

Securities Investor Protection Corp. v. Barbour, 421 U.S. 412

(1975) (Securitics Investor Protection Act's assignment to

the SEC of “plenary authority” to supervise the SIPC pre-

cludes customers of failing broker-dealers from maintaining

private suits to compel SIPC to act for their benefit); Na-

tional Railroad Passenger Corp. vy. National Association of

Railroad Passengers, 414 U.S. 453 (1974) (§307(a) of the

Rail Passenger Service Act of 1970, which allows the At-

torney General to file suits to force railroads to comply with

the Act, negates any private cause of action to enforce com-

pliance). Cf. Touche Ross & Co. v. Redington, 442 U.S.

560 (1979) (no implied private damage remedy under § 17

(a) of the Securities Exchange Act of 1934); Taylor v.

Brighton Corp., -—— F.2d ——— (6th Cir. Feb. 14, 1980)

(no implied private damage remedy under § 11(¢) of OSHA);

Ryan v. Ohio Edison Co., 611 F.2d 1170 (6th Cir. 1979) (no

A-38

38 Curran, et al. v. Merrill Lynch, Inc. No. 77-1300

implied private right of action under the Bankruptcy Act to

prevent creditors from using informal methods to collect dis-

charged debts).

Justice Rehnquist, concurring in the decision of Cannon

v. University of Chicago, 441 U.S. 677, 718 (1979), stated

what I believe to be the guiding principle:

Not only is it “far better” for Congress to so specify when

it intends private litigants to have a cause of action,

but for this very reason this Court in the future should

be extremely reluctant to imply a cause of action absent

such specificity on the part of the Legislative Branch.

I would hold the plaintiffs have no implied private right of

action under the amended Commodity Exchange Act. See

Fischer v. Rosenthal & Co., 481 F. Supp. 53 (N.D. Tex. 1979).

A-39

MEMORANDUM RE MOTION

TO DISMISS AND STAY PROCEEDINGS

United States District Court

Eastern District of Michigan

Southern Division

(Filed Dec. 27, 1976)

Civ. No. 6-70683

J. J. Curran, et al., Plaintiffs, vs. Merrill Lynch,

Pierce, Fenner and Smith, a Delaware Corp.,

Defendant.

In their Complaint herein plaintiffs allege that the

amount in controversy is in excess of $10,000 and that

jurisdiction is conferred on this Court by Section 27 of

the Securities Exchange Act of 1934, by Section 22(a) of

the Securities Act of 1933, by 28 U.S.C. § § 1331, 1332

and 1337 and by pendent jurisdiction. They also allege

that the acts complained of occurred within this judicial

district.

The Court has here for consideration defendant's

Motion To Dismiss Or, In The Alternative, To Dismiss

In Part And Stay Proceedings Pending Arbitration. This

motion was argued before the Court and the parties

have submitted substantial and thorough briefs. Since

plaintiffs have submitted the deposition of one

Lawrence McMann and defendants have submitted the

affidavit of one James Olin, with supporting exhibits,

the motion herein will be treated as one for summary

judgment. Rule 12(b), F.R.Civ.P.

Plaintiffs, in their Reply Memorandum In Opposition

To Motion To Dismiss And Stay Proceedings, filed

August 25, 1976, set forth certain matters contained in

the Complaint which are here recited for purposes of

indicating the background against which this litigation

is set:

A-40

During the year 1973, Plaintiffs opened several

accounts with the Defendant brokerage firm, at

least two of which were for the purpose of

trading in commodity futures. The accounts were

opened after numerous representations were

made concerning Defendant's trading acumen

and the profits which would inure to Plaintiffs

as participants in Defendant's ‘Specialized

Guided Account Trading Program” (hereinafter

referred to as the “Program’’).

It is further alleged that as a condition to

participation in the Program, which was then

being offered by Defendant to persons across the

country through telephone and face-to-face

solicitations, Plaintiffs had to agree to all of the

terms and conditions established by Defendant

in connection with the Program. Among other

things, Plaintiffs agreed to participate in the

Program for at least eighteen (18) months and to

follow all of the Defendant's trading

“suggestions.” Other aspects of the Program, as

represented to Plaintiffs, were periodic reviews

by the local Speculative Sales Department

manager and specfic stop loss procedures

designed to limit the amount of capital which

could be lost by Plaintiffs.

After the Program accounts were opened by

Plaintiffs, Defendant made all trading decisions

and exercised complete control over Plaintiff's

accounts with complete reliance by Plaintiffs

upon Defendants’ actions and decisions.

Contrary to the unsupported allegations set forth

in Defendant’s memorandum, Plaintiffs ‘‘never

initiated or suggested any trade made by

Defendant in said commodity accounts.”

(Complaint, paragraph 17). Accordingly, the

A-41

accounts were “discretionary accounts” as that

term is defined and understood in the brokerage

community and in numerous judicial decisions.

Plaintiffs’ Complaint further sets forth that

Defendant, in breach of the agreement between

the parties and of the fiduciary duties owed to

Plaintiffs, committed fraudulent, reckless and

negligent acts motivated solely by self-interest in

connection with Plaintiffs’ accounts, resulting in

significant financial damage to the Plaintiffs.

Analyzing the relationship between Plaintiffs

and Defendant as described in the Complaint

and in the deposition of Lawrence McMann, an

employee of Defendant during the period at

issue, it is readily apparent that the accounts

maintained by Plaintiffs were not typical

commodity trading accounts or even typical

discretionary commodity accounts. By virtue of

their participation in the Program, Plaintiffs had

specialized commodity accounts quite unlike any

ordinary account. For example, Plaintiffs, who

were greatly concerned about their mounting

losses, requested on several occasions that they

be “cashed out’’ of their positions. In an

ordinary account, their wishes would be

promptly fullfilled but in the instant case

Defendant refused to follow Plaintiffs’ instructions

because Plaintiffs had not remained in the

Program for eighteen (18) months and ‘such

action was not in accordance” with the Program

(Complaint, paragraph 28). Furthermore, in an

ordinary commodity account, the funds invested

by the customer are segregated and _ utilized

solely in connection with trades executed for his

A-42

account. In the course of his deposition, Mr.

McMann testified that all funds received by

Defendant from participants in the Program were

transmitted to Defendants’ New York office

where these funds were pooled and used by

Defendant to engage in futures trading with the

Program participants sharing pro rata in the

contracts which were purchased or sold. This

pooling of interest or “common enterprise”

aspect of the Program is another indication that

these were no ordinary commodity accounts but

rather constituted an opportunity for a unique

form of deception.

In its Motion to Dismiss defendant moves:

1. That this action be dismissed pursuant to

Rule 12(b)(6) Fed.R.Civ.P., for the reason that

the limitation period agreed upon in writing by

the parties expired prior to filing of the

Complaint, or

2. That, in the alternative, the Court dismiss

pursuant to Rule 12(b)(6) Fed.R.Civ.P., those

allegations of the Complaint purporting to state

claims under the Securities Act of 1933 and the

Securities Exchange Act of 1934, to wit: Counts

IV, V and VI of the Complaint, and

3. Stay proceedings of the remaining clainis

pending arbitration, pursuant to the written

agreement of the parties and the Federal

Arbitration Act, 9 U.S.C. § 3.

As to the first ground for its Motion to Dismiss,

defendant's position is that the Commodity Accounts

Agreements entered into between plaintiffs and

defendant provided that all disputes be submitted to

A-43

arbitration and that such arbitration must be

commenced within one year after the accrual of the

cause of action. Defendant contends that the claims

alleged by plaintiffs in their Complaint filed April 5,

1976 accrued more than one year prior to its being filed,

and that the instant action is, therefore, time-barred.

The accounts which are the subject of this lawsuit were

opened with defendant on or about April 5, 1973 and

August 20, 1973. According to the allegations in

plaintiffs’ Complaint plaintiffs discovered the alleged

“false, fraudulent and deceitful nature of the

representations as set forth herein and at that time, in

April 1974, plaintiffs insisted the accounts be cashed

out’’ (Compl. p. 9). Plaintiffs allege that they ‘did not

know nor have any reasonable basis to know that the

said representations were false, but believed and relied

upon said representations as being true” (Compl. p. 9),

until sometime in April 1974. On the basis of said

allegations the Court will not at this posture of these

proceedings determine that plaintiffs’ action is

time-barred.

As to the second ground of defendant's Motion to

Dismiss, the defendant seeks dismissal of Counts IV, V

and VI because they purport to state claims under the

Securities Act of 1933 and the Securities Exchange Act

of 1934, when in fact the contracts involved are not

securities within the meaning of the Acts. The issue for

determination here is whether or not plaintiffs’

agreements/transactions with defendant involve

securities. The purchase and sale of commodity futures

contracts are the subject of the dealings between the

parties. The term “‘security’’ as used in the Act is

defined as follows:

The term “security’’ means any note, stock,

treasury stock, bond, debenture, evidence of

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indebtedness, certificate of interest or

participation in any profit-snaring agreement,

collateral-trust certificate, preorgainzation

certificate or subscription, transferrable share,

investment contract, voting-trust certificate,

certificate of deposit for a security, fractional

undivided interest in oil, gas, or other mineral

rights, or, in general, any interest or instrument

commonly known as a ‘security,’ or any

certificate of interest or participation in,

temporary or interim certificate for, receipt for,

guarantee of, or warrant or right to subscribe to

or purchase, any of the foregoing. 15 U.S.C.

§ 77b(1).

The operative term in the above definition is

“investment contract.’’ If plaintiffs’ agreements or

accounts with defendant were investment contracts then

a “security” situation existed and was subject to the

two Acts and plaintiffs’ cause of action is properly

founded jurisdictionally on them, as to Counts IV, V

and VI. Less simple is the determination of an

investment contract. The parties hereto are in

agreement and our research indicates that the Sixth

Circuit has not had occasion to speak to this issue. Two

Courts of Appeals have. They have reached opposite

conclusions, both courts relying on the guidelines laid

down by the Supreme Court in S.E.C. v. Howey Co.,

328 U.S. 293 (1946). The Howey case involved

investments by customers in citrus acreage in Lake

County, Florida. Customers were offered a land sales

contract and a service contract. They received warranty

deeds upon full payment on the purchase price. The

service contract gave Howey-in-the-Hills Service, Inc. a

leasehold interest and complete possession of the

acreage. The service company was in charge of the

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cultivation of the groves and of the harvesting and

marketing of the crops. An allocation of the net profits

was made based on a check made at the time of

picking. With respect to this operation the requirements

of the Securities Act of 1933 were not complied with. If

the transaction involved was an investment contract,

hence a security, then defendants were guilty of failing

to comply with the statutory and administrative rules in

making the offerings. The Court in Howey stated, at

page 297:

The legal issue in this case turns upon a

determination of whether, under the

circumstances, the land sales contract, the

warranty deed and the service contract together

constitute an “investment contract’’ within the

meaning of § 2(1).

The Court further went on to say, at pages 298-299;

By including an investment contract within the

scope of § 2(1) of the Securities Act, Congress

was using a term the meaning of which had

been crystallized by this prior judicial

interpretation. It is therefore reasonable to attach

that meaning to the term as used by Congress,

especially since such a definition is consistent

with the statutory aims. In other words, an

investment contract for purposes of the

Securities Act means a contract, transaction or

scheme whereby a person invests his money in a

common enterprise and is led to expect profits

solely from the efforts of the promoter or a third

party, it being immaterial whether the shares in

the enterprise are evidenced by formal

certificates or by nominal interests in the

physical assets empioyed in the enterprise. Such

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a definition necessarily underlies this Court's

decision in S.E.C. v. Joiner Corp., 320 U.S. 344,

and has been enunciated and applied many

times by lower federal courts. It permits the

fulfillment of the statutory purpose of

compelling full and fair disclosure relative to the

issuance of ‘‘the many types of instruments that

in our commercial world fall within the ordinary

concept of a security.’’ H.Rep.No. 85, 73d Cong.,

Ist Sess., p. 11. It embodies a flexible rather than

a static principle, one that is capable of

adaptation to meet the countless and variable

schemes devised by those who seek the use of

the money of others on the promise of profits.

This tripartite test has been applied by those courts

considering the question of whether an investment

contract has been made by an investor. As to tests one

and three, we think they must be deemed to be met in

the circumstances of the transactions here. Plaintiffs

invested large sums of money with defendant for the

purpose of gaining the benefit of its expertise in the

commodity trading market. They signed agreements

giving defendant the power and authority to buy and

sell for them. The parties are in disagreement as to

whether plaintiffs did or did not have the right to

direct/approve the transactions made by defendant in

their accounts. Plaintiffs contend they had no say in the

matter, while defendant says they did. Regardless of the

resolution of such dispute we deem it undeterminative

of the investment contract question. We think there can

be little question that plaintiffs invested their money

and were led to expect profits solely from the efforts of

defendant.

The troublesome test of the tripartite guidelines is the

second one, namely, that of a common enterprise. In

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Securities and Exchange Commission v. Continental

Commodities Corp., 497 F.2d 516 (Sth Cir, 1974) the Fifth

Circuit dealt with this in a case which also involved

commodity futures. The district court had held that the

element of common enterprise was absent and that,

therefore, no investment contract existed. ‘[T]he district

court deemed the requisite commonality absent for two

reasons: first, because each individual invested in

different options, the accounts of individual investors

were unrelated; and second, there was no

understanding or expectation that investors would share

in a common fund comprised of the returns on their

investments, These reasons constituted the very

impediments to a finding of commonality in Milnarik.’”

Continental, supra, p. 521, The Court of Appeals (in

Continental) then goes on to comment on the holding of

the Seventh Circuit in Milnarik which had declined to

find a common enterprise in a discretionary commodity

futures account, The Fifth Circuit, in Continental, stated

that it could not “accept’’ the Milnarik view and

reversed the determination of the district court. The

Court, in Continental, seems to take the view that the

element of common enterprise as such is less important

than the other elements and that if the tests of

“investment of money” and “led to expect profits solely

from the efforts of others” are met, the common

enterprise element somehow is blanketed in. The Court,

in Continental, points out that “the success of the

trading enterprise as a whole and customer investments

individually, is contingent upon the sagacious

investment counseling of Continental commodities.

This conclusion comports with the resilient approach

* Milnarik vo M-S Commodities, 457 F.2d 274 (7th Cir. 1972)

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this court adopted to the ‘solely from the effects of

others’ element in SEC v. Koscot Interplanetary, Inc.

and the similar approach to the common enterprise

element which that decision presaged.”* Continental,

supra, pages 522-523,

Our reading of Howey leaves us with the distinct

impression that the Court there laid down a test

comprising three elements, The Court in that relatively

short opinion reiterated this test and these elements a

number of times, the last of which was in the final

paragraph of the opinion where the Court stated:

The test is whether the scheme involves an

investment of money in a common enterprise

with profits to come solely from the efforts of

others,

In a previous paragraph the Court referred to a

‘‘profit-seeking business venture’ in which the

“investors provide the capital and share in the earnings

and profits; the promoters manage, control and operate

the enterprise.” Howey, supra, page 300. When the

Seventh [sic] Circuit in Continental uses the term

“resilient approach” it apparently does so in reliance on

the language in Howey where the Court, in reference to

its definition of investment contract (one that relies on

the three elements hereinabove set forth), says that it

“embodies a flexible rather than a static principle, one

that is capable of adaptation to meet the countless and

variable schemes devised by those who seek the use of

the money of others on the promise of profits” (Howey,

supra, page 299). We view this as a characterization of

* SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir, 1974).

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the definition set down by the Court and not as license

to interpolate or relax the necessary ingredients,

Plaintiffs in the instant case made an investment in

defendant broker's Guided Commodity Account

Program, giving defendant authority to trade in

commodities futures for plaintiffs’ account(s). Plaintiffs

at first realized profits from the trading that was done

on their behalf by defendant. Subsequently losses were

suffered by plaintiffs. Defendant's financial interest in

the transactions was limited to commissions, We are

unable to perceive how this sort of arrangement can be

held to involve a common enterprise, regardless of how

many other customers’ accounts were being handled by

defendant under similar arrangements.

We conclude that defendant's motion to dismiss

Counts IV, V and VI of the Complaint for failure to

state claims under the Securities Act of 1933 and the

Securities Exchange Act of 1934 should be granted for

the reason that no security was involved here since

there was no “investment contract’ as that term has

been construed by the Supreme Court in the Howey

case.

In light of the determination hereinabove made, we

conclude that the third ground of defendant's motion is

sound, If a security were involved herein the arbitration

provision contained in the agreement between the

parties would not be enforceable. Defendant, in its

Reply Memorandum at page 12, concedes this. Since,

however, we conclude that the parties hereto were not

dealing in securities the arbitration agreement is not

subject to the non-enforceability provision of the federal

securities acts and is, therefore, valid.

An order may be presented in accordance with the

foregoing.

By: /s/ Thomas P, Thornton

United States District Judge

Dated: 12-27-1976

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ORDER

United States District Court

Eastern District of Michigan

Southern Division

(Filed, Feb. 23, 1977)

Civ. No. 6-70683

J. J. Curran, et al., Plaintiffs, vs. Merrill Lynch,

Pierce, Fenner and Smith, a Delaware Corp.,

Defendant.

At a session of said Court held in the Federal

Building, Detroit, on February 23, 1977. Present,

Honorable Thomas P. Thornton, United States District

Judge.

The motion of Defendant to Dismiss or, in the

alternative, to dismiss in part and stay proceedings

pending arbitration, having come on for hearing, the

briefs of the parties with respect thereto having been

filed and considered, the Court being fully advised in

the premises, and the Court having rendered its

Memorandum Opinion with respect thereto dated

December 27, 1976,

IT IS HEREBY ORDERED that Counts IV, V and VI of

Plaintiff's Complaint be and the same hereby are

dismissed, and

IT IS FURTHER ORDERED that further proceedings

in this Court are hereby stayed pending completion of

proceedings in accordance with the arbitration

agreement between the parties.

/s/ Thomas P. Thornton

United States District Judge

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JUDGMENT

United States Court of Appeals

For the Sixth Circuit

(Filed May 12, 1980)

No. 77-1300

J. J. Curran, et al., Plaintiffs-Appellants, vs. Merrill

Lynch, Pierce, Fenner and Smith, a Delaware Corp.,

Defendant-Appellee.

Before Livley and Engel, Circuit Judges and Phillips,

Senior Circuit Judge.

APPEAL from the United States District Court for the

Eastern District of Michigan.

THIS CAUSE came on to be heard on the record from

the United States District Court fo

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