# Petition — New York Mercantile Exchange v. Leist

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1981
- **Citation:** 450 U.S. 910

## Text

No. §.0.- 7 5 q 3 oe : S. |

In THE

Supreme Court of the United
October Term, 1980

New York Mercantite EXxcuanece, Ricuarp B. Leving,
Howarp GasLer and ALFrep PENNISsI,

Petitioners,
Vv.
New Leist, Pour Smits and Incomco,

Respondents.

PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

Wuuium EK. Hecarty

80 Pine Street

New York, New York 10005
(212) 825-0100

Counsel for Petitioners

Of Counsel:

| Maurice Mounp

Rein, Mounp & Corton
125 Maiden Lane

New York, New York 10038

CuarLes Piatto

Epwarp P. Krugman
CaHitL Gorpon & REINDEL
80 Pine Street

New York, New York 10005

Question Presented

Is there a private cause of action for damages against a
commodity exchange (a designated “contract market” for
the trading of futures contracts) »rd its officials under
§ 5(d), § 5a(8) or §9(b) of the Commodity Exchange Act?

Related questions are presently before this Court:

Whether §4(b) of the Commodity Exchange Act pro-
vides customers with a cause of action for damages against
their brokers (“futures commission merchants”) is the
subject of the pending petition in Merrill Lynch, Pierce,
Fenner & Smith, Inc. v. Curran, No. 80-203.*

Whether §4(b) or §9(b) of the Commodity Exchange
Act provides non-customers with a cause of action for dam-
ages against futures commission merchants is the subject
of petitions to review the judgment below which are being
submitted by Clayton Brokerage Co. of St. Louis, Ine.
(“Clayton”), Heinold Commodities, Inc. (“Heinold”) and
Thomson & McKinnon Auchincloss Kohlmeyer, Ine.
(“Thomson”).

Parties Below

The parties to the three consolidated appeals below were:
No. 79-7402

Appellants: Neil Leist (“Leist”), Philip Smith (“Smith”)
and Incomeo.

Appellees: New York Mercantile Exchange (the “Ex-
change”), Richard B. Levine (“Levine”), Howard Gabler

* We have filed a brief amicus curiae with respect to the Curran
petition suggesting that the Court consider that petition and the
instant petition together.

ii
(“Gabler”), Alfred Pennisi (“Pennisi”), Clayton, Heinold
and Thomson.
No. 79-7464
Appellant: Incomceo,

Appellee: The Exchange,

No. 79-7482
Appellant: National Super Spuds, Inc,
Appellees: Heinold and Thomson,

The Exchange and Levine, Gabler and Pennisi seek re-
view of the judgment in No, 79-7402. The Exchange seeks
review of the judgment in No. 79-7464. The Exchange
and Levine, Gabler and Pennisi were not parties to the
appeal in No, 79-7482.

iii

TABLE OF CONTENTS

PAGE
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Se OI hicrscaeacetditsdassccnieanectsicittiesenenSantentinnins 2
I ae ND sicciriccicitacesntscttensncsrntccriiitecinesenansn 2
TERN RI BID a coccocterctsccctestigsaseintieivnitresacennes 3
The decision of the district court .........0....0.0000000 6
The decision of the court of appeals ...................... 7
SOUR IIE sccxcectensinlettninticitinnesd nessa 8
Reasons for Granting the Writ ..0...................ccccccccseesseoeee
The importance of the question .0..........0.....cccc0c000
The conflict with this Court’s decisions ................ 12
Conclusion .......... spiesnadiiepdaianiad dich dacetecaisiciemcthagibibanneets 13
ApPpENDIxX—
Opinion of the United States Court of Appeals for
the Second Circuit, dated July 8, 1980 .....000000...... la
I IE ceiecdicldsettedebichcecunsbinicetinesdcensnsciiisniens 5a

I EERE A RRO Ne ea a Ree 9a

iv
PAGE
Opinion of the United States District Court for the

Southern District of New York, dated May 29,
RAR TC, eR Tir all ee Rc 2 RE oe 168a

I ee er uieaiasaaniioasaaimaaateniaiiie 186a

Order dated September 9, 1980 denying Petition for
Rehearing filed by appellees New York Mercan-
tile Exchange, Richard B. Levine, Howard Gab-
RE, Sy re IIE nasatcnscnccmsnssanssnsonnenensncotanaies 188a

Order dated September 9, 1980 denying rehearing
I TN lana canescens Neen bacencastiniesnicensiidinonis 19la

Order dated September 22, 1980 staying issuance
of the mandate pending application for writ of
Sa ATER ae ee IO 194a

Order dated October 29, 1980 continuing stay of

mandate until November 11, 1980.00.00... 196a
Provisions of the Commodity Exchange Act, 7
Pr IN eileen ce cecinesctcesinieenisipsicnasaousaicnntenss 198a
I I re TD arcs da cccccsctidscskctctenescevesscones 198a
RR Sg RARER REGIS Con ee ma ERO 199a
UE Tag 0 as OF ~ esetnernnsectnctiousnisiceianasevcinnnntbics 202a
Gs | | Renesas 208a
Section 6(a), 7 U.S.C. § 8a) coccccccccccesesseeceeeeee 209a
ee GF ts SI oncscecectccccnsiicccccecepecsncternae 210a
Section 6c, 7 U.S.C. § 18a oct cccccsssceneee 212a
MpeenOm GE TBO. © TBD o.sncacccocccscscessoseccsecveecees 213a
Section 9(b), 7 U.S.C. $13(b) oo. 215a
UIE A SURE DIL. secinnsdcaponsescznninandessstcndenstons 216a

Vv

TABLE oF AUTHORITIES

Cases: PAGE
Affiliated Ute Citizens v. United States, 406 U.S. 128
PRINT

Nos. 402, 403, 404—September Term, 1979
(Argued January 16, 1980 Decided July 8, 1980)
Docket Nos. 79-7402, 79-7464, 79-7482

a 5

NEIL LEIST, PHILIP SMITH and [INCOMCO,
Plaintiffs-Appellants,

_—V—

JOHN RICHARD SimPpLoT, J.R. SimpLotT & Co., SIMPLOT
Propucts Co., INc., SIMPLOT INDUSTRIES, INC., SIMTAG
FARMS, INC., PETER J. TAGGARES, P. J. TAGGARES &
Co., HENRY A. POLLACK, HARVEY B. POLLACK,
HARVEY B. POLLACK COMPANY, GERALD RAFFERTY,
PRESSNER TRADING CorP., BENJAMIN PRESSNER,
STEPHEN SUNDHEIMER, JULES NORDLIGHT, EDELSTEIN
& Co., INC., CHARLES EDELSTEIN, ROBERT EDELSTEIN,
MURIAL EDELSTEIN, MEIERFELD & COMPANY, INC.,
GILBERT MEIERFELD, DAVID MEIERFELD, ROBERT REAR
DON, F.J. REARDON, INC., HAROLD COLLINS, CASPAR
MAYERSON, LYNNEWOOD EXPORTING COMPANY, ALEX
SINCLAIR, MANNING STOLLER, HORNBLOWER & WEEKS-
HEMPHILL, Noyes INnc., MFX Commopitigs, INC.,
DONALD SILVER, DUANE SOUTH, KENNETH RAMM, A &
B FARMING INC., HUGH GLENN, GEARHEART FARMING,
Inc., EDWARD McKay, “JOHN” HUMPHREYS, FRANK
FULLMER,

Defendants,
4017

2a

CLAYTON BROKERAGE Co. oF St. Louis, INc., HEINOLD
COMMODITIES, INC., THOMPSON & MCKINNON, AUCHIN.
CLOSS, KOHUMEYER, INC., NEW YORK MERCANTILE
EXCHANGE, RICHARD B. LEVINE, HOWARD GABLER,
ALFRED PENNISI,

Defendants-Appellees.
_
INCOMCO,
Plaintiff-Appellant,
-_—vV _

WAYNE COUNTY PRODUCE Co., and HAROLD COLLINS,
Defendants,

New YORK MERCANTILE EXCHANGE,
De fendant-Appellee.

a oa

NATIONAL SUPER Spups, INc., WILLIAM R. BUSTER, JR.,
WILLARD C. CHINER, EUGENE P. WEISMEN, RICHARD
WELTS, RAYMOND ROTHBERG, ARTHUR S. ARMSTRONG,
THEODORE BRINEK, CAPGAIN HOLDINGS, INC., and HEIz
ROMMINGER, individually and on behalf of all persons
similarly situated,

Plaintiffs-Appellants,
_—Vi—

NEW YORK MERCANTILE EXCHANGE, CLAYTON BROKERAGE
Co. oF St. Louis, INc., PRESSNER TRADING CorP.,

4018

3a

JACK RICHARD Simp.ot, J.R. SimpLot Co., SIMPLOT
INDUSTRIES, INC,, PETER J. TAGGARES, P.J. TAGGARES
Co., C.L. OTTER, SIMTAG FARMS, KENNETH RAMM, A
& B Farms, INc., HUGH V. GLENN, GEARHEART
FARMING, INC. and Ep McKay,

Defendants,

HEINOLD ComMopitTigs, INC., THOMPSON & MCKINNON,
AUCHINCLOSS, KOHLMEYER, INC,

Defendants-Appellees.
a ae —

Before:

FRIENDLY, MANSFIELD and KEARSE,
Circuit Judges.

= a —

Appeal from an order of the District Court for the
Southern District of New York, Lloyd F. MacMahon,
Judge, 470 F.Supp. 1256 (1979), granting partial
summary judgment to the New York Mercantile
Exchange and three futures commission merchants,
defendants in three consolidated actions wherein
plaintiffs claimed damages arising out of the default by
sellers of the May 1976 Maine potato futures contracts,
on the ground that there is no private cause of action
for damages under the Commodity Exchange Act, 7
U.S.C. $§ 1-19.

Reversed.

4019

4a

LEONARD ToBOoROFF, Esq., New York, N.Y.
(Robson & Toboroff, New York, N.Y.),
for Plaintiffs-Appellants Neil Leist,
Philip Smith and Incomco.

POMERANTZ, LEVY, HAUDEK & BLOCK, New
York, N.Y. and

HOLLINSHEAD and MENDELSON, Pittsburgh,
Pa., for Class Plaintiffs-Appellants.

WILLIAM E. HkGARTY, Esq., New York, N.Y.
(Cahill Gordon & Reindel, New York,
N.Y., Charles Platto, Esq. and Peter
Leight, Esq., Of Counsel) and

REIN, Mounp & Corton, New York, N.Y,
(Maurice Mound, Esq., Of Counsel), for
Defendants-Appellees New York Mer-
cantile Exchange, Richard B. Levine,
Howard Gabler and Alfred Pennisi.

LAWRENCE H. Hunt, Esq., Chicago, Ill,
(Sidley & Austin, Chicago, Ill.) and
DEWEY, BALLANTINE, BUSHBY, PALMER &
Woop, New York, N.Y. for Defendant-

Appellee Heinold Commodities, Inc.

W. STANLEY WALCH, Esq., St. Louis, Mis-
souri (Thompson & Mitchell, St. Louis,
Missouri, Gerard K. Sandweg, Esq. and
Kenton FE, Knickmeyer, Esq., Of Coun-
sel) for Defendant-Appellee Clayton
Brokerage Co, of St. Louis, Ine.

HALL, MCNICHOL, HAMILTON, CLARK & MUR.
RAY, New York, N.Y. for Defendant-
Appellee Thomson McKinnon Auchin-
closs Kohlmeyer Ine.

4020

5a

Mark D. YOUNG, Esq., Washington, D.C.
(John G. Gaine, General Counsel, Pat G.
Nicolette, Deputy General Counsel, and
Gregory C. Glynn, Associate General
Counsel, Washington, D.C., Of Counsel),
for Amicus Curiae Commodity Futures
Trading Commission.

pe —

FRIENDLY, Circuit Judge:

Plaintiffs in three consolidated actions in the District
Court for the Southern District of New York appeal
from an order of Judge, now Chief Judge, MacMahon,
470 F.Supp. 1256 (1979), granting appellees’ motions
for partial summary judgment. The court struck from
the complaints all claims based on the Commodity
Exchange Act, (CEA), 7 U.S.C. §§ 1-19, as amended in
1974, as distinguished from other claims under the
antitrust laws. The actions were to recover damag.4
allegedly suffered by the plaintiffs as a result of what
Judge MacMahon characterized as

the much publicized default in May 1976 of Maine
potato futures contracts, when the sellers of almost
1,000 contracts failed to deliver approximately
50,000,000 pounds of potatoes, resulting in the
largest default in the history of commodities
futures trading in this country. 470 F.Supp. at
1258 (footnote omitted),

The basis for the court's order was that no private
cause of action exists for breach of the CEA. Since this
important issue has divided the district courts,
including those within our circuit, we feel constrained

4021

6a

to discuss it in some detail.' We think it desirable, as
did the district court, to begin with an explanation of
the nature of the commodity futures markets.

I, COMMODITY FUTURES MARKETS

A commodity futures contract is simply a bilaterai
executory agreement for the purchase and sale of a
particular commodity. The seller of the contract
commits himself to deliver the commodity at a fixed
date in the future, while the buyer commits himself
then to accept delivery and pay the agreed price. 1
Bromberg & Lowenfels, Securities Fraud & Commodi-
ties Fraud § 4.6 (4211979); H. R. Rep. No. 93-975, 93d
Cong., 2d Sess. 130 (1974). Every aspect of the futures
contract is standardized except price. For example, the
contract involved in this case, the May 1976 Maine
potato futures contract, is for 50,000 pounds of Maine
grown potatoes of a specified quality to be delivered at
specified points in cars of the Bangor & Aroostook
Railroad, between May 7 and May 25, 1976. Since price
is the only variable, negotiations can readily proceed
and the agreed prices can be speedily disseminated to

1 —- The length of our treatment, particularly the explanation of the
nature of the Commodities Futures Market in Part I and the history
of congressional regulation in Part III, is also partly due to the fact
that when the case was argued and for some time after the majority
opinion was prepared, no court of appeals had passed on the question
and we anticipated being the first to do so. However, in a case
decided May 12, 1980, a divided panel of the Court of Appeals for
the Sixth Circuit reached the issue sua sponte and, in an excellent
and succinct opinion, held, as we do, on largely the same reasoning,
that there is an implied private right of action under the CEA
Curran v. Merrill Lynch, Pierce, Fenner and Smith, Inc.. No. 77-
1300, SRLR (BNA) G-1 (May 12, 1980). Although, as argued in the
dissent, Curran involved a suit by a customer against a broker, the
court did not limit its reasoning to that situation

4022

other traders. Standardization also makes the contracts
fungible. Original sellers and buyers can therefore
offset their positions by acquiring opposite contracts,
either paying or gaining any price differential. H. R.
Rep. No. 93-975, supra, at 130.

The person who has sold a futures contract, i.e.,
someone committed to deliver the commodity in the
future, is said to be in a “short” position. Conversely,
someone committed to accept delivery is “long”. It is a
rare case, however, in which actual delivery takes place
pursuant to a futures contract.’ Save in these rare
instances, the short and the long must liquidate their
positions prior to the close of trading in the particular
futures contract. Although the means by which this is
done is routinely referred to as futures traaing, futures
contracts are not “traded” in the normal sense of that
word. Rather they are formed and discharged. Clark,
Genealogy and Genetics of “Contract of Sale of a
Commodity for Future Delivery” in the Commodity
Exchange Act, 27 Emory L. J. 1175, 1176 (1978). A
person seeking to liquidate his futures position must

2 See H. R. Rep. No. 93-975, supra, at 129 (less than 3% of all
futures contracts culminate in delivery); T. Hieronymus, Economics
of Futures Trading 41 (1977) (less than 1%). Neither the speculative
investor nor the person using the futures market as a hedge for his
position in the market for the actual commodity generally desires
delivery. H. R. Rep. N. 93-975, supra, at 129. See Volhart Brothers,
Inc. v. Freeman, 311 F.2d 52, 55-56 (5 Cir. 1962), Note, The
Delivery Requirement: An Illusory Bar to Regulation of Manipula-
tion in Commodity Exchanges 73 Yale L. J. 171, 173 (1963).

In occasional instances, however, people do use futures trading as
an alternative market for the physical commodity. H. R. Rep. No.
93-975, supra, at 132. Delivery is made through the clearing house
by transfer of warehouse receipts or rights to loaded freight cars and
then transported according to the purchaser's instructions. See
Cargill, Inc. v. Hardin, 452 F.2d 1154, 1157 (8 Cir. 1971), cert.
denied, 406 U.S. 932 (1972).

4023

8a

form an opposite contract for the same quantity, so
that his obligations under the two contracts will offset
each other. Thus, a short who does not intend to deliver
the commodity must purchase an equal number of long
contracts; a long must sell an equal number of short
contracts. Money is made or lost in the price
differential between the original contract and the
offsetting transaction. If the price of the future has
declined, usually because of market information indi-
cating a drop in the price of the commodity, the short
will realize a profit; if the futures price has risen, the
long will realize a profit. See Cargill, Inc. v. Hardin,
452 F.2d 1154, 1157 (8 Cir. 1971), cert. denied, 406
U.S. 932 (1972). Futures trading is a zero-sum game.
Since money is made from the change in futures
contract prices, and every contract has a long and a
short, every gain can be matched with a corresponding
loss. See Melamed, The Mechanics of a Commodity
Futures Exchange: A Critique of Automation of the
Transaction Process, 6 Hofstra L. Rev. 149, 166 & n.39
(1977).

The mechanics of the commodity futures market, and
the roles of the various participants, can be illustrated
by tracing a typical transaction. An individual wishing
to invest in the futures market approaches a “futures
commission merchant” (FCM). FCM’s are defined in the
Commodity Exchange Act as individuals or associations
“engaged in soliciting or in accepting orders for the
purchase or sale of any commodity for future delivery
... On... any contract market... ,” § 2(aX1), 7
U.S.C. § 2, and they are registered with the Commodity
Futures Trading Commission (CFTC). The FCM will
demand a “margin” payment from the customer, which
is simply a security deposit designed to pretect against
adverse price movements. The amount of the margin is

4024

9a

based upon the amount which the customer can lose in
a day or two; when the margin is exhausted the FCM
will call the customer for additional payment. The
margin is generally only a small percentage of the value
of the contract. See Melamed, supra, 6 Hofstra L. Rev.
at 167 & n.41. FCM’s are paid a commission on their
customer’s business.

The FCM relays its customer’s order.to one of its
“floor brokers” trading on the exchange. The broker
stands on the outside of a “pit” or “ring” around which
are gathered other persons trading in the same
contract. Some of the traders are brokers acting on
behalf of customers, while others trade on their own
account. Contracts are made by “open outcry”. The
broker with an order will indicate his position at the pit
by shouting and gesticulating with standardized hand
signals. Someone willing to enter the contract responds
across the pit in similar fashion, and the deal is made.
Observers on raised pulpits alongside the pit record the
transaction and feed the information into a communica-
tions system, publicizing it to other traders who, in any
event, had an opportunity to witness the transaction in
the pit. The broker relays the particulars of the deal to
the FCM, who informs the customer.

When two traders have reached an agreement on the
floor of the exchange, the role of the clearinghouse
comes into play. The clearinghouse, a key link in the
futures trading system, operates as the seller to all
buyers and the buyer from all sellers, thus facilitating
the interchangeability of the contracts and the cancel- .
ling of positions. H. R. Rep. No. 93-975, supra, at 149;
S. Rep. No. 93-1131, 93d Cong., 2d Sess. 17 (1974);
Cargill, Inc. v. Hardin, supra, 452 F.2d at 1156. Not all
FCM’s are clearinghouse members; those that are not

4025

10a

must deal through one that is. The clearinghouse treats
FCM’s as principals in trading transactions and
demands margin payments from them. The clearing-
house requires FCM’s to “mark to the market” at the
close of every trading day. Any net gain or loss which
the FCM has sustained in the course of the day’s
trading is computed and margin adjustments are made
accordingly. Melamed, supra, 6 Hofstra L. Rev. at 167-
68.

Generally speaking there are two classes of traders in
commodity futures contracts, although, as some of the
facts of the instant cases indicate, the distinctions
between them are often quite blurred. A “hedger” is a
trader with an interest in the cash market for the
commodity, who deals in futures contracts as a means
of transferring risks he faces in the cash market. See H.
R. Rep. No. 93-975, supra, at 131, 133, 162. See also
the complicated definition of “bona fide hedging
transactions and positions” promulgated by the CFTC,
17 C.F.R. § 1.3(z). The owner of a commodity can hedge
against declining prices by entering into equivalent
short futures contracts for the month when he expects
to be able to sell, and a processor (e.g., a miller) can
hedge against increasing prices by going long for the
month when he will need the commodity. Losses caused
by a decline in prices on the cash market in the former
case or an advance in the latter will be offset by profits
in the futures transactions. See generally H. R. Rep.
No. 93-975, supra, at 130-34; Cargill, Inc. v. Hardin,
supra, 452 F.2d at 1157-58; Note, supra, 73 Yale L. J.
at 171-73. The benefits of hedging extend beyond the
immediate participants in the transactions. “Because
hedging of price risks in a futures market enables a
merchant to reduce the exposures he has in doing

4026

lla

business, he is able to operate on a lower profit margin
with consequent lower prices to the consumer.” H. R.
Rep. No. 93-975, supra, at 132-33; see also S. Rep. No.
93-1131, supra, at 18; Valdez, Modernizing the
Regulation of the Commodity Futures Markets, 13
Harv. J. Legis. 35, 40 (1975).

The system would not function, however, if only
hedgers sold and purchased commodity futures con-
tracts.* While hedging performs an insurance functiun,
it is actually quite different from insurance. The risks
faced by those dealing in the “cash” market, the market
for the actual commodity, are not spread among those
similarly situated, as with insurance, but rather are
shifted to others. Bianco, The Mechanics of Futures
Trading: Speculation and Manipulation, 6 Hofstra L.
Rev. 27, 32 (1977); Cargill, Inc. v. Hardin, supra, 452
F.2d at 1158. The speculative investor, with no
underlying interest in the cash market, is essential to
take on the risks which the hedgers want to shift. The
critical role of the “speculator” was described at some
length in the House Report on the 1974 amendments:

The principal role of the speculator in the markets
is to take the risks that the hedger is unwilling to
accept. The opportunity for profit makes the
speculator willing to take those risks. The activity
of speculators is essential to the operation of a
futures market in that the composite bids and

3 Johnston, Understanding the Dynamics of Commodity Trading, 35
Bus. Law. 705, 709 (1980), states that “{aJs a general rule, for a
market to be broad enough to be efficient and to accomodate the
extremely large orders that come in from time to time from dealers
and commercial firms, 50 to 75 percent of the open interest and
volume of trading must come from speculators—this is essential for
there to be a viable market.”

4027

12a

offers of large numbers of individuals tend to
broaden a market, thus making possible the
execution with minimum price disturbance of the
larger trade hedging orders. By increasing the
number of bids and offers available at any given
price level, the speculator usually helps to minimize
price fluctuations rather than to intensify them.
Without the trading activity of the speculative
fraternity, the liquidity, so badly needed in futures
markets, simply would not exist. Trading volume
would be restricted materially since, without a host
of speculative orders in the trading ring, many
larger trade orders at limit prices would simply go
unfilled due to the floor broker’s inability to find
an equally large but opposing hedge order at the
same price to complete the match. H. R. Rep. No.
93-975, supra, at 138.

As commentators have noted, “Congress itself has
recognized that the investor—although he is commonly
referred to as a speculator in this context—is what
makes the commodity futures market work .
Bromberg & Lowenfels, supra, at § 4.6 (462).

Indeed, there is no bright-line difference between
hedgers and speculators. Hedgers frequently do not
merely balance their cash market risks in the futures
market but engage in some speculation as well, buying
or selling more or less futures contracts based on price
expectations. Note, Abuses in the Commodity Markets:
The Need for Change in the Regulatory Structure, 63
Geo. L. J. 751, 768-70 (1975); Valdez, supra, 13 Harv.
J. Legis. at 64-65. On the other hand, speculators can
become involved in the cash market as the activities of
the plaintiff Incomco will demonstrate.

4028

13a

I]. THE ALLEGED FACTS AND THE PROCEEDINGS
BELOW

The facts alleged in the three complaints here before
us are broadly as follows:*

John Richard Simplot is an Idaho potato entrepre-
neur who controls J. R. Simplot and Co., Simplot
Products Co., Inc., and Simplot Industries, Inc. These
corporations are responsible for the processing of
approximately 50% of all Idaho potato products
processed and sold in the United States. Peter J.
Taggares is a Washington potato entrepreneur. He and
his company, P. J. Taggares Co., process approximately
30% of all the Washington potatoes processed and sold
in this country. Simplot and Taggares are equal
partners in the ownership of Simtag Farms, a large
farm in the State of Washington for the growing and
warehousing of potatoes. Together Simplot, Taggares,
and the companies they control are the largest
purchasers of potatoes throughout the western potato
region of Washington, Idaho and Oregon.

According to the complaints, Simplot, Taggares, and
the companies controlled by them, together with
numerous co-conspirators, embarked in the spring of
1976 on a conspiracy to depress the price of the May
1976 Maine potato futures contract traded on the floor
of the New York Mercantile Exchange (the “short
conspiracy”). As stated by one of the complaints, “(bly
virtue of their position in the potato processing field
and the quantity of potatoes purchased by them, [the

4 We say here once and for all that our statement, in large measure.
is simply what the plaintiffs contend to be the facts and is not to be
read as one of facts found. Accordingly we will generally dispense
with use of words such as “allegedly”, “asserted” and “claimed”.

4029

l4a

conspirators] would be in a position to control the
prices paid for potatoes but for the existence of the
Exchange and the activity . . . in buying and selling
potato futures contracts.” Simplot had encountered
difficulties in the course of his customary negotiations
with the Idaho Potato Growers Association, because the
IPGA believed that the price of potatoes, including
Maine potatoes, would be much higher than what
Simplot was offering. Futures prices supported this
view. A report issued on April 13, 1976 by the United
States Department of Agriculture indicated that total
potato stocks were down 11%, and that Maine stocks
totalled only 7.4 million cwt. compared with 13.0
million cwt. on hand the previous year. An earlier
report issued in August 1975 estimated that national
potato acreage would be down 8% from the previous
year with an even greater drop in Maine. The effect of
this latter report, and other generally available
information, was to drive the price of the May 1976
Maine contract from $9.75 per cwt. to a record high of
$19.15 per cwt. by October 3, 1975. The activities of
the short conspirators were designed to counteract the
impact of these reports and other market information
and rumors tending to raise the price of Maine futures.
A decline in the price of potato futures would suggest
to those dealing in the cash market, such as the IPGA,
that supplies of Maine potatoes would be greater than
earlier anticipated, and that prices in spot transactions
or negotiations for all potatoes should correspondingly
recede.

The primary means by which the short conspirators
sought to depress the futures price was the accumula-
tion of a large net short position in the May contra
The conspirators allegedly agreed to sell a large number

4030

lda

of contracts short and to refuse to liquidate these
shorts at a price higher than that agreed among
themselves and, if necessary, to default on the
obligation to make delivery on all unliquidated
contracts. Such short purchases would give the
impression of the existence of a large supply of
deliverable Maine potatoes and drive down the price of
the contract.

Simplot made $1 million available to Simtag Farms,
which Simtag used to open a credit balance on March
29, 1976, with Pressner Trading Corp., a member of
the New York Mercantile Exchange (the Exchange or
NYME), for the purpose of buying and maintaining
short positions in the May contract. At the same time,
Simplot, Taggares and their other companies also began
to accumulate a large number of short contracts. The
brokers through which the conspirators acquired their
positions included Clayton Brokerage Co. of St. Louis,
Inc. (Clayton), Heinold Commodities, Inc. (Heinold), and
Thompson & McKinnon, Auchincloss, Kohlmeyer, Inc.
(Thompson). These three brokerage firms were, like
Pressner Trading, clearing members of the Exchange
and appropriately registered with the CFTC. The firms
allegedly knew, or should have known, that their
customers neither intended to nor would be able to
cover the large number of short positions the brokers
acquired for them.

On May 4, 1976, Simplot and Taggares were warned
by the CFTC that it was aware of their large short
position and that price manipulation was a violation of
the Commodity Exchange Act. The telegram concluded
that although this “is not an allegation of price
manipulation, if prices of the May 1976 potato future

. . Should become artificial during liquidation due to

4031

l6a

your action or inaction, we will consider whether you
and your firm should be charged with price manipula-
tion under the Commodity Exchange Act.” In the face
of this warning, and the impending close of trading on
May 7, the conspirators not only failed to take steps to
liquidate their large short position but actually
increased it, again with the help and support of the
named brokerage firms. On the last day of trading they
consolidated all the short positions they controlled in
the hands of Pressner. Clayton, Thompson and Heinold
knowingly acquiesced in this consolidation designed to
concentrate the force of the manipulation.

In addition to the accumulation of a large net short
position which they refused to liquidate at higher than
an agreed price, the conspirators also allegedly
manipulated the futures price by shipping large
quantities of unsold Idaho potatoes to the Maine
markets for immediate sale at the going price. The use
of such so-called “roller cars”, railroad cars of potatoes
shipped although there is no pre-determined buyer,
tends to depress the market price, and thus affect
futures prices.

Simplot and Taggares were not the only group
manipulating the price of the May future. A second
group of eastern conspirators thought they could beat
the western producers at their own game. Harold
Collins and Casper Mayrsohn are Maine potato
merchants and traders in Maine futures. MFX Com-
modities, Inc., with Donald Silver as its president, is a
foreign corporation engaged in business as a FCM. This
group learned of the conspiracy of Simplot and
Taggares and conspired to squeeze ther. Pursuant to
this conspiracy (the “long conspiracy”), the “long” group
purchased as many contracts as it could, and then at

4032

17a

the same time maneuvered to tie up the cash potato
market so that the shorts could not make delivery. The
longs reasoned that if the shorts had no access to
deliverable potatoes, the longs would be able to dictate
the price the shorts would have to pay to liquidate their
contracts. The main way in which the longs tied up the
cash markets was by tying up all of the rail cars of the
Bangor & Aroostook Railroad, which alone could
deliver potatoes to satisfy May futures contracts. This
was done by using the cars for phony export shipments
and leaving them loaded or only partially unloaded
when they reached appropriate destinations.

Neither the longs nor the shorts would give in to the
other. The shorts refused to liquidate their position by
buying offsetting long contracts at higher than the
price agreed among them; the longs refused to come
down to the unreasonably low price demanded by the
shorts. At the end of trading on May 7, the short
conspirators controlled 1893 open short positions. The
long conspirators controlled 911 open long positions.
There are usually only approximately 200 open
contracts at the end of trading on the May potato
future.

The plaintiffs were caught in the middle between
these two competing conspiracies. Neil Leist is a duly
licensed member of the Exchange engaged in the
business of trading commodities and futures for his
own account. Incomco, a partnership, is a duly licensed
FCM. Philip Smith is Incomco’s managing partner. The
class action plaintiffs are traders and dealers represent-
ing all persons “who held a net long position in
Contracts and who liquidated their long position in said
contract between April 13, 1976 and the close of
trading on the Exchange on May 7, 1976.”

4033

18a

On the basis of the same sort of information which
motivated Simplot and Taggares to conspire to depress
the price of the contract, plaintiffs believed there was
an investment opportunity on the long side of the
contract. If there was going to be a shortage of
deliverable Maine round whites, those committed to
deliver potatoes at a set price might well find this price
to be under what the potatoes were worth. The shorts
would then have to sustain a loss, either by purchasing
potatoes in the cash market for the higher price and
delivering them for the lower futures contract price, or
by purchasing an offsetting long position. The price of
the long position should have gone up due to the
shortage, so that the shorts would lose the differential
in liquidating. The shorts’ loss would be the longs’ gain,
and itis this gain which the plaintiffs sought to realize
by their investment.

All the plaintiffs invested heavily on the long side of
the May contract. In addition, Incomco developed a
position in the cash market. It had accepted 1,500,000
pounds of Maine potatoes delivered to it pursuant to
the March futures contract, and planned to sell these
potatoes to those short the May contract who needed
supplies to satisfy their delivery obligations. Anticipat-
ing a cash market shortage, Incomco expected to sell its
potatoes at a handsome premium.

Because of the conspiracies, however, plaintiffs not
only did not realize the gains they claim they would
_ have had in an unmanipulated market but suffered
losses. The short conspirators continued to accumulate
short positions when they should have been trying to
liquidate by purchasing long contracts from plaintiffs,
and refused to liquidate above a set price. In the face of
the unnaturally falling price, the plaintiffs were forced

4034

19a

out of the market at a loss. Because the long
conspirators had successfully tied up all the freight cars
of the Bangor & Aroostook, Incomco was unable to
deliver its warehoused potatoes to persons seeking
delivery to fulfill short contracts. As the warm weather
set in, the 1,500,000 pounds of potatoes became rotten,
and Incomco’s total investment was lost.

The Exchange allegedly figured in this debacle almost
from the start. In March, Richard Levine, president of
the Exchange, told plaintiff Leist that the Exchange
was investigating the large number of open positions in
the May contract. On April 28, two members of the
CFTC eastern region office, Howard Bodenhamer and
Marshall Horn, met with Levine and Howard Gabler,
vice-president of the Exchange, to express their concern
over the problems developing with the May contract.
Levine recognized the problem and expressed the view
that Simplot might be trying to create difficulties in
the contract. A second meeting took place two days
later, at which Bodenhamer told Levine that the
Commissioners felt that “the Exchange should take
more action than less to bring about orderly liquida-
tions of the maturing futures.”

Levine did not report these meetings with the CFTC
to the Exchange’s Board of Governors until after the
close of trading on the May contract. Although the
Exchange knew, or should have known, of both the
short and the long conspiracies, it took no action to
prevent manipulation of the market. The Exchange
failed to declare an emergency situation pursuant to its
rules to facilitate orderly liquidation, and, once trading
had closed, failed to take appropriate steps such as
permitting delivery by truck or buying potatoes to
cover the default of the shorts.

4035

20a

The complaint in Leist v. Simplot was filed in the
District Court for the Southern District of New York on
September 30, 1976. Count I, directed against the short
conspirators and their brokers, charged that the
activities of the group constituted violations of 7 U.S.C.
§§ 1-13 and, more specifically, that the group used and
employed manipulative devices and contrivances in
violation of 7 U.S.C. § 13, which makes such action a
felony, and of rules promulgated by the CFTC. In
addition to naming the brokers as conspirators, Count |
specifically alleged that they “failed and neglected to
enter liquidating orders” for the short conspirators
prior to the close of trading “even though they knew
that such short positions could not be covered and that
there would be a default if the accounts were not closed
out”, permitted the short sales to be made and
cooperated in making such short sales “although they
knew or should have known that the sellers did not
intend to and would be unable to cover such short
positions.” Count II of the complaint charged various
violations of the Sherman Antitrust Act, 15 U.S.C.
§§ 1, 2, which are not subject to the present appeal.
Count III was directed against the long conspirators,
describing the facts outlined above and charging that
such conduct violated 7 U.S.C. §§ 1-13. Count IV was
directed against the Exchange and its officials. After
repeating the earlier general allegations against the
short conspirators, the complaint charged that these
defendants “negligently failed to maintain an orderly
market for trading in Maine Futures in violation of the
duties imposed upon them under the provisions of the
Act.” The Exchange was also charged with failing to
report the various violations alleged by the plaintiffs,

4036

2la

and with failing to direct the entry of liquidating
orders for the account of members with net short
positions prior to the close of trading even though the
Exchange officials knew or should have known that the
sellers would not and could not make delivery if the
positions remained open.

‘the complaint in Incomco v. New York Mercantile
Exchange was filed in the District Court for the
Southern District of New York on June 16, 1976. This
complaint was directed at the long conspirators and the
Exchange, “acting separately and also in concert with”
the long conspirators, for “blocking the availability of
railroad cars, thereby creating an aartificial and
manipulative railroad car shortage” in violation of the
Commodity Exchange Act, and against the Exchange
for failing to follow its own regulations requiring it to
buy in the cash market for the account of delinquent
sellers so that outstanding obligations will be fulfilled.
As in Leist v. Simplot, plaintiffs also, included an
antitrust charge.

The complaint in National Super Spuds v. New York
Mercantile Exchange was filed in the District Court for
the Southern District of New York on May 26, 1976.
After consolidation with other actions and amendment,
this class action complaint charged that the activities of
the short sellers described above “violated the applica-
ble provisions of the Commodity Act [and] acted as a
manipulative force which artificially lowered the price
of the Contract.” Count II charged the short sellers
with exceeding position and trading limits set by the
CFTC in 17 C.F.R. § 150.10. Count IV was directed
against the brokers for the short sellers, charging them

4037

22a

with violating Exchange Rule §§ 44.02° by failing to
have liquidating orders placed although they knew or
should have known that their customers could not
deliver potatoes, permitting their customers to exceed
position and trading limits imposed by the Act, and
failing to report these and other violations of the Act,
regulations, and Exchange rules by their customers of
which they knew or should have known. Count V
generally charged that the brokers, “with knowledge of
intent of short Sellers to deflate the price of the
Contract acquiesced and/or participated in the acts of
Short Sellers.” Count VI was directed at the Exchange,
charging that it failed and neglected to report and
concealed violations of the Act, regulations, and its own
rules; failed and neglected to direct that liquidating
orders be entered with respect to members which the
Exchange knew or should have known would default;
generally failed and neglected to perform its duties as a

5 This reads as follows:
44.02-FINAL DAY OF TRADING

(a) On che final day of trading in the delivery month, it shall be
the responsibility of each clearinghouse member who is not in a
position to fulfill his contractual obligation on any maturing
contract by prescribed notice and tender, to have a liquidating
order entered on the Exchange floor not later than five minutes
before the time established as the official close for such delivery
month. All such orders shall be market orders to be executed
prior to the expiration of trading.

(b) On the final day of trading no stop orders will be accepted,
no time limit or contingent orders will be accepted, and brokers
will not be expected to assume responsibility for the execution of
orders placed later than 15 minutes prior to the close of trading.

(c) Cancellations that reach the trading floor after one half (2)
hour prior to the time trading is scheduled to cease on the last
day of trading in an expiring future may involve extraordinary
problems and hence will be accepted solely at the risk of the
customer.

4038

23a

contract market; and failed and neglected to exercise
due care to halt manipulative practices. The three
actions, all claiming extensive compensatory and
punitive damages, were consolidated.

After answers had been filed and extensive discovery
had been had, one phase of which has occupied the
attention of this court, see National Super Spuds v.
New York Mercantile Exchange, 591 F.2d 174 (2 Cir.
1979), three brokers, Clayton, Heinold and Thompson,
and the Exchange and Exchange officials moved in the
different actions for judgment on the pleadings under
Fed. R. Civ. P. 12(c) or, in the alternative, for partial
summary judgment under Fed. R. Civ. P. 56(b). Since
he believed that all the parties had submitted factual
material outside the pleadings, the judge considered the
motions under Rule 56(b), although in fact the
dispositive reasons so far as concerned the claims under
the Commodity Exchange Act, which were all that were
raised by the Exchange, the Exchange officials and
Thompson, seem to have been wholly ones of law which
could have been raised as well when the complaints had
been filed two years earlier. In a thoughtful opinion
issued on May 29, 1979, 470 F.Supp. 1256, Judge
MacMahon held that there was no private right of
action for damages under the Commodity Exchange
Act, and granted summary judgment in favor of the
moving defendants on those counts seeking recovery
under that Act.* Partial final judgment was entered
under Fed. R. Civ. P. 54(b) in favor of the moving
defendants, and the plaintiffs took the instant appeal.

6 For a precise statement of the motions and their disposition, see
470 F.Supp. at 1257 n.1, 1263-64.

4039

24a

III. THE HISTORY OF CONGRESSIONAL
REGULATION OF
COMMODITY FUTURES TRADING

Although our immediate concern is with the Com-
modity Exchange Act (CEA) as it now stands, it will be
useful at this point to review the long history of
Congressional regulation of commodity futures trading.

The first effort at such regulation was the Future
Trading Act, 42 Stat. 187 (1921). This established the
basic pattern of all regulation to follow, concentrating
trading on central exchanges subject to the supervision
and control of the federal government. The 1921 act
levied a tax on all grain futures contracts not traded on
a designated contract market. The Secretary of
Agriculture was authorized to designate a board of
trade as a “contract market” when the board, inter alia,
“provides for the prevention of manipulation of prices.”
§ 5(d), 42 Stat. 188. This provision has remained
virtually unchanged to the present day, and is one of
the provisions upon which plaintiffs seek to base a
private right of action against the Exchange. The act
also empowered a commission composed of the
Secretary of Agriculture, Secretary of Commerce, and
the Attorney General to suspend or revoke the
designation of any board of trade failing to comply with
the conditions of its designation, § 6(a), 42 Stat. 188,
and to preclude any person violating the act or
attempting to manipulate prices from trading on
designated contract markets, § 6(b), 42 Stat. 189.
Failure to pay the appropriate tax or keep required
records made the violator guilty of a misdemeanor with
a fine of up to $10,000 and/or imprisonment for up to
one year. § 10, 42 Stat. 191.

4040

25a

The Future Trading Act was declared to be an
unconstitutional exercise of the taxing power in Hill v.
Wallace, 259 U.S. 44 (1922). It was redrafted
immediately and enacted as the Grain Futures Act, 42
Stat. 998 (1922). The offending tax provision was
deleted, and Congress, relying now on the commerce
power, simply made it unlawful for any person to deal
in futures contracts off a designated contract market,
§ 4, 42 Stat. 999-1000. The other operative provisions
of the 1921 act were retained, with the aforementioned
penalties now activated by violation of § 4 rather than
the failure to pay a tax. A section on purposes was
added, § 3, 42 Stat. 999. This section has been carried
over virtually unchanged to the present day, see 7
U.S.C. § 5. The 1922 act was declared a constitutional
exercise of the commerce power in Board of Trade v.
Olsen, 262 U.S. 1 (1923). The 1921 and 1922 acts
established the basic pattern of limiting trading to
designated exchanges and regulating that trading by
controlling designation of and access to the contract
markets. The fine and imprisonment scheme for
violations was also established.

Major additions, rather than revisions, were enacted
by the Commodity Exchange Act, 49 Stat. 1491 (1936).
Coverage was extended beyond grains to include
commodities such as cotton, butter, and eggs. Section
4a was added, empowering the commission of the
Secretary of Agriculture, Secretary of Commerce, and
Attorney General to fix quantitative limits on specula-
tive trading.’ Here the short conspirators, with the

This provision currently reads as follows:

(1) Excessive speculation in any commodity under contract of
sale of such commodity for future delivery made on or subject to

4041

26a

knowledge of the appellee FCM’s, are alleged to have
violated limits promulgated pursuant to this section. 17
C.F.R. § 150.10. The 1936 revisions also added § 4b, 49
Stat. 1493, the antifraud provision, essentially in its

the rules of contract markets causing sudden or unreasonable
fluctuations or unwarranted changes in the price of such
commodity, is an undue and unnecessary burden on interstate
commerce in such commodity. For the purpose of diminishing,
eliminating, or preventing such burden, the Commission shall,
from time to time, after due notice and opportunity for hearing,
by order, proclaim and fix such limits on the amount of trading
which may be done or positions which may be held by any person
under contracts of sale of such commodity for future delivery on
or subject to the rules of any contract market as the Commission
finds are necessary to diminish, eliminate, or prevent such
burden. In determining whether any person has exceeded such
limits, the positions held and trading done by any persons directly
or indirectly controlled by such person shall be included with the
positions held and trading done by such person; and further, such
limits upon positions and trading shall apply to positions held by,
and trading done by, two or more persons acting pursuant to an
expressed or implied agreement or understanding, the same as if
the positions were held by, or the trading were done by, a single
person.

(2) The Commission shall in such order fix a reasonable time
(not to exceed ten days) after the order's promulgation; after
which, and until such order is suspended, modified, or revoked, it
shall be unlawful for any person—

(A) directly or indirectly to buy or sell, or agree to buy or sell,
under contracts of sale such commodity for future delivery on or
subject to the rules of the contract market or markets to which
the order applies, any amount of such commodity during any one
business day in excess of any trading limit fixed for one business
day by the Commission in such order for or with respect to such
commodity; or

(B) directly or indirectly to hold or control a net long or a net
short position in any commodity for future delivery on or subject
to the rules of any contract market in excess of any position limit
fixed by the Commission for or with respect to such commodity:
Provided, That such position limit shall not apply to a position
acquired in good faith prior to the effective date of such order

4042

27a

present form." New section 4d required the registration
of FCM’s and section 4e of floor brokers, while section
4g provided for the suspension or revocation of these
registrations for violation of the Act or rules adopted
thereunder. Section 5a added new duties of reporting
for contract markets and some substantive obligations
as well. Fines and imprisonment sanctions were
extended to cover violations of the newly enacted
provisions as well as old § 4, and were also applied to

This provision currently reads as follows:

It shall be unlawful (1) for any member of a contract market, or
for any correspondent, agent, or employee of any member, in or in
connection with any order to make, or the making of any contract
of sale of any commodity in interstate commerce, made, or to be
made, on or subject to the rules of any contract market, for or on
behalf of any other person, or (2) for any person, in or in
connection with any order to make, or the making of, any
contract of sale of any commodity for future delivery, made, or to
be made, on or subject to the rules of any contract market, for or
on behalf of any other person if such contract for future delivery
is or may be used for (a) hedging any transaction in interstate
commerce in such commodity or the products or byproducts
thereof, or (b) determining the price basis of any transaction in
interstate commerce in such commodity sold, shipped, er received
in interstate commerce for the fulfillment thereof—

(A) to cheat or defraud or attempt to cheat or defraud such
other person;

(B) willfully to make or cause to be made to such other person
any false report or statement thereof, or willfully to enter or
cause to be entered for such person any false record thereof.

(C) willfully to deceive or attempt to deceive such other person
by any means whatsoever in regard to any such order or contract
or the disposition or exchange of any such order or contract, or in
regard to any act of agency performed with respect to such order
or contract for such person; or

(D) to bucket such order, or to fill such order by offset against
the order or orders of any other person, or willfully and
knowingly and without the prior consent of such person to
become the buyer in respect to any selling order of such person, or
become the seller in respect to any buying order of such person.

4043

28a

anyone attempting to manipulate or manipulating the
price of any commodity. 49 Stat. 1501.

By 1936, then, the major provisions which assertedly
form the bases of the implied right of action against the
FCM’s, the trading limit, antifraud, and antimanipula-
tion provisions, were already in place. One of the two
additional provisions allegedly affording the basis for
an action against the Exchange, § 5(d), had been law
since 1921 and the other, § 5a(8), would be added in
1968.

The 1968 amendments, 82 Stat. 26, extended
regulation to new commodities such as live cattle and
pork bellies. The amendments added § 5a(8), as noted
above, requiring a contract market to enforce all of its
rules not disapproved by the Secretary of Agriculture.’
Corresponding § 8a(7) was added empowering the
Secretary to disapprove rules which violate or will
violate the act or regulations. The penalty provision
was altered somewhat, making FCM embezzlement and
price manipulation felonies instead of misdemeanors,
with a maximum prison term of five years instead of
one. 82 Stat. 33-34. Section 6b was added, granting the
Secretary the power to issue cease and desist orders
against a contract market not enforcing its rules or
violating the act. 82 Stat. 31-32.

% This provision currently reads as follows:

(8) enforce all bylaws, rules, regulations, and resolutions, made
or issued by it or by the governing board thereof or any
committe, which relate to terms and conditions in contracts of
sale to be executed on or subject to the rules of such contract
market or relate to other trading requirements, and which have
been approved by the Commission pursuant to paragraph (12) of
section 5a of this Act; and revoke and not enforce any such bylaw,
rule, regulation, or resolution, made, issued, or proposed by it or
by the governing board thereof or any committee, which has been
disapproved by the Commission.

4044

29a

In contrast to the limited scope of the 1968
amendments, the 1974 amendments, 88 Stat. 1389
(1974), constituted a complete overhaul of the Act.
They broadened its coverage from the agricultural
commodities with which it had historically been
concerned to include “all other goods and articles. . .
and all services, rights, and interests in which contracts
for future delivery are presently or in the future dealt
in”, subject to certain exceptions designed primarily to
exclude securities. Consistently with this expansion in
coverage, enforcement was transferred from the
Department of Agriculture to a newly constituted
Commodity Futures Trading Commission (CFTC). How-
ever, the amendments did not substantially alter any of
the provisions which assertedly form the bases of an
implied right of action. The antifraud and trading
limits sections were basically unchanged. Maximum
fines were increased from $10,000 to $100,000 in the
penalty section.'® Section 5(d), requiring a contract

10 This provision currently reads as follows:

It shall be a felony punishable by a fine of not more that
$500,000 or imprisonment for not more than five years, or both,
together, with the costs of prosecution, for any person to
manipulate or attempt to manipulate the price of any commodity
in interstate commerce. or for future delivery on or subject to the
rules of any contract market, or to corner or to attempt to corner
any such commodity, or knowingly to deliver or cause to be
delivered for transmission through the mails or in interstate
commerce by telegraph, telephone, wireless, or other means of
communication false or misleading or knowingly inaccurate
reports concerning crop or market information or conditions that
affect or tend to affect the price of any commodity in interstate
commerce or knowingly to violate the provisions of section 4,
section 4b, section 4c(b) through section 4c(e), section 4h, section
40(1), or section 19 of this Act, or knowingly to make any false or
misleading statement of a material fact in any registration
application or report filed with the Commission, or knowingly to
omit in any application or report any material fact that is

4045

30a

market as a condition of designation, to prevent
manipulation and cornering, remained unchanged, and
§ 5a(8) was altered so that exchanges were required to
enforce their rules approved by the CFTC rather than
those rules not disapproved by the Secretary.

The 1974 amendments required contract markets to
provide arbitration procedures for settlement of cus-
tomer grievances and claims not exceeding $15,000,
§ 5a(11). The CFTC was vested with power to compel
exchanges to adopt additional rules, § 8a(7), and to
bring actions to enjoin violations of the Act and compel
compliance through writs of mandamus, § 6c. Finally,
the reparations procedure in § 14 was established, of
which more hereafter.

The history of congressional concern with commodity
futures trading has thus been one of steady expansion
in coverage and strengthening of regulation. In 1936,
1968, and 1974 new commodities came under the CEA.
In each of these years the power of the regulatory
authority were augmented, and penalties were either
extended, increased, or both. The question of Congres-
sional intent with respect to private sanctions under
the Act must be considered against this background of
increasingly strong regulation designed to insure the
existence of fair and orderly markets.

required to be stated therein. Notwithstanding the foregoing, in
the case of any violation described in the foregoing sentence by a
person who is an individual, the fine shall not be more than
$100,000, together with the costs of prosecution.

4046

3la

IV. PRIVATE CAUSES OF ACTION UNDER THE
COMMODITY EXCHANGE ACT PRIOR TO
THE 1974 AMENDMENT

During the late 1940’s, the 1950's, the 1960's and the
early 1970’s there was widespread, indeed almost
general, recognition of implied causes of action for
damages under many provisions of the Securities
Exchange Act, including not only the antifraud
provisions, §§ 10 and 15(c\1), see Kardon v. National
Gypsum Co., 69 F.Supp. 512, 513-14 (E.D. Pa. 1946);
Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787 (2
Cir. 1951) (Frank, J.); Fratt v. Robinson, 203 F.2d 627,
631-33 (9 Cir. 1953), but many others. These included
the provision, § 6(aX1), requiring securities exchanges
to enforce compliance with the Act and any rule or
regulation made thereunder, see Baird v. Franklin, 141
F.2d 238, 239, 240, 244-45 (2 Cir.), cert. denied, 323
U.S. 737 (1944),"' and provisions governing the

11 While the point is of no great importance as regards this case, we
take issue with the statements in the dissent, page 38, that Colonial
Realty Corp. v. Bache & Co., 358 F.2d 178 (2 Cir.), cert. denied, 385
U.S. 81 (1966), held that violation of a rule of the New York Stock
Exchange could not give rise to an implied cause of action. Our
conclusion was that violation of certain types of rules would give rise
to an implied cause of action, especially “when the rule imposes an
explicit duty unknown to the common law”, but that violation of the
rule there at issue, requiring brokers to observe “just and equitable
principles of trade”, did not. Jd. at 182-83. We likewise do not accept
the statement in footnote 8 that “it is now well recognized that a
private right of action may not be implied for a violation of a rule of
the New York Stock Exchange,” citing Jablon v. Dean Witter & Co.,
614 F.2d 677 (9 Cir. 1980). Although the particular rule at issue in
Jablon, the “know your customer” rule, Rule 405 of the New York
Stock Exchange, seems analogous to the rule at issue in Colonial
Realty and we thus have no quarrel with the result, we do not
necessarily accept the broad language of the Jabion opinion. In view
of our conclusion that plaintiffs have alleged violations of other
sections of the Act which give rise to private claims, it is

4047

32a

solicitation of proxies, see J. J. Case Co. v. Borak, 377
U.S. 426, 431-35 (1964). The Baird case is of special
importance since the claim was of failure of the New
York Stock Exchange to perform its duties—a claim
paralleling that asserted here against NYME. Writing
in 1961, Professor Loss remarked with respect to
violations of the antifraud provisions that with one
exception “not a single judge has expressed himself to
the contrary.” 3 Securities Regulation 1763-64. See also
Bromberg & Lowenfels, supra, § 2.2 (462) (describing
1946-1974 as the “expansion era” in implied causes of
action under the securities laws). When damage actions
for violation of § 10(b) and Rule 10b-5 reached the
Supreme Court, the existence of an implied cause of
action was not deemed worthy of extended discussion.
Superintendent of Insurance v. Bankers Life &
Casualty Co., 404 U.S. 6 (1971); Affiliated Ute Citizens
v. United States, 406 U.S. 128 (1972)."* Implied private

unnecessary for us now to decide whether such an action would lie
for violation of NYME Rule § 44.02.

So far as concerns the dissent’s citation of O'Neill v. Maytag, 339
F.2d 764 (2 Cir. 1964), as a case denying a private right of action in
the securities area, that decision rested on the scope of Rule 10b-5
and in no way challenged the proposition that a private cause of
action would lie if the facts came within the Rule.

12 Indeed, at the time Congress considered and passed the 1974
amendments to the CEA, the Supreme Court had never rejected a
request to imply a cause of action under the federal securities laws.
Pitt, Standing to Sue Under the Williams Act After Chris-Craft, 34
Bus. Law. 117, 121 (1978).

The suggestion in the dissent that the Superintendent of Insurance
case was a grudging acquiescence in 25 years of lower court
decisions, although finding some support in a footnote to Cannon,
404 US. at 13 nJ9, ignores the language of the opinion in
Superintendent of Insurance and the climate of the times. The
Supreme Court there reversed a decision of this court refusing to
apply § 10(b) under circumstances which pressed that section to its
absolute limit. The Court quoted not simply in acquiescence but with

4048

33a

causes of action under other statutes administered by
the SEC were also widely recognized, see, e.g.,
Goldstein v. Groesbeck, 142 F.2d 422, 426-27 (2 Cir.),
cert. denied, 323 U.S. 737 (1944) (Public Utility
Holding Company Act); Cogan v. Johnston, 162
F.Supp. 907 (S.D.N.Y. 1958); Schwartz v. Bowman, 156
F.Supp. 361 (S.D.N.Y. 1957), appeal dismissed but
holding on this point approved, Schwartz v. Eaton, 264
F.2d 195, 197-98 & n.5 (2 Cir. 1959); Brown v. Bullock,
194 F.Supp. 207, 220-21 (S.D.N.Y.), aff'd, with
appellant conceding this point, 294 F.2d 415, 418 (2
Cir. 1961\Investment Company Act);'* see also Caplin
v. Marine Midland Grace Trust Co., 439 F.2d 118, 123
n.5 (2 Cir. 1971Xdictum), aff'd 406 U.S. 416, 426 n.17
(1972\Trust Indenture Act). These statutes contained a

strong approval the statement in Shell v. Helmsley, 430 F.2d 819,
827 (5 Cir. 1970):

When a person who is dealing with a corporation in a securities
transaction denies the corporation's directors access to material
information known to him, the corporation is disabled from
availing itself of an informed judgment on the part of its board
regarding the merits of the transaction. In this situation the
private right of action recognized under Rule 10b-5 is available as
a remedy for the corporate disability.

And all this under a statute which express/y created three private
actions, §§ 9e), 16(b) and 18, with respect to various types of
securities transactions that were far more efficacious than the
reparations procedure of the 1974 amendments to the CEA. See 6
Loss, Securities Regulation at 3689-73 (1969), suggesting that for
this and other reasons the Borak decision would not necessarily
preclude a different ruling with respect to the existence of a private
cause of action under § 10(b}~a ruling which never came.

13 Indeed, in several important cases under the Investment Company
Act, defendants represented by able counsel did not even think it
worthwhile to question the existence of an implied private cause of
action. See, e.g., Rosenfeld v. Black, 445 F.2d 1337 (2 Cir. 1971),
cert. dismissed 409 U.S. 802 (1972); Moses v. Rurgin, 445 F.2d 369
(1 Cir.), cert. denied 404 U.S. 994 (1971); Fogel v. Chestnutt, 533
F.2d 731 (2 Cir. 1975), cert. denied, 429 U.S. 824 (1976).

4049

34a

panoply of other remedies—enforcement by the SEC,
suspension, civil fines, criminal penalties, and some
express private actions—which, with the exception of
the administrative reparations remedy against one type
of violator, were every bit as or more extensive than
those in the CEA, but arguments that such provisions
negated an implied private cause of action were
regularly and firmly rejected, see, e.g., Judge Clark’s
much cited opinion in Baird v. Franklin, supra, 141
F.2d at 244-45; Goldstein v. Groesbeck, supra, 142 F.2d
at 426-27; Fratt v. Robinson, supra, 203 F.2d at 632;
Dann v. Studebaker-Packard Corp., 288 F.2d 201, 208-
09 (6 Cir. 1961). The question here is not whether all
these decisions were wrong in the light of Supreme
Court opinions of the past four years, as the dissent
necessarily implies, but whether the 1974 Congress was
not justified in assuming they would be followed with
respect to the CEA.

Neither the generality and near unanimity of such
interpretations of statutes regulating unfair securities
practices, for which the CEA was the analogue with
respect to futures trading,'* nor similar decisions in

14 While there are differences between the commodities and
securities fields, what is relevant to the present question is the
common legislative objective of insuring fair dealing for investors on
what are important public markets, and the common legislative
approach to attaining this objective. The analogy between the two
fields has been repeatedly recognized by Congress, see, e.g.. S. Rep
No. 93-1131, supra, at 19; H. R. Rep. No. 93-975, supra, at 39. The
1936 amendments arose from an explicit concern to make pretection
in the commodities field as strong as it was in the securities field,
lest the unscrupulous would simply transfer their operations from
one market to another. H. R. Rep. No. 1522, 73d Cong., 2d Sess. 2
(1934); 78 Cong. Rec. 10446 (June 4, 1934) (Remarks of Chairman
Jones of the House Committee on Agriculture); 79 Cong. Rec. 8589
(June 3, 1935) (same). The analogy has been frequently accepted by
the courts, see, e.g., Silverman v. CFTC, 562 F.2d 432, 438 (7 Cir.

4050

35a

other fields, e.g., Reitmeister v. Reitmeister, 162 F.2d
691 (2 Cir. 1947\action for damages implied from
statute making interception of telephone calls a
crimeXL. Hand, J.); Fitzgerald v. Pan American World
Airways, 229 F.2d 499 (2 Cir. 1956) (action for
damages implied from anti-discrimination provision of
Civil Aeronautics Act although express remedies were
complaint to CAB and criminal sanctions), were at all
novel. They rested on principles recognized in a line of
Supreme Court decisions going back to Texas & Pacific
R. Co. v. Rigsby, 241 U.S. 33 (1916). Rigsby sustained
the right of a switchman to recover damages for
violation of the Federal Safety Appliance Acts although
the only express sanctions were penal. The Court there
stated:

A disregard of the command of the statute is a
wrongful act, and where it results in damage to one
of the class for whose especial benefit the statute
was enacted, the right to recover damages from the
party in default is implied according to a doctrine
of the common law expressed in 1 Com. Dig., tit.
Action upon Statute (F), in these words: “So, in
every case, where a statute enacts, or prohibits a
thing for the benefit of a person, he shall have a

1977) (quoting Moore, J., in Savage v. CFTC, 548 F.2d 192, 197 (7
Cir. 1977)),; P. J. Taggares Co. v. NYME, 476 F.Supp. 72, 77-78
(S.D.N.Y. 1979) (Weinfeld, J.); by the CFTC, see, e.g., brief amicus
curiae at 12; and by the commentators, see, e.g.. Markham and
Meltzer, Secondary Liability Under the Commodity Exchange Act,
27 Emory L. J. 1115 (1978); Note, Private Rights of Action for
Commodity Futures Investors, 55 B.U. L. Rev. 804, 821-22 (1975).
Congress was not only aware of the implied right of action under the
CEA in 1974, as shown below, but surely was also aware of the
private right of action recognized in the analogous field of securities
regulation.

4051

36a

remedy upon the same statute for the thing
enacted for his advantage, or for the recompense of
a wrong done to him contrary to the said law.” (Per
Holt, C.J., Anon., 6 Mod. 26, 27.) 241 US. at 39.

Following Rigsby the Supreme Court recognized im-
plied causes of action on numerous occasions, see, e.g.,
Wyandotte Transportation Co. v. United States, 389
U.S. 191 (1967) (sustaining implied cause of action by
United States for damages under Rivers and Harbors
Act for removing negligently sunk vessel despite
express remedies of in rem action and criminal
penalties); United States v. Republic Steel Corp., 362
U.S. 482 (1960) (sustaining implied cause of action by
United States for an injunction under the Rivers and
Harbors Act); Tunstall v. Locomotive Firemen &
Enginemen, 323 U.S. 210 (1944) (sustaining implied
cause of action by union member against union for
discrimination among members despite existence of
Board of Mediation); Sullivan v. Little Hunting Park,
Inc., 396 U.S. 229 (1969) (sustaining implied private
cause of action under 42 U.S.C. § 1982); Allen v. State
Board of Elections, 393 U.S. 544 (1969) (sustaining
implied private cause of action under § 5 of the Voting
Rights Act despite the existence of a complex
regulatory scheme and explicit rights of action in the
Attorney General); and, of course, the aforementioned
decisions under the securities laws. As the Supreme
Court itself has recognized, the period of the 196C’s and
early 1970’s was one in which the “Court had
consistently found implied remedies.” Cannon v.
University of Chicago, 441 U.S. 677, 698 (1979); id. at
718 (Rehnquist, J., concurring) (“Cases such as J. J.

4052

37a

Case Co. v. Borak . . . and numerous cases from other
federal courts, gave Congress good reason to think that
the federal judiciary would undertake this task”). See
generally Note, Implying Civil Remedies from Federal
Regulatory Statutes, 77 Harv. L. Rev. 285 (1963).
Given so many cases implying private rights of action
under a broad range of statutes, both cognate (as in the
instance of the securities legislation) and otherwise,
supported by a goodly number of Supreme Court
decisions and the reasoning behind them,’ it was
scarcely surprising that the courts that considered the
question prior to the 1974 amendments unanimously
upheld the implication of a private cause of action
under the CEA. Indeed in the climate then prevailing it
would have been almost unthinkable for the lower
courts to have held that administrative and penal

15 Although it is true, as stated in Justice Powell's dissent in Cannon
v. University of Chicago, 441 U.S. at 735, that “During this same
period, the Court frequently turned back private plaintiffs seeking to
imply causes of action from federal statutes,” 411 U.S. at 735, citing
the same cases mentioned in Judge Mansfield’s dissent, there can be
no doubt that particularly in the closely related field of violations of
statutes administered by the SEC, the implied cause of action was so
much taken for granted that usually the issue was not even raised
See note 13 supra. There are many instances of this under the CEA
itself, both before and after the 1974 amendments See. e.g. Booth
v. Peavey Company Commodity Services, 430 F.2d 132, 133 (8 Cir
1970); Ames v. Mernil Lynch. Pierce, Fenner & Smith. Inc... 567
F.2d 1174, 1176 (2 Cir. 1977) (“It is agreed that there is an implied
cause of action under the Act for a private remedy.”); Hofmaver v
Dean Witter & Co.. Inc., 459 F Supp. 733, 737 (N.D. Cal. 1978). In
addition, several courts have begun the process of delineating the
precise contours of the private cause of action under the CEA, aided
of course by the securities law analogy, assuming either arguendo or
implicitly that such an action exists. See, e.g.. Miller v. New York
Produce Exchange, 434 U.S. 823 (1977); Master Commodities. Inc. \
Texas Cattle Management Co., 586 F.2d 1352 (10 Cir. 1978); Moods
v. Bache & Co., Inc., 570 F.2d 523 (5 Cir. 1978); P. J. Taggares Co
v. NYME, supra, 476 F Supp. 72

4053

38a

remedies were adequate for the enforcement of private
claims for economic loss caused by violation of this
important effort by Congress to regulate the commod-
ity futures markets. And they did not. The first
reported case, frequently cited in later decisions, was
Goodman v. H. Hentz & Co., 265 F.Supp. 440 (N.D. Ill.
1967).'° The unbroken line of decisions upholding a
private right of action under pre-1974 law includes
cases frm all of the major centers of activity in the
commodity futures field. Anderson v. Francis I. duPont
& Co., 291 F.Supp. 705, 710 (D. Minn. 1968); Hecht v.
Harris, Upham & Co., 283 F.Supp. 417, 437 (N.D. Cal.
1968), modified, 430 F.2d 1202 (9 Cir. 1970); United
Egg Producers v. Bauer International Corp., 11 F.Supp.
1375, 1384 (S.D.N.Y. 1970); Booth v. Peavey Company
Commodity Services, 430 F.2d 132, 133 (8 Cir. 1970);
McCurnin v. Kohlmeyer & Co., 340 F.Supp. 1338, 1343
(E.D. La. 1972), aff'd, 477 F.2d 113 (5 Cir. 1973); Gould
v. Barnes Brokerage Co., Inc., 345 F.Supp. 294, 295
(N.D. Tex. 1972); Johnson v. Arthur Epsey, Shearson,
Hamill & Co., 341 F.Supp. 764, 766 (S.D.N.Y. 1972);

16 ~The dissent’s suggestion, p. 36, that victims of frauds in futures
trading had never resorted to the federal courts prior to Goodman,
which was “the first case to break the barrier”, lacks adequate
empirical basis. Judge Carter's opinion in the Salad Oil case,
Seligson v. New York Produce Exchange, supra, 376 F.Supp. at
1080, rendered in 1974, tells us that this swindle of the early 1960's
“led to a string of lawsuits and investigations extending over the
past ten years.” It is not unlikely that many counsel for defendants
confronted with the array of cases under the statutes administered
by the SEC, did not think it worthwhile to question the existence of
a private cause of action under the CEA—just as their counterparts
in well-known cases under the Investment Company Act had failed
to do so, see note 13 supra.

While we think the dissent’'s attscks on the reasoning of Goodman
are exaggerated, this is irrelevant, since the courts followed and
extended it without the slightest question, and Congress necessarily
a these decisions, stretching over seven years, as representing
the law.

4054

39a

Arnold v. Bache & Co., 377 F.Supp. 61, 65 (M.D. Pa.
1973); Deaktor v. L. D. Schreiber & Co., 479 F.2d 529,
534 (7 Cir.), revd on other grounds sub nom, Chicago
Mercantile Exchange v. Deaktor, 414 U.S. 113 (1973)
(per curiam); Seligson v. New York Produce Exchange,
378 F.Supp. 1076, 1084 (S.D.N.Y. 1974), aff'd sub nom.
Miller v. New York Produce Exchange, 550 F.2d 762 (2
Cir.), cert. denied, 434 U.S. 823 (1977).

It is true that most of these cases concerned fraud by
a broker against his customers or churning of a
customer’s account, which was clearly within § 4b of
the Act, but none stressed the broker-customer relation
as either the basis or the limit of liability. And several
did not involve fraud practiced by a broker on his
customers. The most important of these is Deaktor v. L.
D. Schreiber & Co., 479 F.2d 529 (7 Cir.), rev'd on other
grounds sub nom. Chicago Mercantile Exchange v.
Deaktor, 414 U.S. 11 (1973). Two cases were before the
court. Plaintiffs in the first case sued the Exchange and
various members alleging that the defendants manipu-
lated the futures market for frozen pork bellies, a
violation of CEA § 9b), 7 U.S.C. § 13(b), artificially
raising the price and thereby injuring those who, like
the Deaktor plaintiffs, had sold short and were forced
to liquidate their positions at higher prices (the
converse of the situation of the plaintiffs in our case).
The Exchange was also charged with violating CEA
§ 5a(8), 7 U.S.C. § 7a(8), the provision requiring an
exchange to “enforce all bylaws, rules, regulations, and
resolutions”. Plaintiffs in the second case charged the
Exchange with monopolizing trading in the fresh egg
futures market, causing the price to fall and forcing
plaintiffs to sell at artificially depressed prices. This
conduct was alleged to violate the notice and hearing

4055

40a

provisions in Rule 217(D) of the Exchange, CEA
§§ 52(8) and Ob\the criminal! penalty provision for
manipulation), 7 U.S.C. §§ 7a(8), 13(b), and the
Sherman Act. The case reached the Seventh Circuit on
denials of motions by the Exchange and_ other
defendants to stay district court action pending the
exercise of primary jurisdiction by the Commodity
Exchange Commission. Having declined to defer to the
primary jurisdiction of the Commission, the court
reached the question whether private damage actions
were allowable under the CEA. Citing numerous cases,
the Deaktor court stated that “courts which have
considered the question . . . have apparently uniformly
concluded that such an action exists.” Jd. at 534. The
court noted that the purpose of the Act was, in the
language of the congressional reports, “to insure fair
practice and honest dealing on the commodity ex-
changes and to provide a measure of control over those
forms of speculative activity which too often demoralize
the markets to the injury of producers and consumers
and the exchanges themselves.” The court further noted
that § 9(b) of the Act made it a felony to manipulate
prices, and concluded that in light of this provision and
the general purpose of the Act, “we think the
enactment is at least in part intended to protect the
interests of the plaintiffs-traders in these actions,” and
therefore held that plaintiffs had a cause of action. Id.
Thus, immediately before consideration of the 1974
amendments began, and only one year prior to their
enactment by the Congress, the Court of Appeals with
jurisdiction over the center where approximately 80%
of all futures contracts were traded in the United
States had clearly held that a private cause of action
existed under the CEA—not simply for fraud by a

4056

tla

broker on his customer but for manipulation as well.
The notion, strongly emphasized by the dissent, that
such a decision escaped the knowledge of those framing
the amendments, seriously underrates the expertise of
our lawmakers and their staffs in subjects of particular
concern to them.

Far from undermining the Seventh Circuit’s recogni-
tion of an implied cause of action, the Supreme Court's
reversal, 414 U.S. 113 (1973) (per curiam), on the
ground that the court should have deferred to the
primary jurisdiction of the Commission implicitly
affirmed this recognition. Noting that “ ‘Congress has
established a specialized agency that would determine
either that a... rule of the Exchange has been
violated or that it has been followed. . .'”, the Court
emphasizid that “‘Either judgment would require
determination of facts and the interpretation and
application of the Act and Exchange rules. . .’” and
that “ ‘either determination will be of great help to the
.. .court. .. . "Ud. at 115, quoting Ricci v. Chicago
Mercantile Exchange, 409 U.S. 289, 307 (1973). Thus
the Court’s reason for insisting on a determination by
the Commission “in the first instance”, 414 U.S. at 116,
was that it would assist a court in hearing plaintiff's
claims “in the second instance”. The Court did not
“decline to reach the issue” whether plaintiffs’ claims
were cognizable in federal court, as the dissent asserts
(p. 40); it simply assumed that they were, as the
Seventh Circuit had held.'™

Other cases upholding an implied cause of action
outside the broker-customer relationship were United

iu = Mr. Justice Stewart would have affirmed and allowed the action to
proceed directly in the district court. 414 US. at 416.

4057

42a

Egg Producers v. Bauer International Corp., supra, 311
F.Supp. 1375, which recognized an implied cause of
action under § 9(b) on behalf of various egg producers
against an import-export firm, and Seligson v. New
York Produce Exchange, supra, 378 F.Supp. 1076.
Seligson arose out of the much-publicized “Salad Oil
Swindle”, and recognized an implied cause of action on
behalf of the trustee in bankruptcy of a brokerage firm
against the exchange, exchange officials, and the
clearinghouse.’

While case based on pre-1974 facts decided after the
1974 amendment, apparently under pre-1974 law, are
of less pertinence since the 1974 Congress could not
have known of the decisions,'* they deserve mention as

17 We fail to appreciate the dissent’s attempt to distinguish these two
cases. With respect to Egg Producers, if implied private causes of
action did not exist under the Act, there would be no cause of action
for an injunction any more than there would be for damages. The
Seligson decision was rendered before Senate consideration of the
1974 amendments and House repassage in the amended form.
Moreover, what the dissent fails adequately to recognize is that the
cases under the CEA, numerous and consistent as they are, cannot be
taken in isolation but must be considered along with the vast body of
law under the securities statutes which set the tone during the late
40's, the ‘50's, the ‘60's, and the early ‘70's, and on which the CEA
decisions relied. The efforts to whittle all this away. pages 41-43, are
unimpressive. We have already dealt, note 14 supra, with the
argument as to the cases under Rule 10b-5. The contention that the
securities legislation offered less in the way of remedies than the
CEA would surprise most students of securities law; with the single
exception of the 1974 reparations procedure for certain types of
CEA violations, whose inadequacies are described below, they
offered more. The argument that the sections of the CEA most
heavily relied upon by plaintiffs were enacted before the explosion of
the private right of action under the securities laws ignores the fact
that the 1974 amendments to the CEA were intended to be a
complete overhaul and were effected with vivid Congressional
awareness of the decisions implying private causes of action under
the CEA as well as the related subject of the laws administered by
the SEC.

is Congress was, however, apparently aware of the pendency of at
least one of these cases. See note 30 infra.

4058

43a

indicative of the uncontradicted view of the law
prevailing when Congress acted. In Case & Co., Inc. v.
Board of Trade, 523 F.2d 355 (7 Cir. 19754¥Cummings,
Stevens, and Tone, JJ.), plaintiff sued the Board and its
governors for violating §§ 5a(1) and 5a(8) of the CEA in
suspending trading limits on soybean futures. The court
began its discussion of liability by stating that “i]t is
undisputed that a private cause of action may be
maintained under the Commodity Exchange Act. See
Deaktor . . . .” Id. at 360. In Hirk v. Agri-Research
Council, Inc., 561 F.2d 96, 103 n.8 (7 Cir. 1977), the
same court flatly stated that “[p]rivate damage actions
are allowable under the CEA. See, e.g.. Deaktor. . . .”
See also Bartley v. P.G. Commodities Associates, Inc.,
CCH Com. Fut. L. Rep. § 20,123 [1975-77 Transfer
Binder] (S.D.N.Y. 1975) (churning complaint under
§ 4b).

We see no need to burden this opinion with detailed
examination of district court decisions concerning
whether the 1974 amendments eliminated the private
cause of action theretofore unanimously recognized.
The courts have divided although the weight of
authority is in favor of continued implication.'® As
noted, the only court of appeals to have considered the
issue has held that a private cause of action should be
implied. Curran v. Merrill Lynch, note 1 supra.

19 Cases finding an implied cause of action: Milani v. ContiCommod-
ity Serv., Inc., 462 F.Supp. 405 (N.D. Cal. 1976); Shearson Hayden
Stone v. Lumber Merchants, Inc., 423 F.Supp. 559 (S.D. Fla. 1976),
Bache Halsey Stuart, Inc. v. French, 425 F Supp. 1231 (D.D.C
1977); Kelley v. Carr, 442 F.Supp. 346 (W.D. Mich. 1977), rev'd on
other grounds, Nos. 78-1091, 1092, 5542, 5460 (6 Cir., May 16,
1980); Hofmayer v. Dean Witter & Co., 459 F.Supp. 733 (N.D. Cal
1978); Berenson v. Madda Trading Co., CCH Comm. Fut. L. Rep
© 20,689 (D.D.C. 1978); Gravois v. Fairchild, Arabatzis & Smith,
Inc., CCH Comm. Fut. L. Rep. $ 20,706 (E.D. La. 1978); Rivers v

4059

dita

V. THE CONTINUED EXISTENCE OF THE
PRIVATE CAUSE OF ACTION

In deciding the issue here before us, we follow the
analysis set forth in Cort v. Ash, 422 U.S. 66. 78
(1975).*°

20

Rosenthal & Cv., Civ. Action File No. CV 178-186 (S.D. Ga. 1978).
appeal pending, 79-1313 (5 Cir); Poplar Grove Planting and
Refining Co., Inc. v. Bache Halsey Stuart Inc., 465 F Supp. 585
(N.D. La. 1979), Jones v. B. C. Christopher & Co., 466 F.Supp. 213
(D. Kansas 1979); R. J. Hereley & Son v. Stotler & Co., 466 F Supp.
345 (N.D. Ill. 1979); Aiken v. Lerner, Civ. Action No. 79-0023
(D.N.J. 1980); Navigator Group Funds v. Shearson Hayden Siane
Inc., 77 Civ. 5350 (S.D.N.Y. 1980) (Broderick, J.); Grayson v.
Conticommodity Services, Inc., 48 L.W. 2807 (D.DC.. May 23,
1980); Witzel v. Chartered Systems Corporation of New York, Ltd..
48 L.W. 2823 (D. Minn., May 27, 1980).

To the contrary, in addition to Judge MacMahon’s opinion in this
case, 470 F.Supp. 1256, see Arkoosh v. Dean Witter & Co.. 415
F.Supp. 535 (D. Neb. 1976), aff'd on other grounds, 571 F.2d 437 (8
Cir. 1978); Consolo v. Hornblower & Weeks-Hemphill, Noyes, Inc.,
436 F.Supp. 447 (N.D. Ohio 1976); Bartels v. International
Commodities Corp., 435 F.Supp. 865 (D. Conn. 1977); Berman v.
Bache Halsey Stuart, Shields, Inc., 467 F.Supp. 311 (S.D. Ohio
1979), Alkan v. Rosenthal & Co., CCH Comm. Fut. L. Rep. § 20,797
(S.D. Ohio 1979); Liang v. Hunt, 477 F. Supp. 891 (N.D. Ill. 1979);
Fischer v. Rosenthal & Co., 481 F Supp. 53 (N.D. Tex. 1979); Stone
v. Saxon and Windsor Group, Lid, CCH Comm. Fut. L. Rep.
§ 31,100 (N.D. Ill. 1980). The three decisions from district courts in
Ohio which declined to find an implied cause of action, Consolo.
Berman, and Alkan, are no longer good law in that circuit in light of
the Sixth Circuit's contrary decision in Curran v. Merrill Lynch,
cited in note 1 supra.

This is:

In determining whether a private remedy is implicit in a statute
not expressly providing one, several factors are relevant. First, is
the plaintiff “one of the class for whose especial benefit the
statute was enacted,” Texas & Pacific R. Co. v. Rigsby, 241 US.
33, 39, 60 L. Ed. 874, 36 S. Ct. 482 (1916) (emphasis supplied)—
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?
See, e.g., National Railroad Passenger C orp. v. National Assn. of

4060

45a

There is, however, one differentiating factor of such
transcendent importance as to demand mention at the
outset. As shown in Part IV of this opinion the
decisions prior to the 1974 amendments had uniformly
upheld the existence of a private cause of action under
the provisions of the Commodity Exchange Act, and as
will be shown in this part, the 1974 Congress was well
aware of the existing state of the law. Even without
more, the question thus would not be whether Congress
intended to create a new private right of action in
1974, but rather whether it intended sub silentio to
alter the significance that had long been given these
provisions by making other changes in the Act. Beyond
this, however, we do not need to assume, as the Court
stated would be “appropriate” in upholding a private
cause of action in Cannon vy. University of Chicago, 441
U.S. 677, 696-97 (1979), “that our elected representa-
tives, like other citizens, know the law” or to “presume”
that they “were aware of the prior interpretation” of a

Railroad Passengers, 414 U.S. 453, 458, 460, 38 L. Ed. 2d 646,
94 S. Ct. 690 (1974) (Amtrak), supra, Securities Investor
Protection Corp. y. Barbour, 421 US. 412. 425, 44 L. Ed. 2d 265,
95 S. Ct. 1733 (1975); Calhoon v. Harvey, 379 US. 134, 13 L.
Ed. 2d 190, 85 S. Ct. 292 (1964). 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? See Wheeldin
v. Wheeler, 373 U.S. 647, 652, 10 L. Ed. 2d 605, 83S. Ct. 1441
(1963); cf. J. 1. Case Co. v. Borak, 377 U.S. 426, 434, 12 L. Ed
2d 423, 84S. Ct. 1555 (1964); Bivens v. Six Unknown Federal
Narcotics Agents, 403 U.S. 388, 394-395, 29 L. Ed. 2d 619, 91 S.
Ct. 1999 (1971); id. at 400, 29 L. Ed. 2d 619, 91S. Ct. 1999
(Harlan, J., concurring in judgment)

We read this in light of the later caveat in Touche Ross & Co. v
Redington, 442 U.S. 560, 575 (1979) that the basic inquiry is always
to plumb the intent of Congress, that the Cort factors are simply
inquiries helpful in that endeavor, and that satisfaction of one or
more of the Cort factors will not alone carry the day.

4061

46a

related statute. See Lorillard v. Pons, 434 U.S. 578,
580 (1978) (“Congress is presumed to be aware of an
administrative or judicial interpretation of a statute’).
Here the existence of an implied right of action under
the Commodity Exchange Act as it stood in 1974 was
repeatedly called to the attention of and implicitly
approved by Congress. This alone sufficiently answers
appellees’ claim that if the 1974 Congress wished to
create a private cause of action, it would and should
have said so and that it is implausible to suppose that
“Congress absentmindedly forgot to mention an in-
tended private action.” Cannon, supra, 441 U.S. at 742
(Powell, J., dissenting). Whether rightly or wrongly in
light of recent Supreme Court jurisprudence, the courts
had read a private cause of action into the statute, just
as they had done with statutes of similar import in
related fields, and Congress knew that they had done
so. The burden thus lies on those who urge that the
1974 amendments demonstrate an intention to change
prior law, or, paraphrasing the language from Mr.
Justice Powell's Cannon dissent, supra, that, in making
the changes that it did, Congress “absentmindedly
forgot” to repeal the private cause of action. The silence
of the 1974 Congress with respect to private causes of
action for violations of the CEA, on which the dissent
leans so heavily, is no more significant than the similar
silence of the 1975 Congress which extensively
amended the Securities Exchange Act, 89 Stat. 97.
When a principle has become settled through court
decisions, there is no occasion for Congress to speak
unless it wishes a change."

“1 We find little force in the dissent’s reliance, page 33 and footnote
11, on the failure of the 1968 Congress to enact a section of a bill
introduced by Representative Fino providing an explicit right of

462

47a

1. Taking the first of the Cort factors, we have no
difficulty in concluding, despite appellees’ claims to the
contrary, that the plaintiffs were among “the class for
whose especial benefit the statute was enacted,” a
phrase going back to Texas & Pacific R. Co. v. Rigsby,
supra, 241 US. at 39. Although Congressional commit-
tees and sponsors of the ill-fated 1921 legislation
devoted most of their eloquence to injuries suffered by
producers at the hands of wicked speculators, the
Senate Report on the 1922 Act recognized that:

action against exchanges. Quite apart from the usual problems of
relying on actions of an earlier Congress, and much more on its
failure to act, see p. 59 infra. the question of a private right of action
was simply not considered by Congress in the 1968 amendment
process. The bill that became the 1968 amendments. H. R 13094,
never contained a private remedy provision, such a remedy was
never mentioned in either congressional report, and was never
discussed in congressional debate. The dissent's picture of Congress’
carefully comparing the bills and deliberately and meaningfully
rejecting the provision in Rep. Fino's bill is indeed based on
gossamer. Since the failure to act on the provision in 1968 is only of
the slightest significance with respect to congressional intent at that
time, its bearing on the effort to discern congressional intent six
years later, in 1974, is infinitesimally small.

Beyond all this, when Rep Fino introduced his bill with the explicit
right of action provision, he included with his speech numerous
newspaper articles about the commodities industry. One of these
discussed the Great Salad Oi! Swindle, and noted that two attorneys
for the receiver of Ira Haupt & Co., a brokerage firm which went
under in that affair, “are trying to determine whether Haupt can
justifiably file suit against the exchange for failure to regulate
Haupt eventually did, and the court recognized an implied right of
action against the exchange, see Seligson v. New York Produce
Exchange, supra, 378 F Supp. 1076. If Congress had given any
consideration to Rep. Fino’s bill, it could well have failed to enact the
explicit remedy provision because it considered this unnecessary in
light of the then judicial climate, as had turned out to be the case for
Ira Haupt & Co. before the 1974 amendments were passed, see note
17 supra. This further illustrates that attempting to attach meaning
to the failure of Congress, and even more so of a previous Congress,
to enact legislation is a speculative enterprise indeed.

4063

48a

Transactions in grain futures are utilized by the
public for speculation and by the grain trade for
the purpose of eliminating or reducing, as far as
practicable, the hazards in the merchandising of
grain and its products and by-products due to price
fluctuations. Public speculation helps to carry the
risk for the producers, dealers, and millers who
wish to hedge their cash grain transections. S. Rep.
No. 871, 67th Cong., 2d Sess. 3 (1922).

It is true that much of the debate on the floor of the
House consisted of vituperative attacks on those
“gambling” in the grain trade to the detriment of the
producers and the consumer. However, these attacks
were generally directed at big speculators, i.e., those in
a position to manipulate the market, and there was
always the recognition that “legitimate trade” was
acceptable and indeed beneficial.**7 The emphasis on
producers in § 3, the statement of purposes in the 1922
Act, was due to a desire to state a basis clearly within
then existing notions of the commerce power rather
than to risk invalidation by including classes whom the
Supreme Court might not think to come within it;
Wickard v. Filburn, 317 U.S. 111 (1942), then lay
twenty years in the future.** At that time, moreover,

22 See, e.g., 62 Cong. Rec. 9404 (June 26, 1922) (Remarks of
Chairman Tincher of the House Committee on Agriculture) (“I have
never said that the sale of wheat for future delivery should be wiped
out ... but have always said, and I still say, that to let a few
gamblers manipulate the grain market was not only unfair to the
consumer but unfair to the legitimate trader.”); id. at 9412 (Remarks
of Rep. Voight, a member of the Committee on Agriculture which
reported out the bill) (“The bil! will reduce gambling but we can not
stop it altogether without hurting both consumer and producer’).

23. +The Court in Hill v. Wallace, supre, had noted that the tax
imposed by the 1921 Act applied to sales between members of the

4064

49a

the importance of the speculator in the efficient
functioning of the futures market had not yet been so
fully recognized by Congress as it has now become.
It is plain in any event that by the time of the 1936
amendments, as was later to be stated in the House
Report on the 1978 amendments, “the community
protected under federal commodities law was expanded
to include speculators.” H. R. Rep. No. 95-1181, 95th
Cong., 2d Sess. 84 (1978). As described in the 1935
House Report, “The fundamental purpose of the
measure is to insure fair practice and honest dealing on
the commodity exchanges and to provide a measure of
control over those forms of speculative activity which
too often demoralize the markets to the injury of
producers and consumers and the exchanges them-
selves.” H. R. Rep. No. 421, 74th Cong., 1st Sess. 1
(1935). “Fair practice and honest dealing” are, of
course, beneficial not only to farmers but also to
legitimate speculators using the market. The concern
expressed in the last clause of the quotation, to avoid
injury to “the exchanges themselves”, certainly encom-
passed protection for those using the exchanges. This
was made clear in a later passage from the same report:

Board of Trade in Chicago. “Looked at in this aspect, and without
any limitation of the application of the tax to interstate commerce,
or to that which Congress may deem, from evidence before it, to be
an obstruction to interstate commerce,” the Court could not sustain
the Act. 259 U.S. at 68. Congress responded with § 3, precisely
focusing on the interstate aspects of futures trading. See 62 Cong.
Rec. 9404 (June 26, 1922) (Remarks of Chairman Tincher of the
House Committee on Agriculture) (“We have defined interstate
commerce, using the language of the Supreme Court, as applving to
grains and this law will not apply to any transaction except
interstate transactions as defined by the court.”); id. at 12723 (Sept.
15, 1922) (The Court “called attention to the fact that if grain was in
interstate commerce we could reach the situation in this bill; and
this bill is strictly following the dictation ... of the Supreme
Court...

4065

50a

“(The bill] simply provides for honesty in the conduct of
what are important public markets. This affects vitally
the interests of the people, whether they be producers
or consumers of the commodities covered by the bill or
whether they belong to that class of citizens who have a
fondness, and perhaps some aptitude for speculative
investment in commodities and who like to test their
judgment concerning values and price trends by
occasiona! and moderate speculation therein.” Jd. at 2-3.
While the debates in Congress, like those in 1922, did
contain many attacks on speculative investors, again
there was a recognition of the necessary role of
speculators, and the focus of the attacks was on the big
manipulator, whose activity was perceived to be
detrimental not only to producers and consumers but
also to those referred to as “legitimate” traders and
dealers.* The clearest indication of Congress’ concern

24 ‘Representative Jones, Chairman of the House Committee on
Agriculture, stated that the bill was aimed at eight to sixteen traders
on the Chicago Board of Trade “who have been largely responsible
for the constant fluctuations in the market ....” 78 Cong. Rec.
10446 (June 4, 1934). He later stated that the purpose of the bill
was “to check manipulation of markets by certain big traders [who]
rig the market to the detriment not only of the producer but also of
all others engaged in legitimate trausactions in various farm
commodities.” 79 Cong. Rec. 8589 (June 3, 1935). Another
Representative considered the bill to be directed against “the
speculators who deal in large quantities,” 78 Cong. Rec. 10449 (June
4, 1935) (Remarks of Rep. Gilchrist); a third favored it to counter the
activities of “15 or 20 big grain manipulators,” and noted it “will not
injure but will beneficially affect legitimate dealers,” id. at 10451
(Remarks of Rep. Sabath). The Senate debates were to the same
effect. The bill was designed to clip the wings of the likes of Arthur
Cutten, a big grain manipulator whose activities were considered in
some detail. See 80 Cong. Rec. 6160 (April 27, 1936) (Remarks of
Sen. Pope). Senator Pope specifically recognized the critical role
played by the typical speculator:

it is the small traders—those who take positions in the market of
less than 100,000 bushels—that not only absorb the hedging sales
but who furnish the rea! support for future trading in grains. In

4066

Sla

to regulate the large-scale market operator is, of course,
the authorization of trading limits in § 4a.

The legislative history of the 1968 amendments
continued the recognition of the critical role played by
speculative investors and the attack on big or powerful
manipulators rather than speculators in general. Both
the House and Senate reports explicitly recognized that
most futures trading was done by speculators. H. R.
Rep. No. 743, 90th Cong., Ist Sess. 2 (1967); S. Rep.
No. 947, 90th Cong., 2d Sess. (1968), reprinted in 2
U.S. Code Cong. & Admin. News 1675 (1968). The
House Report noted that such speculative activity
carried with it “the danger that on occasion powerful
traders will attempt to influence prices,” H. R. Rep. No.
743, supra, at 2, but also recognized the necessary role
of the legitimate speculator: “This speculative activity
provides a means of reducing price risks by persons
handling the actual commodity and thus makes possible
higher prices to producers and lower prices to
consumers.” Jd.

Finally, and most important, the concern to protect
the speculator as well as the hedger was clearly evident
in the enactment of the 1974 amendments. The House
Report noted the large influx of speculators into the
commodity futures market as one of the “specific
situations mandat{ing] a comprehensive rewrite of
futures trading regulation”. H. R. Rep. No. 93-975,
supra, at 39. The beneficial, indeed indispensable, role
of such speculators was recognized not only in the
House Report, in the language quoted in Part I of this
opinion, id. at 138, but also in the debate on the floor of

the main their trading is so diffused and scattered that as a body
they lend a stabilizing influence. Jd. at 6164.

4067

52a

the House. Introducing the bill, Chairman Poage of the
Committee on Agriculture observed that speculators
“provide a very real service to the market and its users,
by providing liquidity.” 119 Cong. Rec. 41332 (Dec. 13,
1973). Representative Wampler, the ranking minority
member of the House Committee and a supporter of the
bill, stated that:

While the speculator has been much maligned to
the point where critics of the present marketing
system have tried to make “speculator” a dirty
word, we must not forget that the speculator
performs an important economic function in
futures markets. He is, in effect, the risk bearer
who assumes the risks which the hedger seeks to
avoid. 120 Cong. Rec. 10739 (April 11, 1974).

The debates reveal that one problem prompting the
amendments was the catastrophic losses suffered by
futures traders, mostly “speculators”, who were dealing
in commodities not regulated by the old act. See 119
Cong. Rec. 41332 (Dec. 13, 1973) (Remarks of
Chairman Poage). In extending regulation to previously
unregulated futures markets, the House Report specifi-
cally stated that “[t]here is no reason why a person
trading in one of the currently unregulated futures
markets should not receive the same _ protection
afforded to those trading in the currently regulated
markets.” H. R. Rep. No. 93-975, supra, at 76. In other
words, the old act protected those trading in the
markets—not merely producers or consumers of the
commodity—and the new act would extend this
protection of traders to new markets in which even
fewer of the traders produced or consumed the actual
commodity.

4068

58a

Senate consideration of the 1974 amendments
reinforced the views evident in the House. The Senate
Report opened with a quotation from Justice Holmes,
Board of Trade v. Christie Grain & Stock Co., 198 US.
236, 247-48 (1905), recognizing the virtues of specula-
tion:

People will endeavor to forecast the future and to
make agreements according to their prophecy.
Speculation of this kind by competent mer is the
self-adjustment of society to the probable. Its value
is well known as a means of avoiding or mitigating
catastrophes, equalizing prices and providing for
periods of want. S. Rep. No. 93-1131, supra, at iii.

Like the House Report, the Senate Report recognized
the role of “the competitive effect of many speculative
buyers and sellers in the market” in reducing merchan-
dising price margins. Jd. at 12. The Senate changed the
House bill to provide for an independent CFTC, rather
than one under the USDA, since it was concerned that
the USDA’s historic role as the spokesman for farm
interests might affect its policing of commodity
markets. See id. at 21-22. This clearly evinces a concern
to protect those trading on the commodity futures
markets, and not simply agricultural producers. Accord,
120 Cong. Rec. 30467 (Sept. 6, 1974) (Remarks of Sen.
Taft). Senator Dole considered the purpose of the 1974
amendments to be “to protect any individual who
desires to participate in futures market trading,” id. at
30466, and Chairman Talmadge of the Senate Commit-
tee on Agriculture and Forestry wrote that “all of the
members of the committee who worked on this
legislation had one goal in mind—to develop a strong,
but fair regulatory scheme that will protect investors,

4069

54a

businessmen and consumers.” 120 Cong. Rec. 34996
(Oct. 10, 1974) (emphasis supplied).

It is true, of course, that the CEA was enacted for the
benefit of the entire public, as hopefully most
regulatory legislation is. But, as is the case with respect
to all such legislation, criminal as well as civil, some
classes are more in need of protection than others. It is
almost self-evident that legislation regulating future
trading was for the “especial benefit” of futures
traders.* Hence it is not surprising that the courts have
thus been nearly unanimous in concluding that
“speculators”, now long recognized to be legitimate
investors, as well as hedgers, are within the class for
whose especial benefit the CEA was enacted, see
especially Smith v. Groover, supra, 468 F.Supp. at 113;
Gravois v. Fairchild, Arabatzis, et al., supra, CCH Com.
Fut. L. Rep. § 20,706. Indeed, even those courts finding
no implied right of action under the Act as amended in
1974, including the district court in this case, 470
F.Supp. at 1259, have generally concluded that the first
prong of the Cort test was satisfied. See, e.g., Berman
v. Bache, Halsey, Stuart, Shields, Inc., supra 467
F.Supp. at 322 (“little question”); cf. Fischer v.
Rosenthal & Co., supra (assuming arguendo that
plaintiff met the first Cort test, “as indeed he may”).
More importantly, this court itself is on record to that
effect. In Ames v. Merrill Lynch, Pierce, Fenner &
Smith, supra, 567 F.2d 1174, where we refused to
grant a stay of plaintiff's private damage action and

25 The securities cases suffice to negate the dissent’s suggestion that
regulated persons may not also belong to the class for whose special
benefit the regulation was enacted. Here Congress made clear that it
wished to regulate “bad” speculators for the benefit of good ones, as
well as hedgers and simple buyers and sellers.

4070

55a

compel arbitration, the parties having agreed that an
implied cause of action existed under the Act, Judge
Gurfein wrote that “[w]le have no doubt that the Act
itself, enacted as it was for the protection of investors,
prohibited a surrender of private remedies through an
agreement to arbitrate which was not voluntary in the
sense that the penalty for refusal was exclusion from
the market.” Jd. at 1179 (emphasis supplied).”* See also
Silverman v. CFTC, 562 F.2d 432, 438 (7 Cir. 1977)
(“We must be mindful of a Congressional purpose,
clearly evidenced at least since 1933, to protect the
American investing and speculating public not only
from fraud and fraudulent practices, but from those
whose past actions indicate that they might be tempted
to engage in such practices”) (quoting Moore, J., in
Savage v. CFTC, 548 F.2d 192, 197 (7 Cir. 1977) ).”’

2. We turn now to the second and evidently the most
important, see Touche Ross & Co. v. Redington, supra,
442 U.S. at 575, of the Cort factors, “is there any
indication of legislative intent, explicit or implicit,
either to create such a [private] remedy or to deny one?”
422 U.S. at 78. This inquiry requires an intensive
examination of the legislative history of the 1974

26 While the dissent chooses to characterize this as a “passing
reference”, it shows the clear understanding of the writer that the
Act was enacted to protect speculators and not merely hedgers.

27 _—s- The only discordant note on the point that the CEA was intended
to protect “speculators” appears to be Liang v. Hunt, 477 F.Supp.
891 (N.D. Ill. 1979), a distinct minority view from which the dissent
liberally quotes. The commentators have joined the courts’ nearly
unanimous chorus on this point. See Bromberg & Lowenfels, supra,
§ 462(1) (concluding that “the commodity laws’ lack of emphasis on
investors is only apparent, not real”); Note, Private Rights of Action
for Commodity Futures Investors, 55 B.U. L. Rev. 804, 826 (1975)
(“the statute’s clear purpose—to increase existing protection of
commodity futures investors”).

4071

6a

amendments. We conduct this, of course, with full
awareness of the cautions in Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 204 n.24 (1976) and Piper v.
Chris-Craft Industries, Inc., 430 U.S. 1, 31-32 (1977),
against the dangers of undue reliance on “passing
references” by others than the Congressional commit-
tees or sponsors or on general statements not directly
relevant to the issue at hand.

In our view the legislative history amply demon-
strates the 1974 Congress’ awareness of the uniform
judicial recognition of private rights of action under the
Commodity Exchange Act and a desire to preserve
them. We are not, as the dissent suggests, “presuming”
that Congress was aware of these decisions; the
evidence of its awareness is overwhelming.

We begin with the House Report. This noted that
when exchange self-regulation first developed, “[VJery
little thought was probably given to whether the failure
to meet [stated] ideals would expose the exchanges to
legal liability. . . .” H. R. Rep. No. 93-975, supra, at
45. The report stated that this view began to change
early in the 1920’s. “Perhaps the adoption of federal
regulatory legislation spurred this total reorientation of
the relationship between exchanges and the public.
Slowly, the courts began to look upon exchange
regulation as a guarantee to the public that its
members would not violate its code of conduct.” Jd. In
1968, the report continued, amendments to the CEA
required exchanges to enforce their rules, § 5a(8). The
existence of private rights of action was thought to
have had a perverse effect on the effectiveness of this
legislation which the report explicitly noted:

In the few years this provision has been in the
present Commodity Exchange Act, there is grow-

4072

57a

ing evidence to indicate that, as opposed to
strengthening the self-regulatory concept in
present law, such a provision, coupled with only
limited federal authority to require the exchanges
to make and issue rules appropriate to enforcement
of the Act—may have actually have worked to
weaken it. With inadequate enforcement personnel
the Committee was informed that attorneys to
several boards of trade have been advising the
boards to reduce—not expand exchange regulations
designed to insure fair trading, since there is a
growing body of opinion that failure to enforce the
exchange rules is a violation of the Act which will
support suits by private litigants. (emphasis in
original).

Later in the Report the Committee noted that one of

the
the:

specific problems “brought to [its] attention” was

Growing difficulties facing exchanges in self-
regulatory actions as a result of private plaintiffs
seeking damages against the markets. As exam-
ples, exchanges are sued for actions taken in
emergency situations even when the action has
been taken at the request (or order) of the CEA. Jd.
at 48 (emphasis supplied).

Nothing in the report, however, indicated dissatisfac-
tion with the private right of action; the objective was
to deal with the attendant reduction in exchange
rulemaking. This was to be accomplished by empower-

ing

the CFTC to require exchanges to adopt rules,

§ 8a(7).”*

2a

The House Report also contained a letter from the Department of
Justice to Chairman Poage of the House Committee on Agriculture,

4073

58a

The existence of an implied private right of action
was also clearly revealed to Congress in the debate on
what became the 1974 amendments. Introducing the
bill, Chairman Poage used the language quoted above,
which eventually appeared in the House Report, about
the change in the legal posture of exchange self-
regulation. He then remarked that “when the Commod-
ity Exchange Act was enacted, courts implied a private
remedy for individual litigants in the Commodity
Exchange Act.” 119 Cong. Rec. 41333 (Dec. 13,
1973).*** He went on to note, as would the House
report, that as “the judgment of the board of directors
of many of the exchanges in implementing decisions
under self-regulatory functions is becoming increasingly
a justiciable issue,” attorneys were advising exchanges
to prune out rules they might not be able to enforce in
order to avoid the threat of liability in private actions.
This threat was described as providing the exchanges
with a “solid reason” for retrenching on self-regulatory
efforts. Id. At the outset of consideration by the whole

wherein the Department representative twice cited to the recent
Supreme Court decision in Deaktor. supra. 414 U.S. 113. The letter
concerned the interrelation between exchange rules and antitrust
law, and the author, discussing the doctrine of primary jurisdiction,
referred to “situations where the challenged activity is alleged to
violate the Commodity Exchange Act as well as antitrust laws”. H.
R. Rep. No. 93-975, supra, at 26 (emphasis supplied). Deaktor was
cited as a case, obviously brought by a private plaintiff. which
alleged violations of the CEA. Any legislator who read this should
thus have been aware that private individuals could sue exchanges
for violations of the CEA; they had done so in Deaktor, and the
Supreme Court had merely required an initial resort to the
regulatory agency for its views where these would be useful

28a = The dissent chooses to make a point, footnote 16, that Chairman
Poage was in error since the first decision implying a private right of
action under the CEA was made in 1967 rather than 1966. We fail
to see the significance of this.

4074

59a

House, then, the legislators were informed by the
Chairman of the Committee considering the bill that
private rights of action were implied under the Act.”
This was not a mere passing reference, but a critical
statement of fact that was a necessary step in
explaining why new legislation was needed. The 1974
amendments signaled a dramatic shift from the theory
of exchange self-regulation to authorization of the
CFTC to compel the exchanges to alter or adopt rules,
§ 8a(7), and the proponents of the amendments were at
pains to explain the need for such a shift. This
explanation centered on the existence of an implied
private right of action. Amendments were required to
force exchanges to adopt beneficial rules because the
threat of the judicially implied private right of action
had led them to shirk this responsibility. Congress
could not have understood why it was changing the
underlying theory from exchange self-regulation to
compulsory regulation without recognizing that the
private rights of action that had been judicially implied
under the Act demanded this change. It opted to cure
the problem that had developed not by abolishing the
private right of action but by empowering the CFTC to
require the exchanges to adopt appropriate rules. No
amount of labored parsing can obscure the self-evident
truth that Congress knew the courts were implying
private rights of action and did nothing to alter this. It
29 The point was repeated later by Representative Thone, a member
of the Committee on Agriculture. See 120 Cong. Rec. 10748 (April

11, 1974) (“Some observers believe that the provision of the 1968
amendments requiring exchanges to enforce their own rules, thereby
implicitly giving private parties the right to sue for nonenforcement,

has had a perverse effect. To avoid risk of litigation, exchange

authorities have been encouraged to reduce rather than strengthen
rules designed to insure fair trading”)

4075

60a

matters little whether this be called recognition or
approval.

The House hearings are replete with references to the
maintenance of private causes of action under the Act.
A representative of various New York commodity
exchanges informed the House Committee on Agricul-
ture that the Chicago Board of Trade was at that very
moment the target of a $200 million class action,*® and
urged Congress to “take steps to insure that federally
regulated exchanges are not exposed to this sort of
astronomical civil liability suits .. .”, Hearings on
Review of Commodity Exchange Act and Discussion of
Possible Changes Before the House Committee on
Agriculture, 93d Cong., 1st Sess. 121 (1973), something
which Congress did not do. Another exchange repre-
sentative and FCM, discussing the arbitration proce-
dures to be required of contract markets, told the
House Committee that “In addition to these arbitration
procedures, complainants of course have access to the
courts.” Hearings on H. R. 11955 Before the House
Committee on Agriculture, 93d Cong., 2d Sess. 249
(1974) (emphasis supplied). A letter sent in the course
of the just-cited hearings from Continental Grain Co.
indicates that the cases cited in Part IV of this opinion
may well have been only the tip of the iceberg—the
cases where the private cause of action was challenged
and was sustained in a published opinion. The letter
calls to the Committee’s attention “one recent class
action settlement proceeding in court” which required
the mailing of 339,000 legal notices and resulted in
legal fee claims of over $2,250,000. Jd. at 321. The

30 The reference was apparently to Case & Co., Inc. v. Board of
Trade, supra, 523 F.2d 355, see p. 31 supra.

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letter advocated requiring complainants to choose
between arbitration or settlement procedures and resort
to courts “which have already held they have jurisdic-
tion over private complaints based on violations of the
present law.” Id.

The existence of a private right of action also was
repeatedly indicated during the Senate hearings on the
four bills to amend the CEA. Hearings on S. 2485, S.
2578, S. 2837, and H. R. 13113 Before the Senate
Committee on Agriculture and Forestry, 93d Cong., 2d
Sess. (1974). Senator Clark and a commodities law
expert, Professor Schotland of Georgetown University,
expressed the view that private actions were available
under the Act, id. at 205, 737, 746. A representative of
the Minneapolis Grain Exchange objected to the
settlement procedure contemplated for contract
markets because the claims which exchanges would be
required to adjudicate were not limited by any dollar
amount and wished these to be confined to cases where
the smallness of the claim entailed an “economic
impediment to Court litigation.” Jd. at 415. Such a limit
appeared in the bill as enacted, § 5a(11 ii). The
President of the Kansas City Board of Trade urged the
Senators to protect exchanges “from unnecessary and
costly defenses of lawsuits” brought under the Act. Jd.
at 317. He had made the same request before the
House, with similar lack of success. Hearings on H. R.
11955, supra, at 123."' We shall have more to say about

41 The dissent relies heavily on a chart introduced during the Senate
Hearings, reproduced at footnote 14, to support the conclusion that
Congress did not preserve the previously recognized private right of
action in 1974. The chart was not prepared by Congress, the relevant
Senate Committee, or even a single legislator, but rather by the
committee staff. There is no suggestion that in preparing the chart
the staff went beyond the explicit provisions of the CEA; the chart

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Congress’ awareness of the private cause of action and
its desire to preserve it when we come to discuss the
provision preserving the jurisdiction of the courts.
However, what we have developed up to this point is
alone sufficient to invoke “the well-recognized canon of
construction that the reenactment of a statute incor-
porates preceding judicial interpretations”, Van
Vranken v. Helvering, 115 F.2d 709, 710 (2 Cir. 1940)
(L. Hand, J.), cert. denied, 313 U.S. 585 (1941)—a
canon which, as shown by the Van Vranken case, i

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1905%3A01. Public record. Not legal advice.