Appendix — CLAYTON BROKERAGEAGE CO. OF ST. LOUIS, INC. v. NEIL LEIST (Nos. 80-895, 80-203, 80-757, 80-936)

Supreme Court, U, $,

80-895 FILED

DEC 4 1980

i et tn ce

In THe

Supreme Court of the United States

OctToser Term, 1980

CLAYTON BROKERAGE Co, OF St. Louis, INC.,

Petitioner,

vs.

Newt Leist, Poitie SMitn and INCOMco,

Respondents.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

GERARD K, SANDWEG, JR.

One Mercantile Center, Suite 3400

St. Louis, Missouri 63101

(314) 231-7676

Counsel for Petitioner,

Clayton Brokerage Co. of

Of Counsel: St. Louis, Inc.

W. STANLEY WALCH

KENTON E, KNICKMEYER

THOMPSON & MITCHELL

One Mercantile Center, Suite 3400

St. Louis, Missouri 63101

(314) 231-7676

_

St, Louis Law Printing Co., Inc,, 411 No, Tenth Street 63101 314.231.4477

TABLE OF CONTENTS

page

Appendix A—

Opinion of the United States Court of Appeals for

the Second Circuit, dated July 8, 1980....... A-l

PIED vac civctrccacicoceseccenvesee A-5

- OPPRTETITTITE ELLE ETT ere eee A-91

Appendix B—

Opinion of the United States District Court for the

Southern District of New York, Dated May 29,

POPRETT ERE TEPTTRTTLEE REET eee A-168

Appendix C—

Judgment of the Court of Appeals, dated July 8,

WO 6.000.00003) 6a0eedscevecndvesecenssa A-186

Appendix D—

Order Denying Rehearing ...........6 6660 c ces A-188

Appendix E—

Order Denying Rehearing En Banc.............. A-190

Appendix F—

Constitutional, Statutory and Regulatory Pro-

PED SIN 6.5 6.00000 00000008 8e00ee eae A-192

—_ =

APPENDIX A

OPINION OF THE J. S. COURT OF APPEALS

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

———_—__~<§>—_-—- -——

Nos. 402, 403, 404—September Term, 1979

(Argued January 16, 1980 Decided July 8, 1980)

Docket Nos. 79-7402, 79-7464, 79-7482

— —= --—{>—_--— —

NeIL Leist, PHILIP SMITH and INCOMCO,

Plaintiffs-Appellants,

Vo

JOHN RICHARD Simptot, J.R. Simptor & 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 MEIFRFELD, 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 Commopirigs, INC.,

DONALD SILVER, DUANE SOUTH, KENNETH RAMM, A &

B FARMING INC., HUGH GLENN, GEARHEART FARMING,

Inc., EDWARD McKay, “JOHN” HUMPHREYS, FRANK

FULLMER,

Defendants,

=

CLAYTON BROKERAGE Co. oF St. Louts, INc., HEINOLD

ComMOoDITIES, INC., THOMPSON & MCKINNON, AUCHIN.

CLOSS, KOHLMEYER, INC., NEW YORK MERCANTILE

EXCHANGE, RICHARD B. LEVINE, HOWARD GABLER,

ALFRED PENNISI,

Defendants-Appellees.

>

INCOMCO,

Plaintiff-Appellant,

—vVvV a

WayYNE COUNTY Propuce Co., and HAROLD COLLINS,

Defendants,

New YorRK MERCANTILE EXCHANGE,

De fendant-Appellee.

— ee ————

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 HEIZz

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.,

— « pon

JACK RICHARD SIMPLOT, 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 COMMODITIES, INC., THOMPSON & MCKINNON,

AUCHINCLOSS, KOHLMEYER, INC.,

Defendants-Appellees.

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.

— A4—

LEONARD TOBOROFF, 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. HEGARTY, Esq., New York, N.Y.

(Cahill Gordon & Reindel, New York,

N.Y., Charles Platto, Esq. and Peter

Leight, Esq., Of Counsel) and

REIN, Mounp & Cotton, 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 E. Knickmeyer, Esq., Of Coun-

sel) for Defendant-Appellee Clayton

Brokerage Co. of St. Louis, Inc.

HALL, MCNICHOL, HAMILTON, CLARK & MUR.

RAY, New York, N.Y. for Defendant-

Appellee Thomson McKinnon Auchin-

closs Kohlmeyer Inc.

=. Pe

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.

—_——_ - —<>- - - -———

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 damages

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

—S

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 bilateral

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.

pay jpn

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, ie.,

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 trading, 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 tutures 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

—_

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 reaiize 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 protect against

adverse price movements. The amount of the margin is

—*

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

— A-10 —

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

— A-ll —

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

darv. 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 function,

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

4 Johnston, Understanding the Dynamics of Commodity Trading, 35

Bus. Law. 705, 709 (1980), states that “{ajs a genera! 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.”

— A-12 —

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.

— A-13 —

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”.

— A-14 —

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 contract.

The conspirators allegedly agreed to sell a large number

— A-15 —

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

— A-16 —

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 aot 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 them. Pursuant to

this conspiracy (the “long conspiracy”), the “long” group

purchased as many contracts as it could, and then at

= &plT =

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.”

— A-18 —

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 it is 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

= Al? —

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.

an eR ae

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 I

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,

— A-21 —

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 artificial 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

— A-22 —

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 the 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.

— A-23 —

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.

=<

Ill. 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.

— A-25 —

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

—_

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.

= 2] =

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

4% 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 »ther 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, or received

in interstate commerce for the fulfillment thereof—

(A) to cheat or defraud or attempt to cheat or defraud such

other person;

(B) willfuily 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 dispositi~); 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.

aye

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.

9 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

committee, 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

— A-29 —

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 regstration

application or report filed with the Commission, or knowingly to

omit in any application or report any material fact that is

—* Po

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.

— A-31 —

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 vy. 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. /d. 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 Jablon 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

= Ai =

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

-_— -———— —_— ~~ ee Ce ee ee

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 n.9, 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

—

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. Bullocr,

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

nr a ae ee ie +

strong approval the statement in Shell v. Helmsley, 450 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 [n 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 expressly created three private

actions, §§ Xe), 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 ¥.2d 1337 (2 Cir. 1971),

cert. dismissed 409 U.S. 802 (1972), Moses v. Burgin, 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).

= Ata

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 protection

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

— A-35 —

other fields, e.g., Reitmeister v. Reitmeister, 162 F.2d

691 (2 Cir. 1947\Xaction 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.

— A-36 —

remedy upon the same statute for the thing

enacted for his advantage, or for the recompense of

a wrong done ¢o 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 1960's and

early 1970’s was one in which the “Court had

consistently found implied remedies.” Cannon v.

University of Chicago, 441 U.S. 677, 698 (1979); id. at

718 (Rehnquist, J., concurring) (“Cases such as J. I.

= AS?

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 Chuago. 441 US. 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. Mernll Lynch, Piero 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

Dean Witter & Co., Inc., 459 F Supp. 733, 737 (ND. 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, eg., Miller v. New York

Produce Exchange, 434 U.S. 823 (1977), Master Commodities, Inc. v

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

— A-38 —

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 attacks 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.

—_

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), affd 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

— A-40 —

provisions in Rule 217(D) of the Exchange, CEA

§§ 52(8) and QbXthe 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 umiformly

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. Jd.

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

— A-4l —

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 luwmakers 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

emphasized that “‘Kither 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... .’" Jd. 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

iée == Mr. Justice Stewart would have affirmed and allowed the action to

proceed directly in the distnct court. 414 US. at 416.

— A-42 —

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 uncer pre-1974 law, are

of less pertinence since the 1974 Congress could not

have known of the decisions,'* they deserve mention as

ee eee ee

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, whove 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.

1% = Congress was, however, apparently aware of the pendency of at

least one of these cases. See note 30 infra

— A-43 —

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. 1975X{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 “[iJt 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 “|pJrivate 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 (DDC

1977); Kelley v. Carr, 442 F Supp 346 (WD. 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 (ND. Cal

1978); Berenson v. Madda Trading Co., CCH Comm. Fut. L. Rep

® 20,689 (D.D.C. 1978), Gravois v. Fairchild, Arabatais & Smith,

Inc., CCH Comm. Fut. L. Rep. $ 20,706 (ED. La 1978); Rivers v

— po

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).

Rosenthal & Co., 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 vy. 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 Stone

Inc, 77 Civ. 5350 (S.D.N.Y. 1980) (Broderick, J.); Grayson v

Conticommodity Services, Inc., 48 L.W. 2807 (D.D.C., 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 & Cou., 415

F Supp. 535 (D. Neb. 1976), affd 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. 9 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, Ltd, 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.

20s 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, 36S. 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 Corp. v National Assn. of

— A-4S —

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

Rat!road Passengers, 414 U.S. 454, 458, 460. 48 L, Ed. 2d 646,

94 5S. Ct. 690 (1974) (Amtrak), supra: Securities Investor

Protection Corp. \. Barbour, 421 US, 412, 4245, 44 L. Ed. 2d 263,

95 S. Ct. 1733 (1975); Calhoon v. Harvey, 379 US 144.13 L

Ed, 2d 190, 85 S. Ct, 292 (1964) And finally, is the cause of

action one traditionally relegated to state low, in an area hasically

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, 835 Ct 1441

(1963), cf. J. 1 Case Co. vy Borak, 377 US 426, 134, 12 L. Ed

2d 423, 845. Ct 1555 (1964). Bivens vo Six Unknown Federal

Narcotics Agents, 403 U.S. 388, 394-395, 29 L. Ed 2d 619,918

Ct. 1999 (1971); id. at 400, 29 L. Fd 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

— Se

related statute. See Lorillard v. Pons, 434 U.S. 575,

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.”

21 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

— A-47 —

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 U.S. 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:

wction against exchanges, Quite apart from the usual problems of

relying on actions of an earlier Congress, and much more on tts

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 Ui! 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 ex: hange for failure to regulate

Haupt eventually did, and the court recognized an implied mght of

action against the exchange, see Seligsun 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.

— A-48 —

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 transactions. 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.*? 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 vy. Filburn, 317 U.S. 111 (1942), then lay

twenty years in the future.”* At that time, moreover,

22 «See, eg., 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 bill will reduce gambling but we can not

stop it altogether without hurting both consumer and producer”)

23. The Court in Hill v. Wallace, supra, had noted that the tax

imposed by the 1921 Act applied to sales between members of the

— A-49 —

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., Ist 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 US. 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 applying 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 .. .”).

—_—C oe

“(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

occasional 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 real support for future trading in grains. In

— A-51 —

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., 1st 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 ioted 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

= Ate =

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.

— A-53 —

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 U.S.

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 men 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,

aS

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 plaintiffs 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.

= A$$ —

compel arbitration, the parties having agreed that an

implied cause of action existed under the Act, Judge

Gurfein wrote that “[w]je 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 _—- 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.C. L. Rev. 804, 826 (1975)

(“the statute's clear purpose—to increase existing protection of

commodity futures investors”).

— A-56 —

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-

— A-57 —

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.

— A-58 —

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. Jd. 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.

— he

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 «.- adopt rules,

§ 8a(7), and the proponents of the amenuinents 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”)

—< ma

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 -ourse

of the just-cited hearings from Continental Grain Co.

indicates that the cases cited in Part IV of this opinion

may weil 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.

— Ai —

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

31 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

~ Ala

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, is not

limited to interpretations by the Supreme Court. See

Electric Storage Battery Co. v. Shimadzu, 307 U.S. 5

14 (1930); Lorillard v. Pons, 434 U.S. 575, 580-81

(1978); Bennett v. Panama Canal Co., 475 F.2d 1280,

1282 (D.C. Cir. 1973) (Wyzanski, J.) (“the almost

irrebuttable presumption which followed from reenact-

ment with knowledge [of the Fifth Circuit’s interpreta-

tion of “may” as permissive}”). This canon applies with

particular force to the instant case, where the 1974

amendments constituted “the first complete overhaul of

the Commodity Exchange Act since its inception,” H. R.

Rep. No. 93-975, supra, at 1, the relevant substantive

provisions were left unchanged, and Congress had been

made acutely aware of the prior judicial construction

that these provisions gave rise to a private cause of

action.”

does not purport to deal with the broad subject of civil money

“damages”, but only with the subject of civil money “penalties”. If

the chart had attempted to deal with the broader subject of damages,

it could have reached only one conclusion, namely, that there was an

implied private right of action, since this was the unanimous view of

the courts prior to the 1974 amendments.

32 The dissent argues that none of the pre-1974 cases, with the

exception of Deaktor, was expressly cited to by Congress and that

— hd x

The Supreme Court has applied this principle on

numerous occasions. In Lorillard v. Pons, 434 U.S. 575

(1978), Justice Marshall, writing for a unanimous

Court, said that when Congress has passed a new

statute incorporating sections of a previously construed

statute, “Congress is presumed to be aware of an

administrative or judicial interpretation of a statute

and to adopt that interpretation when it reenacts a

statute without change”—even though, as indicated

above, the interpretations were by lower federal courts

and not by the Supreme Court. It was considered

significant that the judicial construction of the previous

statute had been unanimous, id. at 580-81, as was the

judicial implication of private rights of action prior to

1974 in our case. In Georgia v. United States, 411 US.

526, 532-33 (1973), the Court was confronted with a

question concerning interpretation of the Voting Rights

Act, enacted in 1965 and extended after “extensive

deliberations” in 1970, with changes and additions in

areas other than the section before the Court. The

Court had reached a decision on a related question in

the 1969 case of Allen v. State Board of Elections, 393

Congress’ failure to mention Deaktor is “highly significant” (p. 43).

We fail to see why. As we have developed, there is a plethora of

evidence that Congress was well aware in 1974 that courts had

consistently implied private rights of action under the CEA. This

fact was brought out in the House Report, congressional debate, and

hearings before both houses, and was crucial to an understanding of

specific aspects of the bill. In light of this it is quite irrelevant that

specific case names or citations were not mentioned. In all likelihood

this was simply because no one particular case was crucial. Every

pre-1974 case confronting the question had found an implied right of

action without limitation in the opinions to the specific relationships

at issue—a result foreordained by the history of decisions under the

securities laws—and Deaktor, which itself had long been foreshad-

owed by Baird v. Franklin, supra, 141 F.2d 238, decided nearly

thirty years before, thus was not a novelty.

U.S. 544 (1969). Justice Stewart reasoned that “{h]ad

Congress disagreed with the interpretation of § 5 in

Allen, it had ample opportunity to amend the statute.

After extensive deliberations in 1970 on bills to extend

the Voting Rights Act, during which the Allen case was

repeatedly discussed, the Act was extended for five

years, without any substantive modification of § 5.”

411 US. at 533. A footnote to this quotation indicated

that the “repeated discussions” were in Congressional

hearings. Jd. n.5. While we have here no Supreme Court

decision of the stature of Allen construing the CEA,

since the Court’s opinion in Deaktor, 414 U.S. 113, was

not an express holding of the existence of a private

cause of action under the CEA, all the pre-1974 CEA

cases, including the Seventh Circuit’s decision under

review in Deaktor, reached the same result in favor of

implication, and decisions sustaining private rights of

action were called to the attention of Congress not only

in Congressional hearings as in Georgia v. United

States but in the House report and in floor debates.

The presumption just referred to is, of course,

rebuttable and appellees insist it has been rebutted by

changes made in the CEA in 1974. Before taking these

up in detail, we note certain circumstances in addition

to those already discussed that require an exceedingly

strong showing of an intention to abolish the private

cause of action for fraud, manipulation and violations

by exchanges that had been universally recognized in

order to justify a conclusion that this was Congress’

intent. The 1974 Congress repeatedly expressed its

view that the changes were designed to strengthen

commodity futures regulation, a goal that would be ill-

served by abolishing the private right of action that

everyone had thought to exist. The bill that became the

— A-65

1974 amendments was described on its face as “an act

to amend the Commodity Exchange Act to strengthen

the regulation of futures trading... .” H. R. 13113,

93d Cong., 2d Sess. 1 (1974) (emphasis supplied). The

original hearings in the House on the bill were called by

the Committee on Agriculture “with a view toward

strengthening and revising the existing law.” H. R. Rep.

No. 93-975, supra, at 53-54. The remarks on the floor

of the House by the Committee chairman and the

ranking minority member repeated this theme. See 120

Cong. Rec. 10736 (April 11, 1974) (Remarks of Rep.

Poage) (“to strengthen the regulation of futures

trading); id. at 10739 (Remarks of Rep. Wampler) (“to

inform and strengthen the laws”). The goal in the

Senate was the same. See, e.g., S. Rep. No. 93-1131,

supra at 18 (section entitled “Need for Better and

Extended Regulation”). See also Curran v. Merrill

Lynch, supra, note 1 at G-8 (“the legislative history of

the CFTC Act. . . indicates that Congress intended to

extend further protection to the exchange customer,

rather than to extinguish existing forms of protection”).

Yet the appellees would have us take the forbidden

course of ascribing to Congress an intent with respect

to private sanctions completely at odds with this clear

legislative purpose. See National Petroleum Refiners

Association v. Federal Trade Commission, 482 F.2d

672, 690 (D.C. Cir. 1973), cert. denied, 415 U.S. 951

(1974) (Wright, J.) (“where a statute is said to be

susceptible of more than one meaning, we must not

only consult its language; we must also relate the

interpretation we provide to the felt and openly

articulated concerns motivating the law's framers”), and

generally Cox, Judge Learned Hand and the Interpreta-

tion of Statutes, 60 Harv. L. Rev. 370 (1947).

ita

In support of this endeavor to rebut the presumption

that the 1974 Congress approved the previous interpre-

tation of the CEA, the appellees point to the new

reparations procedure of § 14. This authorizes any

person complaining of any violation of the Act or any

rule, regulation or order by any person registered or

required to be so,” to apply to the CFTC. If the

Commission thinks there are reasonable grounds for

investigating the complaint, it shall do so. The

Commission may, if in its opinion the facts warrant

such action, serve the respondent, who is entitled to a

hearing before an Administrative Law Judge except

where the amount claimed does not exceed $5,000 in

which event the Commission may proceed on the basis

of depositions or verified statements of fact. A

reparations order is enforceable by suit in a district

court. However, this is subject to a right of the

respondent to seek a prompt review of the reparations

order in a court of appeals.

Quite apart from the provision explicitly preserving

judicial remedies which we shall discuss later, the

argument that Congress intended this to be the sole

private remedy under the CEA is totally unconvincing

for several reasons. The first and perhaps the most

important reason is the limited scope of the reparations

remedy. It is available only against persons who have or

should have registered. On appellees’ argument, the

exchanges which, to the clear knowledge of Congress,

had been held subject to private suits before the 1974

amendments, would be wholly relieved of private

liability, although Congress failed to heed their

33 These are FCM's and certain persons associated with a FCM,

§§ 4d, 4k; floor brokers, § 4e; and commodity trading advisors and

pool operators, § 4m.

— A-67 —

repeated pleas for explicitly granting such relief.’* So

too would large unregistered operators, alleged to have

committed the most flagrant kind of manipulation, like

Simplot and Taggares in the instant case—the very type

of persons whose activities had been the subject of

particular Congressional concern from the outset. We

find it unimaginable that after a half century’s devotion

to the regulation of futures trading, thirty years of

exposure to the liberal implication of private causes cf

action under the related subject of securities regulation,

and knowledge that the courts had consistently applied

the same principle to the CEA, the 1974 Congress could

have meant that the only federal remedies for persons

claiming to have been wronged by such defendants to

the extent of millions of dollars should be the small

solace of having the Government collect civil fines and

enforce administrative or criminal penalties. The

dissent cannot paper over this gaping hole by saying,

fn. 3, that such operators are not before us. They are

defendants, probably the principal defendants, in these

actions. While they have understandably chosen to stay

in the background in the present argument, acceptance

of the dissent’s position would compel the district court

to dismiss the CEA claims against them. Even with

respect to registered persons, the one class of

defendants to whom the reparations procedure applies,

the remedy hinges upon the Commission's preliminary

determination, apparently unreviewable, that the com-

34 = See Hearings on Review of Commodity Exchange Act and

Discussion of Possible Changes Before the House Committee on

Agriculture, supra, at 121; Hearings on H.R. 11955 Before the

House Committee on Agriculture, supra, at 123, Hearings on S

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

Committee on Agriculture and Forestry, supra, at 317.

— A-68 —

plainant has a prima facie case, and there is no

assurance that this will afford the procedural benefits

available in a civil trial. The case differs fundamentally

from instances such as National Railroad Passenger

Corp. v. National Assn of Railroad Passengers

(Amtrak), 414 U.S. 453 (1974), and Touche Ross & Co.

v. Redington, supra, 442 U.S. 560, where Congress,

operating on a tabula rasa, provided a new duty and

certain express remedies to enforce that duty, and the

Court applied the maxim expressio unius est exclusio

alterius. When as here Congress adds a new remedy to

enforce a preexisting duty, where other remedies had

been clearly recognized, it would be expected to say so

if it meant the new remedy to be exclusive. In fact, as

will be seen, it said the opposite. It is just as much

“judicial legislation” for a court to withdraw a remedy

which Congress expected to be continued as to

improvise one that Congress never had in mind.

These conclusions are strengthened by the legislative

history of the reparations procedure. Chairman Poage,

in an apparent reference to the reparations provisions,

noted in the House that the Act “sets up new customer

protection features.” 120 Cong. Rec. 10737 (April 11,

1974). This language suggests that the “new” features

are in addition to the “old” ones, and certainly not that

they are exclusive. In the Senate, Chairman Talmadge

remarked:

The vesting in the Commission of the authority to

have administrative law judges and apply a broad

spectrum of civil and criminal penalties is likewise

not intended to interfere with the courts in any

way. It is hoped that giving the commission this

authority will somewhat lighten the burden upon

the courts, but the entire appeal process and the

—

right of final determination by the courts are

expressly preserved. 120 Cong. Rec. 30459 (Sept.

9, 1974).

The first sentence strongly sug «sts that Congress did

not intend to repeal private right. of action by enacting

the reparations procedure, and the second sentence is

not to the contrary. If the reparations procedure was

intended to be exclusive, then it certainly would lighten

the burden on the* courts, even with review of

reparations orders by the courts of appeals. But the

Senator spoke in terms of “hope” and lightening the

burden “somewhat”—as if reparations were an alterna-

tive he hoped had been made attractive enough to sway

some aggrieved traders away from the courts. The

second clause relating to judicial review simply noted

that even for those who elected reparations there could

still be court involvement. Again the House Report

describes the reparations procedures as “intended as a

separate remedy designed to supplement the informal

‘settlement’ procedures contemplated of the contract

markets and registered futures associations which are

required under other sections of the legislation. . . .”

H. R. Rep. No. 93-975, supra, at 22. These last two

types of settlement procedures, however, are expressly

made voluntary by the Act. See §§ 5a(11), 17(bX10). It

can therefore be inferred that the reparations remedy is

of the same character, and that the aggrieved trader is

in no sense compelled to resort to reparations to obtain

relief. Commentators have relied on this reasoning, and

the savings clause in § 2(aX1), in concluding that “the

victim of a CEA violation is free to ignore the

reparations procedure and file a lawsuit.” Bromberg &

Lowenfels, supra, § 461 at 82.362 (1979). The CFTC is

—

of the same view. See 41 F.R. 3994 (Jan. 27, 1976); id.

at

18472 n.5 (May 4, 1976).**

The argument that the reparations procedure was

intended to be the exclusive private remedy is further

35

The dissent argues, despite all these contrary indications, that the

reparations procedure was designed to be the exclusive private

remedy beyond informal settlement. In support of this it quotes a

letter from Ear! Butz, Secretary of Agriculture, published in the

House Report, which states that the reparations procedure “should

make possible full and equal justice for those who feel that they have

been in some way damaged in the handling of their commodity

accounts.” The dissent underscores this language, although it is not

at all clear what about it suggests that reparations were intended to

preclude private actions rather than constitute an additional remedy

for aggrieved persons to whom the burden of litigation might be

prohibitive. In any event it is irrelevant to our case. The plaintiffs

seeking relief before us are not complaining about the handling of

their accounts but rather of broad market manipulation. The dissent

further stresses a passage from the House Report where it is stated

that the Commission “will have original jurisdiction to consider all

such complaints” which have not been resolved informally. Again,

nothing in this suggests that Commission jurisdiction of reparations

proceedings was meant to preclude the jurisdiction of the courts

which had been widely recognized. The dissent also relies on the

ceiling for civil penalties against exchanges in § 6b of $100,000,

arguing that allowing private recovery for “unlimited” damages

would be inconsistent with this ceiling. Penalties and damages,

however, are quite different in nature. The former are punitive and

some limit on the regulator's discretion to impose them is necessary.

The latter are remedial and naturally limited to the loss caused by

the defendant. Further, the dissent’s argument proves too much.

There is a limit of $100,000 on the fines which can be imposed on a

FCM under § 6(b), but the FCM’s are subject to “unlimited” private

recovery in reparations. Congress obviously saw no inconsistency

between allowing recovery for actual damages and limiting fines.

Finally the dissent states that under § 6b fines against exchanges are

limited to “an amount which will not ‘materially impair the contract

markets’ ability to carry on its operations and duties.’” P_ 47. Rather

the CFTC is required to consider whether a fine will have this effect;

the only ceiling in § 6b is the $100,000 maximum, which,

incidentally, is not an “overall” limitation as the dissent states but

rather a limit per violation. (For example, each day of failure to

comply with a cease and desist order is a separate violation, § 6b).

Concern for an FCM’s ability to carry on business is specifically

required to be considered in § 6(d), yet FCM’s are subject to full

damages in reparations.

— A-71 —

negated and the case for the continuance of the private

cause of action is enhanced by the jurisdictional savings

clause, § 2(aX1).**

As passed by the House, the exclusive jurisdiction

provision read as follows:

Provided, that the Commission shall have exclusive

jurisdiction of transactions dealing in, resulting in,

or relating to future delivery . . . And provided

further, that nothing herein contained shall su-

persede or limit the jurisdiction at any time

conferred on the Securities Exchange Commission

or other regulatory authorities under the laws of

the United States... .

The purpose of this was to separate the functions of the

new CFTC from those of the SEC and other regulators.

As explained in the House Report, “All commodities

trading in futures will be brought within federal

regulation under the aegis of the new Commission,

however, provision is made for preservation of Securi-

ties Exchange Commission jurisdiction in those areas

traditionally regulated by it.” H. R. Rep. No. 93-975,

supra, at 3. See generally Johnson, The Commodity

Futures Trading Commission Act: Preemption as Public

Policy, 29 Vand. L. Rev. 1 (1976); Russo & Lyon, The

Exclusive Jurisdiction of the Commodity Futures

Trading Commission, 6 Hofstra L. Rev. 57 (1977). The

provision was not intended to limit the jurisdiction of

36 —s- Plaintiffs do not seek to-base their right of action on this

jurisdictional provision, but rather point to it as evidencing a

congressional concern to preserve existing rights of action Appellees:

criticism, derived from Touche Ross & Co. v. Redington, supra. 442

US. at 577, that plaintiffs’ rights must be found in substantive and

not jurisdictional provisions, is therefore inapt

=~ =

the courts. See Jones v. B. C. Christopher & Co., supra,

466 F.Supp. at 218-19.

However, there was fear that it would do so and

numerous objections were raised to the House provision

in the Senate hearings. Admittedly some of these were

not primarily concerned with the question of court

jurisdiction to hear claims in private actions under the

CEA. Chairman Rodino of the House Committee on the

Judiciary was concerned that the House provision

might be read as pre-empting state courts of their

jurisdiction to enforce futures contracts under general

commercial law and “to oust even federal courts of

jurisdiction”. Testifying before the Senate Committee,

he suggested an amendment “to define the jurisdiction,

including antitrust jurisdiction, of federal courts for

commodity transactions.” Hearings on S, 2485, S. 2578,

S. 2837 and H. R. 13113 Before the Senate Committee

on Agriculture and Forestry, supra, at 259-60, While

Chairman Rodino’s remarks were focused on antitrust

jurisdiction, they were not limited to that. He argued

generally that federal courts retained jurisdiction, and

cited antitrust jurisdiction as an example supporting

this view. Other objections to the exclusive jurisdiction

provision of the House bill were explicitly addressed to

the preservation of private rights of action.’’ Senator

Clark noted that treble damages actions, provided in

bills which he and Senator McGovern had introduced,

7 = See also testimony of Deputy Assistant Attorney General

Clearwater of the Antitrust Division, id. at 663, to which Chairman

Talmadge responded: “I have read your statement in its entirety, and

I doubt that this committee, and I doubt the House had in mind

depriving either Federal courts or [sic] jurisdiction in antitrust

matters, or any other matter, and certainly not State courts." Jd «

664 (emphasis supplied).

= AT) =

were often the most effective enforcement tools.”

“Unfortunately, the House bill not only does not

authorize them but section 201 of that bill may prohibit

all court actions. The staff of the House Agriculture

Committee has said that this was done inadvertently

and they hope it can be corrected in the Senate.” Jd. at

205. Professor Schotland did not refer directly to the

exclusive jurisdiction provision, but urged rather that

the reparations provision, if retained at all, should be

accompanied by “explicit language in the statute that

Federal and State courts are still open if a complainant

prefers to go to trial there.” Jd, at 737, 747.

The upshot of these various objections was the

addition by the Senate of the “savings clause”, now in

§ 2(a)(1):

nothing in this section shall supersede or limit the

jurisdiction conferred on courts of the United

States or of any State. S. Rep. No. 93-1131, supra,

at 54.

38 = Defendants and the dissent suggest that the failure to enact these

bills is evidence of legislative intent to repeal the private right of

action, This suggestion is unpersuasive. None of the bills provided a

simple private right of action for actual damages, Rather, two of the

proposals, H. K, 11195 and S 2378, would have expanded the

previously judicially recognized right of action by providing for

treble damages for any violation; and one bill, S. 2837, provided

treble damages for a willful violation and actual damages for

nonwillful violations, The dissent’s argument that it would have been

simple to change the bills so as to eliminate the provision for treble

damages ignores that trebling was what the proposers wanted

Simple damages were recoverable under existing law. We have not

“ignored” the discussion in the Amtrak case, 414 US, at 461, as the

dissent charges, p. 45, where Congress failed to adopt an amendment

that would have altered the interpretation which the Secretary of

Transportation had placed on the proposed act. It is simply

inapposite

— A-4 =

The purpose of this change was stated to be to “make

clear that . . . Federal and State courts retain their

jurisdiction.” Jd. at 6. The Conference accepted the

Senate amendment, with the same stated purpose. S.

Rep. No, 93-1194, 93d Cong., 2d Sess, 35 (1974); H.R.

Rep. No. 93-1383, 93d Cong., 2d Sess. 35 (1974), The

respective chairmen of the House and Senate commit-

tees reported that “the conferees wished to make clear

that nothing in the act would super. .de or limit the

jurisdiction presently conferred on courts of the United

States or any State. This act is remedial legislation

designed to correct certain abuses which Congress

found to exist in areas that will now come within the

jurisdiction of the CFTC.” 120 Cong. Rec, 34997 (Oct.

10, 1974) (Senator Talmadge), 120 Cong. Rec. 34737

(Oct. 9, 1974) (Representative Poage), When we couple

this with Congress’ recognition that jurisdiction over

private causes of action had been held to have been

conferred, the conclusion that Congress desired their

continued recognition is nigh irresistible.

Appellees’ primary answer to the foregoing discussion

is that the pre-1974 cases upholding a private cause of

action under the CEA were wrongly decided under the

new trend in Supreme Court jurisprudence with respect

to implication and that, in consequence, if Congress

desired to preserve such a cause of action the savings

clause was insufficient and nothing short of express

statement would do. This argument might be somewhat

impressive if we were dealing with legislation passed by

Congress today. But the law here before us was enacted

on October 23, 1974 and “the relevant inquiry is not

whether Congress correctly perceived the then state of

the law, but rather what its perception of the law was.”

Brown v. G.S.A., 425 U.S. 820, 828-29 (1976), quoted

— A-75 —

with approval by the majority in Cannon v. University

of Chicago, supra, 441 U.S. at 710-11. Here not only

did the 1974 Congress perceive the state of the law as

allowing implied causes of action under the CEA but its

perception was correct. As already developed, the

related area of securities regulation was dominated by

J, I. Case Co. v. Borak, supra, 377 U.S. 426, which was

cited with approval, subsequent to the 1974 amend-

ments, in Cort v. Ash, supra, 422 U.S. at 78, and was

distinguished but in no way disapproved in SIPC v.

Barbour, 421 U.S, 412, 423-24 (1975). While we of

course follow the most recent pronouncements of the

Supreme Court, those pronouncements focus our

attention on the question of legislative intent, and “our

evaluation of congressional action . . . must take into

account its contemporary legal context.” Cannon, supra,

441 U.S. at 698-99,

The sole decision preceding enactment of the 1974

ameodments to which appellees point as evidencing the

new trend is the Amtrak case, 414 U.S. 453, decided on

January 9, 1974. Apart from the fact that Amtrak was

decided when the amendments were well on the road to

enactment and there is no evidence that those

concerned with the amendments were aware of it, the

decision would not in any event have been a warning

flag to Congress to make its approval of a private right

of action explicit. The clear language of the Amtrak Act

and its legislative history manifested an intent to allow

suit only by the Attorney General and affected

employees, and not by others such as the plaintiff, a

passenger association. The Secretary of Transportation

had voiced this interpretation during the hearings and,

as Justice Stewart reasoned, “it is surely most unlikely

that the members of the Committee would have stood

— A-76 —

mute if they had disagreed with it.” Jd. at 460. Here the

sponsor of the bill in the House expressed his view,

both when introducing the bill and in the House Report,

that private actions were available under the CEA. It is

“most unlikely” that the legislators considering the

amendments “would have stood mute if they had

disagreed with it.”

Finally, Justice Stewart emphasized that allowing

private suits would be inconsistent with the legislative

purpose of the Amtrak Act, since Congress was deeply

concerned with paring rail passenger routes efficiently

and without time-consuming proceedings. Jd. at 458.

This would have been reason enough not to imply a

private cause of action even under Borak, 377 U:S. at

432. See also SIPC v. Barbour, 421 U.S. 412, 418, 421

(1975) (Amtrak viewed as case where proposed right of

action was inconsistent with legislative purpose). Here

there is little dispute that the purposes of the CEA

would be effectuated by private actions.

In light of this it is unnecessary to dwell on just how

far the recent triad of Cannon, Redington and

Transamerica may have gone in limiting the implied

cause of action. We do think, however, that the rumors

about the death of the implied cause of action which

have been circulating in the wake of these decisions—an

attitude strongly reflected in the dissent—are exagger-

ated, at least as far as previously enacted statutes are

concerned, and that the effect of the decisions is simply

to emphasize that the ultimate touchstone is congres-

sionel intent and not judicial notions of what would

constitute wise policy. See Zeffiro v. First Pennsylvania

Banking and Trust Company (3 Cir., May 29, 1980)

(No. 79-2259) (injured debenture holder can bring

implied cause of action under Trust Indenture Act

a AF? =

against indenture trustee who breaches agreement).

Two of the decisions themselves recognized implied

actions, Cannon under Title IX and Transamerica under

§ 215 of the Investment Advisers Act. Cannon is strong

support for the result we have reached in this case,

since the majority opinion recognized the earlier view

on implying rights of action and expressly directed

courts to consider Congressional action in light of this

legal context. Both Redington, which found no implied

right of action under § 17(a) of the 1934 Securities

Exchange Act, and Transamerica, which found no

implied action for damages under § 206 of the 1940

Investment Advisers Act, considered statutes which

were enacted prior to the great explosion in judicial

recognition of implied rights. Unlike the congressional

action in 1974 involved in this case, or that in 1972

involved in Cannon, the congressional actions in 1934

and 1940 under review in Redington and Transamerica

were not taken against a background of widespread

judicial recognition of implied private causes of action

for damages either as a general matter or with respect

to the specific subject matter of those statutes. Further,

the legislative history on private rights of action in

both Redington and Transamerica was “entirely silent,”

442 U.S. at 571-72; 62 L. Ed. 2d at 153—quite unlike

the instant case. Redington involved a mere reporting

provision, as to which there was no history of the

implication of private causes of action and which was

“flanked by provisions” expressly according such a

right, and Transamerica turned largely on the express

declaration that certain acts should make contracts

void, which was taken to grant a right of rescission but

not of damages, and the corresponding history of the

jurisdictional clause of the Investment Advisers Act.

=

Far from foreclosing implication of private rights of

action, Transamerica explicitly noted that the intent to

provide such actions “may appear implicitly in the

language or structure of the statute, or in the

circumstances of its enactment.” Jd. at 154.

Even if we were to accept arguendo that the Cannon-

Redington-Transamerica triad would call for affirmance

if they had been rendered before the 1974 amendments

to the CEA were enacted, the legislative history

demonstrates beyond fair doubt that Congress relied on

and approved the unanimous course of decisions

recognizing private causes of action under the CEA,

which in turn, were solidly based on the Supreme

Court’s decision in Borak. Even if that decision were

now to be regarded as an aberration, see Cannon, supra,

441 US. at 735-36 (Powell, J., dissenting); Redington,

supra, 442 U.S. at 576-77, this affords no basis for

thinking that the 1974 Congress had any idea there

would be such a drastic change in the Court’s thinking.

Appellees also argue that the statutory provisions at

issue cannot support a private cause of action because

they merely proscribe certain conduct or prescribe

duties, rather than explicitly creating rights (§§ 4a, 4b,

5(d), 5a(8)). It is true that the form in which Congress

casts a statutory provision may serve as some indicator

of the propriety of implication, see Cannon, supra, 441

U.S. at 690 n.13; Transamerica, supra, 62 L. Ed. 2d at

154, but this is by no means determinative. When, as

here, the legislative history and the “circumstances of

[a statute’s] enactment” evince a clear intent to preserve

a private cause of action, the form in which this intent

is expressed cannot be permitted to become an obstacle

to its realization. The cases do not purport to establish

a linguistic test for implication and, in any event, the

—_*

securities cases are an exception to the right/duty

dichotomy. Cannon, supra, 441 U.S. at 690-92 n.13.

Even if Congress were aware of the perceived

significance of this dichotomy in 1974, which it was

not, there would have been no reason for it to suppose

that the CEA would not fall under this same exception.

The same considerations refute the claim that a

criminal provision such as § 9(b) cannot support a

private cause of action. Prior to 1974 courts had

implied a cause of action under this provision, see, e.g.,

Deaktor, supra, 479 F.2d at 534, and the Supreme

Court had implied such actions from other penal

provisions, see, e.g., Borak, supra. There was no reason

for Congress in 1974 to suppose that this would not

continue. In Cort v. Ash, supra, decided after passage

of the 1974 amendments, Justice Brennan declined to

imply a private cause of action in favor of a shareholder

suing derivatively from a criminal statute prohibiting

corporations from making certain specified political

contributions. He was careful to note, however, that

“provision of a criminal penalty does not necessarily

preclude implication of a private cause of action for

damages,” and he refused to “go so far as to say that

. a bare criminal statute can never be deemed

sufficiently protective of some special group so as to

give rise to a private cause of action by a member of

that group.” 422 U.S. at 79-80 (emphasis in original).

He rested the decision on the basis that “the intent to

protect corporate shareholders particularly was at best

a subsidiary purpose of § 610, and the other relevant

factors are all either not helpful or militate against

implying a private cause of action.” Jd. In the case of

the CEA we have found abundant evidence in the

legislative history that the intent to protect traders in

—* oo

commodity futures was the dominant purpose and the

other relevant factors also militate in favor of implying

the cause of action. Moreover, the CEA cannot be

characterized as a “bare criminal statute”. It is replete

with civil remedies which involve the courts either

directly or on review of CFTC action. See, e.g., § 6(b)

(civil fines for, inter alia, manipulation); § 6b (cease and

desist orders); § 6d (state actions for damages on behalf

of residents); § 5b (suspension or revocation of contract

market designation); § 14 (reparations). This is not at

all a case where a court should be held back from

implying a private cause of action because of a

legitimate fear that Congress intended only criminal

sanctions to apply to certain prohibited conduct.

As previously noted, see note 38, supra, appellees and

the dissent also argue that no right of action should be

implied because Congress did not enact proposals

containing explicit rights of action which were before

it. Indeed, the dissent repeatedly refers to one house or

another of Congress having “rejected” amendments,

when it merely failed to act upon them. The effect of

such a failure is quite different from the voting down

of an amendment, something that the word “rejection”

inevitably calls to mind. A house of Congress may have

failed to act on an amendment for any number of

reasons other than opposition to it—belief that the

point was already covered by existing law, see Diamond

Crystal Salt Co. v. P. J. Ritter Co., 419 F.2d 147, 148

(1 Cir. 1969); Burlington Truck Lines v. Iowa

Employment Security Comm'n, 32 N.W.2d 792, 797

(lowa 1949); objection to the particular terms and

inertia in the way of correction, see note 38 supra; or

just plain loss in the legislative shuffle. The language of

United States v. United Mine Workers, 330 U.S. 258,

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283 (1947), with regard to the failure of the House to

enact a bill specifically providing for the injunctive

relief there sought by the United States is peculiarly

apt—“the fact that the House version did not provide

for the issuance of injunctions to aid in the operation of

seized plants is not the issue here. Rather it is whether

the House expressed any intent to restrict the existing

authority of the courts.” See also Red Lion Broadcast-

ing Co. v. FCC, 395 U.S. 367, 381-82 n.11 (1969)

(“. . . unsuccessful attempts at legislation are not the

best guides to legislative intent”).**

39° = We find little relevance in 7.1.M.E., Inc. v. United States, 359 U.S.

464 (1959), on which the dissent heavily relies. There Congress had

deliberately withheld from the I.C.C. the power to award reparations

for past unreasonable motor carrier rates, in sharp contrast to what

it had done with regard to rail and water rates. The issue was

whether a shipper could circumvent the congressional policy by suit

in the courts, although the Abilene doctrine, 204 U.S. 426 (1907),

would require the courts to refer the issue of reasonableness to the

Commission. The Court concluded, although by the narrowest

margin, that “It would be anomalous to hold that Congress intended

that the sole effect of the omission of reparations provisions in the

Motor Carrier Act would be to require the shipper to bring two

lawsuits instead of one, with the parties required to file their

complaint and answer in a court of competent jurisdiction and then

immediately proceed to the I.C.C. to litigate what would ordinarily

be the sole controversial issue in the suit”, 359 US. at 474—

although some commission cases and two district court cases which

had given only “cursory attention” to the problem had held this

might be done. Unlike the 1974 amendments to the CEA, there had

been no comprehensive revision of the Motor Carrier Act after

consistent judicial interpretation that it did permit reparations suits.

The only communication of the Commission's views to Congress was

in connection with a request that it be given reparations authority,

on which Congress had not acted. In our case Congress deliberately

left in place a series of eleven thoroughly considered decisions, in

line with Supreme Court decisions in a closely related

field, stretching out over seven years. Moreover, on the very point

that concerned the Supreme Court in T..M.E., Inc., namely, that the

Abilene doctrine would involve the agency in an area where Congress

had denied it power and thus circumvent congressional policy, there

is no such conflict here. Indeed, the Supreme Court had ruled in

Deaktor before the 1974 amendments were enacted that in a suit on

— A-82 —

Although the Supreme Court has very recently

warned in Consumer Product Safety Comm'n v. GTE

Sylvania, Inc., 48 L.W. 4658, 4662 (1980), quoting

from United States v. Price, 361 U.S. 304, 313 (1960),

which, in turn, was quoted in United States v.

Philadelphia National Bank, 374 U.S. 321, 348-49

(1963), that “the views of a subsequent Congress form a

hazardous basis for inferring the intent of an earlier

one,” see also the discussion at 48 L.W. 4662 n.13,

NYME, the opinion below and the dissent rely heavily

on a 1978 amendment adding § 6d, which authorizes

state officials to bring suits in federal courts to enjoin

violations of the Act and to obtain monetary redress for

their residents ayainst violators other than exchanges.

NYME asserts that the exception demonstrates a

congressional desire that no private actions should exist

against exchanges; the dissent takes broader grounds.

In fact, the evolution of § 6d actually supports rather

than undermines the implication of a private cause of

action against the exchanges. Section 6d was added

during the reauthorization of the CFTC pursuant to the

sunset provision in the 1974 amendments, 88 Stat.

1391. The period between 1974 and 1978 had seen the

rise of widespread fraud off the regulated and

supervised contract markets, particularly in the form of

commodity options and leverage contracts. The CFTC

was severely criticized for its failure to protect

investors in this area, and the states were eager to take

matters into their own hands and protect their

residents. See generally Lower, State Enforcement of

an implied cause of action under the CEA, the court should stay the

action pending resort to the agency if this seemed desirable to

preserve uniformity.

— A-83 —

.

the Commodity Exchange Act, 27 Emory L. J. 1057

(1978); Young, A Test of Federal Sunset: Congressional

Reauthorization of the CFTC, 27 Emory L. J. 853

(1978). Some had, see, e.g., Kelley v. Carr, supra, 442

F.Supp. 346 (W.D. Mich. 1977), but others were

hamstrung by perceived limitations in the parens

patriae doctrine. H. R. Rep. No. 95-1181, supra, at 14.

The addition of § 6d was designed to remove these

doubts and to enlist the prosecutorial and enforcement

tools of the states to aid the CFTC in correcting abuses

primarily off the contract markets. See id. at 15 (§ 6d

“is intended, among other things, to provide the several

states with the power .. . to protect their citizens

from persons, such as London options firms, vendors of

dealer options and merchants of so-called leverage

contracts who perpetuate fraudulent and other prac-

tices made unlawful by the Federal law”). See also Luna

v. Merrill Lynch, supra, note 1 at 6-8 n.24. Since this

concern was largely with off-market abuses, contract

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