Appendix — Rivers v. Rosenthal & Co.

A-1

APPENDIX

No.

UNITED STATES

79-1313

COURT OF APPEALS

FOR THE FIFTH CIRCUIT

JOHN RIVERS and

TOM LAMB

(Dan P. Rivers, as

Executor of the Will of

John Rivers, substituted

in place and stead of

John Rivers, deceased),

Plaintif fs-Appellees,

>

APPEAL from the

United States District

- Court for the Southern

District of Georgia

v.

ROSENTHAL &

COMPANY,

Defendant-A ppellant

J

Before KRAVITCH, HENDERSON and REAV-

LEY, Circuit Judges.

REAVLEY, Circuit Judge:

[1] This appeal presents a single legal question:

whether there exists an implied private right of ac-

tion under the Commodity Exchange Act (“CEA”),

7 U.S.C. §§ 1-24, as revised in 1974, to redress com-

modity futures customers for damages sustained

from their brokers’ violations of the antifraud pro-

visions and broker registration requirements of that

A-2

Act, 7 U.S.C. §§ 6b,! 6k,?2 and the corresponding

17 U.S.C. § 6b provides, in pertinent part: It shall be un-

lawful (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 con-

tract market, for or on behalf of any other person, or (2)

for any person, in or in connection with any order to make,

or the making of, any contract of sale of any commodity

for future delivery, made, or to be made, on or subject to

the rules of any contract market, for or on behalf of any

other person if such contract for future delivery is or may

be used for (a) hedging any transaction in interstate com-

merce in such commodity or the products or by-products

thereof, or (b) determining the price basis of any transac-

tion in interstate commerce in such commodity, or (c) de-

livering any 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) willfully make or cause to be made to such other

person any false report or statement thereof, or willfully

to enter or cause to be entered for such person any false

record thereof ;

(C) willfully to deceive or attempt to deceive such other

person by any means whatsoever in regard to any such

order or contract or the disposition or execution 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;

a” a ot * # ”

*7 U.S.C. § 6k provides, in pertinent part:

(1) It shall be unlawful for any person to be associated

with any futures commission merchant or with any agent

of a futures commission merchant as a partner, officer,

or employee (or any person occupying a similar status or

performing similar functions), in any capacity which

A-3

regulations, 17 C.F.R. §§ 32.3, 32.9 (1979).3 Rely-

ing upon such an implied right of action, as well as

fraud and fiduciary violation grounds with which we

are not here concerned, John Rivers and Tom Lamb

brought suit below against Rosenthal & Company

and an agent? in its Memphis, Tennessee office, Car]

M. Tipton. Rivers and Lamb allege that in 1976 and

1977 they suffered substantial losses in commodity

futures transactions conceived and carried out in

their behalf by Tipton in violation of the antifraud

and registration provisions noted above.

involves (i) the solicitation or acceptance of customers’

orders (other than in a clerical capacity) or (ii) the

supervision of any person or persons so engaged, unless

such person shall have registered, under this chapter,

with the Commission and such registration shall not have

expired nor been suspended (and the period of suspension

has not expired) or revoked, and it shall be unlawful for

any futures commission merchant or any agent of a

futures commission merchant to permit such a person to

become or remain associated with him in any such capaci-

ty if such futures commission merchant or agent knew or

should have known that such person was not so regis-

tered or that such registration had expired, been sus-

pended (and the period of suspension has not expired)

or revoked: Provided, That any individual who is regis-

tered as a floor broker or futures commission merchant

(and such registration is not suspended or revoked) need

not also register under these provisions.

* * * * + ”

8 See also 7 U.S.C. $§ 6b, 12a(5) (providing authority for

promulgation of regulations and proscribing their contra-

vention).

*7 U.S.C. § 4 imposes upon principals such as Rosenthal

the responsibility for the acts and omissions of their agents.

A-4

Arguing that no such private right of action

exists, Rosenthal moved to dismiss under Fed.R.Civ.

P. 12(b) (6), those counts of the complaint based on

the alleged violations of the CEA. The district court

determined that an implied right of action was avail-

able to Rivers and Lamb and denied the motion to

dismiss. Upon the appropriate recommendation of

the district court that the denial of this motion en-

tailed a controlling and controversial question of law

the immediate resolution of which would materially

advance the ultimate termination of litigation, this

court accepted the interlocutory appeal pursuant to

28 U.S.C. § 1292(b). We now reverse, holding that

no implied private right of action is available to

plaintiffs-appellees, Rivers and Lamb.5

I. BACKGROUND

The question we face here has already received

considerable judicial attention since the 1974 amend-

ments to the CEA. Within the past half year the

Second and Sixth Circuits have ruled that an implied

private right of action does exist under the CEA,

but both decisions were rendered by split. panels over

very forceful dissents. Leist v. Simplot, — F.2d —

(2d Cir. [slip op. nos. 79-7402, -7464, -7482, July

8,] 1980) (per Friendly, J., finding right of action

for contraventions of various sections, such as 7

U.S.C. §§ 6b, 7(d), 7a(8), 13(b), proscribing mar-

5 The named parties are joined on this appeal by the Com-

modity Futures Trading Commission (“CFTC”) and Drexel

Burnham, Lambert, Inc., as amici curiae. The CFTC ap-

pears in favor of the implied right, Drexel in opposition.

The court is indebted to them for their scholarly contribu-

tions.

A-5

ket manipulation, fraud, and dilatory behavior by

exchanges; Mansfield, J., dissenting); Curran v.

Merrill Lynch, Pierce, Fenner & Smith, 622 F.2d 216

(6th Cir. 1980), petition for cert. filed, 49 U.S. L.W.

3053 (U.S. Aug. 9, 1980) (No. 80-203) (private ac-

tion for violation of antifraud provisions such as §

6b).6 Since 1974 numerous district courts also have

faced the issue, with a slight majority of these courts

finding that a cause of action is available under var-

ious provisions.”

° As of this writing, these are the only other two circuits

to have engaged in a reasoned analysis of the existence of

an implied private right of action under the CEA as con-

stituted following the 1974 revision. But see Merrill Lynch,

Pierce, Fenner & Smith, Inc. v. Goldman, 598 F.2d 129, 188

n.7 (8th Cir.), cert. denied, 444 U.S, 888, 100 S.Ct. 76, 62

L.Ed.2d 50 (1979) (noting summarily in dictum that

“[s]luch actions are well recognized.”); Hirk v. Agri-

Research Council, Inc., 561 F.2d 96, 1038 & n.& (7th Cir.

1977) (similar perfunctory assertion). This court has not

faced the issue heretofore, although twice since 1974 it has

expressly reserved decision on the existence of a cause of

action under the Act as constituted prior to the 1974 amend-

ments. Chisper v. Kohlmeyer & Co., 600 F.2d 1061, 1067 &

n.14 (5th Cir. 1979) ; Moody v. Bache & Co., Inc., 570 F.2d

523, 528-29 (5th Cir. 1978).

7 Compare, e.g., Grayson v. ContiCommodity Serv. Ine., 2

Comm.Fut.L.Rep. (CCH) 21,088 (D.D.C. May 23, 1980)

(action pursuant to 7 U.S.C. § 6b) ; Navigator Group Funds

v. Shearson Hayden Stone, Inc., 487 F.Supp. 416 (S.D.N.Y.

1980) (§ 6b); Alken v. Lerner, 485 F.Supp. 871 (D.NJ.

1980) (§ 6b) ; Smith v. Groover, 468 F.Supp. 105 (N.D TL

1979) (§$ 6b, 13a, 18b) ; Poplar Grove Planting & Refining

Co. v. Bache Halsey Stuart, Inc., 465 F.Supp. 585, 589-90

(M.D.La. 1979) ($§ 6b, 6d), all finding implied private

rights of action, with, e. g., Stone v. Saxon & Windsor Group

A-6

A. Prior to 1974

The present federal statutory scheme for regulat-

ing the trading of commodity futures traces its line-

age back to The Futures Trading Act, ch. 86, 42

Stat. 187 (1921), and its successor, The Grain Fu-

tures Act, ch. 369, 42 Stat. 998 (1922). These acts,

limited to grain futures, inaugurated the pattern of

restricting futures trading to designated “contract

markets,” i.e., central exchanges subject to govern-

ment supervision and charged with adopting meas-

ures to prevent price manipulation.’ Although these

Ltd., 485 F.Supp. 1212 (N.D.IIl, 1980) (construing §§ 6c

(b), (c)) ; Sunnyside Eggs, Inc. v. Urner Barry Publ, Inc.,

No. 78-1661A (N.D.Ga. Mar. 28, 1980) (§ 18b) ; Fischer v.

Rosenthal & Co., 481 F.Supp. 538 (N.D.Tex. 1979) (§ 6b) ;

Bartels v. International Commodities Corp., 435 F.Supp. 865

(D.Conn. 1977) (§ 6b), all ruling that no private cause of

action exists under the CEA as amended in 1974, See also

Hofmayer v. Dean Witter & Co., Inc., 459 F.Supp. 733 (N.D.

Cal. 1978) (finding right of action under fraud provisions,

§$ 6b and 60, but not for violation of registration provisions,

§§ 6k and 6n (as alleged here), or for violation of exchange

rules).

*The mechanism through which the 1921 Act was to ac-

complish its systemization of the national futures trade—

i. e., by the levying of a tax on all grain futures contracts

traded other than on licensed contract markets—soon was

declared an unconstitutional exercise of the taxing power.

Hill v. Wallace, 259 U.S. 44, 42 S.Ct. 453, 66 L.Ed. 822

(1922). Almost immediately, however, Congress redrafted

the substantive provisions, substituted for the offending tax

section a simple proscription of all futures dealings other

than on licensed contract markets, and reenacted the whole

pursuant to its power to regulate interstate commerce as

The Grain Futures Act. The Supreme Court upheld the new

Act as constitutional in Board of Trade v. Olsen, 262 U.S.

1, 48 S.Ct, 470, 67 L.Ed. 839 (1923).

A-7

acts empowered the government to take some steps

against individual price manipulations, in practice

almost total reliance for the regulation of such ac-

tivities rested with the individual exchanges.

In 1936, Congress significantly expanded the

scope of federal regulation of the futures trading

industry and retitled the legislation the “Commodity

Exchange Act,” ch. 545, 49 Stat. 1491 (1936). Un-

der this Act, regulator coverage went beyond grain

futures to include other specified agricultural com-

modities. Additional substantive regulatory pro-

visions were enacted, including an antifraud pro-

vision, § 4b, 49 Stat. 1493, in essentially the same

form as that in the present codification, 7 U.S.C. §

6b, which forms one of the bases of this action.

Greater direct government control of market abuses

by individual traders also was established by the

addition of criminal sanctions for violation of the

proscription against price manipulation as well as

fines and penalties for the transgressions of other

provisions and by the vesting of broader powers of

direct supervision and enforcement in the Depart-

ment of Agriculture.

Notwithstanding this beefing up of the federal

regulatory scheme, the principal emphasis and es-

sential philosophy of the legislation remained one of

industry self-regulation through the contract

markets. Curran v. Merrill Lynch, 622 F.2d at

231; Stone v. Saxon & Windsor Group Ltd., 485 F.

Supp. at 1214. Despite similar, though less expan-

sive, amendments in 1968 that increased the sanc-

tions and penalties under the CEA and added sev-

eral new substantive requirements not pertinent

here, Pub.L. 90-258, 82 Stat. 26 (1968), the basic

A-8

approach of industry self-regulation continued until

the drastic revision of the CEA in 1974,

Significantly for our purposes, the relatively lim-

ited role expressly legislated for the federal govern-

ment to play in the active enforcement of this ex-

panding regulatory scheme during the period 1922-

1974 consisted of punitive or coercive mechanisms

such as fines, removal of licenses, or criminal penal-

ties—all sanctions against transgressors. Congress

did not expressly provide for any federal judicial or

administrative forum or remedy through which those

injured due to fraud or other violations of the acts or

regulations could seek redress from those transgres-

sors.

By at least 1967 with the decision in Goodman v.

H. Hentz & Co., 265 F.Supp. 440, 447 (N.D.III.

1967), however, the courts began to fill that void by

finding an implied private right of action under the

CEA. See Leist v. Simplot, — F.2d at —, [slip op.

at 4076] (intimating that private actions may have

been maintained prior to and in greater number than

is indicated by only the published decisions). In fact,

all courts that decided the issue held unanimously

that such a private cause of action was available

under the CEA as constituted prior to 1974. See, e.g.,

Deaktor v. L. D. Schreiber & Co., 479 F.2d 529, 534

(7th Cir. 1978), rev’d on other grounds sub nom.

Chicago Mercantile Exchange v. Deaktor, 414 U.S.

118, 94 S.Ct. 466, 38 L.Ed.2d 344 (1978) (cause of

action under 7 U.S.C. § 18b); Booth v. Peavey Co.

Community Services, 430 F.2d 182, 183 (8th Cir.

1970) ($ 6(d)); Arnold v. Bache & Co., Inc., 377

F.Supp. 61, 65 (M.D.Pa.1978) (§ 6b); McCurnin v.

A-9

Kohlmeyer & Co., 340 F.Supp. 1338, 1343 (E.D.La.

1972), aff'd per curiam, 477 F.2d 113 (5th Cir.

1973). But see Chipser v. Kohlmeyer & Co., 600 F.2d

1061, 1067 & n. 14 (5th Cir. 1979) (suggesting

existence of pre-1974 cause of action an open ques-

tion upon remand) ; Moody v. Bache & Co., 570 F.2d

523, 528-29 (5th Cir. 1978). Moreover — although

the correctness of these decisions is dubious when

measured against the present wisdom for determin-

ing the existence of implied rights of action, see e.g.,

Transamerica Mortgage Advisors, Inc. v. Lewis, 444

U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979)

(“TAMA”) and Part II, infra — this course of al-

lowing the victims of violations to take the initiative

and hail their trespassing tormentors before the

courts was basically consistent with that era’s fund-

amental approach of relying principally upon the

self-policing of the futures trade by those involved

in it.

B. 1974 Amendments

By the early 1970’s, however, the vastly increased

volume, scope and complexity of futures trading and

the apparent inability of the individual exchanges

to cope coherently and satisfactorily with these geo-

metrically expanding problems compelled a reevalua-

tion of that basic self-regulatory approach. S.Rep.

No. 850, 95th Cong., 2d Sess. 8-10, reprinted in

[1978] U.S. Code Cong. & Ad.News, pp. 2087, 2096-

98; S.Rep.No. 1131, 93d Cong., 2d Sess., reprinted in

[1974] U.S. Code Cong. & Ad.News, pp. 5843, 5858-

59. The product of this re-evaluation was the Com-

modity Futures Trading Commission Act of 1974,

Pub.L. 93-463, 88 Stat. 1389 (“CFTCA”’’). Different

A-10

in character from even the significant amendments

of 1936 and 1968, the CFTCA “signalled a dramatic

shift from the theory of exchange self-regulation,”

upon which federal futures trading legislation had

been premised up to that point, Leist v. Simplot, —

F.2d at —, [slip op. at 4075], and proposed in its

place “a comprehensive regulatory structure” creat-

ing a coherent uniform system of federal control

over the entirety of the national futures trading in-

dustry. H.R.Rep.No. 975, 93d Cong., 2d Sess. 1. Con-

sequently, rather than comprising mere patchwork

additions as had all prior amendatory schemes, the

CFTCA actually constituted “the first complete

overhaul of the Commodity Exchange Act since its

inception.” 7d. (emphasis added).

The CFTCA dramatically expanded federal regu-

latory coverage beyond agricultural products to en-

compass futures trading in several categories of

goods and services not previously regulated. See 7

U.S.C. §§ 2, 6c(a) & (b). The most significant

changes pertinent to our consideration here, how-

ever, came in the total revamping of the regulatory

oversight and enforcement systems designed to ef-

fectuate the shift in policy to a uniform, compre-

hensive federal control over the industry.

The focal point of this shift was the creation of

the Commodity Futures Trading Commission

(“CFTC”), a strong regulatory body, vested with

exclusive jurisdiction over futures trading, 7 U.S.C.

§ 2, that was to be the keystone of the new compre-

hensive federal regulatory structure. Federal over-

sight responsibility over the daily functioning of the

industry was greatly expanded through the CFTC.

For example, the Commission was empowered to

A-11

designate and to prescribe certain terms of operation

for licensed contract markets, as well as to review all

regulations and bylaws of these markets and to dis-

approve, alter or supplement those rules insofar as it

deemed necessary. See, e. y., 7 U.S.C. § 12a(7). Fur-

ther, the activities of certain classes of individual

traders were for the first time brought under the

federal eye by the requirement that they register

periodically with the CFTC. See, e. g., 7 U.S.C. § 6k

(one of the provisions forming the basis of plain-

tiffs’ complaint here, requiring registration of as-

sociates of futures commission merchants).

Central to our concern are those provisions elab-

orately overhauling the comparatively limited en-

forcement scheme extant under the old law in order

to assure compliance with the new oversight provi-

sions above, and the many substantive standards of

conduct that had been carried forward into the new

statutory framework virtually unchanged (such as

the antifraud provision, § 6b, involved here). Con-

sistent with the shift in philosophy toward affirma-

tive federal responsibility, this renovated enforce-

ment system was greatly strengthened relative to

prior law both by the enhancement of some old tools

and by the addition of several potent new ones. See

S.Rep.No. 850, supra at 11-12, 1978 U.S.Code Cong.

& Ad.News at 2099-2100. For example, maximum

civil penalties and fines assessable against individu-

al violators and against contract markets that failed

to enforce their rules were drastically increased from

$10,000 to $100,000 per episode. See, e. g., 7 U.S.C.

§§ 13a, 13b. The Commission also was newly em-

powered, for instance, to sue in federal court for in-

junctive relief whenever it appeared that an individ-

A-12

ual or contract market had engaged, was engaging,

or was about to engage in conduct violating the Act

or regulations, 7 U.S.C. § 13a-1, as well as to conduct

disciplinary proceedings against exchange members,

7 U.S.C. § 12c, and revoke or suspend the registra-

tion or trading privileges of any such individual, 7

U.S.C. §§ 6n(6), 9, or contract market, 7 U.S.C.

§ 7b.

Most importantly, the 1974 Act for the first time

expressly provided the means for persons injured by

violations of the Act to seek redress from those re-

sponsible. First, each designated contract market

was required to provide an arbitration or other in-

formal procedure for the settlement of customers’

claims and grievances involving less than $15,000.°

7 U.S.C. § 7a(11). Second, the Act established an

administrative reparations procedure pursuant to

which complaints might be filed with the CFTC

against virtually any futures trading professional

required to be registered under the Act. 7 U.S.C. §

18. The CFTC is obliged to investigate such com-

plaints and, if warranted in the Commission’s opin-

ion, to allow the complainant to proceed against the

alleged culprit before an administrative law judge

either by hearing or by depositions or certified state-

ments of facts, depending upon the size of the claim.

® As indicated by this provision, the role of the individual

exchanges, particularly in the enforcement vein, was not

totally extinguished despite the shift in policy toward a

more uniform, government-controlled regulatory system.

See also 7 U.S.C. § 21 (enabling provision for the creation

of registered futures associations formed to engage in broad

industry self-regulation).

A-13

7 U.S.C. § 18(b). The administrative law judge in

turn is authorized to rule upon the merits of the

claim and to order payment of damages necessary to

compensate the injured individual. See, e. g., Gordon

v. Shearson Hayden Stone, Inc., 2 Comm.Fut.L.Rep.

(CCH) { 21,016 (April 10, 1980). An order of

payment is enforceable in federal district court, and

the Commission’s ruling on the merits of a claim may

be appealed by either party to the court of appeals

in the designated circuit. 7 U.S.C. § 18(f), (g).™

The question we face is whether an implied judi-

cial private right of action also was meant to be in-

cluded among the panoply of express enforcement

tools in this “comprehensive regulatory structure”

erected by the 1974 revision. We conclude that it was

not.

II. DEFINING THE INQUIRY

As indicated by our recent opinions in United

States v. Capeletti Bros., Inc., 621 F.2d 1309, 1313

10The CEA was significantly amended again in 1978. Fu-

tures Trading Act of 1978, Pub.L. 95-405, 92 Stat. 865.

These alterations took the form primarily of adjustments

to the framework erected in 1974. The most significant

changes for our purposes were the modification of the repa-

rations procedure to allow full-fledged hearings only for

claims greater than $5,000 (as opposed to $2,500 in the

original enactment), 7 U.S.C. § 18(b) & (c), and the addi-

tion of a new provision expressly allowing the attorneys

general of the various states to lodge damage actions in

federal courts on behalf of their residents against alleged

violators of the Act, 7 U.S.C. § 13a-2. These amendments

and their legislative history will be discussed more fully as

they appear pertinent to the analysis below.

A-14

(5th Cir. 1980) and Rogers v. Frito-Lay, Inc., 611

F.24 1074, 1078 (5th Cir.), petition for cert. filed,

48 U.S. L.W. 3769 (no. 79-1810, May 14, 1980),

this court continues to employ the factors articulated

in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.

2d 26 (1975), as a guide to determining whether a

cause of action should be inferred from any particu-

lar statutory scheme. In Cort the Supreme Court

identified four factors it considered particularly

relevant to this inquiry:

“First, is the plaintiff “one of the class for whose

especial benefit the statute was enacted... that

is, does the statute create a federal right in favor

of the plaintiff? Second, is there any indication of

legislative intent, explicit or implicit, either to

create such a remedy or to deny one... ? Third, is

it consistent with the underlying purposes of the

legislative scheme to imply such a remedy for the

plaintiff... ? And finally, is the cause of action

one traditionally relegated to state law, in an area

basically the concern of the States, so that it would

be inappropriate to infer a cause of action based

solely on federal law?”

422 U.S. at 78, 95 S.Ct. at 2087 (citations omitted,

emphasis in original).

[2-6] In its more recent pronouncements in

Transamerica Mortgage Advisors, Inc. v. Lewis, 444

U.S. 11, 15, 23, 100 S.Ct. 242, 245, 249, 62 L.Ed.2d

146 (1979) (“TAMA”) and Touche Ross & Co. v.

Redington, 442 U.S. 560, 568, 576, 99 S.Ct. 2479,

2485, 2489, 61 L.Ed.2d 82 (1979), however, the Su-

preme Court has made clear that the dispositive in-

A-15

quiry in evaluating claims upon implied rights of

action is the divining of whether Congress intended

such a cause of action to be born,"! the second of the

Cort criteria. Thus the Cort factors, rather than be-

ing utilized as some sort of self-contained litmus test,

are useful only insofar as they help to elucidate that

1! This conclusive reliance upon congressional intent in the

evaluation of claims of implied rights of action is not simply

an expedient tool or canon of construction, but is rooted in

the limitations of the functional role allotted the judiciary

by the Constitution. United States v. Capeletti Bros., 621

F.2d at 1312; Rogers v. Frito-Lay, 611 F.2d at 1078. See

also Cannon v. University of Chicago, 441 U.S. 677, 742, 99

S.Ct. 1946, 1981-85, 60 L.Ed.2d 560 (1979) (Powell, J., dis-

senting). Although we may breathe practical life into them,

the federal judiciary—endowed with no legislative or policy

making authority—has no power to “imply” or otherwise

to create private causes of action supplementary to express

statutory schemes. Rather, we may only recognize or infer

rights of action affirmatively created by the Legislative

Branch, whether that affirmative legislative intent is mani-

fested expressly in statutory language or by implication in

statutory structure, context, or legislative history. That

this approach may justifiably be characterized as a re-

trenchment from that applied in the recent past, when

causes of action might have been judicially “implied” mere-

ly upon a court’s policy determination that such a cause

would be useful or “necessary” to statutory goals, is a

lamentable indictment of our past failure to recognize or

confine ourselves to our constitutionally assigned role and

our concomitant willingness to countenance Congress’ ab-

dication to the courts of its constitutionally assigned policy

making responsibility. See Cannon v. University of Chicago,

441 U.S. at 742-749, 99 S.Ct. at 1981-85 (Powell, J., dis-

senting). See also, TAMA, 444 U.S. at 23, 100 S.Ct. at 249

(Powell, J., concurring and indicating that the approach

deployed there was consistent with his Cannon dissent).

A-16

legislative intent.!2 Indeed, as the opinions in both

TAMA and Touche Ross demonstrate, should the

issue of intent be settled by, for example, the legis-

lative history and the language or structure of the

statute, the inquiry has reached its end and no pur-

pose is served by the further ritualistic application

of the remainder of the Cort litany.83 TAMA, 444

12 Since the primary indicators of legislative intent are the

language and overall structure of a statute as well as its

legislative history and the context of its enactment, the first

and third of the Cort factors are useful guideposts to intent,

although not as directly to the point as the inquiry directed

by the second criterion. Touche Ross, 442 U.S. at 576, 99

S.Ct. at 2489; Rogers v. Frito-Lay, 611 F.2d at 1078-79 n.4.

13 Qur path is smoothed somewhat in that respect here by

appellant Rosenthal’s decision not to dispute two of the four

Cort criteria. Appellant first has conceded, as it must, that

regulation of the commodity futures trade plainly is not an

area traditionally relegated to state law. Therefore, this

fourth factor, to the extent that it carries any weight, bal-

ances in favor of the plaintiffs and will not be discussed

further. Appellant further conceded in its Reply Brief that

the first Cort factor—-that plaintiffs are members “of a

class for whose especial benefit to the statute was enacted”

—should similarly be resolved in plaintiffs’ favor. We are

less certain of the correctness or advisability of this con-

cession, particularly in light of this court’s rigorous analysis

of this factor in United States v. Capeletti Bros., 621 F.2d

at 1313-14. Also, compare TAMA, 444 U.S. at 23, 100 S.Ct.

at 249 (observing that § 206 of the Investment Advisors

Act, 15 U.S.C. § 806-6 (an anti-fraud statute strikingly

similar to that in issue here), “concededly was intended to

protect the victims cf the fraudulent practices it prohibit-

ed”) with Cannon v. University of Chicago, 441 U.S. 677,

690 n.13, 99 S.Ct. 1946, 1955 n.13 (1979) (intimating in

dictum that rule 10b-5 under the Securities Exchange Act

of 1934 merely “create[s] duties on the part of persons for

A-17

U.S. at 23, 100 S.Ct. at 249; Touche Ross, 442 U.S.

at 576, 99 S.Ct. at 2489.

As indicated above and as unquestioningly recog-

nized by every court to entertain the issue, the focus

of our inquiry is properly directed to the 1974 re-

vision of the CEA. While many of the individual

the benefit of the public at large” rather than a right in

specific persons). See also Leist v. Simplot, __ F.2d at —,

— [slip op. at 4063-71, dissent at 4133-42] (majority and

dissent differ with regard to “especial benefit” factor when

CEA applied to futures “speculators’”). In fact, concession

of this factor might have seriously skewed our analysis of

the case under the puzzling assertion by the Supreme Court

in Cannon that where “it is clear that federal law has

granted a class of persons certain rights, it is not necessary

to show an intention to create a cause of action, although an

explicit purpose to deny such a cause of action would be

controlling.” 441 U.S. at 693, 99 S.Ct. at 1956, quoting Cort

v. Ash, 422 U.S. at 82, 95 S.Ct. at 2089 (dictum) (emphasis

in original).

The Supreme Court has more recently observed in TAMA,

however, that “the mere fact that the statute was designed

to protect advisers’ clients does not require the implication

of a private cause of action for damages on their behalf.

[citations omitted]. The dispositive question remains wheth-

er Congress intended to create any such remedy.” 444 U.S.

at 24, 100 S.Ct. at 249. We can only assume that this state-

ment serves to repudiate the curious allusion in the Cannon

statement to a drastically more liberal approach to “intent”

where the first Cort criterion is satisfied. At the least, in-

sistence upon the strict standard would seem reasonable in

situations where (as opposed to Cannon) any “rights” of

the class, at least potentially, may be adequately secured by

the statute’s express remedies. Consequently, we shall as-

sume, arguendo, the correctness of appellants’ concession

and analyze this factor no further as well, directing our

attention only toward the second and third Cort criteria.

A-18

concepts and provisions originated in prior enact-

ments, including § 6b (the anti-fraud provision),

the overall “regulatory scheme as it exists today is

a product of the 1974 amendments” and the drastic

shift in regulatory philosophy that they represent.

Navigator Group Funds v. Shearson Hayden Stone,

Inc., 487 F.Supp. 416, 420 & n. 6 (S.D.N.Y. 1980).

Thus it is the intent of that Congress and the legis-

lative history of that enactment that will form the

basis of our decision here.

This focus on what is basically revisionary legisla-

tion, as opposed to an altogether new and original

enactment, requires some adjustment or at least

some reevaluation of the conventional analytical ap-

proach, however. In particular and most important-

ly, the fact that a private cause of action had pre-

viously been inferred under the old statutory scheme

in connection with certain express provisions (such

as § 6b), which were incorporated or carried forward

into the present structure, raises questions concern-

ing the type of congressional intent we are bound to

search for and where the axe should fall in the ab-

sence of any definitive evidence of intent.

As indicated in footnote 11, swpra, an implied

private right of action ordinarily may be recognized

only upon clear evidence that Congress affirmatively

intended to provide such a remedy. See Touche Ross,

442 U.S. at 568, 99 S.Ct. at 2485. Customarily,

“those who contend a statute has endowed them with

a cause of action must establish their proposition,”

and their failure to demonstrate Congress’ intent to

provide a cause of action compels the denial of such

actions. Rogers v. Frito-Lay, 611 F.2d at 1085.

A-19

[7] Plaintiffs, along with the CFTC as amicus

curiae,'4 contend here, however, that because courts

had uniformly recognized private rights of action

under the CEA prior to 1974, it is the rejection of a

private right that would constitute a change in the

status quo. Moreover, they suggest, Congress was or

must have been aware of this judicial stance. There-

fore, they argue, the onus here should be upon the

defendants to prove a congressional intent tu alter

this status quo by abrogating this previously exist-

ing cause of action in the course of the 1974 revision.

This argument has some appeal and has been accep-

ted and deployed by several courts, all of whom even-

tually upheld the existence of an implied private

right. See, e.g., Leist, — F.2d at — [slip op. at

4061]; Curran v. Merrill Lynch, 622 F.2d at 234;

Alken v. Lerner, 485 F.Supp. 871, 877 (D.N.J.

1980).

[8,9] While we agree that some account must be

taken of the pre-1974 judicial decisions inferring a

cause of action and any congressional awareness of

1 Through its appearance here and in other litigation, along

with its official pronouncements on the subject, see 41 Fed.

Reg. 3994 (1976), the CFTC has made clear its belief that

an implied right of action is available to private litigants.

Ordinarily the interpretation of a statute by the agency

charged with its administration would be entitled to great

deference. See United States v. Consumer Life Ins. Co., 480

U.S. 725, 752, 97 S.Ct. 1440, 1454, 52 L.Ed.2d 4 (1977).

The Supreme Court made clear in Piper v. Chris-Craft In-

dustries, Inc., 480 U.S. 1, 41 n.27, 97 S.Ct, 926, 949 n.27, 51

L.Ed.2d 124 (1977), however, that such deference was not

to be accorded on the narrow issue, “reserved for judicial

resolution,” of whether an implied right of action should

be recognized under the statute.

A-20

those decisions, we do not believe plaintiffs’ suggest-

ed mode of analysis is appropriate to this case. As is

recognized by the courts employing this approach,

see, e.g., Leist, — F.2d at— [slip op. at 4061-62,

4077-80], the thesis has its foundation in the tradi-

tional canon of construction that, absent express in-

dications to the contrary, the reenactment of statutes

in substantially the same form or their wholesale

adoption into other statutory schemes are presumed

to perpetuate and incorporate the judicial baggage

that has accumulated in relation to those provisions.

See, e.g., Lorillard v. Pons, 434 U.S. 575, 580-81, 98

S.Ct. 866, 869-70, 55 L.Ed.2d 40 (1978); Alabama

Association of Insurance Agents v. Board of Gover-

nors, 583 F.2d 224, 245 (5th Cir. 1976), cert. denied,

435 U.S. 904, 98 S.Ct. 1448, 55 L.Ed.2d 494 (1978).

We believe, contrary to Judge Friendly’s assertions

in Leist, — F.2d at — [slip op. at 4077-78], that the

1974 revision of the CEA simply does not fall within

this paradigm.

The CFTCA was not a mere reenactment, but the

“first complete overhaul” of the CEA. H.R.Rep. 975,

supra, at 1. While it is true as noted earlier that

many of the substantive measures, such as the anti-

fraud provision, 7 U.S.C. § 6b, were left untouched

or were carried forward virtually unchanged into

the new regulatory structure, the immediate context

of those provisions was drastically changed. Most

significantly, as delineated in Part I.B., supra, the

enforcement scheme — which an implied right pre-

sumably had been thought necessary to supplement

—was dramatically altered and expanded. So signif-

icant a transfiguration of the extant statutory

framework is, itself, a wholesale obliteration of the

A-21

prior status quo and sufficient reason for declining

to adopt plaintiffs’ analytical approach, grounded as

it is in the reenactment doctrine described above.

Stone v. Saxon & Windsor Group Ltd., 485 F.Supp.

at 1221; Smith v. Groover, 468 F.Supp. 105, 112-113

(N.D.IIl. 1979) (rejecting the identical approach

urged here by plaintiffs and CFTC as amicus

curiae)."§ Our decision to continue to require proof

of affirmative congressional intent to provide a pri-

vate right of action is further grounded in a related

reason, however, calling into play still another canon

that guides inquiries into the existence of implied

causes of action.

As outlined in Part I.B., supra, Congress greatly

expanded the federal regulatory enforcement arsenal

in the 1974 Act by expressly enacting several potent

new judicial and administrative tools and strength-

ening many of those previously contained in the

CEA. Most significantly, for the first time it expres-

sly provided for remedial mechanisms — the admin-

istrative reparations procedure, 7 U.S.C. § 18, and

the requirement that exchanges provide the means

for arbitration of small claims, 7 U.S.C. § 7a(11) —

through which those injured by violations of the Act

could seek compensation from the infractors.

“(I]t is an elemental canon of statutory construc-

‘Cf. Georgia v. United States, 411 U.S. 526, 532-83, 93

S.Ct. 1702, 1706-07, 36 L.Ed.2d 472 (1973) (applying the

reenactment doctrine to uphold perpetuation of Supreme

Court interpretation of the provision reenacted, with some

changes in context, where, unlike here, that prior interpre-

tation had been the subject of “extensive deliberations” at

least in hearings, and Congress had thereafter done nothing

to alter or foreclose that interpretation).

A-22

tion that where a statute expressly provides a par-

ticular remedy or remedies, a court must be chary of

reading others into it.” TAMA, 444 U.S. at 19, 100

S.Ct. at 247. Thus Congress’ express provision in

1974 of the numerous judicial and administrative

means for enforcing compliance with the antifraud

and other provisions of the CEA — and most par-

ticularly the remedial mechanisms of arbitration

and reparations procedures — in effect creates a

presumption against the implication of yet another

unexpressed judicial means of enforcement and rem-

edy.'® This “presumption” against finding an im-

plied right of action may be overcome, but only upon

“clear contrary evidence of legislative intent” af-

firmatively to provide such an implied right in addi-

tion to the express remedies. National Railroad Pas-

senger Corp. v. National Association of Railroad

Passengers, 414 U.S. 458, 458, 94 S.Ct. 690, 693, 38

L.Ed.2d 646 (1974) (“Amtrak”). Accord, e.g.,

TAMA, 444 U.S. at 19, 100 S.Ct. at 247; Securities

Investor Protection Corp. v. Barbour, 421 U.S. 412,

419, 95 S.Ct. 1738, 1738, 44 L.Ed.2d 263 (1975).

16 Indeed, the presumption is much more appropriately

suited to this case than to the TAMA decision from which

the formulation of the rule quoted in text was drawn.

Navigator Group Funds v. Shearson Hayden Stone, Inc.,

487 F.Supp. at 420. There the Supreme Court declined to

infer a private cause of action for damages largely on the

basis of express enforcement provisions merely aimed at

sanctioning violators of the substantive provisions. As the

court in Navigator Group Funds observed, the express pro-

visions of the CF TCA include compensatory remedial mech-

anisms which are more truly functional alternatives to the

implied judicial forum sought by injured customers. 487

F.Supp. at 420.

A-23

Therefore, following the pattern of TAMA, we con-

clude that the onus remains upon plaintiffs to dem-

onstrate “a clear and affirmative congressional in-

tent to approve a private right of action.”!” Leist, —

F.2d at -— [slip op. dissent at 4147] (Mansfield, J.,

dissenting). Accord, Stone v. Saxon & Windsor

Group Ltd., 485 F.Supp. at 1218, 1220.

[10,11] The history of judicial recognition of a

private cause of action under the CEA prior to 1974

justified some adjustment to and tailoring of the tra-

ditional formulation of the precise nature of congres-

sional intent that must be shown. Rather than re-

quiring establishment of a legislative intent to create

a cause of action, we will require proponents of the

implied right here to show, first, simply that Cong-

ress was actually aware in 1974 of this prior judicial

recognition of an implied right of action, and second,

that it approved these holdings and affirmatively in-

tended to adopt or incorporate this extant, judicially

articulated, right of action into the comprehensive

express legislative enforcement scheme erected by

17 We adopt this approach and embark on our analysis fully

cognizant that application of plaintiffs’ suggested approach,

as in Leist and Alken, very well might—indeed, probably

would—produce a different final result.

18 Given such proof, the actual correctness or incorrectness

of these earlier judicial decisions would be largely imma-

terial. “For the relevant inquiry is not whether Congress

correctly perceived the then state of the law, but rather

what its perception of the state of the law was.” Brown v.

General Services Administration, 425 U.S. 820, 828, 96 S.Ct.

1961, 1965, 48 L.Ed.2d 402 (1976). Thus, if Congress em-

braced such a cause of action and intended its perpetuation

in the revised regulatory system, this affirmative intent

A-24

the 1974 Act.!8 It is to this precise inquiry, in addi-

tion to the arguments and evidence put forth by

plaintiffs, along with our sister courts’ attempt to

satisfy this inquiry, that we now turn our attention.

III. CONGRESSIONAL INTENT

A. Content of Act and Legislative History

The direct sources from which plaintiffs might

demonstrate the requisite congressional intent to

provide, or to continue to provide, a private right of

action are the legislative history, language and

structure of the 1974 Act. Our study of these sources,

however, guided by the plaintiffs’ arguments, fails

to yield any such “clear . . . evidence of legislative

intent” to adopt such a private right.

Plaintiffs rely first on several passages of legis-

lative history which, they argue, plainly demonstrate

that Congress was aware in 1974, during its deliber-

ations on the CFTCA, of the consistent judicial rec-

ognition of implied private rights under the CEA

prior to that time. They point initially to two state-

ments in H.R.Rep.No. 975, supra, at 46, 48, refer-

ring to the growth of private suits against contract

markets for the failure to enforce their own rules as

well as for actions taken in emergency situations.

Representative Poage, the sponsor of H.R.11955 (the

version of the legislation that later passed the House

as H.R.13113, 938d Cong., 2d Sess. (1974) U.S.Code

Cong. & Ad.News, p. 5843), also made essentially the

renders completely irrelevant to our purposes the question

of the propriety, under whatever standards, of the decisions

originally giving birth to the cause of action. Accord, Can-

non v. University of Chicago, 441 U.S. at 709, 99 S.Ct. at

1964.

A-25

same observation on the House floor. 119 Cong.Rec.

41333 (1974). Plaintiffs also point to several men-

tions of the existence of a private right of action by

witnesses before the House and Senate Committees

conducting hearings on the commodity futures legis-

lation. Hearings before the Senate Committee on

Agriculture and Forestry on 8.2485, 8.2578, S.2837,

and H.R.13113, 98d Cong., 2d Sess. 415, U.S.Code

Cong. & Ad.News, p. 5843 (1974) (hereinafter “Sen-

ate Hearings’”’) (statement of Alvin Donahoo, Min-

neapolis Grain Exchange, noting court litigation as

extant alternative to proposed arbitration proce-

dures) ; Hearings before the Comm. on Agriculture

on H.R.11955, 93d Cong., 2d Sess. 249, 321 (1974)

(hereinafter “House Hearings’) (statements of rep-

resentatives of international commodity exchanges

and the Continental Grain Company, respectively, ob-

serving that in addition to the proposed reparations

and exchange arbitration procedures “complainants

of course have access to the courts,” p. 249, and that

“courts ... have already held they have jurisdiction

over private complaints,” p. 321). See also Senate

Hearings, supra, at 737, 746 (statement of Professor

Ray Schotland, arguing for an express private right

of action and assurance “that Federal and State

courts are still open” (emphasis added) ).

Stated charitably, we are less certain than are

the plaintiffs and several of our sister courts! that

these few fleeting references—sometimes cryptic

1° EB. g., Leist v. Simplot, __ F.2d __ at _— [slip op. at 4074-

78]; Curran v. Merrill Lynch, 622 F.2d at 234; Alken v.

Lerner, 485 F.Supp. at 877; Smith v. Groover, 468 F.Supp.

at 113.

A-26

and all comparatively isolated among the hundreds

of pages of testimony and debate that comprise the

legislative history of the 1974 Act—are sufficient to

establish that the entire Congress was even aware

of and duly considered the existence of any pre-

viously inferred cause of action in its deliberations

and vote upon the CFTCA. See SEC v. Sloan, 436

U.S. 103, 119-123, 98 S.Ct. 1702, 1712-14, 56 L.Ed.2d

148 (1978) ;29 Tennessee Valley Authority v. Hill,

437 U.S. 153, 191-194, 98 S.Ct. 2279, 2300-01, 57 L.

Ed.2d 117 (1978). Plainly, the consideration of the

prior judicial interpretations here involved much

less attention, even among the legislators and wit-

nesses noted above, than the “extensive [legislative]

deliberations” (albeit in hearings) of the Supreme

Court’s prior interpretation of a provision of the Vot-

ing Rights Act from which, in Georgia v. United

States, 411 U.S. 525, 532-33, 93 S.Ct. 1702, 1707, 36

L.Ed.2d 472 (1973), the Court presumed general

congressional awareness and acceptance of that in-

terpretation in the reenactment of the provision. See

note 15, supra.

[12] Nonetheless, even assuming that these re-

*°In Sloan, the Supreme Court rejected the SEC’s conten-

tion that its longstanding interpretation of a particular

section of the Securities Exchange Act of 1934 had been

essentially incorporated into that section by Congress’ re-

enactment of the provision in substantially the same form.

In doing so, even though the Senate committee overseeing

the reenactment had not only acknowledged but expressly

approved of the SEC’s construction in its official report,

the Court declined “to presume general congressional

awareness of the Commission’s construction based only up-

on a few isolated statements in the thousands of pages of

legislative documents.” 436 U.S. at 121, 98 S.Ct. at 1713.

A-27

marks demonstrate Congress’ awareness of the prior

judicial recognition of an implied right under the

CEA?! and that the first prong of our inquiry (de-

lineated in Part II, supra) is satisfied, these pas-

sages unquestionably give no indication that Con-

gress approved of and intended to perpetuate such

actions as a part of the elaborate express enforce-

ment scheme that it was in the process of fashion-

ing.22 Proof of such approval is, of course, the vital

element of congressional intent which plaintiff must

establish.”3

*1 In the context of a similar situation, the Supreme Court

stated in Cannon that “[i]t is always appropriate to assume

our elected officials, like other citizens, know the law’—

referring to the prior judicial construction of a statute upon

which the one under the Court’s consideration had been pat-

terned. 441 U.S. at 696, 99 S.Ct. at 1957-58 (dictum). This

suggests that awareness of the prior judicial constructions

recognizing an implied right of action under the CEA ap-

parently may merely be ascribed to Congress. However, the

wisdom of imputing to Congress the knowledge upon which

we then, in turn, assume that legislation is predicated, seems

dubious. See SEC v. Sloan, 436 U.S. at 118-24, 98 S.Ct. at

1712-14, and note 20 supra.

*2 The polarity between the analytical approaches and con-

cepts of burden of persuasion employed by this court and

the Second Circuit in Leist is epitomized by Judge Friend-

ly’s observation, respecting the passages of legislative his-

tory just examined, that “[i]t matters little whether this be

called recognition or approval [of prior implied rights].”

—. F.2d at __ [slip op. at 4075-76].

*3 Indeed, the passages in the H.R.Rep.975 as well as Repre-

sentative Poage’s remarks evince a disparagement of such

actions, at least insofar as they had presented an impedi-

ment to effective exchange self-regulation—quite likely

a factor in the exclusion of exchanges from the ranks of

A-28

[13, 14] For their demonstration of congressional

approval and adoption of the judicially created

right of action, then, plaintiffs rely almost totally

on the jurisdictional savings proviso of 7 U.S.C. § 2.

Set amid the ascription of exclusive jurisdiction over

futures trading to the CFTC, this proviso states

that “[n]Jothing in this section”! shall supersede or

limit the jurisdiction conferred on courts of the

United States....” This, plaintiffs contend, affirma-

tively demonstrates the intent of Congress to retain

the power of the courts to entertain private actions

under the CEA. See A. Bromberg & R. Lowenfels,

Securities Fraud & Commodities Fraud § 461 at

82.362-.363 (1979).

The language of the proviso does not clearly evince

an intent to approve of implied private actions, how-

ever,® and the legislative history relevant to this

those suable by states under 7 U.S.C. § 13a-2 and those sus-

ceptible to the administrative reparations procedure of 7

U.S.C. § 18.

24Even though the proviso explicitly provides only that

nothing “in this section” was meant to supersede extant

court jurisdiction, the legislative history illustrates that

Congress’ intention was that nothing in the Act was to be

taken to diminish that jurisdiction. S.Rep. No. 1131, 93d

Cong., 2d Sess. 23, reprinted in [1974] U.S.Code Cong. &

Ad.News, pp. 5848, 5863; 120 Cong.Rec. 34737, 34997

(1974).

25 If we may indulge in so simplistic an observation: it is

quite a different matter to remove the jurisdiction of courts

over even a limited subject area like futures trading, than

to eliminate a cause of action within that subject area. By

the same token, a provision such as that in § 2, which ex-

plicitly directs the retention of jurisdiction, need not also

denote the retention of an individual cause of action.

A-29

specific proviso indicates that it probably was in-

tended to serve another purpose entirely. The House,

Senate and Conference reports all are mute as to

the purpose behind the proviso, which was added to

H.R.13113 in the Senate. Allusions to the provision

during debates on the floor are similarly unen-

lightening.

Only recourse to the attenuated source of hearing

testimony gives any hope of insight. Plaintiffs ar-

gue, therefore, that the proviso was enacted in re-

sponse to the admonitions of Senator Dick Clark

and Professor Roy Schotland that some sort of ex-

press assurance should be given complainants that

the courts were still open to them under the new

Act. Senate Hearings, supra, at 205, 737 & 746.76

Rosenthal contends, on the other hand, that the

more likely stimulus for the proviso was the state-

ment of the Chairman of the House Judiciary Com-

26 Senator Clark testified that,

“Often the most effective enforcement tool is a private

suit where the plaintiff can recover three times his actual

damages. The McGovern bill also authorizes them. Un-

fortunately, the House bill not only does not authorize

them, but section 201 of the bill [now 7 U.S.C. § 2] may

prohibit all court actions. The staff of the House Agri-

culture Committee has said that this was done inadver-

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

Senate Hearings supra, at 205.

Professor Schotland, while addressing the proposed repara-

tions procedure, observed more generally that “[i]f you do

choose to retain [the reparations mechanism] . . . there

should be explicit language in the statute that federal and

state courts are still open if a complainant prefers to go

to trial there.” Jd. at 737, 746.

A-30

mittee, Representative Peter Rodino, Senate Hear-

ings, supra, at 257-60, and the testimony of Deputy

Assistant Attorney General Keith Clearwaters di-

rectly attacking the exclusive jurisdiction provision

of § 2 to which the proviso was eventually added, id.

at 663-64. The concern of both these witnesses was

that the all-encompassing language of § 2, allocating

to the CFTC exclusive jurisdiction over the futures

trade, was so broad that it even “could be interpreted

to deprive Federal courts of their jurisdiction under

the antitrust laws and to deprive Federal and State

courts of jurisdiction to enforce contract and com-

mercial law rights” in the futures area. Jd. at 663.

Because the statements, as opposed to those relied

upon by plaintiff, are derived from extensive and

pointed attacks on the very section that the proviso

later served to amend and because they, like the

proviso itself, are directed to the question of juris-

diction as opposed to a single cause of action, see

note 25, supra, the Rodino-Clearwaters’ statements

do appear to be the somewhat more likely source for

the proviso.

Unfortunately, we may only speculate since, as

stated above, Congress gave us no indication of

which, if either, of these sets of comments spurred

it to add the proviso of § 2. We are likewise unable

to deduce the answer with any certainty solely on

the basis of the nature of the comments. Even this

statement and the sheer speculativeness of the true

answer, however, effectively blunt plaintiffs’ reli-

ance on the § 2 proviso as a “clear and affirmative”

indication of congressional intent to approve or adopt

an implied cause of action.

Plaintiffs find little support elsewhere in the legis-

A-31]

lative history of the 1974 Act.27 On the other hand,

appellant Rosenthal seeks to solidify its case fur-

ther by arguing that at least one aspect of that

legislative history indicates an intent to deny the

*7 Some additional purported inferences of congressional

awareness and approval of an implied cause of action have

been noted by other courts. We find none of them persua-

sive. For example, both the Leist and Curran majorities

presume, from various statements throughout the legis-

lative history to the effect that the purpose of the

CFTCA was “to strengthen” regulation, e. g., H.R.Rep.

975, supra, at 53-54, that any existing enforcement

mechanisms were meant to be maintained. Leist, —_

F.2d at __ [slip op. at 4080-81], Curran v. Merrill Lynch,

622 F.2d at 232. It is just as reasonable to infer, however,

that this “strengthening” of the extant regulatory struc-

ture was to be accomplished by the centralization in the

federal government of a much-enlarged express enforcement

structure, and that the “strengthening” need not include

private actions—especially in light of the reparations pro-

cedure.

A second example is the reliance in Leist, __ F.2d at __ [slip

op. at 4084-85], for instance, on the observation of Senator

Talmadge that “[i]t is hoped that giving the Commission

this [reparations] authority will somewhat lighten the bur-

den upon the courts....” 120 Cong. Rec. 30459 (1974). The

argument raised from this is that if the reparations pro-

cedure had been intended fully to displace rather than sup-

plement implied judicial actions, the Senator would have

known rather than “hoped” that the burden on the courts

would be significantly lightened. Aside from the fact that

the Senator’s statement conciudes by noting, however, that

the entire appeal and enforcement process remains in the

courts, this particular statement was made with respect to

a bill in which the right of appeal from a reparations pro-

ceeding lay initially to district court. H.R.13113, supra,

§ 106. Thus while one might hope for a reduction in judicial

time commitments, there was little reason to expect a de-

creased docket of cases.

A-32

existence of a private cause of action.

In the process of enacting the CFTCA, Congress

considered, but failed to adopt, no fewer than three

bills containing express private rights of action. H.R.

11195, 93d Cong., 1st Sess. § 17(3) (1973) ; S.2837,

93d Cong., 1st Sess. § 505 (1973); S.2578, 93d

Cong., lst Sess. § 203(3) (1973). The weight to be

given to a failure to enact such a provision — not an

outright rejection by vote of either house — is un-

clear. Compare Amtrak, 414 U.S. at 460-61, 94 S.Ct.

at 694. (“Committee’s deliberate failure to adopt

that proposal .. . cannot but give weight” to the com-

mittee’s disapproval of the principle contained in the

proposal) with Red Lion Broadcasting Co. v. FCC,

395 U.S. 367, 381-82 n. 11, 89 S.Ct. 1794, 1802 n. 11,

23 L.Ed.2d 371 (1969) (“unsuccessful attempts at

legislation are not the best guides to legislative in-

tent”). Whatever clear inference might ordinarily

be drawn from such an occurrence is largely under-

cut here by the fact that each of the bills provided for

treble damages, at least for willful violations of the

Act. Congress’ refusal to adopt these bills might just

as reasonably be presumed to have derived from an

opposition to treble damages as from an opposition to

the damage remedy itself. Alken v. Lerner, 485 F.

Supp. at 877. Consequently, this indicator of Cong-

ress’ purported intent to deny private rights of ac-

tion is hardly less equivocal than those relied upon

by plaintiffs to show the opposite intent.28

*8 Each party seeks to embellish the basic analysis above, to

some extent. Plaintiffs contend, supported by some district

courts, that Congress’ failure to enact these express provi-

sions actually provides evidence that Congress recognized

A-33

Having failed to distill any tangible evidence of

affirmative congressional intent from the legislative

history, language or structure of the 1974 Act, plain-

tiffs next argue that a congressional purpose to pro-

vide a cause of action may be inferred simply from

the context or zeitgeist in which the legislation was

enacted. They rely for this assertion on the discus-

sion in Cannon v. University of Chicago, 441 U.S.

677, 698, 99 St.Ct. 1946, 1958, 60 L.Ed.2d 560

(1979), to the effect that statutes, such as the

CFTCA, enacted during a period when the courts

were much more liberal in their approach to implied

rights of action, see, e. g., J. 1. Case v. Borak, 377

U.S. 426, 433, 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423

(1964), must be judged in light of that “contempor-

and approved the existing implied right and saw no need

to supplement or expand it. See Navigator Group Funds,

487 F.Supp. at 423, quoting Smith v. Groover, 468 F.Supp.

113; Alken v. Lerner, 485 F.Supp. at 877. This is a very

attenuated inference, however, and we join in the statement

of the Supreme Court in 7.1.M.E., Inc. v. United States, 359

U.S. 464, 478, 79 S.Ct. 904, 912, 3 L.Ed.2d 952 (1959):

“we do not think that from the failure of Congress to grant

a new authority any reliable inference can permissibly be

drawn to the effect that any authority previously claimed

was recognized and confirmed.”

Rosenthal, on the other hand points out that the reparations

procedure that was eventually enacted first made its ap-

pearance in H.R.11955, immediately after the failure and

withdrawal of the express judicial cause of action in H.R.

11195. See Fischer v. Rosenthal & Co., 481 F.Supp. at 56.

While this very well could be mere coincidence, one might

infer from the chain of events that the reparations pro-

cedure was indeed viewed by Congress as displacing any

judicial forum. The legislative history contains no express

discussion elucidating any relationship between the two.

A-34

ary legal context.’’2® From this, they contend that it

must be presumed, in the absence of contrary evi-

dence, that Congress expected the judiciary to supply

any cause of action consistent with the prevalent

pattern of interpretation of that time. Accord, Navi-

gator Group Funds v. Shearson Hayden Stone, 487

F.Supp. at 421 (applying the Cannon thesis to

CFTCA); Alken v. Lerner, 485 F.Supp. at 876-77

(same).

[15] We agree that the liberal judicial climate in

which the CFTCA was born requires us to be more

solicitous and sensitive to indications of Congress’

desire to create a cause of action. Indeed, any indica-

tion that Congress actually intended merely to leave

the question to the judiciary to be resolved according

to its contemporary rules of construction, while

clearly inadequate under current standards, would

likely be sufficient to carry the day here.

The prior judicial activism and our present duty

of solicitousness because of that, however, cannot

alter the constitutional requirement, see note 11,

supra, that a cause of action be created only by Cong-

ress. There must be some expression of affirmative

congressional intent either to provide a case of ac-

tion or at least to rely on the context of judicial ac-

tivism contemporary to the enactment (though the

2° The Amtrak case was handed down during congressional

deliberations on the CFTCA. However, the restrictive trend

toward implied rights of action initiated there and carried

forward with increasing intensity through later cases such

as Barbour, Cort, and others up to TAMA and Touche Ross,

could not have been evident to or anticipated by Congress

at the time it enacted the CFTCA.

A-35

latter is somewhat unrealistic). In Cannon, for ex-

ample, the Court observed that Congress “explicitly

assumed that [the statute in question] would be in-

terpreted and applied as” had the statute upon which

it was patterned, including the judicial recognition

or creation of an implied cause of action thereunder.

441 U.S. at 693-696, 99 S.Ct. at 1956-57 (emphasis

added). We have received no such message from the

enactors of the CFTCA.

Finally, plaintiffs contend that the legislative his-

tory of the 1978 amendments — specifically certain

remarks of Senators Huddleston and Leahy during

debate on the Senate floor — demonstrate Congress’

assumption and understanding that implied private

actions are available under the Act. Initially, we

note that the views of subsequent Congresses (and

particularly the isolated remarks of individual leg-

islators )hardly provide the most persuasive evi-

dence of the intent of the enacting Congress. Con-

sumer Product Safety Commission v. GTE Sylvania,

Inc., — U.S. —, —, 100 S.Ct. 2051, 2060-61, 64 L.

E.2d 766 (1980); Rogers v. Frito-Lay, 611 F.2d at

1080-81. However, virtually every court to consider

the issue before us since 1978 has taken into account,

with varying degrees of deference, the legislative

history of the 1978 amendments. Moreover, we are

reminded by other Supreme Court opinions that

“while the views of subsequent Congresses cannot

override the unmistakable intent of the enacting

one, ... such views are entitled to significant weight,

... and particularly so when the intent of the enact-

ing Congress is obscure.” Seatrain Shipbuilding

Corp. v. Shell Oil Co., 444 U.S. 572, 596, 100 S.Ct.

800, 814, 63 L.Ed.2d 36 (1980) (citations omitted).

A-36

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

at 686 n. 7, 99 S.Ct. at 1952 n. 7 (subsequent legis-

lative history not as pertinent as contemporary his-

tory, but helpful to some extent). Therefore, we shall

attempt to glean what we can from this field of leg-

islative material.

The remarks in question of Senators Huddleston

and Leahy, reproduced in the margin, do indicate

39 While introducing the amendment raising from $2,500 to

$5,000 the amount necessary to secure a full-fledged hearing

in the reparations procedure, 7 U.S.C. § 18(b), Senator

Huddleston discussed the backlog problem that the amend-

ment was designed to help alleviate:

“Compounding the undue stress placed on the reparation

program, certain Federal district courts have taken the

unfortunate position that Congress intended reparations

to be the exclusive forum for adjudicating commodity cus-

tomer claims. [citations omitted.] In order to alleviate

the burden on the Commission’s reparation program, the

committee adopted an amendment that provides—for rep-

aration complaints where the amount ciaimed as damages

does not exceed $5,000—that a hearing be held only on

the novel or basic issues that are determinative of the

case. Thus, an aggrieved commodity customer will be able

to obtain more expeditious treatment of his claim should

the customer elect to pursue a claim in reparations rather

than to proceed to arbitration or pursue in court the

private right of action which has been judicially implied

for violations of certain provisions of the Commodity Ex-

change Act, or which in the future courts may recognize

for other provisions of the act.”

124 Cong.Rec. 10537 (1978).

Senator Leahy, in discussing the new provision expressly

allowing states to pursue parens patriae actions for damages

on behalf of their residents, observed :

“The exemption from State suits provided to contract

markets is justified due to the deterrent effect on contract

A-37

a clear assumption on the part of these two legisla-

tors that an implied private right of action was

available under the CEA even after the 1974 revis-

ion. There is no indication elsewhere, however, that

this assumption was shared by the remainder of

Congress. In fact, certain other aspects of the 1978

legislative history imply the absence of such an as-

sumption on the part of Congress as a whole.

For example, the Senate report on the bill, S.Rep.

No. 850, 95th Cong., 2d Sess., reprinted in [1978]

U.S.Code Cong. & Ad.News, p. 2087, twice catalogs

the means by which “customers are afforded protec-

tion” under the CEA, and each time conspicuously

omits to mention an implied private right of action.

Id. at 12-13, 32, U.S. Code Cong. & Ad.News at 2100-

2101, 2120 (the latter passage states, in reference to

a provision not included in the bill as enacted, that

“Talggrieved customers ... would have the choice of

seeking resolution of their claims through associa-

tion arbitration or reparations proceedings or a

Commission reparations proceeding” ). See also H.R.

markets caused by Commission regulation, institution of

Commission enforcement proceedings, and the implied

private rights of action that may be brought against

those contract markets that fail to discharge their duties

under the Commodity Exchange Act. In those actions

brought by a State under this bill, a customer who makes

an informed, voluntary election to have his State sue on

his behalf to recover monetary damages for a particular

violation would thereby extinguish that person’s other

alternatives for redress: arbitration reparations, or ju-

dicially implied private rights of civil action under the

Act.”

124 Cong.Rec. 8.16527 (daily ed. Sept. 28, 1978).

A-38

Rep. No. 975, supra, at 22 (similarly noting that the

reparations procedure was “designed to supplement

the informal ‘settlement procedures’ contemplated of

the contract markets . . . which are required under

other sections of the legislation,” omitting any refer-

ence to such a procedure being supplementary to any

judicial forum).

[16] A second indicator that the assumption ex-

pressed by Senators Huddleston and Leahy was not

one shared by the remainder of Congress is found in

the 1978 amendment expressly providing a cause of

action to the states, 7 U.S.C. § 13a-2.5! Section 13a-

2(2) provides exclusive jurisdiction to the federal

courts for suits based on violations of the CEA and

brought by states under this section. No such provis-

ion exists with respect to the Act generally. The

rationale behind this reservation of exclusive juris-

diction is two-fold: (1) to draw upon the extensive

experience developed exclusively in federal courts in

similar cases under the Securities Exchange Act of

51 Tt has been suggested that the passage of the express

cause of action for states in § 13a-2 demonstrates that

“when Congress wished to provide a private damage reme-

dy, it knew how to do so and did so expressly,” Touche Ross,

442 U.S. at 571, 99 S.Ct. at 2487, and it obviously, there-

fore, did not intend to provide a cause of action for indi-

viduals under the CEA. See, e. g., Stone v. Saxon & Windsor

Group Ltd., 485 F.Supp. at 1220-21. While we are not in-

sensitive to the logic of this position, the legislative history

of § 13a-2 indicates that a primary motivator in making

explicit the right of states to sue may have been the need

to overcome various common law prerequisites and restric-

tions on such parens patriae suits. See S.Rep.No.850, supra,

at 25. Accord, Leist v. Simplot, __ F.2d at — [slip op. at

4098-99].

A-39

1934 under which they similarly hold exclusive juris-

diction, 15 U.S.C. § 78aa, and (2) by means of re-

course to this experience, to evolve a unified “coher-

ent body of [decisional] law” under the CEA. S.Rep.

No. 850, supra, at 25, 1978 U.S. Code Cong. & Ad.

News at 2113. In view of these goals, it would be

anomalous indeed for Congress to require exclusive

jurisdiction only of these relatively infrequent suits

by states while continuing to countenance an implied

cause of action, without such a restriction, for any

individual who cares to sue. The natural inference

is, therefore, that no such individual suits were con-

templated.

B. Consistency With Statutory Goals

[17] Our final inquiry is that directed by the

third Cort criterion. Like our excursion into more

direct indicators of legislative intent, this foray also

yields only conflicting or equivocal results. It is, of

course, true that the recognition of an implied pri-

vate right of action for damages would provide

another, perhaps useful, enforcement tool in harmo-

ny with the aim of the CEA to protect futures cus-

tomers from fraud and market manipulation. Cur-

ran v. Merrill Lynch, 692 F.2d at 234-35.%

As noted earlier, however, a second goal of the

1974 legislation was to create a “uniform regulatory

structure” evolving a coherent body of law coordinat-

ed by the CFTC. S.Rep. No. 850, supra, at 10, 25,

82 In light of the reparations procedure it is not true, how-

ever, that such private actions are “necessary” to effectuate

the purposes of the statute, as has sometimes been required.

See United States v. Capelleti, 621 F.2d at 1317.

A-40

1978 U.S. Code Cong. & Ad.News at 2098, 2113; H.R.

Rep. No. 975, supra, at 1. In order to effectuate this

purpose, “[t]o assure that the body of decisional

laws developed under [the CEA] would be coherent

and consistent with national policy,” the Senate ver-

sion of the 1978 amendments initially required states

to receive approval from the CFTC before they could

bring an action under § 13a-2. S.Rep. No. 850, supra,

at 26, 1978 U.S. Code Cong. & Ad.News at 2114. Al-

though this provision was not incorporated into the

bill as finally enacted, the same function was to be

served by the provision in the Act as passed, § 13a-

2(3), requiring states to notify the Commission of

their intent to file suit and guaranteeing the Com-

mission’s right to intervene in any such suit.

From these restrictions and the remarks in the

Senate report, it is apparent that Congress perceived

even infrequent uncontrolled suits for damages even

by the state governments as a threat to the goal of

developing a coherent and consistent body of law.

Yet, as was the case with respect to the similar con-

cern over the exclusivity of federal jurisdiction,

above, no such restraints or safeguards would be

placed by the statute as presently constituted on the

potentially much more numerous and diverse suits

that would be lodged pursuant to an implied private

cause of action. In this situation we are counselled

by the Supreme Court’s admonition in Santa Clara

Pueblo v. Martinez, 436 U.S. 49, 64, 98 S.Ct. 1670,

1680, 56 L.Ed.2d 106 (1978): “[w]here Congress

seeks to promote dual objectives in a single statute,

courts must be more than usually hesitant to infer

from its silence a cause of action that, while serving

one legislative purpose, will disserve the other.”

A-41

IV. CONCLUSION

The foregoing analysis of the language, structure

and legislative history of the 1974 version of the

CEA and its 1978 amendments obviously has yielded

a result that might be described as emphatically

equivocal. Although some individual passages or as-

pects of the Act appear to give some insight, these

inferences frequently conflict with those from other

passages or, upon closer examination, their apparent

persuasiveness dims or vanishes. Chief Justice

Marshall once observed that “[w]here the mind

labours to discover the design of the legislature, it

seizes everything from which aid can be derived. . . .”

United States v. Fisher, 2 Cranch. 358, 386, 2 L.Ed.

304 (1805), quoted in, Brown v. General Services

Administration, 425 U.S. 820, 825, 96 S.Ct. 1961,

1964, 48 L.Ed.2d 402 (1976). After our analysis of

the legislative material and decisions of other courts

on this question, we might add that in this metaphys-

ical pursuit of prescience the mind often snatches at

shadows and mirages in its attempt to discern evi-

dence of such congressional design — a singularly

inappropriate base upon which to predicate an im-

plied private cause of action.

[18] The net result of our study and delibera-

tions in this case is the determination that the lan-

guage and legislative history of the CEA and

CFTCA, dissected by all of the varied and even con-

flicting canons of construction, simply do not provide

any clear indication of congressional intent either to

approve or deny an implied right of action. In such a

case, as explained in Part II, supra — given the

absence of clear evidence of the requisite affirmative

A-42

congressional intent to create or provide such a cause

of action — we are bound to refuse plaintiffs’ suit.

Accordingly, the order of the district court deny-

ing appellants’ motion to dismiss plaintiffs’ claims

under the CEA is REVERSED and the case RE-

MANDED.

[Dated and entered Dec. 16, 1980]

A-43

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

October Term, 19

No. 79-1313

D. C. Docket No. CA 178-186

JOHN RIVERS and TOM LAMB, (Dan P. Rivers,

as Executor of the will of John Rivers, substituted

in place and stead of John Rivers, deceased)

Plaintif fs-Appellees,

versus

ROSENTHAL & COMPANY,

Defendant-A ppellant.

Appeal from the United States District Court for

the Southern District of Georgia

Before KRAVITCH, HENDERSON and

REAVLEY, Circuit Judges.

JUDGMENT

This cause came on to be heard on the transcript

of the record from the United Staves District Court

for the Southern District of Georgia, and was argued

by counsel;

ON CONSIDERATION WHEREOF, It is now

here ordered and adjudged by this Court that the

order of the District Court appealed from, in this

cause be, and the same is hereby, reversed and that

this cause be and the same is hereby remanded to

the said District Court in accordance with the opin-

ion of this Court;

IT IS FURTHER ORDERED that plaintiffs-

appellees pay to defendant-appellant, the costs on

appeal to be taxed by the Clerk of this Court.

DECEMBER 16, 1980

ISSUED AS MANDATE: Jan. 7, 1981

A-44

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF GEORGIA

AUGUSTA DIVISION

JOHN RIVERS and '

TOM LAMB, Civil Action File

Plaintiffs No. CV178-186

- VS -

ROSENTHAL & j ORDER

COMPANY

and CARL M. TIPTON,

Defendants

The reply brief of Defendant, Rosentha! & Com-

pany having been filed on December 22, 1978, the

order of this Court dated December 21, 1978, is

vacated; however, after consideration of said reply

brief, Defendants’ motions to dismiss are denied.

Further the Court is of the opinion that this order

involves a controlling question of law as to which

there is substantial ground for difference of opinion

and that an immediate appeal from this order may

materially advance the ultimate termination of the

litigation; and that the interests of justice and ju-

dicial economy would best be served by staying the

proceedings in this Court until the final disposition

of this matter by the Court of Appeals; therefore,

all proceedings, including pleadings and discovery,

shall be stayed until the Court of Appeals shall

either decline to hear an interlocutory appeal or un-

til final disposition of this matter by the Court of

Appeals. Such stay shall expire, with respect to

pleadings 30 days and, with respect to discovery, 45

A-45

days after the occurrence of either of such events.

SO ORDERED. This 28th day of December, 1978.

ANTHONY A. ALAIMO

Chief Judge, United States District

Court, Southern District of Georgia

[Filed Dec. 28, 1978]

A-46

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 79-8011

ROSENTHAL & COMPANY,

Petitioner,

versus

J OHN RIVERS and TOM LAMB,

Respondents.

On Application for Leave to Appeal from an

Interlocutory Order

Before AINSWORTH, GODBOLD and VANCE,

Circuit Judges.

BY THE COURT:

IT IS ORDERED that leave to appeal from the

interlocutory order of the United States District

Court for the Southern District of Georgia entered

on December 28, 1978, is GRANTED.

[Filed Feb. 2, 1979]

A-47

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF GEORGIA

AUGUSTA DIVISION

JOHN RIVERS and

TOM LAMB,

Plaintiffs,

ROSENTHAL & F :

COMPANY and CV178-186

CARL M. TIPTON,

Defendants. |

COMPLAINT

Jurisdiction and Venue

1

This action is brought pursuant to the Commodity

Exchange Act as amended (7 U.S.C. $1 et seq.) and

the rules and regulations of the Commodity Futures

Trading Commission promulgated thereunder.

2.

The Defendants utilized the instrumentalities of

interstate commerce, including (but not limited to)

telephone facilities and the United States mails, in

connection with the purchase and sale of commodity

option contracts. All of the material acts and omis-

sions complained of occurred in the Southern Dis-

trict of Georgia.

3.

Plaintiffs JOHN RIVERS (“Rivers”) and TOM

LAMB (“Lamb”) reside in Wrens, in the Southern

A-48

District of Georgia.

4,

Defendant, ROSENTHAL & COMPANY (“Ros-

enthal”), is an Illinois Limited Partnership with its

principal office and place of business located in Chi-

cago, Illinois. Rosenthal is a commodity merchant

which deals in commodity option contracts. Rosen-

thal, at all times material hereto, promoted and sold

commodity options to Plaintiffs through its author-

ized agents and employees. Rosenthal was a fiduci-

ary of Plaintiffs and was obligated to observe the

strictest fairness and good faith in its dealings with

Plaintiffs.

5.

Defendant, CARL M. TIPTON (“Tipton”), resides

in Memphis, Tennessee. Tipton was a commodity

broker with Resenthal and, as its authorized agent

and employee, was a principal participant in the

promotion and sale of commodity options to Plain-

tiffs as set forth below. Tipton was a fiduciary of

Plaintiffs and was obligated to observe the strictest

fairness and good faith in his dealings with Plain-

tiffs.

6.

The Defendants are subject to the jurisdiction of

this Court and venue is proper within this judicial

district. Jurisdiction and venue are based on the

Commodity Exchange Act, the Commodity Futures

Trading Commission Act and the doctrine of pen-

dant jurisdiction.

A-49

PLAINTIFFS WERE FRAUDULENTLY

INDUCED TO INVEST IN COMMODITY

OPTIONS.

7.

Plaintiffs were initially contacted by Tipton in a

long distance, “cold canvass” telephone call in June,

1976. Tipton represented himself to be a commodity

options broker with Rosenthal’s Memphis, Tennes-

see, office.

8.

At the time the Plaintiffs were first contacted by

Tipton, they were both inexperienced and unsophis-

ticated as to London commodity option transactions.

Neither of the Plaintiffs were aware of the risks

involved in trading London commodity options, and

neither had access to information as to the day to

day fluctuations in the options market.

9.

Plaintiffs received repeated unsolicited telephone

calls from Tipton in which he falsely and fraudulent-

ly represented to the Plaintiffs, among other things,

the following:

(a) That the Plaintiffs should purchase specified

commodity options immediately in order to take ad-

vantage of favorable market prices for those options;

(b) That there was no way to lose money on the

options being offered and that profits were guaran-

teed ;

(c) That investments in the options being offered

A-50

would result in a doubling or tripling of the invest-

ment within a short period of time; and

(d) That Tipton was one of the top commodity

options brokers in the country and that he had never

had a customer who lost.

10.

In addition, Tipton failed to disclose the following

material information:

(a) That investment in commodity options in-

volves a high degree of risk and that, in fact, a loss

of the entire investment is highly likely;

(b) That there was, in fact, no reasonable factual

basis for the profits which he promised;

(c) That the purchase price (or premium) for

the options being offered was substantially higher

than the actual price paid by Rosenthal when acquir-

ing the options on the London market;

(d) That the “foreign service fee” charged by

Rosenthal in connection with purchases of the op-

tions was, in fact, a commission; and

(e) That a substantial rise in the price of the

commodity was necessary before the “break even”

point on the investment was reached.

11.

In addition, the Plaintiffs were contacted by other

agents and employees of Rosenthal who made similar

false and fraudulent representations and who simil-

arly failed to disclose material information.

A-51

12.

In reliance on the aforesaid misrepresentations

and omissions, Lamb invested in sugar, rubber and

cocoa options and lost $52,592.61 of his investment

and Rivers invested in rubber and sugar options and

lost $12,215.79 of his investment.

13.

In reliance on the same misrepresentations and

omissions, the Plaintiffs each lost a portion of their

investment in coffee options. Specifically, Lamb’s

out-of-pocket loss on his thirteen coffee options in

question was $42,393.79 and Rivers’ out-of-pocket

loss on his thirteen coffee options was $537.05.

PLAINTIFFS WERE FRAUDULENTLY

INDUCED NOT TO SELL THEIR COFFEE

OPTIONS.

14,

In early April, 1977, Plaintiffs were informed by

Tipton that the value of Lamb’s thirteen coffee op-

tion contracts was approximately $198,000.00. Sim-

ilarly, the Plaintiffs were informed that the value of

Rivers’ thirteen coffee option contracts was approxi-

mately $196,000.00. Tipton’s statement as to those

values was substantially accurate.

15. |

Upon being so advised, the Plaintiffs informed

Tipton that they were satisfied with their gain.

Tipton then falsely and fraudulently represented to

Plaintiffs that the value of their coffee options was

“locked in” or “scotched” so that the coffee options

could not lose any of the value they had. When the

Plaintiffs inquired as to whether they should sell

the options, Tipton insisted that they should not be

A-52

sold and falsely and fraudulently reiterated that

their value was “locked in” or “‘scotched”’.

16.

In reliance on the aforesaid false and fraudulent

representations, the Plaintiffs exercised only a rela-

tively small portion of their coffee options. Because

the coffee options had not been “locked in” or

“scotched” as represented, the value of the coffee

options not sold was lost.

17.

As a direct and proximate result of the aforesaid

false and fraudulent representations, Lamb suffered

damages of $173,502.70 and Rivers suffered dam-

ages in the amount of $139,562.30.

FIRST CAUSE OF ACTION

18.

By virtue of the facts herein set forth, Defendants

violated §4 of the Commodity Exchange Act (7

U.S.C. §6) and the rules and regulations promulgat-

ed thereunder, including §30.01 of the rules and reg-

ulations of the Commodity Futures Trading Com-

mission (17 C.F.R. §30.01) in that Defendants:

(a) Cheated and defrauded Plaintiffs;

(b) Made false statements to Plaintiffs; and

(c) Deceived Plaintiffs;

in connection with an offer to enter into, the entry

into and the confirmation of the execution of com-

modity option transactions.

A-53

17. [sic]

As a direct and proximate result of the Defend-

ants’ violations of the Commodity Exchange Act,

Lamb sustained damages of $226,095.31 and Rivers

sustained damages of $151,778.09 and the Defend-

ants are liable therefor.

SECOND CAUSE OF ACTION

18. [sic]

By virtue of the facts herein set forth, Defendants

deliberately and willfully defrauded Plaintiffs by

inducing Plaintiffs to invest in commodity option

contracts and by inducing the Plaintiffs to forego a

sale of profitable commodity option contracts by

making false and fraudulent representations and by

failing to disclose material facts unknown to Plain-

tiffs.

19.

The conduct of Defendants herein set forth, in-

cluding without limitation, the deliberate and inten-

tional misrepresentations and omissions made in fur-

therance of the scheme, device and conspiracy among

the Defendants, constitutes fraud under Georgia

Law (specifically Ga. Code Ann. §105-301, et seq.).

20.

Asa direct and proximate result of the Defendants

fraud, Lamb sustained damages of $226,095.31 and

Rivers sustained damages of $151,778.09, and De-

fendants are liable therefor.

THIRD CAUSE OF ACTION

21.

Beginning in early 1977, the rules and regulations

A-54

adopted pursuant to the Commodity Exchange Act

(7 U.S.C. $1 et seq) required that persons engaged

in the selling of commodity options be registered

with the Commodity Futures Trading Commission

as “associated persons’. Although Defendant Tip-

ton’s application to be registered as an associated

person was denied, and Tipton could not legally act

as an associated person after March 18, 1978, and

although this was well known to Rosenthal, Tipton

continued to solicit orders from Plaintiffs and to ad-

vise them with respect to their commodity option ac-

counts with Rosenthal in willful and knowing viola-

tion of the law. By reason thereof, the Defendants

are liable to the Plaintiffs for the damages suffered

by them in reliance upon the representations, advice

and counsel of Tipton after March 18, 1977.

22.

After March 18, 1977, as a result of the dealings

with Tipton, Rivers suffered damages in the amount

of at least $208,106.51 and Lamb suffered damages

of $151,778.09 and Defendants are liable therefor.

FOURTH CAUSE OF ACTION

23.

By virtue of the facts set forth herein, the De-

fendants were wilfully and wantonly negligent in the

performance of their professional and fiduciary

duties to Plaintiffs. Moreover, Rosenthal was wii-

fully and wantonly negligent in allowing Tipton to

solicit sales of commodity options despite its aware-

ness of his past criminal record and bankruptcy.

24.

As a direct and proximate result of the Defend-

A-55

ants’ negligence, Lamb suffered damages of

$226,095.31 and Rivers suffered damages of $151,-

778.09, and Defendants are liable therefor.

EXEMPLARY DAMAGES AND ATTORNEYS’

FEES

25.

The actions of Defendants herein set forth were

wilful, wanton, reckless and made without regard to

their consequences, such that the Plaintiffs are en-

titled to exemplary damages under Ga. Code Ann.

§$105-2002 so as to deter such action by Defendants

in the future.

26.

The actions of Defendants herein set forth were

made in bad faith and caused the Plaintiff unneces-

sary trouble and expense, thereby entitling Plaintiff

to recover expenses of this litigation, including rea-

sonable attorney’s fees under Ga. Code Ann. §20-

1404.

27.

By reason of the facts set forth herein, each of the

Plaintiffs is entitled to exemplary damages of

$150,000.00 plus all expenses of this litigation, in-

cluding reasonable attorney fees in an amount not

less than $25,000.00

WHEREFORE, Plaintiffs demand:

(a) That judgment be rendered in favor of Lamb

against the Defendants, jointly and severally, in the

amount of $226,095.31 plus interest at the legal

rate;

A-56

(b) That judgment be rendered in favor of Rivers

against the Defendants, jointly and severally, in the

amount of $151,778.09 plus interest as [sic] the

legal rate;

(c) That judgment be rendered in favor of Lamb

against the Defendants, jointly and severally, in the

amount of $150,000.00 for exemplary damages and

$25,000.00 for attorney’s fees;

(d) That judgment be rendered in favor of Riv-

ers against the Defendants, jointly and severally, in

the amount of $150,000.00 for exemplary damages

and $25,000.00 for attorney’s fees;

(e) That Defendants be required to pay all costs

of this action; and

(f) That the Court grant such other and further

relief as it deems just and proper.

ALBERT H. DALLAS

304 Black Street, S. E.

Thomson, Georgia 30824

(404) 595-7170

JERRY L. SIMS

Kaler, Lefkoff, Pike & Fox, P.C.

Suite 2101

100 Colony Square

Atlanta, Georgia 30361

(404) 892-3300

A-57

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF GEORGIA

AUGUSTA DIVISION

JOHN RIVERS and ;

TOM LAMB,

Plaintiffs,

v. CIVIL ACTION

ROSENTHAL & ’ FILE NO. CV178-186

COMPANY

and CARL TIPTON,

Defendants. |} -

PLAINTIFFS’ AMENDED COMPLAINT

The Plaintiffs hereby amend their Complaint as

follows:

1.

The following sentence is added to the allegations

of Paragraph 6 of the Complaint:

“Jurisdiction is based on 28 U.S.C. §1332 since

there is complete diversity of citizenship be-

tween Plaintiffs and Defendants and the amount

in controversy exceeds the sum of $10,000.00,

exclusive of interest and costs.

2.

Paragraph 21 of the Complaint is amended to

correct a typographical error in line 6 where the

date “March 18, 1978” should be “March 18, 1977.”

KALER, LEFKOFF, PIKE & FOX, P.C.

BY:

Jerry L. Sims

Attorneys for Plaintiffs

A-58

2101-100 Colony Square

1175 Peachtree Street, N.E.

Atlanta, GA 30361

(404) 892-3300

Albert H. Dallas

Attorney for Plaintiffs

P. O. Box 1150

Thomson, GA 30824

(404) 595-7170

A-59

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF GEORGIA

AUGUSTA DIVISION

JOHN RIVERS and

TOM LAMB,

Plaintiffs

v. CIVIL ACTION

ROSENTHAL & | FILE NO. CV178-186

COMPANY

and CARL M. TIPTON,

Defendants |

DEFENDANT ROSENTHAL & COMPANY’S

MOTION TO DISMISS

COMES NOW Defendant ROSENTHAL & COM-

PANY (hereinafter “Rosenthal”) and, pursuant to

Rule 12(b) F.R.C.P. and principles of federal law,

moves the Court to dismiss the above-styled action

against Rosenthal without prejudice for lack of

jurisdiction over the subject matter and for failure

to state a claim upon which relief can be granted, as

more particularly delineated in the Brief attached

hereto.

WHEREFORE, Rosenthal respectfully requests

that its Motion to Dismiss be granted.

This 13th day of November, 1978.

WYCK A. KNOX, JR.

Of Counsel:

KNOX AND ZACKS

P. O. Box 2043

Augusta, Georgia 30903

(404) 724-2622

A-60

JAMES 8. STOKES, IV

PETER Q. BASSETT

Of Counsel:

Alston, Miller & Gaines

1200 C&S National Bank Bldg.

35 Broad Street

Atlanta, Georgia 30303

_ (404) 586-1500

CLINTON BURR

Counsei for Defendant

ROSENTHAL & COMPANY

Rosenthal & Company

141 West Jackson Boulevard

Suite 1025

Chicago, Illinois 60604

(312) 786-0900

A-61

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF GEORGIA

AUGUSTA DIVISION

JOHN RIVERS and

TOM LAMB,

Plaintiffs,

vs. | CIVIL ACTION

ROSENTHAL & File No. CV178-186

COMPANY and

CARL M. TIPTON,

Defendants.

MOTION OF DEFENDANT CARL M. TIPTON

TO DISMISS OR, IN THE ALTERNATIVE

TO STAY THIS ACTION

COMES NOW Defendant CARL M. TIPTON

(hereinafter “Tipton”) and, pursuant to Rule 12(b)

F.R.C.P. and principles of federal law, moves the

Court to dismiss the above-styled action against

Rosenthal without prejudice or, in the alternative,

to stay this action pending Plaintiffs’ compliance

with the Commodity Exchange Act reparations pro-

cedures (7 U.S.C. $18), all for reasons more par-

ticularly delineated in the Brief attached hereto.

WHEREFORE, TIPTON respectfully requests

that his Motion to Dismiss or, in the Alternative, to

Stay this Action, be granted.

Dated this 9th day of November, 1978.

WILLIAM M. PHELAN,

Attorney for Carl M. Tipton

William M. Phelan Ltd.

111 West Washington Street

Chicago, Illinois 60602

(312) 782-5600

A-62

COMMODITY EXCHANGE ACT

SECTION 4b, 7 U.S.C. §6b

§6b. Contracts designed to defraud or mislead;

bucketing orders; buying and selling orders for cot-

ton

It shall be unlawful (1) for any member of a contract

market, or for any correspondent, agent, or em-

ployee of any member, in or in connection with any

order to make, or the making of, any contract of sale

of any commodity in interstate commerce, made, or

to be made, on or subject to the rules of any contract

market, for or on behalf of any other person, or (2)

for any person, in or in connection with any order

to make, or the making of, any contract of sale of

any commodity for future delivery, made, or to be

made, on or subject to the rules of any contract mar-

ket, for or on behalf of any other person if such con-

tract for future delivery is or may be used for (a)

hedging any transaction in interstate commerce in

such commodity or the products or byproducts there-

of, or (b) determining the price basis of any trans-

action in interstate commerce in such commodity, or

(c) delivering any such commodity sold, shipped, or

received in interstate commerce for the fulfillment

thereof—

(A) to cheat or defraud or attempt to cheat or de-

fraud such other person;

(B) willfully to make or cause to be made to such

other person any false report or statement thereof,

or willfully to enter or cause to be entered for such

person any false record thereof ;

(C) willfully to deceive or attempt to deceive such

A-63

other person by any means whatsoever in regard

to any such order or contract or the disposition

or execution of any such order or contract, or in

regard to any act of agency performed with re-

spect 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 per-

son, 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.

Nothing in this section or in any other section of this

Act [7 USC §$§ 1 et seq.] shall be construed to pre-

vent a futures commission merchant or floor broker

who shall have in hand, simultaneously, buying and

selling orders at the market for different principals

for a like quantity of a commodity for future de-

livery in the same month, from executing such buy-

ing and selling orders at the market price: Provided,

That any such execution shall take place on the floor

of the exchange where such orders are to be executed

at public outery across the ring and shall be duly re-

ported, recorded, and cleared in the same manner as

other orders executed on such exchange. And pro-

vided, further, That such transactions shall be made

in accordance with such rules and regulations as the

Commission may promulgate regarding the manner

of the execution of such transactions.

(Sept. 21, 1922, e. 369, § 4b, as added June 15, 1936,

c. 545, §5, 49 Stat. 1493; Feb. 19, 1968, P. L. 90-258,

$5, 82 Stat. 27; Oct. 23, 1974, P. L. 93-463, Title IV,

$405, 88 Stat. 1413.)

A-64

COMMODITY EXCHANGE ACT

SECTION 4c(b), 7 U.S.C. §6c(b)

§6c. Wash sales; cross trades; fictitious sales; priv-

ileges; offers; puts; calls; guaranties.

(b) No person shall offer to enter into, enter into,

or confirm the execution of, any transaction subject

to the provisions of subsection (a) of this section

involving any commodity regulated under this Act

[7 USC §$§ 1 et seq.], but not specifically set forth

in section 2(a) of this Act [7 USC §2], prior to the

enactment of the Commodity Futures Trading Com-

mission Act of 1974 [enacted Oct. 23, 1974], which

is of the character of, or is commonly known to the

trade as, an “option”, “privilege”, “indemnity”,

“bid”, “offer”, “put”, “call”, “advance guaranty”, or

“decline guaranty”, contrary to any rule, regulation,

or order of the Commission prohibiting any such

transaction or allowing any such transaction under

such terms and conditions as the Commission shall

prescribe within one year after the effective date of

the Commodity Futures Trading Commission Act of

1974 unless the Commission determines and notifies

the Senate Committee on Agriculture and Forestry

and the House Committee on Agriculture that it is

unable to prescribe such terms and conditions within

such period of time: Provided, That any such order,

rule, or regulation may be made only after notice and

opportunity for hearing: And provided further, That

the Commission may set different terms and condi-

tions for different markets. (Sept. 21, 1922, c. 369, §

4c, as added June 15, 1936, c. 545, § 5, 49 Stat. 1494;

as added June 15, 1936, c. 545, § 5, 49 Stat. 1494;

Oct. 23, 1974, P. L. 93-463, Title I, § 108(a), Title

IV, § 402, 88 Stat. 1392, 1412.)

A-65

COMMODITY EXCHANGE ACT

SECTION 4k, 7 U.S.C. §6k

§6k. Registration of associates of futures commis-

sion merchants

(1) It shall be unlawful for any person to be associ-

ated with any futures commission merchant or with

any agent of a futures commission merchant as a

partner, officer, or employee (or any person occupy-

ing a similar status or performing similar func-

tions), in any capacity which involves (i) the solici-

tation or acceptance of customers’ orders (other

than in a clerical capacity) or (ii) the supervision

of any person or persons so engaged, unless such

person shall have registered, under this Act [7 USC

§3 1 et seq.], with the Commission and such registra-

tion shall not have expired nor been suspended (and

the period of suspension has not expired) or revoked,

and it shall be unlawful for any futures commission

merchant or any agent of a futures commission mer-

chant to permit such a person to become or remain

associated with him in any such capacity if such fu-

tures commission merchant or agent knew or should

have known that such person was not so registered or

that such registration had expired, been suspended

(and the period of suspension has not expired) or

revoked: Provided, That any individual who is regis-

tered as a floor broker or futures commission mer-

chant (and such registration is not suspended or re-

voked) need not also register under these provisions.

(2) Any such person desiring to be registered shall

make application to the Commission in the form and

manner prescribed by the Commission, giving such

A-66

information and facts as the Commission may deem

necessary concerning the applicant. Such person,

when registered hereunder, shall likewise continue to

report and furnish to the Commission such informa-

tion as the Commission may require. Such registra-

tion shall expire two years after the effective date

thereof, and shall be renewed upon application there-

for unless the registration has been suspended (and

the period of such suspension has not expired) or re-

voked after notice and hearing as prescribed in sec-

tion 6(b) of this Act [7 USC §9]: Provided, That

upon initial registration, the effective period of such

registration shall be set by the Commission, not to

exceed two years from the effective date thereof and

not to be less than one year from the effective date

thereof.

(Sept. 21, 1966, c. 369, § 4k, as added Oct. 23, 1974,

P. L. 93-463, Title II, § 204(a), 88 Stat. 1396.)

COMMODITY FUTURES TRADING

COMMISSION

Reg. §32.3(b), 17 C.F.R. §32.3(b) (1978)

32.3 Unlawful Commodity option transaction.

(b) On and after January 27, 1977, it shall be un-

lawful for —

(1) any person to solicit or accept orders (other

than in a clerical capacity) for the purchase or sale

of any commodity option, or to supervise any person

or persons so engaged, unless such person is

(i) registered as a futures commission merchant

under the Act, or

(ii) if such person is an individual, registered as

A-67

an associated person of a specified futures commis-

sion merchant under the Act;

and such registration shall not have expired, been

suspended (and the period of suspension has not

expired) or revoked; and

(2) any futures commission merchant to permit

an individual to become or remain associated with

such futures commission merchant as a partner, of-

ficer or employee (or in any similar status or posi-

tion 6(b) of this Act [7 USC § 9]: Provided, That

volving such solicitation, acceptance or supervision

if such futures commission merchant knew or should

have known that such individual was not registered

as an associated person or that such registration has

expired, been suspended (and the period of suspen-

sion has not expired) or revoked;

COMMODITY FUTURES TRADING

COMMISSION

Reg. §32.9, 17 C.F.R. §32.9 (1978)

§32.9 Fraud in connection with commodity option

transactions

It shall be unlawful for any person directly or in-

directly—

(a) to cheat or defraud or attempt to cheat or de-

fraud any other person;

(b) to make or cause to be made to any other per-

son any false report or statement thereof or cause to

be entered for any person any false record thereof;

(c) to deceive or attempt to deceive any other per-

son by any means whatsoever ;

in or in connection with an offer to enter into, the

entry into, or the confirmation of the execution of,

any commodity option transaction.