Appeal from a judgment in favor of defendants following a jury trial before Judge Robert L. Carter in the United States District Court for the Southern District of New York in an action seeking recovery for alleged violations of the Commodity Exchange Act and the Sherman Act. Affirmed.
Mulligan and Van Graafeiland, Circuit Judges, and Pollack, District Judge.*fn*
VAN GRAAFEILAND, Circuit Judge:
On April 11, 1966, plaintiff's predecessor as Trustee commenced the above entitled action to recover approximately $12 million which, he alleged, the bankrupt, Ira Haupt & Co., had lost through the fault of the defendants. Nine years later, after extensive pretrial discovery and a massive accumulation of papers, documents, transcripts and records from this and other proceedings, the case went to trial before Judge Carter and a jury. Following a six-week trial, verdicts were directed in favor of several of the named defendants, and the jury thereafter found for those who remained. Review of the exhaustive record and exhausting briefs discloses no error, and the judgments are affirmed.
This litigation is an off-shoot of one of the most notorious financial scandals of our time, in which some 1.6 billion pounds of salad oil mysteriously disappeared from storage tanks and losses in excess of $200 million were sustained by investors and financial institutions. See American Express Warehousing, Ltd. v. Transamerica Insurance Co., 380 F.2d 277 (2d Cir. 1967); People v. Bunge Corp., 25 N.Y. 2d 91, 96, 302 N.Y.S.2d 785, 250 N.E.2d 204 (1969); Procter & Gamble Distributing Co. v. Lawrence American Field Warehousing Corp., 22 App. Div. 2d 420, 425, 255 N.Y.S.2d 788 (1st Dept.), rev'd 16 N.Y. 2d 344, 266 N.Y.S.2d 785, 213 N.E.2d 873 (1965).
Among those who suffered most grievously in this debacle was Ira Haupt & Co. which was forced into bankruptcy. See In re Ira Haupt & Co., 234 F. Supp. 167 (S.D.N.Y. 1964), aff'd, 343 F.2d 726 (2d Cir.), cert. denied, 382 U.S. 890, 86 S. Ct. 182, 15 L. Ed. 2d 148 (1965) & 348 F.2d 907 (2d Cir. 1965). As so often happens in situations of this nature, the victim is forced to seek financial solace from other than the fraudulent miscreant; the target in this case being the New York Produce Exchange and a number of its directors.
The miscreant who magically transformed oil into water was Anthony De Angelis, and the corporate vehicle through which he performed this legerdemain was Allied Crude Vegetable Oil Refining Corp. (Allied). Allied did much of its trading on the New York Produce Exchange (the Exchange); and, in the Spring of 1963, Haupt, a member of the Exchange, became Allied's broker. The events which followed upon this unhappy association are set forth in detail in the opinion of Judge Carter on defendants' summary judgment motion, reported at 378 F. Supp. 1076-1109, and need not again be recounted at length. Briefly, however, it appears that Allied attempted to hide its vulnerable position by creating a seller's market through rising prices. To accomplish this, it invested heavily in cottonseed oil futures. By November 1963, it was the buyer in approximately 90% of the future oil contracts on the Exchange, and Haupt was the broker on 80% of these contracts. As the price of oil climbed, Haupt's financial position was rosy. Gains and losses on futures contracts were calculated daily by the New York Produce Exchange Clearing Association, and variation margin payments were paid or received by the Association accordingly. Haupt therefore received daily payments of variation margin from the Association which in turn were collected by it from those who had sold short. However, when Allied began its financial collapse on November 14, 1963, the futures market turned about; and Haupt was then required to pay variation margin for the benefit of the short sellers. During the next five days, until the exchange was closed on November 19, Haupt paid the $12 million which its Trustee in bankruptcy seeks to recover in this suit.
Congress has recognized that excessive speculation and manipulation in commodity transactions obstruct and burden interstate commerce and has enacted preventive legislation known as the Commodity Exchange Act. 7 U.S.C. § 1, et seq. Under this Act,*fn1 the Secretary of Agriculture was authorized to designate boards of trade as "contract markets", and the markets, of which the Exchange was one, were required to provide for the prevention of manipulation of prices and the cornering of any commodity by dealers or operators. 7 U.S.C. § 7; Case & Co. v. The Board of Trade of the City of Chicago, 523 F.2d 355, 362 (7th Cir. 1975). The Act also made it unlawful for any person to manipulate or attempt to manipulate the price of any commodity or to corner or attempt to corner any commodity. 7 U.S.C. § 13.
Plaintiff's allegation of wrongdoing on the part of the defendants is that they allowed Allied to gain an inordinately dominant long position in the futures market and then failed to immediately close the market on November 14, 1963 when this position was discovered. Defendants contend, on the other hand, that, prior to November 14, they did not know, and had no way of knowing, what Allied was up to but that Haupt, who was the broker on most of Allied's deals, did. Defendants also contend that their actions subsequent to November 14 were intended only to prevent panic and to attempt to maintain an orderly market. The principal matter in dispute between the parties on appeal involves the correctness of the District Court's rulings and charge concerning the respective duties of Haupt and the defendants.
The Duties of the Exchange
Plaintiff based his claim against the defendants upon alleged violations of both the Commodity Exchange Act and the Sherman Act, 15 U.S.C. § 1 et seq. It was his contention that the officers of the Exchange acted both negligently and in bad faith and that therefore the activities of the Exchange were in violation of both acts. The District Court found, however, that there was no evidence to support plaintiff's claim of bad faith and dismissed those portions of the complaint which relied upon such proof.
In submitting the case to the jury, the District Judge instructed it that there were two separate time periods which it must consider in evaluating plaintiff's claims - one from the Spring of 1963 to November 14, and the other from November 14 to November 19, the date on which the Exchange was closed. With regard to the first period, he charged that the Exchange had the initial responsibility for maintaining orderly market conditions and that its directors "must act with the utmost objectivity, impartiality, honesty, and good faith, and they must exercise reasonable diligence in observing and making themselves aware of market conditions in order to carry out their regulatory responsibilities." He charged further, that, if Allied was manipulating or distorting the orderly function of the market during this time and if the defendants "knew or should have had reason to believe or suspect that a manipulation was in progress, or that disruptive forces were at work which would lead to a disorderly market", the directors were required to take appropriate remedial action.
With regard to the second period, it was plaintiff's contention, as outlined by the District Judge, that defendants were negligent in waiting until November 19 to close the market instead of doing so on November 14. The Judge charged that a director has broad discretion in making business judgment; that he could be held liable only if his conduct deviated from that of reasonable men in similar positions and circumstances and he failed to reasonably carry out his duties and abused his discretion in regulating the market.
After carefully reviewing the record, we agree with the District Judge that it is entirely devoid of any evidence of bad faith on the part of the defendants. The Exchange was a non-profit corporation whose directors served without compensation, and none of them stood to gain in any way by permitting Allied to corner the oil market. There is no proof that any of them had actual knowledge of Allied's allegedly unlawful activities. The positions of all traders on the Exchange were kept secret from all other traders and from the Exchange itself, and plaintiff's proof was of the "should have suspected" variety based on indicia pointed to twelve years after the event by plaintiff's expert witnesses. The Commodity Exchange Authority of the Department of Agriculture (CEA), which did know the exact position of every trader on the Exchange because this information was required to be filed with it, did not detect any of the wrongdoing which plaintiff contends ...