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GONZALEZ v. PAINE

July 3, 1980

MICHAEL GONZALEZ, Plaintiff, against PAINE, WEBBER, JACKSON & CURTIS, Incorporated, RON LINDNER, NORMAN EISNER, and ROBERT MANTA, Defendants.


The opinion of the court was delivered by: WERKER

This action was commenced by the plaintiff Michael Gonzalez against the defendants Paine, Webber, Jackson & Curtis, Incorporated ("Paine Webber"), Ron Lindner, Norman Eisner, and Robert Manta for alleged violations of the federal securities laws, the rules of the National Association of Securities Dealers, Inc. ("NASD"), the Commodity Exchange Act, and New York law. This matter is before the Court on the defendants' motion to dismiss the amended complaint pursuant to Fed.R.Civ.P. 9(b), 12(b)(1) and 12(b)(6) for failure to plead fraud with sufficient particularity, for lack of subject matter jurisdiction, and for failure to state a claim upon which relief can be granted.

FACTS

For purposes of this motion, the well-pleaded allegations of the complaint are taken as being true.

 Paine Webber, a New York corporation, is a member of the principal stock and commodity exchanges in New York and other cities. Lindner, Eisner and Manta are registered representatives and employees of Paine Webber.

 From July 3, 1978 to about June 20, 1979, plaintiff maintained a customer account with Paine Webber for investing in commodities. The defendants traded on plaintiff's behalf in contracts for the purchase and sale of futures in sugar and other agricultural commodities. At the defendants' behest, the plaintiff's account was opened as a "discretionary" account. Before the account was opened, plaintiff made certain disclosures to the defendants concerning his financial condition, background and investment objectives. The complaint alleges that the defendants falsely represented to the plaintiff that his financial status was sufficient to qualify him as an investor in futures trading on a margin account basis when they in fact knew or should have known that his income and assets were insufficient to permit him to trade in the commodity futures market on such a basis. The complaint further alleges that the defendants misrepresented the extent of their knowledge of and ability to trade in the commodity futures market, and that the misrepresentations were made with the intent to deceive and defraud the plaintiff in order to induce him to trade in commodity futures so as to generate commissions for the defendants.

 On a number of occasions, the defendants engaged in transactions on the plaintiff's behalf either without his knowledge or consent or in contravention of his directions. As a result of the defendants' actions, on certain transactions the plaintiff did not make as great a profit as he claims he should have made, and on others he suffered an outright loss. He alleges that the defendants made certain misrepresentations in carrying out these transactions, including on a number of occasions falsely representing that they were acting at his direction. Plaintiff also accuses the defendants of "scalping," "hedging," "bucketing," and "churning."

 In October 1978, plaintiff advised defendants that further trades on his behalf were to be made only upon his special authorization. He claims that at one point he directed defendants to sell short twelve March 1979 sugar contracts, but the defendants, with the intent to defraud him, advised him not to sell. He followed their advice, and did not realize the full profit he otherwise would have realized.

 Plaintiff subsequently took personal control of his account with Paine Webber, and was able to earn sufficient profit to cause the defendants to lower his margin requirements. Shortly thereafter, however, the defendants, with the intent to defraud the plaintiff and with knowledge that an increase in the plaintiff's margin requirements was not necessary, nevertheless increased his margin requirements retroactively. As a result, the plaintiff was required to post an additional $ 25,000 in cash or securities. When he was unable to do so, he was forced to liquidate his sugar contracts. Plaintiff contends that the defendants knowingly and deceitfully concealed from him the possibility of a "stop loss order," a trading device by which plaintiff could have retained his contracts with safe margins.

 Plaintiff filed the instant action in October 1979, and defendants moved to dismiss the complaint. In submitting papers in opposition to the motion, plaintiff simultaneously filed an amended complaint which sought to provide more particulars regarding the fraud charges and which eliminated claims for damages under the Investment Advisers Act. See Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 100 S. Ct. 242, 62 L. Ed. 2d 146 (1979) (held, no private cause of action for damages under section 206 of Investment Advisors Act). The defendants thereafter filed the instant motion to dismiss the amended complaint. Since the original complaint has been superseded by the amended complaint, the motion to dismiss the original complaint has been rendered moot; the merits of the defendants' defenses will be considered only with respect to the amended complaint.

 The amended complaint contains ten causes of action and alleges violations of the Securities Act of 1933, 15 U.S.C. § 77a et seq., the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., the rules and regulations promulgated by the Securities Exchange Commission, the rules of the NASD, and the Commodity Exchange Act, 7 U.S.C. § 1 et seq. The amended complaint also asserts claims for fraud and deceit, infliction of emotional distress, and breach of fiduciary duty, claims which must be considered under the common law of New York. The defendants' motion to dismiss is premised on their contentions that (1) the amended complaint fails to plead fraud with sufficient particularity, (2) there is no express or implied private right of action for damages under the Commodity Exchange Act, (3) the federal securities laws are not applicable to commodity futures trading accounts, whether discretionary or not, (4) there is no express or implied private right of action for damages for violations of the NASD rules, and (5) there is no pendent jurisdiction over the state claims, since the federal claims must be dismissed for the foregoing reasons.

 DISCUSSION

 The question of whether an implied cause of action for damages exists under the Commodity Exchange Act (the "Act") has been a much litigated one. The district courts are fairly evenly divided on the issue, see, e.g., Navigator Group Funds v. Shearson Hayden Stone Inc., 487 F. Supp. 416 (VLB) (S.D.N.Y.1980) (finding private right of action); National Super Spuds, Inc. v. New York Mercantile Exchange, 470 F. Supp. 1256 (S.D.N.Y.1979) (finding no private right of action); Smith v. Groover, 468 F. Supp. 105 (N.D.Ill.1979) (finding private right of action); and cases cited therein, *fn1" and apparently only one circuit court has expressly decided the question since the Act was amended in 1974 by the Commodity Futures Trading Commission Act, Pub.L. No. 93-463. In a 2-to-1 decision, the sixth circuit in Curran v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 622 F.2d 216 (6th Cir. 1980), held that there is an implied cause of action under the Act. The second circuit, in Ames v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d 1174, 1176 (2d Cir. 1977), stated that: "It is agreed that there is an implied cause of action under the Act for a private remedy." The court did not, however, explicitly hold that an implied right of action exists, nor did it discuss the issue any further.

 It was well-settled prior to the 1974 amendments that a private right of action for violations of the Act did indeed exist. See, e.g., Deaktor v. L. D. Schreiber & Co., 479 F.2d 529 (7th Cir.), rev'd on other grounds sub nom. Chicago Mercantile Exchange v. Deaktor, 414 U.S. 113, 94 S. Ct. 466, 38 L. Ed. 2d 344 (1973); Booth v. Peavey Co., 430 F.2d 132 (8th Cir. 1970). The 1974 amendments, however, created the Commodity Futures Trading Commission (the "CFTC") and established an administrative procedure by which "any person complaining of any violation of any provision of this chapter or any rule, regulation, or order thereunder by any person who is registered or required to be registered under . . . this title may" commence a proceeding before the CFTC. 7 U.S.C. § 18(a). If the CFTC determines that the Act has been violated, it may award the aggrieved party damages. Id. § 18(e). Decisions made by the CFTC may be appealed to the circuit courts, id. § 18(g), and enforced by the district courts. Id. § 18(f).

 The fact that Congress instituted an administrative procedure whereby persons aggrieved by violations of the Act could seek damages before the CFTC is a strong indication that Congress did not intend to also grant such persons a direct cause of action to be initially brought in the district courts. *fn2" Fischer v. Rosenthal & Co., 481 F. Supp. 53, 56-57 (N.D.Tex.1979); National Super Spuds, supra, 470 F. Supp. at 1260; Alkan v. Rosenthal & Co., Comm.Fut.L.Rep. (CCH) P 20,797, at 23,252 (S.D.Ohio Feb. 28, 1979); Berman v. Bache, Halsey, Stuart, Shields, Inc., 467 F. Supp. 311, 322 (S.D.Ohio 1979); Bartels v. International Commodities Corp., 435 F. Supp. 865, 868-69 (D.Conn.1977) (Newman, J.). *fn3" Moreover, as Judge MacMahon observed in National Super Spuds, the conclusion that Congress intended "to deny a private right of action under the Act . . . is reinforced by the fact that ...


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