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STRAX v. COMMODITY EXCH.

September 11, 1981

Selig STRAX, Plaintiff,
v.
COMMODITY EXCHANGE, INC., Nelson Bunker Hunt, William Herbert Hunt, Lamar Hunt, International Metals Investment Co., Ltd., Bache Halsey Stuart Shields, Inc., Bache Group, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Conticommodity Services, Inc., Norton Waltuch, Melvin Schnell, Gillian Financial, Conticapital Management, Inc., Conticapital Ltd., Naji Robert Nahas, Sheik Mohammed Aboud Al-Amoudi, Sheik Ali Bin Mussalem Banque Populaire Suisse, The Board of Tradeof the City of Chicago and "John Does" Nos. 17 through 30, Defendants



The opinion of the court was delivered by: LASKER

This lawsuit arises out of the much publicized events in the silver market in 1979 and 1980 which included the meteoric rise in the price of silver and the subsequent collapse of the market in March 1980. Selig Strax filed this class action *fn1" against Nelson Bunker Hunt, William Herbert Hunt, Lamar Hunt, International Metal Investment Co., Ltd. ("IMIC"), Bache Halsey Stuart Shields, Inc., Bache Group (together, "Bache"), Conticommodity Services, Inc., Norton Waltuch, Conticapital Management, Inc., Conticapital Ltd. (together, "Conti"), Melvin Schnell, Gillian Financial, Naji Robert Nahas, Sheik Mohammad Aboud Al-Amoudi, Sheik Ali Bin Mussalem, Banque Populaire Suisee (all of the above are collectively referred to as the "nonexchange defendants"), the Board of Trade of the City of Chicago ("CBOT"), Commodity Exchange, Inc. ("Comex"), and various "John Does." Strax alleges that the non-exchange defendants conspired to and did cause the price of refined silver and silver futures to rise, monopolize the trade in silver and seize control of supplies of refined silver and silver production facilities, in violation of federal and state antitrust laws, specified and unspecified sections of the Commodity Exchange Act, 7 U.S.C. §§ 1 et seq. ("CEA"), and regulations of the Commodity Futures Trading Commission ("CFTC") promulgated thereunder. The exchanges (Comex and the CBOT) are alleged to have negligently failed to maintain an orderly market in silver futures and to have done so willfully and intentionally. *fn2"

A number of motions based on a variety of theories, are pending: (1) Merrill Lynch, Bache and Conti move pursuant to Rule 12(b)(6), Fed.R.Civ.P., to dismiss the antitrust claims. (2) Comex and the CBOT move pursuant to Rules 12(b)(1) and 12(b)(6), Fed.R.Civ.P., to dismiss all claims against them, arguing that there is no private right of action for failure to maintain an orderly market, and that by failing to allege that he traded on the Comex or the CBOT, Strax has not established (i) standing to sue, (ii) a private right of action under the CEA in his favor, and (iii) proximate cause. Finally, the exchange defendants argue that Strax has not alleged scienter. (3) The Hunts, Bache and Conti move pursuant to Rule 12(b)(6), Fed.R.Civ.P., to dismiss the claims not based on the antitrust laws for failure to state a claim. *fn3"

 I.

 Merrill Lynch, Bache and Conti move under Rule 12(b)(6) to dismiss the antitrust claims against them. As to the federal antitrust claims, *fn4" they argue that Strax lacks "antitrust standing" and that the CEA impliedly repealed the operation of the antitrust laws in the area of commodity futures trading. As to the state claims *fn5" defendants argue that state antitrust laws have been preempted by the CEA. Strax responds (1) that he has "antitrust standing" because he was in the target area of the alleged conspiracy and (2) that the legislative history of the CEA demonstrates Congressional intent both to preserve the application of the antitrust laws to the commodities market and to confer private standing to assert antitrust claims.

 A. Standing

 Section 4 of the Clayton Act, 15 U.S.C. § 15, provides:

 
"Any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor in any district court of the United States in the district in which the defendant resides or is found or has an agent, without respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee."

 Several judicial doctrines limit the classes of plaintiffs who may sue under this section. E. g., Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S. Ct. 2061, 52 L. Ed. 2d 707 (1977); Reading Industries, Inc. v. Kennecott Copper Corp., 631 F.2d 10 (2d Cir. 1980); Mid-West Paper Products Co. v. Continental Group, Inc., 596 F.2d 573 (3d Cir. 1979). Defendants rely on the doctrine of Reading Industries, Inc. v. Kennecott Copper Corp., supra, 631 F.2d 10 (2d Cir. 1980).

 In Reading, a refiner of copper scrap sued three producers of refined copper, alleging that defendants' alleged conspiracy to keep the price of refined copper low and to ration its supplies among customers drove up the price of copper scrap. The copper scrap market in which the plaintiff traded is a separate market from that for refined copper in which defendants sold, although the plaintiff alleged that the prices in each were interrelated. The court held that "the causal relationship between defendants alleged payment of high scrap prices is too remote to permit imposition of liability." Id. at 13 (footnote omitted).

 Defendants argue that this case is controlled by Reading because Strax does not allege that he or the members of the proposed class entered into transactions directly with the defendants, but only that defendants' actions had a "primary impact" on the market in which Strax traded "as a whole." *fn6"

 Reading relied in part on the rationale of the decision in Illinois Brick Co. v. Illinois, supra, 431 U.S. 720, 97 S. Ct. 2061, 52 L. Ed. 2d 707 (1977), in which the Court held that an indirect purchaser in a vertical chain of distribution could not recover under the antitrust laws. To allow such an action would involve the courts in "the attempt to trace the complex economic adjustments to a change in the cost of a particular factor of production (and) would greatly complicate and reduce the effectiveness of already protracted treble-damage proceedings." Id. at 732, *fn7" 97 S. Ct. at 2068. The Reading court held that to permit the plaintiff to bring its claim would similarly "engage the court in hopeless speculation:"

 
"Reading's theory of antitrust injury depends upon a complicated series of market interactions between two sources of copper: the refined copper market in which defendants acted and the copper scrap market in which Reading allegedly sustained injuries. To establish a causal chain, the actions of innumerable individual decision-makers must be reconstructed ....
 
... (To) find antitrust damages in this case would engage the court in hopeless speculation concerning the relative effect of an alleged conspiracy in the market for refined copper on the price of copper scrap, where countless other market variables could have intervened to affect those pricing decisions. The court's task of tracing would be difficult, if not impossible."

 631 F.2d at 13-14.

 In contrast to Reading, Strax alleges he traded in the very market which the defendants are alleged to have manipulated, and proof of the impact of defendants' alleged action on that market would not require speculation or attenuated theories of causation. As Judge Pierce observed in response to a similar challenge to antitrust claims asserted for alleged manipulation of the prices of November 1977 orange juice futures contracts,

 
"(t)hat futures contracts trading is a "zero sum game' (i. e., every gain can be matched with a corresponding loss), see Leist v. Simplot, (638 F.2d 283, 286-87 (2d Cir. 1980)), leads the Court to conclude that the plaintiffs were well within the "target area' of the defendants' alleged anticompetitive behavior; that is, their anticompetitive behavior was "aimed' at the plaintiffs. Stated another way, the Court finds that there is a "legally significant causal relationship between the (defendants') alleged violation and the (plaintiffs') alleged injury.' Reading, supra, at 12.
 
"The plaintiffs allege that they were forced to pay higher prices due to the defendants' restriction on the supply of offsetting contracts. Regardless of whether the plaintiffs ultimately purchased offsetting contracts from the defendants or from other traders with a long position, the price throughout the market allegedly rose as a result of the defendants' activities. In short, while-as is true with the vast majority of antitrust cases-proof of damages will most likely not be simple, this is not an action "based on conjectural theories of injury and attenuated economic causality that would mire the courts in intricate efforts to recreate the possible permutations in the causes and effects of a price change.' Reading, supra, at 14."

 Pollock v. Citrus Associates, 512 F. Supp. 711, 719 (S.D.N.Y.1981).

 Moreover, the result of defendants' position here, if adopted, would be to preclude the application of the antitrust laws to any economic activity effected through an exchange system, since it is impossible to show that a particular purchaser bought from a particular seller in ...


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