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MINPECO, S.A. v. CONTICOMMODITY SERVS.

November 24, 1982

MINPECO, S.A., Plaintiff,
v.
CONTICOMMODITY SERVICES, INC., CONTICAPITAL MANAGEMENT, INC., CONTICAPITAL LIMITED, NORTON WALTUCH, NELSON BUNKER HUNT, LAMAR HUNT, WILLIAM HERBERT HUNT, INTERNATIONAL METALS INVESTMENT CO., LTD., SHEIK MOHAMMED ABOUD AL-AMOUDI, SHEIK ALI BIN MUSSALEM, NAJI ROBERT NAHAS, GILIAN FINANCIAL, ACLI INTERNATIONAL COMMODITY SERVICES, INC., BANQUE POPULAIRE SUISSE, ADVICORP ADVISORY AND FINANCIAL CORPORATION, S.A., MAHMOUD FUSTOK, FAISAL BIN ABDULLAH, MERRILL, LYNCH, PIERCE, FENNER & SMITH, INC., BACHE HALSEY STUART SHIELDS, INC., E.F. HUTTON & COMPANY, INC., COMMODITY EXCHANGE, INC., AND THE BOARD OF TRADE OF THE CITY OF CHICAGO, Defendants


Lasker, D.J.


The opinion of the court was delivered by: LASKER

LASKER, D.J.

Between the summer of 1979 and early 1980, the price of silver futures rose dramatically from approximately $9 an ounce to $50 an ounce. The situation was unprecedented, creating enormous profits for some and enormous losses for others. Investigations into the causes of the price increase have been made by committees of both the Senate and the House of Representatives *fn1" and further inquiries by various federal agencies are reported to be in process. Minpeco S.A. ("Minpeco"), a silver trader wholly-owned by the government of Peru, alleges that it held a "short" position in silver futures during the relevant periods, and that it lost over $80 million as a result of the price increases. The thrust of Minpeco's complaint is that certain defendants conspired to monopolize the silver market, and that, in doing so, they artificially boosted the price of silver to an unprecedented and artificially high level. In addition, Minpeco charges that its brokers deceived it by urging it to "sell short" while knowing that such a trading plan was "misleading and detrimental" to it. (Complaint paras. 84, 93). Minpeco also asserts that the commodity exchanges violated their statutory and common law duties to prevent market manipulation. The defendants move to dismiss the Eighth Claim of the complaint, which alleges that the defendants defrauded Minpeco under the common law of New York.

 The gist of the fraud claim is as follows. At the inducement of its brokers, Minpeco entered into futures contracts for short sales of silver. A short sale is an agreement by someone who does not own -- i.e. is short -- a commodity to sell it at a certain time and a specified price. Such a contract is normally entered into by a trader who anticipates that the market price will be below the contract price at the time specified for closing the sale.

 Minpeco alleges that it understood at the time it entered into the contracts that the price of silver was "artificially" high, that is, that it was higher than justified by world demand for the commodity, and that it entered into the sales believing that prices should decrease. What Minpeco did not know, it alleges, is that the increase in price was not merely the result of other traders' overestimation of world demands, but was, rather, the consequence of a conspiracy between defendants to monopolize the silver market. The argument continues that due to the conspiracy to monopolize, the price of silver did not drop, as Minpeco alleges it would otherwise have done, but persisted in its steady climb, with the result that Minpeco was required to "cover" its short positions at a loss of over $80 million.

 Minpeco contends that it believed that the various defendants who were buying silver during the relevant periods were buying as individuals, not as members of an organized group. Had it known of the agreement to monopolize the market, it would not have entered into the short sale contracts.

 First we consider the motions of the various "trading" defendants, those defendants who are alleged to have been part of the conspiracy to monopolize; *fn2" second, the motions of Minpeco's brokers, Merrill Lynch, Pierce, Fenner & Smith, Inc. ("M/L") and E.F. Hutton & Co. Inc. ("Hutton"); and third, the motions of the Commodity Exchange, Inc. and the Board of Trade of the City of Chicago ("the exchanges").

 I. The Trading Defendants

 Whether the complaint states a claim under the New York common law of fraud is, of course, a question of state law. However, research of the New York cases leads to the conclusion that none is closely on point. It becomes necessary, therefore, to predict what the ruling of the New York courts would be if they were confronted with the question. The task of prediction, perilous in the most favorable of circumstances, is compounded in this case by the fact that the law of fraud is, and has been for a considerable period, in a state of flux.

 Minpeco has not alleged that the defendants made any affirmative misrepresentations. The defendants argue that under New York law, mere silence does not constitute fraud in the absence of a fiduciary duty or a confidential relationship between themselves and plaintiff. Moreover, they contend positively that the relationship between parties on opposite sides of a market is not a fiduciary or confidential relationship.

 Defendants' analysis of New York case law appears to be correct, as far as it goes. See, e.g., Perin v. Mardine Realty Co., Inc., 5 A.D. 2d 685, 685, 168 N.Y.S.2d 647, 648 (2d Dept. 1957) (When parties deal "at arm's length," seller is under no duty to speak, and his "mere silence" does not constitute fraud.), aff'd, 6 N.Y.2d 920, 190 N.Y.S.2d 995, 161 N.E.2d 210 (1959); Noved Realty Corp. v. A.A.P. Co., Inc., 250 A.D. 1, 5, 293 N.Y.S. 336, 341 (1st Dept. 1937) (relation of buyer and seller is not affected by any fiduciary relations).

 Relying in part on its interpretation of the common law of fraud, the United States Supreme Court reached the same conclusion as to the federal securities laws. In Chiarella v. United States, 445 U.S. 222, 63 L. Ed. 2d 348, 100 S. Ct. 1108 (1980), the Court held that a buyer of shares has no duty to disclose nonpublic information to the sellers, unless there is a confidential or fiduciary relationship between the buyer and the sellers:

 
"No duty could arise from [Chiarella's] relationship with the sellers of the target company's securities . . . He was not their agent, he was not a fiduciary, he was not a person in whom the sellers had placed their trust and confidence."

 445 U.S. at 232

 Thus, defendants are correct that the law did not impose upon them a duty to speak merely because they were on the opposite side of the market from plaintiff. However, even between parties who do not have a fiduciary or other confidential relationship, a duty to speak does arise where defendants have engaged in "some act or conduct which deceived plaintiffs." Moser v. Spizzirro, 31 A.D.2d 537, 295 N.Y.S.2d 188, 189 (2d Dept. 1968), aff'd 25 N.Y.2d 941, 305 N.Y.S.2d 153, 252 N.E.2d 632 (1969). Accord: Perin v. Mardine Realty, supra, 5 A.D.2d at 685, 168 N.Y.S.2d at 648. Defendants' response that they did not say anything false is therefore insufficient: conduct, even without speech, may be "tantamount to a false representation." D'Alessandra v. Manufacturers Cas. Ins. Co., 106 N.Y.S.2d 561, 564, 567 (Sup.Ct. Kings Co. 1951) (Bartels, J.). See Noved Realty Corp., supra, 250 A.D. at 6, 293 N.Y.S.2d at 341:

 
"'The gist of the action is fraudulently producing a false impression upon the mind of the other party; and if this result is accomplished, it is unimportant whether the means of accomplishing it are words or acts of the defendant, or his concealment of material facts not equally within the knowledge or reach of plaintiff.'"

 quoting Stewart v. Wyoming Cattle Ranche Co., 128 U.S. 383, 32 L. Ed. 439, 9 S. Ct. 101 (1888). See also Ziring v. Corrugated Container Corp., 183 Misc. 600, 604, 49 N.Y.S.2d 686, 691 (Sup. Ct. Kings Co. 1944):

 
"Actual or positive fraud includes cases of the intentional and successful employment of any cunning, deception, or artifice, used to circumvent, cheat, or deceive another."

 The question, then, is whether, measured by these criteria, the alleged actions of the defendants amounted to fraudulent conduct. One pertinent New York decision is Donovan v. Aeolian Co., 270 N.Y. 267, 200 N.E. 815 (1936). *fn3" In Donovan, the plaintiff brought an action in fraud, alleging that she had purchased a piano from the showroom of a manufacturer believing it to be new, and had later discovered that it was used. It was conceded that no representations had been made to plaintiff as to the piano's age. However, the court concluded that the manufacturer, in putting a piano for sale in its showroom, "induced" in plaintiff the belief that the piano was new. Having, through its conduct, created a mistaken belief as to a material fact, the manufacturer was under a duty to speak to correct the mistaken impression.

 
"Where failure to disclose a material fact is calculated to induce a false belief, the distinction between concealment and affirmative misrepresentation is tenuous. Both are fraudulent. In this case it is clear that the defendant's salesman was under a duty ...

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