The opinion of the court was delivered by: LASKER
Defendants move pursuant to Fed. R. Civ. Pr. 12(b)(6) and 9(b) to dismiss the complaint in this action which alleges manipulation of the market for silver futures contracts. Familiarity with the earlier decision in this case, 562 F. Supp. 516 (May 11, 1983), is assumed.
David Bishop, who held a "long position" in silver futures in January, 1980, complains that the promulgation by the Commodity Exchange, Inc. ("Comex") of a "liquidation only rule" ("the rule") constituted bad faith on the part of the Comex Board of Governors, in that the Governors who enacted the rule did so "[i]n order to derive direct financial benefits and to advance their own individual and/or corporate "interests" (Complaint P33). Bishop alleges that the enactment of the rule violated the Commodity Exchange Act, 7 U.S.C. § 1, et seq. (the "CEA"), and New York Gen. Bus. Law § 352 et seq. (the "Martin Act").
Comex and the individual Governors argue that the complaint fails to state a claim because: (1) there is no private right of action for bad faith rulemaking, particularly where the exchange's action has been ratified by the Commodities Futures Trading Commission ("CFTC") as defendants allege occurred here; (2) the complaint fails to allege that the rule was unreasonable; (3) the complaint fails to satisfy the particularity requirement of Fed. R. Civ. Pr. 9(b); and (4) the Martin Act is preempted by the CEA, and, in any event, the complaint fails to state a claim under the Martin Act. The Governors also allege that they are immune from suit with respect to their actions in promulgating emergency rules.
Bishop answers: (1) that the Supreme Court's recent decision in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 72 L. Ed. 2d 182, 102 S. Ct. 1825 (1982), established the right of private plaintiffs to sue for the conduct alleged here; (2) that it is not necessary to plead that the rule was unreasonable; (3) that the complaint gives defendants ample notice of the claims against them; (4) that the complaint states a claim under the Martin Act, which was not preempted by passage of the CEA; and (5) that the Governors are not entitled to immunity.
I. The Private Right of Action
In Curran, the Supreme Court ruled that Congress impliedly created a private right of action for violation of the CEA. The Curran plaintiffs alleged that the exchanges had failed to fulfill their statutory duties to enforce the rules prohibiting manipulation of prices of futures contracts. 456 U.S. at 394. The defendants here allege that the rulemaking which they undertook is distinguishable from failure to enforce anti-manipulation rules because: (a) exchange rulemaking is reviewed by the CFTC; (b) private suits which attack the actions of rulemaking will impair the self-regulatory scheme established by the CEA; and (c) the cases on which the Supreme Court relied in finding that the courts had consistently recognized a private right of action under the CEA did not concern rulemaking. Defendants also contend that their actions were approved by the CFTC and that such approval immunizes their actions from private suit.
(a) The fact that the CFTC is charged with reviewing rules promulgated by exchanges does not lead to the conclusion that such rules may not be the subject of private suits. To the contrary, the legislative history of the CEA indicates that the 1974 amendments which created the CFTC were intended to supplement, not to replace, private suits as a means of regulating commodities trading:
"Congress in 1974 created new procedures through which traders might seek relief for violations of the CEA, but the legislative evidence indicates that these informal procedures were intended to supplement rather than supplant the judicial remedy. These procedures do not substitute for the private remedy either as a means of compensating injured traders or as a means of enforcing compliance with the statute."
Curran, 456 U.S. at 384 (emphasas added).
(b) Defendants' argument that private actions will impair the CEA's self-regulatory scheme was also rejected in Curran. The Court concluded that "Congress viewed private litigation against exchanges as a valuable component of the self-regulation concept." Id.
(c) Nor is Curran distinguishable from the instant case on the ground that the present action alleges a type of manipulation different from that alleged in the cases reviewed in Curran. There is no indication in Curran that the private right of action which it recognized was limited to the specific factual contexts presented in those cases. The CEA prohibits manipulation, and anti-manipulation statutes are generally interpreted to encompass "the full range of ingenious devices that might be used to manipulate." Santa Fe Industries v. Green, 430 U.S. 462, 477, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977).
Moreover, Curran cited with approval Chicago Mercantile Exchange v. Deaktor, 414 U.S. 113, 38 L. Ed. 2d 344, 94 S. Ct. 466 (1973), in which the plaintiffs had alleged that orders promulgated by the Chicago Mercantile Exchange constituted manipulation. Defendants correctly note that the issue reviewed in Deaktor did not concern the existence of a private right of action; however, Curran states that, in Deaktor, the Court "did not question the availability of a private remedy under the CEA." 456 U.S. at 380. In sum, there is no intimation in Curran that the Supreme Court disapproved in any way the Seventh Circuit's ruling in Deaktor upholding a private right of action for manipulation by rulemaking.
Accordingly, we conclude that the CEA, as interpreted by the Supreme Court in Curran, creates a private right of action for the type of commodities manipulation alleged in the instant complaint.
Defendants' contention that the action should be dismissed because the CFTC "sanctioned" the rules at issue here is also unpersuasive. The proposition that the CFTC has sanctioned the "liquidation only" rule is not only disputed, it is not even supported by the record presented by defendants. First, the CFTC report relied on by defendants, the "Rule Enforcement Review of the Commodity Exchange, Inc.," prepared by the CFTC Division of Trading and Markets (Exhibit B to Comex Memorandum of Law)
is redacted to such an extent that it is impossible to draw a conclusion about the Division's findings. More important, the parties inform us that another CTFC investigation of exchange actions respecting the silver market during 1979-1980 is currently pending. (Comex Memorandum at 12 n.*; Bishop Memorandum at 12). Under the ...