The opinion of the court was delivered by: KNAPP
This is an action under the antifraud provisions of the Commodity Exchange Act, 7 U.S.C. §§ 6b, 60, and a regulation promulgated thereunder. 17 C.F.R. § 166.3 (1982). The case is before us on defendant Rosenberg Commodities' (Rosenberg) motion for summary judgment. For reasons stated below the motion is GRANTED.
In this procedural posture we view the record as establishing the following material facts. Plaintiffs Sherman and Willensky are in the business of advising, managing, and making investments in commodity futures for themselves and for third parties. Wishing to trade in platinum futures, but having themselves had no immediate trading experience in that metal, they engaged defendant Sokoloff to do so on their behalf. Sokoloff, a registered floor broker, had been recommended to plaintiffs by a person unrelated to defendant Rosenberg as having had experience in trading platinum futures. In August of 1980 plaintiffs entered into a partnership agreement with Sokoloff regarding a platinum futures account which he would trade. The written agreement gave Sokoloff unrestricted authority to manage the account and provided for his compensation a fixed annual salary plus a percentage of the account's profits. In addition to making the written contract, the partners agreed orally that Sokoloff would be constrained in the management of the platinum account in ways that were intended to curb the potential for losses.
At Sokoloff's behest the platinum account -- capitalized to the tune of $50,000 -- was opened with Rosenberg Commodities, a futures commission merchant (FCM) with whom Sokoloff had previously dealt.
Rosenberg was not advised about the oral trading restrictions to which Sokoloff had agreed with his partners. Trading in the account began on August 25, 1980 and the partners "contemplated a full review of Mr. Sokoloff's performance and trading for the account after the first full month of trading ended on September 30, 1980." Sherman Affidavit P8. Alas, the relationship did not last that long.
During the following weeks Rosenberg regularly mailed to plaintiffs daily transaction confirmation statements and equity statements, the latter showing the positions in the account and their individual and total value at the end of the respective trading day. And then came the fateful week of September 22, 1980.
On the morning of Thursday, September 25, plaintiffs received in the mail a $9,300 margin call which had been incurred the previous Tuesday, September 23. Rosenberg's practice was to mail margin calls on the next day after they were incurred, on receipt of the appropriate information from a computer accounting service. The margin request which the plaintiffs received in the mail on September 25 suggested that Sokoloff had exceeded his oral restrictions and, accordingly, plaintiffs immediately called their partner for an explanation. Whatever explanation was proffered seemed to satisfy them that all was in order, because they did nothing to curb Sokoloff's power to trade. On that very day, however, Sokoloff lost almost $80,000, which resulted in yet another margin call of some $54,000. The next day, September 26, Sokoloff lost an additional $217,000, prompting another margin call of about $145,000. The platinum account had posted a total loss of almost $300,000 by the end of trading on Friday, September 26. The precise extent of the losses had become apparent by the following Monday, September 29, at which time plaintiffs tendered a check to Rosenberg for $145,000 to cover the balance due. Shortly thereafter plaintiffs severed their relation with Sokoloff, and started this action to recover the $300,000.
We also regard it as established that, although Alan Rosenberg -- Rosenberg Commodities' sole employee -- occasionally assisted Sokoloff with the mechanics of trading, no jury could reasonably find that Sokoloff was employed by Rosenberg or that Rosenberg had any authority to trade the ill-fated platinum account.
Moreover, the evidence shows that Sokoloff knew Alan Rosenberg personally before August 1980, but there is no evidence to suggest that Rosenberg seduced Sokoloff into opening this particular account with it or that Rosenberg knew about trading requirements or investment objectives peculiar to the account at issue.
There is, finally, much dispute about the role and status of William Cameron, a floor broker who substituted for Alan Rosenberg -- apparently without direct compensation -- on the days the latter was not at work.
The evidence described in PP23 and 25 of the Bergmann Affidavit indicates that Cameron may have had a jaudiced view of Sokoloff's abilities.
We will impute such views to Rosenberg. Accordingly, we take it as established that Alan Rosenberg would not have recommended Sokoloff to plaintiffs had they asked him to express an opinion. The totality of Cameron's testimony allows, however, no further reasonable inference.
Plaintiffs bring two separate counts against Rosenberg, which counts we regard as identical for purposes of this motion. One alleges that plaintiffs were defrauded by Rosenberg's failure "to exercise diligent supervision" of the trading in the platinum account. Complaint P54. The other alleges that the self-same failure "aided and abetted" Sokoloff's fraud. Complaint P63. The parties' vitriolic submissions have been more spirited than enlightening. Accordingly, it is no immediately apparent precisely what is the nature of the fraud Rosenberg is alleged to have committed.
As we cull it from their papers, the focus of plaintiffs' charge is that, by his daily observation of Sokoloff, defendant must have learned about Sokoloff's "intrinsically fraudulent" trading but took no steps to alert them about such fraud.
Plaintiffs claim, in particular, that they should have been advised about the intra-day pattern of Sokoloff's trading because the daily reports "only provided a snapshot of the positions . . . at day's end," and were, accordingly, "no help" in discerning Sokoloff's fraud. Plaintiff's Memordandum at 9; Sherman Affidavit P7.
Plaintiffs fail to demonstrate, however, that Rosenberg had a duty -- the willful or reckless breach of which may be tantamount to fraud -- to advise them of Sokoloff's intra-day activities.
Plaintiffs describe Rolf v. Blyth, Eastman Dillon & Co. (2d Cir. 1978) 570 F.2d 38, cert. denied, 439 U.S. 1039, 58 L. Ed. 2d 698, 99 S. Ct. 642 as the "most instructive decision" regarding Rosenberg's liability for failure to advise them of Sokoloff's trading pattern.
Rolf, however, is altogether distinguishable. That was an unsuitability case against an investment advisor and a broker. The broker -- to whom Rosenberg is compared -- was held liable for fraud on a finding that he had repeatedly given assurances to the plaintiff about the wisdom of the advisor's investment decisions, in reckless disregard of whether those assurances were true or false. Rolf, supra, 570 F.2d at 44. Indeed, the broker in Rolf might well have known that his assurances were false because he "either recommended or was somehow involved in the decision to purchase" ...