The opinion of the court was delivered by: SAND
LEONARD B. SAND, U.S.D.J.
Plaintiff Dennis Herman, an investor in commodities, brings this action against T. & S. Commodities, Inc. ("T & S"), a futures commission merchant, and Robert Sherman, an officer of T & S. Plaintiff alleges that defendants have violated § 4(b) of the Commodities Exchange Act ("the Act") by engaging in unauthorized trading
with respect to Mr. Herman's account.Defendants have moved for summary judgment under Fed.R.Civ.P. 56 on the ground that plaintiff has not demonstrated that defendants acted with the level of scienter required for liability under § 4(b) of the Act. For reasons set forth below, defendant's motion is denied.
The facts relevant to this motion are largely undisputed. On June 7, 1982, plaintiff, an investor in the silver futures commodities market, transferred his account to T & S. At that time, plaintiff had established a "short" position of 20 September 1982 Comex silver futures. The following day, Mr. Sherman, the plaintiff's account executive at T & S, converted his new client's account to a "long" position of 21 September 1982 futures contracts. Mr. Sherman took this action without the authorization of his client but apparently in the belief that the plaintiff would benefit from his new position. Unfortunately, Mr. Sherman's appraisal of the market proved erroneous, and plaintiff suffered a substantial loss.
Section 4(b) of the Commodities Exchange Act (7 U.S.C. § 6(b) (1976)) provides in relevant part as follows:
It shall be unlawful (1) for any member of a contract market, or for any correspondent, agent, or employee of any member, in or in connection with any order to make, or the making of, any contract of sale of any commodity in interstate commerce, made, or to be made, on or subject to the rules of any contract market, for or on behalf of any other person...
(A) to cheat or defraud or attempt to cheat or defraud such other person;
(B) willfully to make or cause to be made to such other person nay false report or statement thereof, or willfully to enter or cause to be entered for such person any false record thereof;
(C) willfully to deceive or attempt to deceive such other person by any means whatsoever in regard to any such order or contract or the disposition or execution of any such order or contract, or in regard to any act of agency performed with respect to such order or contract for such person; or
(D) to bucket such order, or to fill such order by offset against the order or orders of any other person, or willfully and knowingly and without the prior consent of such person to become the buyer in respect to any selling order of such person, or become the seller in respect to any buying order of such person.
It is undisputed that unauthorized trading by a broker is an activity that this section directly proscribes. Haltmier v. Commodity Futures Trading Commission, 554 F.2d 556, 560 (2d Cir. 1977). Cf. also 7 C.F.R. § 166.2(a) (Commodity Futures Trading Commission rule prohibiting brokers from trading without specific customer authorization). There is no requirement that the unauthorized trades be in themselves fundamentally unfair or injurious to the client's interests. Therefore, liability will attach if the broker possesses the requisite degree of culpability with respect to the act of unauthorized trading. The sole issue before us, then, is to define that level of culpability.
Defendants urge that § 4(b) (A)
requires that the broker act with malicious intent or evil motive. In this case, they contend, defendants are shielded from liability because Mr. Sherman ...