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MARKOWITZ v. MERRILL LYNCH

January 25, 1984

STANLEY MARKOWITZ, Plaintiff,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., AMIN SOORTY and RICHARD G. FREEBURG, Defendants



The opinion of the court was delivered by: LASKER

LASKER, D.J.

 This case concerns application of the antifraud provisions of the Commodities Exchange Act ("CEA"). Defendants have developed alternative theories of relief in support of their motions to dismiss and for summary judgment pursuant to Rules 12(b) and 56 of the Federal Rules of Civil Procedure. Plaintiff has brought a Rule 56 cross-motion for summary judgment based upon the doctrine of collateral estoppel. For the reasons described below, the complaint is dismissed without prejudice because it fails to state a claim under the CEA.

 I.

 On the morning of August 31, 1979, plaintiff, who held a commodities trading account with Merrill Lynch, gave defendant Soorty, at the time a Merrill Lynch account executive, an order to buy a number of silver futures contracts for him. It was established at the state trial involving related issues that Soorty made an error when he sold instead of bought silver futures contracts for plaintiff, *fn1" and that this error produced a deficit in plaintiff's trading account. With respect to transactions made by Soorty later on the same day which increased the size of plaintiff's loss, the state jury decided that the losses were the result of plaintiff's own doing. *fn2"

 On September 4, 1981, the next business day following the Labor Day weekend, plaintiff went to defendants' offices to demand, in light of Soorty's error, that defendants reverse the August 31 transactions. Defendants refused, stating that they considered the resulting loss as being entirely plaintiff's responsibility, that the loss had to be borne solely by plaintiff, and that defendants intended to collect the unsecured debt created by this loss as soon as possible. By September 5, Soorty had prepared an inter-office memorandum describing his version of the events of August 31. On the same day, plaintiff's objections notwithstanding, defendants liquidated plaintiff's account. It is alleged that defendants relied upon the Soorty memorandum as a justification for their action even though they knew, or should have known, that the contents of the memorandum were false.

 As indicated above, in November 1979, plaintiff filed a complaint in New York State Supreme Court which contained four common law counts, among them negligence and breach of fiduciary duty, based upon the disputed transactions of August 31. *fn3" The trial court held defendants liable for the first transaction of August 31.

 Plaintiff then brought this action against defendants for the wrongful liquidation of his account. The four-count complaint charges defendants with violating Sections 4b and 4 o of the CEA *fn4" (count 1), wrongful conversion of plaintiff's commodities account (count 2), negligent liquidation of plaintiff's commodities and stocks (count 3), and breach of fiduciary duty (count 4). Jurisdiction is based upon the existence of a federal question *fn5" and the doctrine of pendent jurisdiction. *fn6"

 Defendants move to dismiss the complaint or for summary judgment arguing that res judicata and the applicable statute of limitations prevent plaintiff from bringing this proceeding, and that there is no jurisdictional basis for this suit because plaintiff has failed to allege a cause of action under the Commodities Exchange Act. Plaintiff cross-moves for partial summary judgment arguing that the findings of the state court are entitled to preclusive effect here. The complaint is dismissed without prejudice because plaintiff has failed to allege a cause of action under Sections 4b or 4 o of the CEA.

 II.

 A. The CEA Section 4 o Claim

 Defendants argue that the CEA Section 4 o claim should be dismissed because it is an antifraud provision aimed at the "commodity trading advisor" or "commodity pool operator", the complaint does not allege that Merrill Lynch was a "commodity pool operator," and the complaint insufficiently alleges that Merrill Lynch is a "commodity trading advisor" as defined by the Commodities Future Trading Commission ("CFTC"). Plaintiff asserts that whether Merrill Lynch is a "commodity trading advisor" depends upon a question of fact which is not determinable on a motion to dismiss.

 Section 4 o of the CEA makes it unlawful for any "commodity trading advisor" or "commodity pool operator" to defraud any client. *fn7" Since plaintiff has not alleged Merrill Lynch is a "commodity pool operator," the question to be resolved is whether the complaint sufficiently alleges that Merrill Lynch is a "commodity trading advisor."

 According to the CFTC, a "commodity trading advisor" is

 
"any person who, for compensation or profit, engages in the business of advising others, . . . as to the value of commodities or as to the advisability of trading in any commodity for future delivery . . . but does not include . . . (iii) any floor broker or futures commission merchant, . . . Provided, That the furnishings of such services by the foregoing persons is solely incidental to the ...

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