The opinion of the court was delivered by: SOFAER
Plaintiff Rex Cauble ("Cauble") brought this action against Mabon, Nugent and Co., ("Mabon"), a commodities brokerage partnership, and two of its general partners, Jeffrey Pollack and Leon Pollack, seeking relief on nine causes of action under both the Commodity Exchange Act ("CEA") and state law. Four counts -- including fraudulent trading under § 4B of the CEA, 7 USC § 6b (1982), aiding and abetting under § 13 of the CEA, 7 USC § 13c (1982, negligence and gross negligence under state law -- stem from the allegedly wrongful liquidtion of Cauble's commodity account by Mabon on July 8, 1982. Four additional counts -- including fraudulent inducement under § 4b of the CEA and under state law, conversion, and aiding and abetting under § 13 of the CEA -- arises out of a settlement agreement between the parties and Cauble's payment of $174,755.00 to Mabon on August 4, 1982. Plaintiff also alleges that in late August 1982, Mabon interfered with Cauble's business relationship with the clearing house of Bear, Stearns & Co., and caused the clearing house to cancel a commodities account for Cauble with Miller, Tabak and Hirsch. Defendants initially moved to dismiss the complaint and on February 25, 1983 this court dismissed the claim for punitive damages. After additional discovery, defendants now move for summary judgment on all nine counts, and incorporate the affidavits submitted on the motion to dismiss.
Cauble, a Texas resident, opened an account with Mabon in April 1982 for the purpose of trading in commodity and financial fitures. Though Mabon maintained an office in Houston, Texas, where Cauble's cousin Alan Harp was a registered representative. Cauble's orders were placed through Mabon's New York office where Mabon partner, defendant Leon Pollack, and a Mabon employee, Joe Belanoff, generally managed the transactions. Cauble also assumed financial responsibility for accounts opened with Mabon for his son, Lewis Cauble, and for a friend, Fern Lynch.
On April 20, 1982, Leon Pollack sent Cauble a letter explaining how his trades would be executed and enclosed forms which were provided to Mabon by Goodman-Manaster & Co. ("Goodman"). He explained that Mabon, though a registered futures commodity merchant (FCM), was not a clearing member of the Chicago Board of Trade or the internation monetary market of the Chicago Mercantile Exchange where the financial futures Cauble was interested in were traded. Cauble's orders would therefore be executed by Goodman, a clearing broker on those exchanges. According to Pollack's letter, Goodman would send only confirmations of trades directly to Cauble but Cauble would have direct contract only with Mabon in submitting orders and providing sufficient margain to maintain the positions in his account. Cauble signed and returned the Goodman customer application, agreement, and risk disclosure. Among other things, the customer agreement signed by Cauble provided for the closing of all positions in the account without prior notice or demand if the proper margin was not maintained in the account.
A course of dealing was established between the parties whereby Cauble communicated with mabon directly, by telephone, on a daily basis. His account was non-discretionary and therefore his authorization was required for each transaction. Cauble received daily statements of transactions and sent periodic payments by checks drawn on the Cauble family bank to Mabon via Federal Express to meet margin requirements. Mabon normally extended credit to Cauble by forwarding its own funds to satisfy Cauble's initial and maintenance requirements directly to Goodman. Cauble then made up the deficits created in his accounts by either transferring checks or off-setting trades.
By June 1982, the trading activity in Cauble's account reached very high levels. On July 2, 1982, Cauble's account showed a deficit of over $500,000. Although Cauble failed at that time to settle-up with mabon, he was allowed to continue trading in his account as usual. The deflicit in his account at the clost of business on July 6 was $563,112.50. Only July 7, an agreement was made between Cauble and Joe Belanoff, the normal account executive assigned to his accounts, that his position would be offset to reduce it to 100 financial futures contracts and a long position in 30 silver futures contracts. At the close of trading on July 7, the deficit in Cauble's account was $394,050. That same day, Jeffrey Pollack and John Friel decided not to accept any new orders from Cauble, and advised him on the morning of July 8 to send in the required margin so that Mabon could continue accepting his trades. Cauble did not clear up his margin deficiency but nevertheless attempted to place a trade to sell short 50 U.S. Treasury Bond future, a transaction defendants claim they did not execute. Instead, when Cauble's margin check did not arrive by 1:00 p.m. in Mabon's usual Federal Express delivery, Mabon placed orders with Goodman that effectively closed out all positions in Cauble's account.
After liquidation, there was a deficit in Cauble's account at Mabon. From July 23 to August 3, Cauble actively negotiated with Joe Belanoff and Leon Pollack over payment of the deficit balance in his account, in addition to the $69,000 deficit in the Lewsi Cauble and Fern Lynch accounts which had been closed with Cauble's agreement. Upon the completion of a long series of negotiations between Cauble and Mabon, an agreement was reached for the exchange of a payment by Cauble to Mabon of $174,785 in return for a promised release. Plaintiff alleges that the release was to contain a number of specific provisions agreed upon by the parties. Instead, Mabon sent a standard release after receiving Cauble's check. Cauble rejected the standard release and demanded the return of his check.
On August 24, 1982, Joe Belanoff, who had left Mabon to join Miller, Tabak and Hirsch ("MT & H"), contacted Cauble and obtained his agreement to open a new commodity trading account at MT & H. The Cauble account at MT & H was cleared through Bear Sterns & Co. After a week, the account was closed out be Bear Sterns. Cauble alleges that this liquidation was the result of a negative report circulated throughout the investment community by Mabon.
I. Claims of Unauthorized Liquidation
Cauble claims in Court One of his complaint that Mabon violated section 4b of the CEA by unauthorized and fraudulent trading in the closing of Cauble's account without notice. A futures commission merchant, or broker, may not effect a transaction, purchase, or sale for the account of any customer without specific authorization. See 17; CFR § 166.2. A broker's closing out of open positions in a commodity account without a margin call for additional funds constitutes unauthorized trading in violation of § 4b. See Schultz v. Incomco [1980-82 Transfer Binder] Comm. Fut. Law Rep. (CCH) P21.280 [CFTC 1981].Margin call notice requirements may be altered or waived by contrast, however, and this is done typically in customer agreements which authorize the broker to liquidate any customer property in its possession to satisfy account deficiencies whenever an account becomes undermargined. See Jacobs v. Paine, Webber, Jackson and Curtis Inc., [1977-1980 Transfer Binder] Comm. Fut. Law Rep. (CCH) P20,893 at 23,626 (FCTC 1979); Chipser v. Kohlmeyer & Co., 600 F.2d 1061, 1066-67 (5th Cir. 1979).
Liquidation provision in customer agreements have been upheld by the Commodity Futures Trading Commission and the courts where sufficient equality of bargaining power exists, as between a sophisticated, experienced investor and a broker, and where the liquidation provisions are commercially reasonable. Geldermann & Co., Inc. v. Land Processing, Inc., 527 F.2d 571, 575-76 (8th Cir. 1975) The clause at issue in Gelderman provided: "In case of my [the customer's] failure to maintain with you [the broker$0 at all times such margin as you may deem adequate for your protection, you may, without prior demand or notice to me, Sell and/or Purchase such commodities as you may consider necessary to fully protect my account." Id. at 574. TheGelderman court ruled the liquidation provision was no unconscionable, and upheld its validity on the basis of policy considerations designed to counter-balance the business resks inherent in futures trading:
It is clear that the liquidation provision promoted the interest and protection of the commission merchants, their customers and the investing public as a whole. Investors of speculators who have failed to deposit sufficient maintnenance margins may have insufficient financial resources to withstand substantial losses on the market and, if so, continued trading on that account is a financial risk for the commission merchant, and ...