The opinion of the court was delivered by: DUFFY
KEVIN THOMAS DUFFY, D.J.:
Trading in gold options is a highly volatile market where fortunes can be made and lost in one day. This case should stand as a reminder that the fallout from an explosive day in the gold market can affect not only the traders in that market but can also have a detrimental effect on the market place, including the organized exchanges dealing in gold, the exchange clearing house, the members of the exchange, and the innocent public customers of member firms, which customers may not even be involved in the trading of gold or gold options. Such explosive trading happened between the opening of trading on the Commodities Exchange ("COMEX") on Monday, March 18, 1985 and the close of trading on Tuesday, March 19, 1985, when the price of gold surged by approximately $44 per ounce.
Valerie and Gerald Westheimer as members of the COMEX have been, for the last year, involved in the trading of gold options. On March 18th, the accounts of the Westheimers and another exchange member, James Paruch, whose accounts were guaranteed by the Westheimers, were each near the maximum of 4,000 short gold call options for a total of approximately 12,000 short gold call options. While members of the exchange may trade freely with each other, they are required to clear their accounts by either being a member of the COMEX clearing house or by funneling their trades through a member of the clearing house. The COMEX clearing house matches the trades from the floor every evening after the close of trading and by the following morning renders an account to each clearing member crediting the member with the gains or losses from the previous day's trading. Where margin trading is permitted, the clearing house bills the member for margin every morning and is entitled to payment by 11:00 a.m., just a few short hours after the account is rendered. Thus, each clearing member prepares an account for each of its customers (including non-clearing members of the COMEX) on an overnight basis and attempts to have margin calls paid before its 11:00 a.m. deadline for required payment to the clearing house.
On Wednesday, March 20, 1985, Volume Investors Corp. ("VIC"), the brokerage firm through which the Westheimers and Mr. Paruch cleared their trades, missed a multi-million dollar margin call because of trades made by the defendants. VIC and all of the defendants were immediately suspended from trading on the COMEX and notification of this action and the reasons therefor [therefore] was given to the Commodity Futures Trading Commission ("CFTC") and the various other exchanges.
On March 21, 1985, the CFTC commenced an action against VIC (85 Civ. 2213 (KTD)) alleging violations of the Commodity Exchange Act and the regulations promulgated thereunder arising from the missed margin call. In the early morning hours of March 21st, the CFTC presented to the Part I judge, at her home, a proposed order providing for injunctive relief against VIC and the appointment of a temporary receiver. The order was signed and the plaintiff was appointed. This action was subsequently assigned to me.
Almost simultaneously with his appointment, the temporary receiver commenced an action against the Westheimers and James Paruch, (85 Civ. 2230 (RLC)), alleging basically that they breached a customer agreement that they signed upon opening accounts at VIC which obligated them to maintain sufficient margin in their accounts at VIC. This second action, though initially assigned to Judge Carter, was reassigned to me as a related case. At the same time that the temporary receiver commenced the action against the Westheimers and Mr. Paruch, an application was made, by Order to Show Cause, for an order of attachment against the assets of the three defendants and specifically with respect to $3.4 million which had been transferred, at the direction of Valerie Westheimer, to Lazard Freres & Co. ("Lazard Freres"), which brokerage firm was to convert the monies into bearer securities. The request for an attachment with respect to Mr. Paruch's assets became moot when the parties stipulated to an arrangement concerning his assets.
A hearing on the request for attachment was thereafter scheduled for Wednesday, March 27, 1985.
On March 27th, certain preliminary matters were disposed of and shortly thereafter, a third action was commenced by the Westheimers against a myriad of individuals including the President of VIC, COMEX, and the temporary receiver. (85 Civ. 2388 (KTD)). The Westheimers allege that the defendants manipulated the price of futures and options and in other, yet undefined ways, caused the losses suffered by the Westheimers. Upon the commencement of this action, the Westheimers moved by Order to Show Cause seeking a variety of relief including the appointment of a special master to supervise discovery, expedited discovery, the removal of the receiver, an injunction against COMEX's prosecution of administrative proceedings, and the impounding of certain documents. At the hearing held on March 28, 1985, most of this requested relief was denied, and to the extent I did not address any of the requests included in the Westheimer's Order to Show Cause, with one exception, they are formally denied.
The exception involves the appointment of a receiver in this matter. The temporary receiver, Frank Wohl, is assertedly a recent former member of the law firm of Rosenman, Colin, Freund, Lewis & Cohen, counsel for VIC. As such, he is alleged to have a conflict of interest; but on the record developed thus far, it is impossible to determine. Accordingly, Mr. Wohl is directed to submit an affidavit which sets forth any factors that may be relevant in ascertaining the nature and extent of any potential conflict.
Frank Wohl, as temporary receiver for VIC, pursuant to Fed. R. Civ. P. 64 and N.Y. Civ. Prac. Law and Rules ("CPLR") §§ 6201, 6210, and 6212, seeks an order of attachment directing the levy upon "such property in which the defendants have an interest and upon such debts owing to the defendants as will satisfy the amount of not less than $14 million."
CPLR § 6212(a) provides that:
On a motion for an order of attachment, . . . the plaintiff shall show, by affidavit and such other written evidence as may be submitted, that there is a cause of action, that it is probable that the plaintiff will succeed on the merits, that one or more grounds for attachment provided in section 6201 exist, and that the amount demanded from the defendant exceeds all counterclaims known to the plaintiff.
CPLR § 6212(a) (McKinney 1980). The section 6201 ground relied on by the temporary ...