The opinion of the court was delivered by: LASKER
In the current round of submissions in this litigation the defendants collectively attack the legal sufficiency of the fourth, fifth, eighth, ninth, twelfth through twentieth and twenty-third claims in Fustok's Amended Complaint. Subsequent to the filing of this "omnibus motion" Fustok filed a Second Amended Complaint which alleges in identical form the claims under siege here. Accordingly, we treat the defendants' motion as if it were addressed to the claims in the Second Amended Complaint.
The defendants move (1) to dismiss pursuant to Rule 12(b), Fed. R. Civ. P., the seventeenth through twentieth claims for failure to state a cause of action; (2) for summary judgment dismissing claims thirteen through sixteen pursuant to Federal Rules of Civil Procedure 56(b), and in the alternative (3) to dismiss the fourteenth and fifteenth claims for failure to state a claim; (4) to dismiss the eighth, twelfth and sixteenth claims for failure to state a claim under Illinois law; (5) to dismiss the twenty-third claim as barred by the statute of limitations; and (6) to dismiss the fourth, fifth, eighth, ninth, twelfth, thirteenth and sixteenth claims for failure to plead essential elements of fraud and/or for failing to comply with Federal Rules of Civil Procedure 9(b).
For the reasons set forth below the motion is denied.
The seventeenth and eighteenth claims are based upon the March 4, 1980 purchase of 100 Comex silver contracts for Fustok's account. Fustok asserts that "under the rules of the Comex then in effect, the 100 May Comex silver contracts should not have been purchased for Account No. 38055 on March 4, 1980 unless there was margin of at least $4 million (i.e. $40,000 per contract) then in or in transit to that account." Second Amended Complaint at P77. The plaintiff asserts that the defendants purchased the contracts without sufficient equity in, or in transit to, Fustok's account and in so doing breached the fiduciary duty owed to plaintiff (seventeenth claim) and were negligent (eighteenth claim).
The nineteenth and twentieth claims are pleaded in the alternative to claims seventeen and eighteen, respectively. The claims allege that the defendants purchased 40 silver contracts on the London Metals Exchange ("LME") on February 29, 1980, and 90 LME silver contracts on March 5 and 7, 1980 and that the contracts "were unsupported by any equity or other margin." Second Amended Complaint at PP84, 85. Fustok asserts that the transactions were made in breach of the defendants' fiduciary obligations (nineteenth claim) and that the defendants' conduct was negligent (twentieth claim).
The defendants move to dismiss the seventeenth through twentieth claims for failure to state a cause of action on the ground that a broker's violation of the Comex margin requirements, standing alone, does not give rise to a cause of action in the customer's favor. Fustok does not directly respond to this proposition. Instead, he argues that a cognizable claim exists where margin violations are alleged in the context of a scheme to defraud. He asserts, moreover, that the allegations state valid common law claims for negligence and breach of fiduciary duty.
The defendants respond that the decisions upon which Fustok relies are inapplicable because they involve violations of securities margin rules which are "drastically different" than in the commodities industry, and that, in any event, the seventeenth through twentieth claims should be dismissed because they are duplicative of Fustok's first and second claims for unauthorized trading and fraud.
Inasmuch as Fustok apparently concedes, or at least does not discuss whether, absent fraud or bad faith, a violation of the margin requirements gives rise to a cause of action, the focus of the inquiry here is not on the various functions of margin rules in the commodities industry versus the securities industry. The issue is whether the claims support a cause of action for commodities fraud. Cf. Evans v. Kerbs and Co., 411 F. Supp. 616, 624 (S.D.N.Y. 1976) ("The securities acts are essentially directed against fraud and the gravamen of plaintiff's complaint is a fraudulent inducement to engage in margin transactions through knowing and willful misrepresentations of the applicable margin requirements.")
In making such an inquiry courts frequently look to the securities laws and related decisions for guidance, and there is merit in this approach. See Leist v. Simplot, 638 F.2d 283, 298 n.14 (2d Cir. 1980), aff'd sub nom. Merrill Lynch Pierce, Fenner & Smith v. Curran, 456 U.S. 353, 102 S. Ct. 1825, 72 L. Ed. 2d 182 (1982) ("While there are differences between the commodities and securities fields, what is relevant to the present question is the common legislative objective of insuring fair dealing for investors on what are important public markets, and the common legislative approach to attaining this objective.")
An investor has a private right of action for commodities fraud. See, e.g., id. Although the courts continue to wrestle with the task of defining what behavior will support this type of claim, it is evident that a broker's failure to obey margin requirements may form part of a fraudulent commodities scheme. Moreover, the law appears to support the proposition that such conduct is actionable if it is properly pleaded. For example, in Klein v. Merrill Lynch, Pierce, Fenner & Smith, Inc., [1978 Transfer Binder]FED. SEC. L. REP. (CCH) P96,523 (E.D.N.Y. 1978), the court read the complaint as alleging that "[p]laintiffs . . . were injured by defendant's fraudulent and manipulative purchases and sales of call options for plaintiffs' respective accounts and by various intentional and wrongful acts which culminated in the liquidation of plaintiffs' margin accounts," and concluded that it was unnecessary to decide whether there was a right of action based upon a failure to comply with margin rules because the margin violations were part of a claim for fraud which was pleaded in compliance with Rule 9(b). Id. at 94,054. See also Evans v. Kerbs and Co., 411 F. Supp. at 624; cf. Friedman v. Dean, Witter & Co., [1980-82 Transfer Binder]COMM. FUT. L. REP. (CCH) P21,307 (CFTC Nov. 13, 1981) (distinguishing between mere violations of margin rules and regulations and margin violations committed in bad faith or in furtherance of fraud).
Here, however, the pleadings of the seventeenth through twentieth claims are woefully inadequate to make out a claim for fraud. The claims allege simply that the defendants purchased certain silver contracts that should not have been purchased because there was inadequate margin or other equity in Fustok's account. Even under the most liberal reading of the complaint such allegations do not amount to fraud. It follows that the claims fall short of compliance with the specificity required by Federal Rule of Civil Procedure 9(b). See generally Minpeco, S.A. v. ContiCommodity Services, Inc., 552 F. Supp. 332, 338-39 (S.D.N.Y. 1982) (requirements of Rule 9(b)).
Accordingly, if the sole basis for the seventeenth through twentieth claims were an alleged private right of action under the commodities regulations, dismissal of the claim would be compelled, for the reasons set forth above. However, Fustok asserts that his allegations give rise to common law claims for negligence and breach of fiduciary duty. The defendants' one-sentence response is that "[m]argin violations were of course unknown to the common law," quoting Hornblower & Weeks-Hemphill, Noyes v. Burchfield, 366 F. Supp. 1364, 1367 (S.D.N.Y. 1973) (Lasker, J.).
Hornblower is not relevant here inasmuch as the counterclaims at issue in that case were all based on statutory violations rather than on liability arising under the common law. Here, even if statutory margin requirements did not exist, Fustok could still maintain an action for breach of fiduciary duty based upon the prinicipal/agent status which the common law applies to a broker/customer relationship. Of course, the same basic concepts, e.g., the existence of a duty and a breach of that duty (along with the element of causation), will support a substantive tort claim for negligence.
During oral argument on the motion Fustok's counsel asserted that the defendants' deviation from industry norms is sufficient to support the common law claims. Transcript at 46 (May 10, 1985) ("hereafter "Tr. at "). This is not specifically pleaded in the Second Amended Complaint. Nonetheless, we conclude that Fustok's allegations that the defendants purchased millions of dollars in silver contracts without sufficient equity in the account and that the purchases were "wrongful" and in violation of established rules are sufficient to put the defendants on notice as to the bases for Fustok's claims of negligence and breach of fiduciary duty.
Claims thirteen through sixteen of the Second Amended Complaint assert causes of action for fraud, breach of fiduciary duty, negligence and violation of N.Y. GEN. BUS. LAW § 352-c (McKinney 1984) ("the Martin Act"), respectively. All rely on the same allegations, namely, that the defendants, acting on instructions of Advicorp Advisory and Financial Corporation S.A. ("Advicorp"), purchased 400 Comex silver receipts from Gilion Financial for Fustok's account with knowledge that Advicorp's principals were also principals of Gilion who were "self dealing". Fustok accuses the Conti defendants of executing the purchase to provide Gilion with funds to meet a margin call by Conti.
The defendants move for summary judgment dismissing the thirteenth through sixteenth claims. They assert that the undisputed facts establish that the purchase complained of was executed on December 3, 1979; that the 400 silver receipts represented title to 2,023,504.38 troy ounces of physical silver bullion; that the official spot price for silver bullion on December 3, 1979 was $19.84 per ounce; that Fustok [through his agents] paid $18.26 per ounce for the silver; and that the immediate effect of the transaction was to generate a paper profit for Fustok of $3,197,136.92. See Affidavit of Cameron Clark at Point "A" (filed Jan. 14, 1985) ("Clark Aff.") and Exhibit 1 (attached). They add that it is further established that the price of silver rose following the Gilion transaction until it reached a peak of $48.00 per ounce on January 21, 1980; and that until March 17, 1980 the price paid for the Gilion silver was less than the market price. Id. at P6 and Exh 2. Fustok's counsel stated during oral argument "that in all likelihood the evidence at trial will show that the transaction took place in late November and ...