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December 9, 1986

D.E. JONES COMMODITIES, INC. and ALPHA O. NICKELBERRY, Defendants and Third-Party Plaintiffs, v. SHIV B. KATARA, in his individual capacity, Third-Party Defendant

Kevin Thomas Duffy, D.J.

The opinion of the court was delivered by: DUFFY


D.E. Jones Commodities, Inc. ("Jones") is made up of people who defraud their clients. The jury so found. Jones defrauded Shiv B. Katara, the plaintiff, here. The jury so found. Indeed, the jury found that in this case, Jones was guilty of a gross and wanton fraud evincing a "high degree of moral turpitude and absolutely wanton dishonesty." Tr. 401. The jury similarly held against the defendant Alpha O. Nickelberry. The jury made these findings in a relatively short period of deliberations because the evidence in this case compelled them.

 By ignoring these findings and acting as if the defendant's case had been totally accepted by the jury, the defendants now move to set aside the verdict herein and to have the court enter a judgment n.o.v.

 This case involves an old fashioned fraud committed by the defendants in the sale of commodity futures contracts. Jones is a commodity futures brokerage house or a futures commissioned merchant registered with the Commodities Futures Trading Commission ("CFTC") and located in New York City. At all relevant times, Alpha O. Nickelberry ("Nickelberry") was an account executive and manager at Jones and was registered with the CFTC as an associated person of Jones. At the time of trial the fast talking Nickelberry had no connection with Jones. Katara was the administrator of the Manisha Sportswear Defined Pension Trust Plan and a fiduciary as that term is defined in the Employment Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. ยง 1001 et seq. (1979). See Findings of Fact in Consent Pretrial Order.

 Apparently Jones solicited Katara on a number of occasions to open a commodities account with Jones. Finally, Katara drove two hours from the Manisha plant in New Jersey to the offices of Jones in New York. At the time, Katara had an account at Merrill Lynch, both in his own name and as administrator of the Manisha Sportswear Pension Trust. When Katara entered the Jones office he met a Mr. Rutherford who immediately took him to meet the defendant Alpha O. Nickelberry. A discussion ensued at which Nickelberry advised Katara that he could not as the administrator of the Pension Trust invest in gold or silver since that would be too speculative. Nickelberry suggested that because Katara was interested in stocks and bonds that he could purchase the Standard and Poors ("S & P") 500 Index. He explained to Katara that the S & P 500 Index futures contract was made up of composite stock prices.

 Nickelberry also told Katara that normally they charged a $20 commission but said that he would try to have the commissions reduced to $17 for every round turn. In fact, a $20 commission was charged for every round turn.

 The following day, Katara met with Nickelberry at the Jones office. Certain form agreements were given to Katara which he signed and at trial he testified that he believed Mr. Rutherford was there when the forms were signed.

 Among the agreements which Katara signed in connection with the opening of the Manisha Sportswear account was a customer agreement. The customer agreement was prepared totally and completely by Jones, printed up and given to Katara to sign. That agreement stated among other things that "the undersigned acknowledges that Commodities Future Trading is speculative, involves a high degree of risk and is suitable for persons who can assume the risk of substantial losses." At some point, Katara also received Jones' Risk Disclosure Statement. That document was also a form prepared by and printed for Jones to give to its customers. The Risk Disclosure Statement contained a similar rubric concerning the risks of commodities trading.

 Apparently, these statements did not bear much weight with the jury particularly in view of the fact that Katara and Nickelberry had discussed the possibility of trading conventional commodities such as gold and silver but that had been swept aside by Katara as being too speculative for the Pension Plan. It is clear that the S & P 500 Index futures contracts have absolutely nothing to do with ordinary commodities contracts or commodities futures contracts. Tr. 174. Indeed, since Katara testified that the gold and silver deals were out because they were too speculative, the jury could have concluded that the forms Katara signed were thought by him as a reasonable person to deal with general commodities and not with such noncommodity items as the S & P 500 Index futures contract. In any event the Risk Disclosure Statement somehow was dated four months after the opening of the account. Tr. 358.

 Both the day before and during the meeting at which these form agreements were signed Katara also told Nickelberry that the fund of which he was trustee had $800,000 to invest. He advised Nickelberry that the fund was in its first year and the $800,000 had been put into the fund as an initial down payment for prior service as required by some actuary. The form shows the $800,000 entry for both net worth and annual income. Neither Nickelberry, Rutherford nor anyone else at Jones ever asked to see the trust agreement under which Katara was operating until the account was closed. Nickelberry, Rutherford and Jones knew that the entire $800,000 was not intended to go for S & P 500 Index futures contracts if not from common sense then from Katara's disclosure that the Manisha Defined Pension Trust had a stock investment account at Merrill Lynch.

 Discussions were also had, apparently on both days concerning margins; Katara told both Nickelberry and Rutherford that he would not be able to trade if he had to pay an initial margin of $6,000 per contract. Tr. 54. Mr. Nickelberry assured Katara that if he had enough in the maintenance margins, the initial margin would not be charged by Jones. It appears that maintenance margin was explained to Katara as an amount put into the account from time to time to cover possible losses in the fluctuations of the market. Tr. 56. It is unclear as to the exact words spoken to Katara that day.

 In any event, Katara entered an order for two S & P 500 Index futures contracts that day. He also deposited with Jones a $10,000 check which he claimed was intended for maintenance margin only. It cannot be disputed that if the two contracts were ordered at the same time and Jones was charging the plaintiff initial margin, the transaction could not be completed ($6,000 initial margin times 2 contracts equals $12,000, $2,000 more than plaintiff admittedly paid in to the account that day).

 From this alone the jury could reasonably have concluded that Katara was telling the truth when he testified that Jones and its representatives had agreed to waive initial margin on the Manisha account. The defendants contended that Katara did not order the two contracts at one time but rather ordered one contract in the morning, hung around the Jones office all day and ordered the other contract in the latter part of the day. This testimony was palpably false. It seems silly to argue, as the defendants seemingly still do, that Katara, a busy importing executive with a place of business in New Jersey, two hours from Jones' office in Manhattan, spent long periods of time over many days hanging around the Jones' board room. It is even more incredible when Jones' counsel brought out that Katara had a machine at his place of business in New Jersey to get up to the minute quotes from the financial markets. The jury could easily have concluded from what appear to be deliberate falsehoods that the Jones' representatives were trying to "con" the jury the same way that Jones "conned" Katara.

 The defendants raise another interesting argument which they apparently believe mandates a finding that Nickelberry and Jones never waived initial margin. The defendants assert that the waiver of initial margin would violate the rules of the Chicago Mercantile Exchange and possibly the Commodities Futures Trading Act and that therefore Nickelberry never said that there would be such a waiver. I have seen it argued that a violation of Exchange Rules does not give rise to a cause of action but this is the first time I have seen the chutzpah of the argument that a potential violation of such rules precludes good old fashioned fraud.

 In passing I should note that I believe Nickelberry and Rutherford, acting for Jones, did violate such rules and did so wilfully, unlawfully, and intentionally. Indeed, Arnold Zisselman, the Comptroller and Vice-President of Jones and its margin expert, admitted to other Exchange Rules violations. Tr. 277.

 In any event over the ensuing months, with one minor exception when the account was closed, the plaintiff bought and sold S & P 500 Index futures contracts apparently without any difficulties and apparently in accord with his version of the margin requirements given him by Jones. No new account papers were ever signed and it seems there was never any further discussion as to margin or to the way the account was to be handled.

 By February 2, 1984 the Manisha account at Jones had thirty-five March, 1984 S & P 500 Index futures contracts. Tr. 207. Katara had deposited about $160,000 into the account to support the trading. Tr. 92-94, 207-8. About this time the market apparently turned against the plaintiff. On February 3, 1984, on recommendation of the defendants, Tr. 110, the plaintiff purchased twenty-five more S & P 500 Index futures contracts. Tr. 209. As of February 3, 1984, Jones considered the Manisha account undermargined and on February 6, 1984 actually put out a margin call to Katara for the Manisha account for $315,000. This amount was calculated by demanding a full $6,000 initial margin for each of the sixty accounts less an assigned value of $45,000 for the contracts and other assets in the account. Tr. 213. Katara was notified of a margin call by Arnold Zisselman and the plaintiff wired $150,000 to Jones. On that same date Jones also purchased another five contracts at Katara's request for the Manisha account. This was done although according to Zisselman the account was seriously undermargined. Another five contracts were purchased for the Manisha account on February 7, 1984 again when the account was even more seriously under margined. There is no indication that initial margins for these two purchases were ever charged at the time of the purchases. Tr. 130, 166.

 On February 8, 1984, Zisselman called Katara and demanded an immediate initial margin on all seventy contracts in the account totaling $420,000. Katara complained that he had never been charged initial margin, that no initial margin was supposed to be charged in the account and Katara explained that he could not deliver $420,000 immediately to Jones. In reply, Zisselman told him that he would liquidate at least fifty contracts. On February 9, 1984, Katara directed Jones to liquidate the remaining positions in the Manisha account and to close that account. Consent Pretrial Order, 4. Jones eventually sent a check or checks to Katara for the $120,000 liquidation value of the account.

 This action thereafter ensued for the damages incurred because of the liquidation of the account. After the account was liquidated the market turned up and the jury found the damages actually done to the Manisha Pension Trust to be $296,125. The jury also awarded punitive damages in the amount of $150,000. Tr. 415.

 Although there was little basis for the cross-claim by Jones and Nickelberry against Katara personally, and the cross-claim seemed abandoned in the defendants' summation, I let it go to the jury. The jury applied the law and its common sense to the evidence and found that "Katara is innocent of any wrongdoing . . . ." Tr. 415.

 The defendants now claim that they are entitled to a judgment n.o.v. because Katara's testimony must be viewed as "unsupported, self-serving testimony, which is insufficient even to withstand this motion", citing Comfort v. Trane Air Conditioning Co., 592 F.2d 1373, 1383 (5th Cir. 1979); Defendants' Memo, 10. The simple answer to this argument is that Katara's testimony was not unsupported. Indeed, the documents generated by the defendants support the testimony. This in itself completely blunts the rest of the defendants' argument.

 However, the defendants also argue that fraud has not been proven. Ignoring the claim by defendants that the plaintiffs testimony cannot be considered in this connection, Defendants' Memo, 10, it is clear that all five elements were proven:

 (1) The defendants are responsible for a statement that no initial margin was to be demanded or collected;

 (2) That statement was clearly false ;

 (3) At the time the statement was made the defendants knew it was false;

 (4) The plaintiff relied upon the representation that no initial margin was to be collected. If he had not he would neither have opened the account nor traded as heavily as he did. With a fund of $800,000 it is unreasonable to think the plaintiff would have undertaken positions that would call for an initial margin (that could be demanded at any time) of $420,000; and

 (5) Clearly the plaintiff suffered damage as a direct result of the false statements.

 The same analysis would apply to the false statements of the defendants that S & P 500 Index futures contracts were "safe".

 The defendants also argue that the court was prejudiced against them and prevented them from getting a fair trial. This argument is totally specious and built solely on distortions of the record.

 To show the lengths to which counsel for the defendants have gone in practicing their deceit, it is necessary only to point to the affidavit of Earl H. Nemser, Esq. submitted as part of the moving papers on this motion. In his affidavit, Mr. Nemser purports to describe an off-the-record conversation had with the court. To make his description of that off-the-record conversation part of the record, the affidavit contains the following paragraph:

2. Prior to the end of my opening statement to the jury, the Court terminated my remarks and directed me to sit down. Thereafter, in Chambers and off-the-record I respectfully asked the Court for permission to complete my opening statement. This request was denied.

 Nemser Affidavit para. 2.

 The rest of the affidavit goes on to say what would have happened if Mr. Nemser had been permitted to complete his opening statement. The affidavit is totally and completely misleading. It fails to mention that in his opening statement, Earl Nemser decided to advise the jury, "I think the judge made an error in describing margin." Tr. 40. Nemser made these comments to the jury after I had advised them that I would describe the technical words to them and I had given an example of margin to them. Tr. 15, 16. Mr. Nemser, when asked if he had taken any exceptions to the court's instructions including that on margins, said "No, your Honor." Tr. 17. Mr. Nemser does not argue that his suggestion to the jury that the court was in error was not sufficient grounds to stop the opening statement. Rather, he ignores the reason for the interruption of the opening statement and makes it appear as if he was denied a chance to continue his opening statement purely out of personal pique.

 Similarly, his recitation of the off-the-record conversation is totally and completely misleading.

 The conversation alluded to by Mr. Nemser was off-the-record at the specific request of Mr. Nemser, Tr. 42, because Mr. Nemser represented that he had personal and private matters to share with the court. After this start, Mr. Nemser stated that he was under great pressure and he apologized for his statements and for his condition. He did ask for permission to finish his opening statement and stated that he was almost finished with it. At first, I started to say that he had not done so well by publicly insulting the court, but when he became physically agitated, I suggested that it may be better if he did not attempt to finish the opening. I did so out of a real concern for his physical and psychological well being. It would appear that my concern was well placed because part way through the trial Mr. Nemser was caught misrepresenting the facts to the court and jury when he read a small part of a deposition answer in a vain attempt to show an inconsistency in the witness' testimony. Tr. 98. Somehow the defendants now argue that admonishing counsel for this lack of honesty was improper. Defendants' Memo, 26 n.4. Thereafter, he, in effect, almost retired from the litigation of the case leaving an associate (obviously a tyro) to present the rest of the clients' case and to read a summation at, rather than to, the jury. Nemser was present throughout this and indeed, handled the exceptions to the court's charge. See, e.g., Tr. 406. The day after the court's charge when the jury returned a verdict, Mr. Haveles, apparently Mr. Nemser's partner, was on hand for an obviously confused Earl Nemser. Tr. 416. It should be noted that Earl Nemser's name does not appear on the papers for this motion other than as affiant.

 The defendants complain that the court made prejudicial comments and list nine instances in the record where this supposedly occurred. The first two listings are pages 155-57 and 173-74. Defendants' Memo, 31. These pages are copied in full in the margin. *fn1" The first page complained of, page 155, shows the court saying two words -- "Sustained" twice. These "prejudicial comments" were proper rulings, and made after objection excluding clearly hearsay items. These were prejudicial only in the sense that the defense team was not permitted to get inadmissable evidence before the jury. On page 156 the same thing occurs at lines 12 and 13. At line 17 Ms. Caldwell for the defense finished her direct examination. Thereafter, on pages 156 and 157 the court cleaned up some obvious misstatements by the defendant Nickelberry who was on the witness stand. Nickelberry stated on direct examination he had met Katara in June or July, 1983, but the court pointed out that the original ...

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