The opinion of the court was delivered by: SOTOMAYOR
MEMORANDUM ORDER AND OPINION
The two instant actions arise from a dispute between plaintiff Ping He (Hai Nam) Company Limited ("Ping He") and defendant NonFerrous Metals (U.S.A.) Inc. ("NFM") over a commodity futures trading account opened by Ping He with NFM in 1993. Ping He moves for summary judgment pursuant to Fed. R. Civ. P. 56, seeking the return of $ 350,000 it deposited into the account, on the grounds that NFM defrauded Ping He into opening the account, engaged in unauthorized trading, falsified an invoice, and misappropriated Ping He's funds, all in violation of the Commodity Exchange Act, 7 U.S.C. § 1 et seq., and the regulations promulgated thereunder. In opposing the motion, NFM claims that Ping He owes it more than $ 650,000 in trading losses, and that triable issues of fact prevent the granting of summary judgment.
In the related action, defendant Agricultural Bank of China ("Bank of China") moves for summary judgment against NFM. NFM sues Bank of China for refusing it access to two letters of credit, totaling $ 800,000, which Ping He had established in favor of NFM upon opening the trading account. Bank of China now seeks dismissal of the action, arguing that it properly refused NFM access to the funds because NFM presented the Bank with fraudulent documentation.
Finally, by separate motion, Ping He and Bank of China, who are represented by the same counsel, jointly move for sanctions against NFM and NFM's counsel, pursuant to Fed. R. Civ. P. 11, based upon their alleged misconduct during this litigation.
For the reasons discussed, the Court grants Ping He's and Bank of China's respective motions for summary judgment, and imposes sanctions upon NFM's counsel.
The following facts are undisputed. Ping He and NFM are both entities owned by the People's Republic of China. Ping He is a foreign corporation with its principal place of business in China. NFM, although owned by the Chinese government, is a New York corporation with its principal place of business in Manhattan. NFM holds itself out as being in the business of soliciting orders for the purchase and sale of commodity futures. Once an order is placed with NFM, NFM arranges for the order to be executed on American and foreign markets through registered floor brokers. NFM, however, is not and has never been registered with the Commodity Future Trading Commission ("CFTC"), or with any federal or state regulatory body in the United States, in any capacity.
In or about April 1993, Ping He agreed to open a futures trading account with NFM. The parties did not reduce their agreement to writing. However, pursuant to their oral agreement, all trades were to be non-discretionary, meaning that NFM was only authorized to execute trades for Ping He upon the express instructions of Ping He or Ping He's designated agent. Toward that end, by letter dated April 27, 1993, Ping He advised NFM that it was authorizing Mr. Li Zheng of China National Metal Products Co. ("China Metals") to act as Ping He's agent in all matters relating to its futures trading account. (See Ex. 2 to Li Dep.). In the letter, Ping He specified that China Metals was authorized "to do some future business of metal products directly or through some agent with you on our behalf." Id. (emphasis added).
Also in connection with opening the account, on April 19 and April 23, 1993, Ping He established two standby letters of credit in favor of NFM with Bank of China, in the amounts of $ 300,000 and $ 500,000, to cover trading margin maintenance, losses and expenses associated with the account. The terms of the letters of credit provided that NFM could draw upon the funds only after presenting Bank of China with certain documentation, including (i) a signed declaration by NFM stating that the amount being drawn was owed to NFM in relation to Ping He's commodity dealings, and (ii) a certified copy of a telex dispatched to Ping He within five working days prior to drawing from the standby letters of credit. (See Ex. A to Rosenthal Aff.) In May 1993, Ping He also made an initial deposit of $ 50,000 into the account held by NFM.
Unfortunately, nearly all facts concerning what actually happened to Ping He's trading account after it was opened are in dispute, including: whether NFM conducted any trading for Ping He; when such trading began and ended; whether trades on Ping He's account were authorized or unauthorized; and whether trades conducted for Ping He resulted in profits or losses. The parties additionally dispute whether Ping He knew when it opened the account that NFM was not registered with the CFTC.
What is clear and uncontroverted, however, is that on May 4, 1993, NFM tried to draw down on the two letters of credit, claiming that Ping He had lost $ 800,000 as the result of trading. Bank of China refused NFM access to the funds. Approximately one month later, on June 8, 1993, China Metals sent NFM a fax suspending the account. The letter stated:
We are very pleased to see that we have made a little profits [sic] through those deals done with your brokerage. . . . As a result of our internal arrangements, we would like to inform you that we have suspended our future trading account with your brokerage effective from today. Therefore, the said standby L/Cs [letters of credit] will be canceled by an official notice given tomorrow [to Bank of China].
(Ex. C to Rosenthal Aff.) China Metals' June 8 letter also requested that NFM provide it with a list of all trades executed on the account, together with a list of all commissions charged. Id.
Soon afterwards, NFM sent China Metals an account invoice, dated June 16, 1993 (hereafter "the June 16 invoice"). (Ex. D to Rosenthal Aff.) The June 16 invoice stated that $ 344,893 was due on Ping He's account (not $ 800,000, as NFM had contended when it sought to draw upon the letters of credit). That figure consisted of $ 104,500 in alleged trading losses and $ 240,393 in commissions and interest, for trading activity between the dates of April 22 and April 29, 1993. Thereafter, NFM repeatedly wrote to China Metals in June and July of 1993, demanding payment of the $ 344,893. (See June 28, June 30, and July 8, 1993 letters from NFM to China Metals; Ex. E to Rosenthal Aff.) Several months later, on December 9, 1993, Ping He wired NFM the sum of $ 300,000. It is also undisputed that at some point during 1993, NFM converted for its own use Ping He's $ 50,000 initial deposit.
Ping He brought the instant suit against NFM on June 2, 1994, claiming that NFM defrauded it at every step of their dealings. First, Ping He claims, NFM misrepresented itself as a registered commodity broker in order to induce Ping He to open an account with NFM. (Complaint P 7.) Ping He further claims that, after the account opened, neither it nor China Metals ever authorized NFM to execute trades on its behalf, but that NFM nevertheless improperly charged it for large trading losses. According to Ping He, NFM either engaged in unauthorized trading on Ping He's account, charged Ping He for fictitious trades, or fraudulently allocated to Ping He's account losing trades that had been undertaken for other customers. Whichever was the case, Ping He contends that NFM's fraudulent conduct is evinced by the fact that NFM has been unable to produce any records reflecting trades ordered by Ping He or China Metals, or showing that the losing trades charged to Ping He were in fact made for Ping He's account. In addition, Ping He contends that NFM falsified the June 16 invoice, charged it grossly excessive commissions in violation of their agreement, and presented fraudulent documents to Bank of China in an attempt to draw upon the two standby letters of credit. Finally, Ping He contends that documents produced by NFM during discovery show that any trades conceivably executed by NFM on Ping He's behalf resulted in profits, not losses. By its Complaint, Ping He seeks the return of the $ 350,000 it paid NFM (the $ 50,000 May 1993 payment and the $ 300,000 December 1993 payment) based upon NFM's alleged fraud, unauthorized trading, conversion of funds, breach of contract and breach of fiduciary duty.
Not surprisingly, NFM offers a rather different version of events. While conceding that it never received trading instructions from Ping He or China Metals (see Wang Aff. P 31), NFM maintains that all of the trades it conducted for Ping He were authorized by NonFerrous B.M. Corp. ("B.M. Corp."), a private New Jersey corporation (unrelated to NFM and Ping He) that China Metals allegedly retained to give trading instructions for Ping He's account. In effect, NFM claims that a two-tiered agency structure existed: Ping He authorized China Metals to act as its agent, which in turn authorized B.M. Corp. to act as its agent. NFM contends that it traded for Ping He upon the specific instructions of B.M. Corp., that it kept track of the trades for Ping He in an account labeled the "ZZ" account, and that such trades resulted in large losses. Furthermore, NFM maintains that Ping He knew from the outset that NFM was not registered with the CFTC. According to NFM, it had no reason to misrepresent its registration status because it was at all times legally exempt from registration. Thus, in its answer to the Complaint, NFM denied all allegations of wrongdoing and counterclaimed against Ping He for $ 650,000 that it claimed was still owed. (As discussed below, NFM has frequently changed its position, both prior to and during this litigation, as to how much Ping He owes it.) Furthermore, on August 26, 1994, NFM filed a separate action against Bank of China for failing to honor the two standby letters of credit after NFM allegedly presented the bank with the required documentation.
The motions presently before the Court have a long history. Ping He and Bank of China first moved for summary judgment and sanctions against NFM in or about August, 1996. At that time, NFM cross-moved for summary judgment and sanctions. Finding both sides' briefing to be grossly inadequate, on February 11, 1997, I denied all parties' motions with leave to renew. Ping He and Bank of China subsequently refiled their joint motions for summary judgment and sanctions in May 1997. In response, NFM again cross-moved for summary judgment and sanctions against Ping He and Bank of China, and also moved to dismiss Ping He's Complaint pursuant to Fed. R. Civ. P. 9(b). At a conference held on August 22, 1997, I denied all of NFM's motions and reserved decision on Ping He's and Bank of China's motions for summary judgment and sanctions pending the submission of supplemental briefing on certain issues pertaining to NFM's registration status. The Court has now received the necessary briefing and is finally ready to consider the outstanding motions.
Summary judgment is appropriate if "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). A court's role on a motion for summary judgment is "not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986) (citing Anderson v. Liberty Lobby Inc., 477 U.S. 242, 249, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986)). In seeking summary judgment, the moving party has the initial burden of demonstrating the absence of a genuine issue of material fact. See Celotex Corp v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). Once the movant satisfies its initial burden, the nonmoving party must then come forward with "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). If a court determines that the "record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial." Porky Prods. v. Nippon Express U.S.A., Inc., 1 F. Supp. 2d 227, 230 (S.D.N.Y. 1997) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986). See also Anderson, 477 U.S. at 251-52, 106 S. Ct. at 2512 (the relevant inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law").
II. Overview of Statutory Scheme
The Commodity Exchange Act, as amended by Congress in 1974, 7 U.S.C. § 1 et seq. ("CEA" or "the Act"), established the Commodity Futures Trading Commission (CFTC) and erected a comprehensive statutory scheme governing the trading of commodity futures by persons in the United States.
Congress passed the CEA in response to concerns of widespread abuses in commodity futures trading, and in order to protect investors amid "the volatile and esoteric futures trading complex." CFTC v. Schor, 478 U.S. 833, 836, 106 S. Ct. 3245, 92 L. Ed. 2d 675 (1986) (quoting H.R.Rep. No. 93-975, p. 1 (1974)). The CEA charges the CFTC with enforcement of the Act, and grants the CFTC broad discretion to promulgate rules and regulations in furtherance of the Act's goals.
Central to the Act's regulatory scheme are its registration requirements, which have been hailed as "the kingpin in this statutory machinery, giving the [CFTC] the information about participants in commodity trading which it so vitally requires to carry out its other statutory functions of monitoring and enforcing the Act." CFTC v. British American Commodity Options Corp., 560 F.2d 135, 139-40 (2d Cir. 1977). The registration requirements ensure that persons dealing in commodities meet certain minimum financial and fitness requirements, and enable the CFTC to monitor the trading activities of market members. See 7 U.S.C. § 6f.
Because of their critical importance, the CEA's registration requirements apply to nearly every class of professionals who deal in commodities. Thus, under the Act, anyone who acts as a broker and executes sales of commodities on the trading floor of a contract market must be registered as a broker under § 4e. 7 U.S.C. § 6e. Futures commission merchants ("FCMs"), who do not trade themselves on the floor, but who, like NFM, solicit transactions which are then executed through brokers, must also register, pursuant to § 4d.
7 U.S.C. § 6d. Even a person who is simply "associated" with an FCM must register. See 7 U.S.C. § 6k. See CFTC Interpretative Letter No. 97-44 [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) P 27,084; 1997 WL 348744, at *2 (Jun. 9, 1997) ("The registration requirements serve to screen unfit persons from dealings with customers and thus represent an important customer safeguard. To assure that these requirements reach all persons involved in customer solicitations, the registration requirements have been construed flexibly to require the registration of persons who participate even indirectly in such solicitations.") Those who either fail to register or who misrepresent their registration status can be criminally prosecuted. See 7 U.S.C. §§ 6h, 13(a)(2) (making it a felony punishable by a $ 1 million fine or 5-year's imprisonment for any person falsely to represent himself or herself as registered); 7 U.S.C. § 6d(1) (making it unlawful for any person to operate as an FCM unless registered).
Limited exemptions to the Act's registration requirements do exist, however. One such exemption, set forth in CFTC Rule 3.10, applies to persons who trade "solely for proprietary accounts." 17 C.F.R. § 3.10(c).
The term "proprietary account," as defined in Rule 1.3(y), includes an account carried by a corporation for "a business affiliate that directly or indirectly is controlled by or is under the common control with such . . . corporation." 17 C.F.R. § 1.3(y). Here, NFM claims that, because it is owned by the Chinese government and traded solely for affiliated companies also under the common ownership and control of the Chinese government, it at all times fell within the "proprietary account" exemption and did not need to register under the Act. Ping He counters that NFM did not trade "solely" for Chinese-owned accounts and, therefore, can claim no exemption. Significantly, however, even if NFM did fall within the "proprietary account" exemption, Rule 3.10 conditions that exemption upon "such a person remaining subject to all other provisions of the Act and of the rules, regulations and orders thereunder." 17 C.F.R. § 3.10(c). Thus, regardless of NFM's registration obligations, NFM was at all times obligated to comply with the CEA provisions and CFTC rules regulating the conduct of FCMs. See CFTC Interpretative Letter 88-15, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) P 24,296 (Aug. 10, 1998) (emphasizing that entities exempt from registration under Rule 3.10(c) still must comply with all provisions of the CEA and CFTC Rules); CFTC Interp. Letter No. 89-7, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) P 24,479 (Jun. 22, 1989) (same).
As stated, a key purpose of the CEA is to protect customers against fraudulent and abusive trading practices by FCMs and other market participants. Toward that end, § 4b of the Act makes it unlawful for FCMs "to cheat or defraud or attempt to cheat or defraud" investors, "willfully to make or cause to be made . . . any false report or statement . . . [or] any false record" of sales involving futures contracts, or to engage in unauthorized trading by "willfully and knowingly" buying or selling commodities on another's behalf "without their prior consent." 7 U.S.C. § 6b(a).
Also, § 4g of the Act requires FCMs to maintain intelligible daily trading records for each customer, and to report to customers on their transactions, in the manner prescribed by the CFTC. 7 U.S.C. § 6g. In that regard, the CFTC has promulgated Rules 1.33 and 1.35, setting forth strict record-keeping and reporting requirements. Rule 1.35 requires FCMs to keep "full, complete, and systematic records" of all transactions relating to each customer, including order forms, signature cards, journals, ledgers, canceled checks, and any other notations recorded in the regular course of business. 17 C.F.R. § 1.35(a). Rule 1.35 also requires FCMs who receive customer orders to prepare "immediately" a written record of the order that contains the account identification number and is time-stamped to the nearest minute of receipt. 17 C.F.R. § 1.35(a-1)(1).
Finally, to prevent the commingling of trades for different customers, Rule 1.35 requires FCMs to maintain "a record of transactions which will show separately for each account" all future transactions and commodity options transactions executed, including date, price, quantity, market, commodity and future. 17 C.F.R. § 1.35(b)(2).
As for reporting, Rule 1.33 requires FCMs to send customers monthly statements setting forth, among other things, the profits or losses realized upon trades and all financial charges assessed a customer during the monthly reporting period. 17 C.F.R. § 1.33. In addition, CFTC Rule 1.55 provides that, even before a futures trading account can even be opened, FCMs must furnish customers with a risk disclosure statement, and obtain the customer's signature stating that he or she received and understood the risks disclosed. See 17 C.F.R. § 1.55.
The CEA empowers the CFTC to bring enforcement actions against violators of the Act and CFTC rules. See 7 U.S.C. § 15. Significantly, the Act also provides several avenues by which injured investors can obtain redress for violations of the Act. First, § 14 of the CEA, enacted by Congress in 1974, provides a reparations procedure whereby persons aggrieved by violations of the Act or CFTC rules can seek to recover damages from a registered industry professional by filing a complaint with the CFTC. See 7 U.S.C. § 18(a). Complaints brought under § 14 are adjudicated by administrative law judges or presiding CFTC officers, and reparations awards thereunder are enforceable in federal district court. Id. Separate and apart from this reparations procedure, § 22 of the Act, enacted in 1982, provides a private right of action permitting investors to sue directly in federal court for "actual damages" caused by another's violations of the Act. 7 U.S.C. § 25(a). It is pursuant to § 22 that Ping He now seeks to recover damages. Finally, the Act mandates each contract market to provide an arbitration mechanism under which parties can agree to arbitrate any dispute arising under the Act's provisions. See 7 U.S.C. §§ 7a(11); 25(a)(2).
III. Ping He's Motion for Summary Judgment
Although the Complaint alleges numerous common law bases for recovery, Ping He moves for summary judgment based solely upon NFM's alleged violations of the CEA. First and foremost, Ping He argues that summary judgment is required because NFM operated as an unregistered FCM in violation of § 4d. According to Ping He, this violation alone entitles it to disgorgement of the $ 350,000 it paid NFM. As a second, independent ground for summary judgment, Ping He argues that NFM violated CFTC Rules 1.33, 1.35 and 1.55, in failing to make required disclosures and maintain proper records. Finally, Ping He seeks summary judgment on the ground that NFM committed fraud in violation of § 4b of the Act by engaging in unauthorized trading and falsely reporting losses to Ping He.
NFM opposes summary judgment on the grounds that Ping He (i) failed to raise the CEA in its Complaint as a basis for recovery, (ii) lacks standing to sue under the CEA, and (iii) ratified NFM's conduct by paying NFM $ 300,000 in December 1993, months after trading on Ping He's account had ceased. NFM also maintains that it did not violate any of the CEA's provisions or CFTC rules, but that whether or not it did raises questions of fact that must be determined at trial.
(i) Adequacy of the Complaint
The Court first addresses NFM's contention that Ping He should be prohibited from seeking summary judgment based upon violations of the CEA because Ping He failed to cite the CEA, or any of the regulations promulgated thereunder, as a basis for recovery in the Complaint. This argument ignores the liberal notice pleading rules that have long been a part of the federal courts. Under the Federal Rules of Civil Procedure, a complaint need not specify the legal theory or statutory provisions upon which a claim is grounded, so long as the facts alleged in the complaint are sufficient to give the defendant notice of the nature of the claim. See Fed. R. Civ. P. 8(a) (a complaint need only set forth "a short and plain statement of the claim showing that the pleader is entitled to relief" and "a demand for judgment for the relief the pleader seeks"). As the Supreme Court stated in Conley v. Gibson, 355 U.S. 41, 47-48, 78 S. Ct. 99, 103, 2 L. Ed. 2d 80 (1957), "simplified 'notice pleading' is made possible by the liberal opportunity for discovery and other pretrial procedures established by the Rules to disclose more precisely the basis of both claim and defense and to define more narrowly the disputed facts and issues." See also Flickinger v. Harold C. Brown & Co., Inc., 947 F.2d 595, 600 (2d Cir. 1991) ("federal pleading is by statement of claim, not by legal theory").
Here, while it is true that Ping He's Complaint does not allege specific violations of the CEA, or mention the CEA at all, the Complaint alleges that NFM's chairman induced Ping He to open a trading account by misrepresenting NFM to be a registered commodity broker (Complaint PP 7-10); that NFM engaged in unauthorized trading in Ping He's name (Complaint PP 5, 15-16); that NFM presented fraudulent declarations to Bank of China (Complaint PP 22-23); that NFM charged Ping He for $ 344,893, although it "knew that Ping He was not indebted to [NFM] for any amounts" (Complaint PP 17, 35); and that NFM wrongfully "took and converted for its own usage and benefit" a total of $ 350,000 of Ping He's money (Complaint PP 5, 20). These allegations are more than sufficient to permit claims for violations of the CEA's registration and anti-fraud provisions.
A somewhat closer question is whether Ping He's Complaint alleges sufficient facts upon which to base claims for relief under the CFTC record-keeping, reporting and risk disclosure rules. The Complaint contains no allegations at all concerning NFM's failure to report, provide a risk disclosure statement, or maintain proper records. Nevertheless, I find that these claims should also be permitted. The futures trading activities at issue in Ping He's Complaint are so obviously within the regulatory province of the CEA and CFTC that NFM could not possibly be surprised by Ping He's reliance upon the CFTC rules for recovery. More importantly, the extremely long discovery period in this case provided both sides with ample notice of the legal and factual claims and defenses upon which the parties would ultimately rely, including Ping He's claims the NFM failed to keep adequate records and make required reports and disclosures. In fact, these issues have been a part of the three rounds of briefing on the instant motion, and of the intervening discovery in the action. Additionally, violations of Rules 1.33, 1.35 and 1.55 have often been treated by the CFTC as evidence of fraud, a charge the Complaint clearly makes. See e.g., Knight v. First Comm. Fin. Group, Inc., [1994-1996 Transfer Binder] Fut. Comm. L. Rep. (CCH) P 26,515, at 43,319 (Oct. 5, 1995) (violations of Rules 1.55 were evidence that defendant engaged in scheme to cheat and defraud plaintiff); In re GNP Commodities Inc., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) P 25, 360, at 39,214 (Aug. 11, 1992) (defendant's failure to place account numbers on order tickets, in violation of Rule 1.35, made possible the fraudulent allocation of trades). Finally, in the case of NFM's alleged internal record-keeping violations, under Rule 1.35, Ping He could not reasonably have been expected to know of such violations prior to discovery and, therefore, good cause exists to permit it to add these violations once discovered.
For these reasons, I find that the Complaint is adequate to permit Ping He's claims for recovery based upon the CFTC rules, as well as the CEA itself. To reject these claims at this late hour would not serve the spirit of the Federal Rules of Civil Procedure, which "favor, as a matter of high priority, that disputes be resolved on their merits" McLearn v. Cowen & Co., 660 F.2d 845 (2d Cir. 1981), and which direct that "all pleadings shall be so construed as to do substantial justice." Fed. R. Civ. P. 8(f).
Prior to 1982, the CEA was silent on the subject of private judicial remedies for persons injured by violations of the CEA. Nevertheless, federal district and appeals courts had routinely recognized an implied private cause of action under various provisions of the statute. In 1982, the Supreme Court endorsed this view, holding that Congress intended for investors to have the right to sue for damages under at least five separate provisions of the CEA, including § 4b. Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S. Ct. 1825, 72 L. Ed. 2d 182 (1982). In so holding, however, the Court invited Congress to clarify its intent. Id., 456 U.S. at 394-95, 102 S. Ct. at 1847-48. Congress did so almost immediately thereafter by enacting § 22, which explicitly provides a right of action for violations of the Act. 7 U.S.C. § 25.
Specifically, § 22 provides that any person (other than certain specified organizations not involved in this case) who violates the CEA "or who willfully aids, abets, counsels, induces, or procures the commission of a violation" of the Act, "shall be liable for actual damages" caused by the violation. 7 U.S.C. § 25(a)(1).
Federal district courts have exclusive jurisdiction to hear suits brought under § 22. 7 U.S.C. § 25(c). Furthermore, with certain exceptions not applicable here, the private rights of action created by § 22 are "the exclusive [judicial] remedies . . . available to any person who sustains loss as a result of any alleged violation of [the Act]." 7 U.S.C. § 25(a)(2).
To maintain a suit under § 22, however, it is not enough to allege that a defendant violated provisions of the Act. A plaintiff must also allege that (1) it incurred "actual damages" from the alleged violation, and (2) that the damages resulted from one or more of the four transactions enumerated in subsections (A) through (D). See 7 U.S.C. § 25(a)(1)(A)-(D). As to this second prerequisite, Ping He bases its standing upon the transaction described in § 22(a)(1)(B), in that Ping He "deposited with or paid to [NFM] money . . . in connection with any order" of a futures contract. 7 U.S.C. § 25(a)(1)(B).
NFM does not challenge Ping He's satisfaction of either of these prerequisites to maintaining an action under § 22. However, NFM claims that Ping He lacks standing to sue for lack of privity, i.e., because Ping He delegated its authority to deal with NFM to agents that are not party to this lawsuit. This argument is both legally unsupported and flatly contradicted by NFM's own statements throughout this litigation. Even if direct personal contact between a plaintiff and defendant were required to maintain an action under § 22 -- and NFM has presented no legal authority indicating that it is
-- NFM conceded that privity exists when it stated in its 3(g) statement that "Ping He provided the sum of $ 300,000.00 to NFM . . . in December 1993 [and] . . . the sum of $ 50,000.00 to NFM as an initial margin." (NFM's 3(g) Statement PP 6-7.) NFM has repeated these contentions in its briefs, supporting affidavits, and at oral argument. (See NFM 1997 Opp. Brief at 13; Wang Aff. P 49; Transcript of May 30, 1997 hearing, at 13.) Moreover, NFM has counterclaimed directly against Ping He on the ground that Ping He, and not some other entity or agent, owes it $ 650,000 in trading losses. For NFM to take these positions, yet argue that Ping He lacks privity with NFM, is preposterous.
However, there are two harder questions -- both critical to whether Ping He is entitled to an award of damages in this action -- which neither party has addressed. Those questions are: first, whether Ping He has satisfied the "actual damages" requirement for its claims under §§ 4b and 4d of the CEA, and Rules 1.33, 1.35 and 1.55; and second, whether private litigants have standing to sue for violations of the CFTC rules. I will address each of these questions in turn.
Even if NFM violated every provision of the CEA or the CFTC rules, under the express language of § 22, Ping He is only authorized to bring suit, and can only recover, for those violations that caused Ping He to suffer "actual damages." See 7 U.S.C. 25(a). The term "actual damages" has been applied by courts in a straightforward manner to require a showing of actual injury caused by the violation. See Wigod v. Chicago Mercantile Exchange, 981 F.2d 1510, 1521-22 (7th Cir. 1992) ("under the explicit terms of the statute," a private litigant has no standing to sue under CEA provisions unless violation of that provision caused him "actual injury"); Apex Oil Co. v. DiMauro, 744 F. Supp. 53, 56 (S.D.N.Y. 1990) (holding that "no damages were recoverable" for CEA violations where plaintiffs "had not suffered damages but had actually prospered as a result of the alleged wrongdoing"); Kwiatkowski v. Bear Stearns Co., Inc., 1997 U.S. Dist. LEXIS 13078, *34, 1997 WL 538819, at *29, 31 (S.D.N.Y. Aug. 27, 1997) (dismissing damages claim where plaintiff alleged no facts showing that he suffered any loss from the alleged violation).
Cf. Curran, 456 U.S. at 388, 102 S. Ct. at 1844 (prior to enactment of § 22, plaintiffs who brought suit under CEA's implied ...