The opinion of the court was delivered by: Sweet, D.J.,
Third-party defendant John L. Johnston ("Johnston") has
moved, pursuant to Rule 12(c) of the Federal Rules of Civil
Procedure, for judgment on the pleadings to dismiss the third-party
complaint (the "TPC") of defendant John D. Leahy, Jr. ("Leahy").
Leahy has moved, pursuant to Rules 15(a) and 13(f), to amend his
answer to the complaint (the "Complaint") of plaintiff Bradley N.
Rotter ("Rotter"), and to amend his TPC against Johnston.
Defendant Dennis Maloney ("Maloney") has moved, pursuant to Rules
56 and 11, for summary judgment to dismiss the claims of the
Complaint set forth against him, and for sanctions. For the
reasons set forth below, the motions will be granted in part and
denied in part.
Rotter, at all times relevant to the Complaint in this
action, was a California resident. He is currently a Nevada
Leahy is a New Jersey resident and, at all times relevant
to the Complaint in this action, was a member of the New York
Mercantile Exchange ("NYMEX").
Maloney, at all times relevant to this action, was a
NYMEX member and had a principal place of business in New York, New
Johnston is a New Jersey resident.
Rotter filed his Complaint against Leahy and Maloney on
November 25, 1997. Leahy filed an answer to the Complaint, and
filed his TPC against Johnston, on January 8, 1998. Maloney filed
his answer to the Complaint on January 28, 1998. Johnston filed
his answer to the TPC on April 8, 1998.
Discovery proceeded. Johnston filed his instant motion
to dismiss the TPC on September 29, 1999. Leahy served his motion
to amend both the TPC and his answer to the Complaint on or around
November 23, 1999. Briefing papers relating to these motions were
received through January 19, 2000, when the Court heard oral
argument and at which point the motions were deemed fully briefed.
The facts set forth below are drawn from the Complaint,
the TPC, the Rule 56.1 Statements, and the additional submissions
of the parties. Facts material to Maloney's summary judgment
motion, where disputed, are construed in the light most favorable
to Rotter. Facts material to Johnston's motion to dismiss, which
the Court is treating as a motion for summary judgment since
materials outside the pleadings were submitted in connection with
the motion, are construed in the light most favorable to Leahy.
Johnston and Leahy are former owners and directors of
Institutional Brokerage Corp. ("IBC"), a Delaware corporation which
provided floor brokerage services on various New York commodity
futures exchanges from 1987 until approximately April 1994. Leahy
became a shareholder and director on July 1, 1991. Previously, he
was an IBC employee who traded crude oil futures contracts at the
NYMEX for IBC customers.
Maloney has been since at least January 9, 1991 a NYMEX
member. His NYMEX badge name is "SLIP." He has never been an IBC
principal or employee.
During the time relevant to this action, Rotter had an
office at the Echelon Group in San Francisco, from which he
conducted trading activities. On January 1, 1988, he entered into
an agreement with IBC to place trades for execution on the NYMEX
for his account directly with IBC.
January 9, 1991 was a volatile day at the NYMEX. Iraq
had occupied Kuwait and then-Secretary of State James Baker was in
talks with Iraqi Foreign Minister Tariq Aziz, attempting to reach
a diplomatic solution to the crisis. In anticipation of a public
announcement from Baker, customers were on telephone calls with
NYMEX crude oil traders ready to place buy or sell orders, since
prices were expected to move sharply in one direction or other
depending on the outcome of the talks. At approximately 1:53 p.m.
Eastern Standard Time, Rotter phoned the IBC order desk on the
NYMEX floor. About the time of Baker's announcement that
"regrettably" a diplomatic solution had not been reached, Rotter
placed an order to buy 100 February crude oil futures contracts "at
the market" (the "Order"). An IBC telephone clerk accepted the
Order and gave it to Leahy for execution in the pit. At
approximately the same time, IBC's telephone clerks received two
other "at the market" orders to buy a total of 45 February crude
oil futures contracts.*fn1 Rotter waited on the phone for
approximately twenty-three minutes with IBC for confirmation of the
price at which the Order was executed, but could not receive
confirmation over the phone.
According to Rotter's confirmation statements, Leahy
filled the Order at the following quantities and prices:
25 contracts at $25.50
20 contracts at $28.00
30 contracts at $29.00
10 contracts at $29.85
14 contracts at $29.80
1 contract at $26.20
Rotter, a sophisticated commodities trader, suspected
malfeasance in connection with the placing of the Order: that IBC
had failed to execute the Order at the best market price available
at the time, and had misallocated the execution of trades made for
Rotter's account to accounts of other IBC customers. He filed a
complaint against IBC with the Compliance Department of NYMEX in
Rotter subsequently sued IBC, Johnston, and Bruce L.
Cleland ("Cleland"), another IBC principal, in January 1993 in the
Northern District of California, seeking recovery of the money he
allegedly lost in the January 9, 1991 trade under claims of breach
of contract, common law fraud, fraud under the Commodity Exchange
Act, and breach of fiduciary duty (the "1993 Action")
At some point after the initiation of the 1993 Action,
Rotter received, pursuant to discovery, Leahy's trading card No.
AA694536, which listed the trades Leahy made to fill the Order.
Although there were at least two "versions" of this trading card,
only one was produced at the time. The produced card showed a
blank line above a trade buying 30 February crude oil futures
contracts at $29.00 from "SLIP" (i.e., Maloney). Directly across
from that entry on the same line was another entry reflecting the
sale of 30 March crude oil futures contracts to Maloney at $25.00.
Typically, a buy and sell order entered on the same line
indicates a spread. However, under NYMEX Rule 6.08A, a spread
trade consisting of different delivery months on the buy and sell
side can only be executed if both trades are for the same customer.
While the 30 February contracts at $29.00 were allocated to fill
partially Rotter's Order, Rotter did not trade March crude oil
contracts on January 9, 1991; therefore the listing of the two
trades on the same line did not indicate a spread trade.
NYMEX Rule 6.90 requires that "[a]ll transactions must be
recorded in exact chronological order of execution on sequential
lines of the trading card without skipping lines between trades."
Thus, Leahy's trading card contained a record-keeping violation,
since he could not have executed the 30 February trades at $29.00
and the 30 March trades at $25.00 at the same time.
The 1993 Action was transferred to this District and
dismissed as to Johnston and Cleland upon their motions. The
entire action was then dismissed in February 1995 on consent of the
parties, and refiled as an arbitration before the National Futures
Association ("NFA"), by which time IBC had ceased trading.
In or around April 1994, IBC ceased to be a going
concern. During the first five months of 1994, Johnston received
distributions from IBC in excess of $120,000.
On or around May 8, 1996, Johnston retained Aegis J.
Frumento ("Frumento") to represent IBC in the arbitration, on a
referral from IBC's previous counsel, Stumpp & Bond. Shortly
thereafter, Johnston retained David L. Leffler ("Leffler") as his
personal attorney. Leffler had previously represented IBC.
A hearing on the arbitration scheduled by the NFA for May
29 and 30, 1996, was continued at IBC's request.
On June 13, 1996, Leffler took notes of a telephone
conversation with Gary Stumpp ("Stumpp") of Stumpp & Bond. The
notes indicated that Johnston could provide "some info that is very
helpful" in order to obtain a judgment against IBC. The "info"
apparently pertained to something "intentional" that Leahy did and
for which "Leahy owes IBC."
At Johnston's direction, Frumento had refrained during
this period from doing any work in connection with the arbitration,
and, after the Release was signed, Frumento advised the NFA on
September 19, 1996 that IBC would no longer participate in the
arbitration and would not appear at the September 23, 1996 hearing.
The same day, Carey moved for a default award, which the NFA
granted on September 24, 1996, awarding Rotter in excess of
$250,000, plus interest, costs, and attorney's fees. Judgment on
the award was rendered in New York Supreme Court, New York County,
in June 1997.
The arbitration award was calculated based on the
difference between the lowest price at which the Order was
partially filled--$25.50 (for 25 contracts) — and the prices at
which the remaining 75 contracts were purchased. There is a
factual dispute as to whether this award was excessive, as Leahy
contends that he filled the Order at the best prices he could, in
light of the volatility in the market after Baker's announcement.
On February 25, 1997, Johnston executed an affidavit for
Rotter in which Johnston stated that in the spring of 1993, "Leahy
indicated in connection with Rotter's order he had prearranged a
trade with Maloney that had earned Maloney approximately $100,000.
Maloney was supposed to have paid Leahy $30,000 of that amount but
according to Leahy never did so."
On November 25, 1997, Rotter brought the instant action.
Rotter's Complaint alleges that on January 9, 1991, Leahy and
Maloney engaged in an illegal, prearranged trade involving 30 crude
oil futures contracts for February 1991, which were part of the
Order which Rotter placed with IBC and which Leahy executed. Leahy
bought 30 of the 100 contracts from Maloney at a price of $29.00,
allegedly $3.50 higher than the market price at the time of the
transaction. These contracts were allegedly wrongfully assigned to
Rotter's account, resulting in alleged damages of at least
In addition, the Complaint alleges that when IBC
dissolved in 1994, Leahy deliberately distributed IBC's assets to
himself and to "one other shareholder"*fn2 without providing for the
payment of a potential judgment on Rotter's pending claim. The
Complaint also alleges that Rotter first learned of the alleged
prearranged trade between Leahy and Maloney in January 1997.
The Complaint alleges two causes of action against Leahy
and Maloney: (I) commodities fraud in violation of § 4(b) of the
Commodity Exchange Act, 7 U.S.C. § 6b; and (II) common law fraud.
Additional causes of action are alleged solely against Leahy: (III)
breach of fiduciary duty for personal diversion of IBC assets; (IV)
breach of fiduciary duty for the illegal trading; and (V)
fraudulent conveyance of the IBC assets.