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April 21, 2000


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.

The Parties

Rotter, at all times relevant to the Complaint in this action, was a California resident. He is currently a Nevada resident.

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 York.

Johnston is a New Jersey resident.

Prior Proceedings

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

According to the Price Change Register of NYMEX, the earliest time at which a $25.50 price could have been executed on the afternoon of January 9, 1991 was 13:58:05. The earliest time the $29.80 price could have been achieved was 14:08:47. Thus, Leahy took at least eleven minutes to execute the Order. February crude oil futures contracts traded at fourteen different prices, ranging from $23.70 to $26.00, between 13:53:59 and 13:58:05.

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 January 1991.

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 $100,000.

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.

The TPC, in turn, alleges that Johnston was Chairman and President of IBC and solely responsible for handling IBC's dissolution. The TPC asserts six causes of action against Johnston: three counts alleging liability for the full amount of Rotter's claim against Leahy under (I) Delaware Code Ann. tit. 8 § 281(c) (director liability for creditor claims); (II) Del. Code Ann. tit. 8 § 282(b), (c) (shareholder responsibility for pro-rata share of claim or amount distributed to shareholder); (III) New York Debtor & Creditor Law §§ 273, 273-a (distribution of assets to Johnston for less than fair consideration), and § 276 (fraud); and three counts pertaining to Johnston's actions with respect to the distribution of ...

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