(CITE AS: 487 F.SUPP. 416)
NAVIGATOR GROUP FUNDS, Eileen Kirkwood, Paul Singer, Maria
Saumberger and Livingston H. Domas,
Plaintiffs,
v.
SHEARSON HAYDEN STONE INC., Joseph Szoecs and Joel Margolies,
Defendants.
No. 77 Civ. 5350 (VLB).
United States District Court, S. D. New York.
March 20, 1980.
JOHN C. KLOTZ, New York City, for plaintiffs.
Willkie, Farr & Gallagher, New York City, for defendants.
MEMORANDUM ORDER
VINCENT L. BRODERICK, District Judge.
I.
The amended complaint in this action ("complaint") charges viola
tions of the Commodity Exchange Act of 1936 as amended by the
Commodity Futures Trading Commission Act of 1974 (collectively
"the commodities acts"), 7 U.S.C. s 1 et seq. It also purports to
charge violations of the securities acts, and charges violations
of fiduciary obligations under the laws of New York State. The
plaintiffs are Navigator Group Funds ("Navigator"), a limited
partnership engaged in pooled commodities investment, and four of
its limited partners. Defendants are Shearson Hayden Stone Inc.
("Shearson"), a corporation with principal place of business in
New York, and Joel Margolies and Joseph I. Szoecs, two employees
of Shearson.
Defendants have moved to dismiss the complaint. For the reasons
which follow, the motion is denied as to the claims on behalf of
Navigator; it is granted on the basis set forth in Section IV,
infra, with respect to the securities claims on behalf of Naviga
tor's limited partners.[FN1]
II.
The factual allegations of the complaint are accepted as true for
purposes of considering defendants' motions. The facts as dis
tilled from the complaint follow.
In 1976 Shearson "embarked on a course of conduct designed to
increase its corporate profits" by generating large amounts of
commission income "through the purchase and sale of investments
in commodity futures contracts." Thus it encouraged the estab
lishment of pooled investment accounts with Shearson.
To induce Navigator to open a limited discretionary account at
Shearson, Shearson and its employees made various misrepresenta
tions. Thus they represented that at least 40% of Navigator's
account would be kept in reserve at all times, that no more than
20% of the account would be committed to a single investment
position, and that the Navigator account would be reviewed daily
by a Shearson officer. On July 7, 1976 Navigator opened a pooled
account for investment in commodities with Shearson, and Szoecs
began to function as broker for Navigator under the supervision
of Margolies. With the full knowledge, consent, advice and en
couragement of Shearson, monies were solicited from Navigator's
limited partners to be invested in the pooled account maintained
by Navigator at Shearson. In or about April, 1977 Shearson held
for the account of Navigator the sum of $404,000, and it accepted
an additional $95,000 capital investment in the pool in or about
May, 1977.
Defendants failed to hold the stated percentages of Navigator's
account in reserve; they invested an excessive percentage of the
account in single commodity contracts; they failed to place stop
orders on futures contracts; and they refused to follow Naviga
tor's specific directions as to investments in commodity futures.
$464,000 of the total of $499,000 invested through Navigator in
the account at Shearson was dissipated and lost.
III.
Commodities Acts Claim
The first count of the complaint alleges, on behalf of Navigator,
violations by the defendants of the antifraud provisions of the
commodities acts applicable to members of contract markets, 7
U.S.C. s 6b.[FN2] The gist of the first cause of action is that
Shearson and its employees induced Navigator to open a limited
discretionary account at Shearson by various misrepresentations.
The defendants' motion to dismiss the first count is predicated
on the ground that there is no implied private right of action
under the commodities acts. On the basis of the analysis which
follows, I hold that there is such a right of action.
Analysis of this issue must begin with the Supreme Court deci
sions in Touche Ross v. Redington, 442 U.S. 560, 99 S.Ct. 2479,
61 L.Ed.2d 82 (1979), and Transamerica Mortgage Advisors, Inc. v.
Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979).[FN3]
The goal of the analysis, according to these cases, is to deter
mine what Congress actually intended.
In determining intent, the court may look to two sources: the
language of the statute and the legislative history. If those
sources indicate an intent not to create a right of action, the
court's inquiry is at an end. Other factors for the court's
consideration, enumerated in Cort v. Ash, 422 U.S. 66, 95 S.Ct.
2080, 45 L.Ed.2d 26 (1975),[FN4] need not be reached if the
language of the statute and its history clearly indicate that
creation of a private right of action was not intended.
The statute itself does not explicitly provide for a private
right of action for violation of its antifraud (or any other)
provisions, nor does it explicitly confer jurisdiction on the
courts over private actions brought under it. It does provide a
number of other remedies for violation of the commodities acts,
including a reparations procedure to be administered by the
Commodities Futures Trading Commission ("CFTC") and open to any
injured investor, 7 U.S.C. s 18; disciplinary proceedings to be
conducted by the CFTC with respect to members of commodities
exchanges found violating the Act, 7 U.S.C. s 12c; authority in
the CFTC to sue in federal court for injunctions against unlawful
commodities futures practices, 7 U.S.C. s 13a-1; and authority in
the CFTC to issue cease and desist orders, 7 U.S.C. s 13b. It
also provides criminal penalties for knowing violation of various
sections of the commodities acts, 7 U.S.C. s 13.
If the statute itself were the only source, the availability of
these remedies would, under Transamerica, be dispositive of the
question of legislative intent. In Transamerica the Court refused
to imply a private right of action for violation of the anti-
fraud section of the Investment Advisers Act, suggesting that the
postulation of specific remedies by Congress inhibited the impli
cation of others:
Unlike s 215, s 206 simply proscribes certain conduct, and does
not in terms create or alter any civil liabilities. If monetary
liability to a private plaintiff is to be found, it (sic the
court?) must read it into the Act. Yet it is an elemental canon
of statutory construction that where a statute expressly provides
a particular remedy or remedies, a court must be chary of reading
others into it. When a statute limits a thing to be done in a
particular mode, it includes the negative of any other mode.
(citations omitted) Congress expressly provided both judicial and
administrative means for enforcing compliance with s 206. First,
under s 217 willful violations of the Act are criminal offenses,
punishable by fine or imprisonment, or both. Second, s 209 au
thorizes the Commission to bring civil actions in federal courts
to enjoin compliance with the Act, including, of course, s 206.
Third, the Commission is authorized by s 203 to impose various
administrative sanctions on persons who violate the Act, includ
ing s 206. In view of these express provisions for enforcing the
duties imposed by s 206, it is highly improbable that "Congress
absentmindedly forgot to mention an intended private action."
Cannon v. University of Chicago, 441 U.S. (677) at 742, (99 S.Ct.
1946 at 1981, 60 L.Ed.2d 560) (Powell, J., dissenting). Id. 444
at 20, 100 S.Ct. at 247.
The anti-fraud provisions of the commodities acts are similar to
those contained in the Investment Advisers Act at issue in Trans
america, and the commodities acts contain counterparts to various
of the remedies available under the Investment Advisers Act.
The administrative reparations procedure which is available to
injured investors under the commodities acts has no counterpart
under the Investment Advisers Act. So far as the individual
investor is concerned, this procedure is a more adequate substi
tute for a private right of action than those remedies which in
Transamerica were found to negate any legislative intent to
permit the implication of a private right of action; unlike the
remedies in the Investment Advisers Act it serves not only to
deter the conduct prohibited, but it also provides the injured
investor with a means of being compensated for his loss. [FN5]
The inquiry under Transamerica, however, does not end here. "Even
settled rules of statutory construction could yield, of course,
to persuasive evidence of a contrary legislative intent." Id. at
20, 100 S.Ct. at 247. Accordingly, examination of the legislative
history of the commodities acts is indicated, to determine wheth
er it yields "persuasive evidence" of contrary legislative int
ent.
While the original Commodity Exchange Act ("CEA") was enacted in
1936, the regulatory scheme as it exists today is a product of
the 1974 amendments. Those amendments, passed as the Commodities
Futures Trading Commission Act ("CFTCA"), vested in an independ
ent commission, the CFTC, "exclusive" jurisdiction over the
trading of commodities futures. It is therefore the legislative
history of the 1974 amendments which is relevant to the instant
inquiry.[FN6]
Prior to 1974, a number of courts had implied a private right of
action under various provisions of the CEA, including its anti
fraud provisions, e. g. Deaktor v. L.D. Schreiber & Co., 479 F.2d
529 (7th Cir.), rev'd on other grounds sub nom. Chicago Mercan
tile Exchange v. Deaktor, 414 U.S. 113, 94 S.Ct. 466, 38 L.Ed.2d
344 (1973); Goodman v. H. Hentz & Co., 265 F.Supp. 440
(N.D.Ill.1967); Booth v. Peavey Co. Commod. Services, 430 F.2d
132 (8th Cir. 1970); Johnson v. Arthur, Espey, Shearson, Hammill
& Co., 341 F.Supp. 764 (S.D.N.Y.1972). The legislative history of
the CFTCA indicates that Congress was aware of these cases at the
time that it passed the 1974 amendments, e. g., 120 Cong.Rec.
4133, 92nd Cong., 1st Session, Remarks of Rep. Poage (Chairman of
House Committee on Agriculture); Hearings on H.R.11955, House
Committee on Agriculture, 93d Cong., 2d Session ("House Hearings
1974"), 249, 32; Hearings on S.2485, S.2578, S.2837, H.R.13113,
Senate Committee on Agriculture and Forestry, 93d Cong., 2d
Session ("Senate Hearings 1974"), Pt. 3 at 737, 746.
In determining what if any conclusions can be drawn from that
knowledge, the Supreme Court's decision in Cannon v. University
of Chicago, 441 U.S. 677, 99 S.Ct. 1946, 60 L.Ed.2d 560 (1979),
provides some guidance. In Cannon, the Court implied a right of
action under Title IX of the Education Act Amendments of 1972 in
spite of the statute's silence on that issue and its explicit
provision of another remedy for violation of the Act. The Court
regarded it as significant that Title IX was patterned on Title
VI of the Civil Rights Act of 1964, under which one circuit court
and a number of district courts had implied private rights of
action. From this the Court reasoned that Congress, presumably
aware of case law developments, intended that Title IX share the
same judicial gloss. The Court found it possible to draw this
inference only because in 1972, when Title IX was passed, Con
gress knew it could count on the courts to imply statutory rights
of action quite liberally. The reasoning of Cannon is complemen
tary to, rather than inconsistent with, that of Touche Ross,
decided only one month later, and Transamerica, decided only six
months later. All three indicate that search should be made for
the actual intent of Congress. Cannon recognizes that the inquiry
into legislative intent requires, at least with respect to legis
lation passed during a more permissive era of judicial implica
tion of private rights of action, consideration of congressional
awareness of and response to judicial developments. Touche Ross
and Transamerica were concerned with statutes enacted before the
era of liberal implication of private rights of action, and thus
the likelihood of congressional awareness of this judicial liber
ality did not have to be factored into the analyses in those
cases.
This case presents what is in many ways a more appropriate con
text for the Cannon reasoning than did Cannon itself. Here it is
not necessary to look to a different statute for a background of
court-implied remedies; private rights of action had been implied
with respect to the CEA itself, which the 1974 legislation amend
ed and revamped. Nor is it necessary to impute knowledge of the
case law to the legislators who enacted the CFTCA; the legisla
tive history contains ample evidence that they possessed that
knowledge. As in 1972 when Title IX was passed, Congress in 1974
had every reason to believe that its omission expressly to pro
vide for private rights of action would not preclude the courts
from implying them. The judicial trend toward a more restrictive
approach to implied private rights of action was not established
until the Supreme Court issued a series of decisions in 1974 and
1975, e. g. National Railroad Passenger Corp. v. National Assoc.
of R.R. Passengers, 414 U.S. 453, 94 S.Ct. 690, 38 L.Ed.2d 646
(1974); Securities Investor Protection Corp. v. Barbour, 421 U.S.
412, 95 S.Ct. 1733, 44 L.Ed.2d 263 (1975); Cort v. Ash, 422 U.S.
66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975).[FN7] Congress in early
1974 cannot be expected to have read the handwriting on the
wall.[FN8] I find it consistent with the legislative history to
imply a private right of action for violation of the antifraud
provisions of the commodities acts.
To whatever extent it has significance, the legislative history
of the 1978 amendments to the commodities acts supports this
conclusion. "While subsequent legislation can disclose little or
nothing of the intent of Congress in enacting earlier laws,"
Transamerica supra, at n. 13, the interpretation placed on the
earlier legislation by congressmen amending it only four years
later is surely entitled to some weight. Two items in the legis
lative history of the 1978 amendments are worthy of note. One is
the description of the administrative reparations procedure as an
alternative forum for customer claims; the other is a rationale
offered for exempting contract markets from law suits by states.
Senator Huddleston, a member of the Senate committee responsible
for the amendments, described the administrative reparations
procedure as follows:
In 1974, Congress directed the Commission to establish a repara
tion procedure for adjudicating customer complaints against
commodity professionals and firms inexpensively and quickly.
During the past 3 years, an unexpected number of reparation cases
have been filed with the Commission, resulting in a substantial
backlog in the processing of these customer claims. Compounding
the undue stress placed on the reparation program, certain Feder
al district courts have taken the unfortunate position that
Congress intended reparations to be the exclusive forum for
adjudicating commodity customer claims. (citations omitted) In
order to alleviate the burden on the Commission's reparation
program, the committee adopted an amendment that provides for
reparation complaints where the amount claimed as damages does
not exceed $5,000 that a hearing be held only on the novel or
basic issues that are determinative of the case. Thus, an ag
grieved commodity customer will be able to obtain more expedi
tious treatment of his claim should the customer elect to pursue
a claim in reparations rather than proceed to arbitration or
pursue in court the private right of action which has been judi
cially implied for violations of certain provisions of the Com
modity Exchange Act, or which in the future courts may recognize
for other provisions of the act.
124 Cong.Rec. 10537, 95th Cong., 2d Sess. (1978) (Remarks of Sen.
Huddleston).
Senator Huddleston's remarks strongly suggest that the repara
tions procedure was designed to provide an attractive alternative
to, rather than a replacement for, litigation.[FN9] They also
suggest that even as late as 1978, Congress was still inclined to
let the courts decide which statutory provisions would give rise
to an implied private right of action, even though the courts
were showing an increasing reluctance to shoulder that burden.
One of the changes effected by the 1978 amendments was the addi
tion of a statutory cause of action by a state as "parens pa
triae" for injunctive relief and damages. The provision specifi
cally exempts suits against contract markets from its coverage.
Senator Leahy of the Senate Committee responsible for the bill,
the Committee on Forestry and Agriculture, explained that a part
of the justification for exempting contract markets from law
suits by states was the subsisting deterrent effect upon such
contract markets of implied private rights of action that might
be invoked against them:
The exemption from State suits provided to contract markets is
justified due to the deterrent effect on contract markets caused
by Commission regulation, institution of Commission enforcement
proceedings, and the implied private rights of action that may be
brought against those contract markets that fail to discharge
their duties under the Commodity Exchange Act. In those actions
brought by a State under this bill, a customer who makes an
informed, voluntary election to have his State sue on his behalf
to recover monetary damages for a particular violation would
thereby extinguish that person's other alternatives for redress:
arbitration, reparations, or judicially implied private rights of
civil action under the Act. 124 Cong.Rec. 10527, 95th Cong., 2d
Sess (1978), Remarks of Sen. Leahy.
In light of Congress' express reliance on judicially implied
private rights of action in fashioning an exemption from one of
its enforcement provisions, failure to fulfill that expectation
could distort the intended regulatory scheme.
Defendants have pointed to other aspects of the legislative
history which, they suggest, indicate that Congress did not
intend that a private right of action be implied. Thus they note
that prior to the passage of the 1974 Act, three bills were
introduced and died in committee which would expressly have
provided for private rights of action. With regard to these
bills, I find persuasive the reasoning of the court in Smith v.
Groover, 468 F.Supp. 105, 113 (N.D.Ill.1979):
The bills to which defendants refer all provided for the recovery
of treble damages, a remedy previously unavailable to plaintiffs
suing on an implied right of action. The defeat of these bills,
therefore, demonstrates nothing more than a congressional deci
sion not to expand recovery under the existing private right.
Nor is it useful to speculate on the significance of bills which
were never debated on the floor of Congress or made the subject
of committee reports. Defendants also note the failure of the
Senate Report on the 1978 Amendments to catalog private rights of
action among the protections and remedies provided under the
commodities acts:
The Commodity Exchange Act provides many customer protections and
remedies. The Act directs the Commission to promulgate and admin
ister a regulatory program that includes registration of commodi
ty professionals, segregation of customers' funds by futures
commission merchants, establishment of dual trading guidelines,
creation of a procedure for the adjudication of reparation
claims, monitoring exchange arbitration procedures and discipli
nary actions, and licensing of industry self-regulatory futures
associations. Moreover, customers are afforded protection through
the Commission's power to sue directly for injunctive relief and
to invoke a full range of administrative remedies where appro
priate to curb unlawful behavior.
The Commodity Futures Trading Commission was created in order to
assure that a single expert agency would have the responsibility
for developing a coherent regulatory program encompassing futures
trading and related activities. Therefore, Congress has vested in
the Commission exclusive jurisdiction to build upon the founda
tion provided by the Commodity Exchange Act in erecting a sound
and strong Federal regulatory policy governing futures trading.
S.Rep. No. 95-850, 95th Cong., 2d Sess. (1978), reprinted in
(1978) U.S.Code Cong. & Admin.News, pp. 2087, 2100-2101.
The defendants contend that had Congress intended to allow a
private right of action, it would have listed that remedy along
with all the others.
Nothing in the quoted portion suggests that Congress intended to
preclude the courts from implying remedies. The Senate Report
simply describes those remedies which are to be specifically
provided by the commodities acts. Other aspects of the 1978
legislative history, explicated above, indicate that Congress
intended to rely on the courts to "provide" certain judicial
remedies. Defendants further contend that since Congress amended
the commodities acts in 1978, its failure explicitly to provide
for private rights of action is a clear reflection of their
intent to preclude such rights. In support of that contention
they note that Congress was aware in 1978 that certain courts had
declined to imply private rights of action in the wake of the
1974 amendments, see Remarks of Senator Huddleston, quoted supra
at 11-12, and they assert that by 1978 the trend toward a more
restrictive judicial approach to such implied private rights had
become quite clear.[FN10]
Had Congress set out in 1978 to rewrite the law of commodities
futures regulation as thoroughly as it did in 1974, the defend
ants' argument would be more persuasive. While the 1978 amend
ments made some substantial changes in and additions to the
commodities acts, they did not alter the fundamental regulatory
framework. The logic of defendants' argument would be to require
federal courts to prohibit private actions with respect to any
statute amended in any way after the mid-1970's, if Congress did
not explicitly create a private right of action. There is no
support in the recent Supreme Court decisions for such a require
ment. Absent some indication that Congress' attention was focused
on the need to overrule the district court decisions disapprov
ingly cited by Senator Huddleston, I decline to conclude that the
failure to enact legislation overruling those decisions consti
tuted an implied endorsement of their holdings.
Since the legislative history supports the implication of a
private right of action, the analysis may proceed to the other,
now less important factors enumerated by Cort v. Ash, 422 U.S. at
78, 95 S.Ct. at 2088: [FN11]
1) is "the plaintiff 'one of the class for whose especial benefit
the statute was enacted'?" (emphasis in original). 2) "is it
consistent with the underlying purpose of the legislative scheme
to imply such a remedy for the plaintiff"? 3) "is the cause of
action one traditionally relegated to state law, in an area
basically the concern of the States, so that it would be inappro
priate to infer a cause of action based solely on federal law"?
[FN12]
1) Class to be benefitted by statute. The commodities acts were
certainly designed to protect investors in commodities futures,
among others. The congressional reports on the bill which became
the CFTCA cite fraudulent treatment of customer accounts as among
the many evils which prompted the amendments, e. g. H.Rep. No.
93-975, 93d Cong., 2d Sess., 34, 38.
2) Consistency with statutory scheme. Defendants urge that imply
ing a remedy in this case would be inconsistent with the statu
tory scheme. They contend that by vesting plenary jurisdiction in
the CFTC and providing a detailed scheme of administrative re
lief, Congress created a completely comprehensive regulatory
structure, the purpose of which would be controverted by allowing
injured customers access to the courts.
The CFTC itself does not agree; its position is that providing
such access for injured customers is entirely appropriate. State
ment of the CFTC Concerning Referral of Private Litigation under
the Doctrine of Primary Jurisdiction, 41 Fed.Reg. 18471 (May 5,
1976). I agree with the defendants that the CFTC's position is
not entitled to any particular deference on the issue of legisla
tive intent. It is, however, entitled to considerable deference
on the issue of consistency with the legislative scheme as the
opinion of the regulatory body to whom enforcement under the
scheme is entrusted. The legislative history of the 1978 amend
ments reveals Congress' concern with the backlog of reparation
cases burdening the CFTC, and its concomitant eagerness to pro
vide additional enforcement by streamlining the reparations
procedure and by creating causes of action on behalf of the
states. See 24 Cong.Rec. 10537, 93d Cong., 1st Sess. (1978)
(Remarks of Sen. Huddleston); S.Rep. No. 95-850, 93d Cong., 1st
Sess. (1978), 26. Both the CFTC and Congress appear to have
recognized that the more enforcement assistance is provided from
other quarters, the more effectively the regulatory provisions of
the commodities acts will be carried out.
3) Appropriateness of implying cause of action based on federal
law. While fraudulent conduct by commodities brokers might give
rise to state tort liability, commodities futures activity im
pacts upon national markets. It is, and historically has been, an
area of primary federal concern. Smith v. Groover, 468 F.Supp.
105, 115 (N.D.Ill.1979).[FN13]
IV.
Securities Acts Claims
The second count of the complaint is apparently intended to
allege, on behalf of the individual limited partners, violations
of the registration provisions of the Securities Act of 1933, 15
U.S.C. ss 77e, and violations of the Securities Exchange Act of
1934, 15 U.S.C. s 78a et seq. The defendants move to dismiss on
two grounds: 1) that the partnership interests of the individual
plaintiffs were not subject to the Securities Act registration
requirements since they were "accounts . . . and transactions
involving contracts of sale of a commodity for future delivery,"
7 U.S.C. s 2, and therefore subject to the exclusive regulatory
jurisdiction of the CFTC; and 2) that the complaint does not
allege conduct amounting to a violation of the registration
exemption.
In an earlier decision in this case (filed April 18, 1979), I
dismissed an earlier complaint insofar as it alleged claims on
behalf of Navigator for securities acts violations in connection
with the commodities trading account which Shearson had induced
Navigator to open. The basis for that decision was my finding
that the commodities acts oust the federal courts of jurisdiction
over actions alleging fraud in connection with commodities
futures contract transactions. As I made clear in a subsequent
memorandum order (filed May 1, 1979), my decision on that issue
did not address the applicability of the securities acts to the
limited partners' partnership interests in Navigator; only alle
gations involving Navigator's account with Shearson were subject
to that holding.
The issue left open in the April 18 decision would presumably now
be before me if the allegations under the securities laws on
behalf of the individual partner plaintiffs were articulated with
sufficient clarity to notify me (and the defendants) of the
actions allegedly taken by the defendants in violation of the
securities acts.[FN14] They are not so articulated, and I do not
know what the plaintiffs claim. I do not intend to speculate
myself, and I shall not require defendants to speculate. Count 2
of the complaint is dismissed without prejudice to the service
and filing within ten (10) days of an application to file a
proposed amended complaint [FN15] which sets forth with precision
and with particularity the specific conduct by each of the de
fendants which is complained of, and which designates the specif
ic provisions of the securities acts and the regulations thereun
der which plaintiffs allege were violated by that conduct. If
such an application, with proposed amended complaint, is not
served and filed within ten (10) days, an order will be entered
without further notice making it clear that this dismissal of
Count 2 of the complaint is with prejudice.
SO ORDERED.
FOOTNOTES
FN1. The defendants have moved to dismiss the first and third
counts of the complaint on the grounds that these claims, brought
in the name of Navigator Group Funds, a limited partnership,
constitute a derivative action by the limited partners. Under New
York law, the complaint in a limited partners' derivative suit
must allege demand on and refusal by the general partners to
institute the suit. N.Y.Part. Law s 115-a. There is no such
allegation in this complaint. Section 115-a applies only to
limited partners' derivative suits. On its face the complaint, to
the extent that it alleges claims in the name of the partnership,
appears to have been brought by the partnership itself, not by
the limited partners suing derivatively. Section 1025 of the CPLR
authorizes such suits in the partnership name. The defendants
have not offered any evidence that Navigator's general partner
failed to authorize this suit. The joinder of some of the limited
partners as plaintiffs does not establish that they alone have
authorized and directed the entire law suit. Whatever other
disabilities affect their claims (see Section IV, infra ), their
claims are distinct from those of the partnership, although they
apparently arise out of the same series of events. Nor have the
defendants cited any authority for the proposition that proper
authorization for the bringing of the action by the partnership
must be alleged in the complaint. Accordingly, I deny the motion
to dismiss the claims against Navigator on this ground without
prejudice to renewal if the defendants produce evidence that the
suit was not properly brought on behalf of the partnership.
FN2. While the complaint does not specify, the plaintiffs' memo
randum indicates that the action is brought for violation of s 4b
of the Act, 7 U.S.C. s 6b, which is the only anti-fraud provision
applicable to members of contract markets: It shall be unlawful
for any member of a contract market, or for any correspondent,
agent, or employee of any member, in or in connection with any
order to make, or the making of (1) any contract of sale of any
commodity in interstate commerce, or (2) any contract of sale of
any commodity for future delivery made, or to be made, on or
subject to the rules of any contract market for or on behalf of
any person if such contract for future delivery is or may be used
for (a) hedging any transaction in interstate commerce in such
commodity or the products or by-products thereof, or (b) deter
mining the price basis of any transaction in interstate commerce
in such commodity, or (c) delivering any such commodity sold,
shipped, or received in interstate commerce for the fulfillment
thereof (A) to cheat or defraud or attempt to cheat or defraud
such person; (B) willfully to make or cause to be made to such
person any false report or statement thereof, or willfully to
enter or cause to be entered for such person any false record
thereof; (C) willfully to deceive or attempt to deceive such
person by any means whatsoever in regard to any such order or
contract or the disposition or execution of any such order or
contract, or in regard to any act of agency performed with re
spect to such order or contract for such person; or
FN3. In a decision dated August 24, 1978, I denied the defend
ants' motion to dismiss an earlier complaint on the same grounds.
That decision relied to some extent on the reasoning of Goodman
v. Hentz, 265 F.Supp. 440 (N.D.Ill.1967). The reasoning of that
case and, indeed, that of a substantial number of cases decided
before last year has been cast in doubt by the Supreme Court's
recent decisions. I therefore find it necessary to take a new
look at the issue in light of those decisions. The 1978 amend
ments to the commodities acts, passed very shortly after my
August decision, also prompt a fresh consideration.
FN4. Those factors are: First, is the plaintiff "one of the class
for whose especial benefit the statute was enacted," (emphasis in
original; citation omitted) that is, does the statute create a
federal right in favor of the plaintiff? Second, is there any
indication of legislative intent, explicit or implicit, either to
create such a remedy or to deny one? (citation omitted) Third, is
it consistent with the underlying purposes of the legislative
scheme to imply such a remedy for the plaintiff? (citations
omitted) And finally, is the cause of action one traditionally
relegated to state law, in an area basically the concern of the
States, so that it would be inappropriate to infer a cause of
action based solely on federal law? (citations omitted). Cort v.
Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 2088, 45 L.Ed.2d 26 (1975).
FN5. The defendants have also relied on the statute's grant (7
U.S.C. s 2) of "exclusive jurisdiction" over commodities trading
to the CFTC. The legislative history, however, indicates that
this provision was primarily designed to insure that there would
be no interference by other government agencies in the area
committed to the plenary control of the CFTC. Conf.Rep. No. 93-
1383, 93d Cong., 2d Sess. at 23. Indeed, Congress explicitly
provided that: Nothing in this section shall supersede or limit
the jurisdiction conferred on courts of the United States or any
State. 7 U.S.C. s 2. While the legislative history reveals that
Congress was particularly concerned, when it drafted that provi
so, that there be no interference with the jurisdiction of the
courts over antitrust and ordinary commercial cases, Hearings on
S.2485, S.2578, S.2837, and H.R.13113, Senate Committee on Agri
culture and Forestry, 93d Cong., 2d Sess. ("Senate Hearings
1974"), Pt. 3 at 663-664, its presence renders the impact on the
federal courts of the "exclusive jurisdiction" language ambiguous
at best.
FN6. The CEA contained an antifraud provision which was not
substantially changed in 1974. The statutory scheme in the con
text of which the provision appears, however, was radically
changed in 1974.
FN7. Defendants do not seriously dispute that the restrictive
trend was not well established, if at all, in 1974. They cite no
cases earlier than these as evidence of that trend.
FN8. The Senate Agriculture and Forestry Committee was warned by
one witness that the suggested reparations procedure might be
construed by the courts to preclude the right of recourse to the
courts. Senate Hearings 1974, Pt. 3, 737. He suggested that
Congress amend the bill to make it clear that the reparations
procedure was only an alternative remedy. Without any indication
of the credence or importance accorded to this testimony, it can
hardly be regarded as evidence that Congress was on notice of the
construction that might be given this new provision. In addition,
it is quite possible that the Committee assumed that by adding
the proviso quoted above at fn. 5, it was taking care of this
potential problem as well as of the problems of jurisdiction over
ordinary commercial and antitrust litigation.
FN9. The Conference Report indicates that the reparations proce
dure was intended to provide a faster, less expensive alternative
to litigation. In an attempt to bring about inexpensive and
expeditious adjudication of customer claims, Congress authorized
the creation of two extra-judicial forums for resolution of
customer complaints. First, each contract market was required to
provide a fair and equitable procedure for the voluntary settle
ment by arbitration or otherwise of customers' claims and
grievances not in excess of $15,000. Second, the Commission was
directed to establish a reparations procedure for adjudicating
customer complaints brought against commodity professionals and
firms. Additional customer protection was contemplated by the
provisions of the 1974 amendments that (1) authorized the Commis
sion to determine whether and on what terms dual trading practic
es of floor brokers and futures commission merchants should be
permitted, and (2) broadly proscribed fraudulent and deceptive
practices by commodity trading advisors and pool operators. 1978
U.S.Code Cong. & Admin.News, pp. 2087, 2099.
FN10. The defendants also suggest that Congress could have re
sponded to the backlog of reparations claims described by Senator
Huddleston in one of two ways: by streamlining the reparations
procedure or by expressly conferring jurisdiction on the courts.
By taking the former course, they suggest, Congress implicitly
rejected the latter. It is not at all clear, however, that the
provisions in the 1978 legislation, with respect to reparations
procedures, shed any light on Congress' attitude towards judi
cially implied rights. Given the enormous backlog, those provi
sions would probably have been necessary regardless of the avail
ability of a judicial forum; Senator Huddleston's comments sug
gest that the refusal of a few district courts to imply private
rights of action had only somewhat aggravated a pre-existing
condition. It could just as easily be surmised that Congress
undertook to streamline the procedures in order to preserve their
character as an attractive alternative to litigation.
FN11. See fn. 4, supra.
FN12. Touche Ross and Transamerica hold that these factors need
not be considered if the statute and its history clearly reveal a
negative intent. Presumably, they would also be irrelevant if
Congress had quite clearly expressed a positive intent by, for
example, providing for attorney's fees, or by so stating in a
committee report. In cases like this one, however, where intent
must be established by inference from the legislative history, it
probably remains appropriate to examine the additional Cort
factors.
FN13. In holding that implied rights of action under the commodi
ties acts survive both the 1974 and the 1978 amendments, I join a
number of other district judges who have reached the same conclu
sion. Hofmayer v. Dean Witter & Co., 459 F.Supp. 733
(N.D.Cal.1978); Smith v. Groover, supra ; R. J. Hereley Son Co.
v. Stotler & Co., 466 F.Supp. 345 (N.D.Ill.1979); Jones v. B. C.
Christopher & Co., 466 F.Supp. 213 (D.Kan.1979). But see National
Super Spuds Inc. v. New York Mercantile Exchange, 470 F.Supp.
1256 (S.D.N.Y.1979); Beeman v. Bache, Halsey, Stuart, Shields
Inc., Commod. Fut. L.Rep. (CCH) P 20,796 (S.D.Ohio 1979); Alkan
v. Rosenthal & Co., Commod.Fut.L.Rep. (CCH) P 20,797 (S.D.Ohio
1979).
FN14. While it is apparently the Securities and Exchange Commis
sion exemption which plaintiffs allege to have been violated,
plaintiffs do not allege in what respects defendants violated it.
Moreover, without explication, plaintiffs allege jurisdiction
under, inter alia, "The Exchange Act s 10(b), 15 U.S.C. s 78j(b)
and Rule 10b-5, 17 C.F.R. s 240.10b-5."
FN15. The complaints in this and an earlier identical action
which was voluntarily dismissed have been amended, to date, seven
times. I trust that this memorandum order makes it clear to
plaintiffs' counsel that this is the final amendment. The federal
courts have moved to the practice of notice pleading, but plead
ings which are filed must give reasonable notice, with reasonable
precision, of what is claimed. If the plaintiffs are claiming
fraud, the specific activities alleged to constitute the fraud,
and the specific provisions of the law and regulations which
plaintiffs claim have been violated, must be set forth so that
the defendants may know, and if possible meet, the charges, and
so that the judge may have a basis for intelligent adjudication.