go to the floor governor and recite facts concerning whether he used due diligence in attempting to execute the order.
72. National Coin's sell stop-loss order was also marked "SPW." SPW stands for Steven Willner who is a member of the floor committee. The fact that the sell-stop order was marked SPW indicates that the floor committee found that Great American used due diligence in attempting to execute National Coin's sell-stop order and that the market situation ultimately prevented the order from being executed.
73. Mr. Thomas, the executive vice president of operations for Balfour testified that after Balfour places an order with a floor broker, Balfour does not know if such order is ultimately executed in the proper sequence.
74. Euler testified that he received a telephone call from Regis at 12:30 p.m. on April 27, 1987 during which Regis told Euler that National Coin's stop-loss order had been executed.
75. Euler testified that he became concerned at 5:00 p.m. on April 27, 1987 when he heard no response from Balfour concerning his transaction. He testified that he was looking to Balfour to execute his stop-loss order.
76. Euler testified that by 7:00 p.m. on April 27, 1987, he thought "he had been taken" since no one knew what had happened to his order.
77. On the afternoon of April 28, 1987, Regis called Euler and informed him that his order had not been executed due to fast market conditions and that Regis received a margin call because of the drop in the price of silver. Euler informed Regis that he was not going to honor the margin call and that as far as he was concerned, he no longer had any responsibility for the trade.
78. On April 29, 1987, the 10 July 1987 contracts were liquidated at a price of $ 7.93 per ounce, for a loss of $ 61,557.80.
79. As a result of the trades made on behalf of National Coin, National Coin sustained losses in its account, after applicable credits, of $66,558.20.
80. In 1987, Euler and National Coin traded silver futures through Balfour and, as had happened when they traded through Clayton in 1980 and 1983, they lost money in doing so.
The court makes the following Conclusions of Law:
1. Jurisdiction is founded upon 28 U.S.C. § 1332, based upon the diverse citizenship of the parties, and the amount in controversy, which exceeds $10,000, exclusive of interest and costs.
2. Venue in this district is proper based upon 28 U.S.C. § 1391(a), in that National Coin resides here and the claim arose here.
3. Euler is an experienced investor in the silver futures market who appreciates the risk of loss involved in trading in silver futures and who in the past has lost money by trading in silver futures. As a result of his experience, Euler was fully familiar with margin calls and the possibility of enormous losses.
4. Euler was authorized to act on behalf of National Coin in connection with its transactions with Balfour.
5. Balfour was properly authorized by National Coin to buy 10 July 1987 Comex silver futures contracts and 10 April 1987 Comex silver futures contracts on April 24, 1987.
6. Balfour was properly authorized by National Coin to sell the 10 April 1987 Comex silver futures contracts on April 24, 1987.
7. National Coin is liable to Balfour for $ 38,277.80 for the purchase and sale of the 10 April 1987 Comex silver futures contracts on April 24, 1987.
8. On April 27, 1987, Balfour was properly authorized by National Coin to place a sell stop-loss order at $ 9.69 per ounce to liquidate the 10 July 1987 silver futures contracts.
9. On April 27, 1987, Balfour properly placed the sell stop-loss order with an independent floor broker, Great American.
10. A futures commission merchant is an agent of the client and, accordingly, owes the client a fiduciary duty. Sherman v. Sokoloff, 570 F. Supp. 1266, 1269 n. 10 (S.D.N.Y. 1983); see e.g., Monette v. Premex, Inc., (CFTC 1983) 2Comm.Fut.L.Rep. (CCH) P21,733 at 26,882 (citing cases); Graves v. Shearson, Hayden Stone, (CFTC 1981) [1980-1982 Trans. Binder]Comm.Fut.L.Rep. (CCH) P21,301 at 25,521.
11. A futures commission merchant owes his client a fiduciary duty in taking orders, securing trades and in dealing with customer funds. See Sherman v. Sokoloff, supra ; 17 C.F.R. § 1.3(p) (1987); 17 C.F.R. §§ 1.20-1.28 (1987) (obligations regarding customer funds).
12. In Sherman v. Sokoloff, supra, the plaintiffs had entered into a partnership with Sokoloff under which Sokoloff had invested the plaintiffs' money in platinum futures. Sokoloff had opened a platinum account with the defendant Rosenburg Commodities, a futures commission merchant. Sokoloff then had breached his agreement with the plaintiffs and quickly lost a large sum of money. Plaintiffs sought to hold Rosenburg liable for their losses on the ground that Rosenburg must have known of Sokoloff's fraudulent trading but failed to alert them to it. Rosenburg moved for summary judgment on the claims against it, and the trial court granted the motion, stating:
Our own research has located no cases where a broker (or FCM) in Rosenburg's position has been saddled with the obligation of monitoring and reporting the trading pattern of a person in no way affiliated to him, let alone a partner of plaintiffs. We decline the invitation to impose such a duty. Id. 570 F. Supp. at 1270 (emphasis added).
13. Great American, as an independent broker, was in no way affiliated to Balfour as an agent, employer, director or officer of Balfour. In fact, the provision in the Commodity Customer's Agreement entitled CONSENT TO TAKE THE OTHER SIDE OF AN ORDER states "Customer hereby agrees that . . . when Customer executes, sells or buys orders on Customer's behalf, BMI [Balfour], its directors, officers, employees, agents, and any floor broker may buy or sell. . . ." (emphasis added). This language demonstrates that a floor broker is considered a separate entity from one of Balfour's directors, officers, employees or agents.
14. Accordingly, Balfour did not owe National Coin a fiduciary duty to monitor and supervise Great American's trading activities including the execution of National Coin's sell stop-loss order.
15. Even if Great American was affiliated with Balfour in some manner, the evidence adduced at trial reveals that Great American did not execute out of time and price sequence on April 27, 1987. Rather, the only reason that Great American was unable to execute National Coin's sell stop-loss order on April 27, 1987 was due to fast and hectic market conditions.
16. Paragraph 3 of the Risk Disclosure Statement which Euler signed on April 24, 1987 specifically warned that "placing contingent orders such as a "stop-loss" order "will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders." (emphasis added).
17. Although Euler testified he did not read the Risk Disclosure Statement or any of the other documents he hurriedly signed on April 24, 1987, "ignorance of the contents of a document or failure to read before signing is no defense to a contractual obligation under Pennsylvania law." Tose v. First Pennsylvania Bank, N.A., 648 F.2d 879, 900 (3d Cir. 1981), cert. denied, 454 U.S. 893, 70 L. Ed. 2d 208, 102 S. Ct. 390 (1981). "The general rule is that absent an allegation of fraud or incompetence a person has a duty to read a contract before signing it and his failure to do so will not excuse his ignorance of its contents." Stanley A. Klopp, Inc. v. John Deere Co., 510 F. Supp. 807, 811 (E.D. Pa. 1981), aff'd, 676 F.2d 688 (3d Cir. 1982). A claim that a contract was signed in haste is not a justification for ignorance of its contents.
18. In any event, Euler testified that he read the Customer Risk Disclosure Statement when he opened a corporate commodity account with Clayton in 1980 and again when he opened the personal commodity account with Clayton in 1983 and both times he was aware of Paragraph 3 and appreciated the risk involved. Euler also testified that he "understood" the contents of the Risk Disclosure Statement he signed on April 24, 1987.
19. Section 4b of the Commodity Exchange Act, 7 U.S.C. § 6b, like analogous provisions of federal securities laws imposes liability on brokers (or FCM's) for omissions of material fact and the making of material misrepresentations. Herman v. T. & S. Commodities, Inc., 592 F. Supp. 1406, 1416 (S.D. N.Y. 1984).
20. A material fact is one which "a reasonable man would attach importance [to] in determining his choice of action in the transaction in question." List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir.), cert. denied sub nom. List v. Lerner, 382 U.S. 811, 86 S. Ct. 23, 15 L. Ed. 2d 60 (1965).
21. The test is subjective and thus an investor's experience must be considered to determine whether Section 4b has been violated. See, e.g., Dachslager v. Rosenthal and Co., [1977-1980 Transfer Binder]Comm.Fut.L.Rep. (CCH) P20,890 (CFTC ALJ Sept. 7, 1979); Wagoner v. Rosenthal and Co., [1977-1980 Transfer Binder]Comm.Fut.L.Rep. (CCH) P20,623 (CFTC ALJ June 12, 1978).
22. Regis' failure to tell Euler that the spot price of silver had declined from $ 11.25 per ounce at 9:07 a.m. on April 27, 1987 to $ 10.00 per ounce at 10:48 a.m. on April 27, 1987 did not constitute an omission of a material fact on the part of Balfour. In the first instance, although the spot price of silver at 9:07 a.m. on April 27, 1987 was $ 11.25 per ounce and the spot price of silver at 10:48 a.m. on April 27, 1987 was $ 10.00 per ounce, Regis testified that to say the spot price of silver was actually declining during this interval is to generalize. Regis testified that in fact the price of spot silver was taking two steps down for every one step up and thus the price of spot silver was increasing as well as decreasing during this interval. In fact, even as late as 10:50 a.m., Regis was aware of trades of spot silver selling at more than $ 10.60 per ounce. Moreover, after examining the condition of the silver market from 9:07 a.m. to 10:48 a.m. on April 27, 1987, Stillwaggon testified that Regis "had every reason to believe that the price of silver would move higher given what transpired."
In the second instance, Regis was aware that Euler had considerable experience in the silver futures market. In fact, Regis testified that the reason he contacted Euler after Regis joined Balfour was because he knew that Euler had experience in the commodities market as evidenced by National Coin's corporate account with Clayton and Euler's 1983 personal account with Clayton. In addition, Euler had a screen in his office through which he kept in daily contact with the silver market and changes in the spot price of silver at any given time. After all, when Euler arrived at Balfour's branch office on April 24, he already knew that the condition of the silver market reminded him of the long lines of the silver market of 1980-81. Given Euler's experience, we find that Regis, on behalf of Balfour had no duty to keep Euler apprised of every fact concerning the spot price of silver. If such were the case, an experienced investor such as Euler could recover damages from his broker (FCM) merely by proving non-transmission of some fact which, he could testify with the wisdom of hindsight, would have affected his judgment had he learned of it.
23. For the reasons stated in Conclusion of Law #22, Regis' statement to Euler during the 10:50 a.m. telephone conversation on April 27, 1987 that the spot market for silver is "strong" did not constitute a material misrepresentation.
As noted above, at 10:50 a.m., Regis was aware of trades of spot silver selling at more than $ 10.60 per ounce. In addition, Stillwaggon testified that Regis "had every reason to believe that the price of silver would move higher given what transpired."
24. On April 29, 1987, Balfour acted properly in liquidating the 10 July 1987 silver futures contracts on behalf of National Coin.
25. National Coin is liable to Balfour for $ 61,557.80 for the sale of the 10 July 1987 silver futures contracts on April 29, 1987.
26. National Coin breached the Commodity Customer's Agreement by failing to pay for the losses sustained in connection with the trades performed by Balfour on its behalf.
27. National Coin is liable to Balfour for $ 66,558.20 for the losses sustained in National Coin's account.
28. National Coin is also liable to Balfour for the costs of suit, including a reasonable attorney's fee.
29. Judgment is hereby entered in favor of Balfour and against National Coin for $ 66,558.20, plus interest at 6 percent from April 29, 1987 through March 4, 1988, for $ 3,050.56, for a total judgment of $69,608.76.
30. Balfour shall, within thirty days, file with the court an application for reimbursement of its expenses incurred in connection with this claim, including its attorney fees.
On the complaint, we find in favor of the plaintiff Balfour Maclaine, Inc. and against the defendant National Coin Exchange, Inc.
Judgment on the complaint is entered in favor of Balfour Maclaine, Inc. and against National Coin Exchange, Inc. for $ 66,558.20, plus interest at 6 percent from April 29, 1987 through March 4, 1988, in the amount of $ 3,050.56 for a total judgment of $ 69,608.76.
On the counterclaim, we find in favor of Balfour Maclaine, Inc. and against National Coin Exchange, Inc.
Judgment on the counterclaim is entered in favor of Balfour Maclaine, Inc. and against National Coin Exchange.
Within thirty days from the date of this order, Balfour Maclaine, Inc. shall file with the court an application for reimbursement of its expenses incurred in connection with this action, including its attorney fees.
IT IS SO ORDERED.
© 1992-2004 VersusLaw Inc.