Klein & Co. Futures v. Bd. of Trade of NYC
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[edit] Briefs and Documents
Docket: 06-1265
Oral Argument: Transcript
Judgment: DISMISSED after argument according to Rule 46.
Merits briefs- Brief for Petitioner Klein & Co. Futures, Inc.
- Brief for Respondent Board of Trade of the City of New York
- Reply Brief for Petitioner Klein & Co. Futures, Inc.
Amicus briefs
Certiorari Filings
- Petition for Certiorari
- Brief in Opposition
- Petitioner's Reply
- Amicus brief of the Futures Industry Association, Inc. in support of the petitioner
[edit] Pre-Argument Articles
[edit] Grant write-up
The following appeared on SCOTUSblog when the case was granted, on 5/21/07. It was written by Kevin Russell.
Today the Court granted cert. in Klein & Co. Futures, Inc. v. Board of Trade of the City of New York, No. 06-1265, a case involving the commodities futures trading market. The now-granted petition poses the following question : “Whether the court of appeals erred in concluding that futures commission merchants lack statutory standing to invoke that right of action because, in the court’s view, they do not engage in such transactions, despite the statutory requirement that the merchants enter into and execute their transactions on, and subject to the rules of, a board of trade and the fact of the merchants’ financial liability for the transactions.”
For those unfamiliar with commodities futures markets, a little background may be helpful. A commodities future is a contract to sell a particular commodity (say, frozen concentrated orange juice, as in the movie “Trading Places”) at a price set in the contract. The seller of the contract becomes obligated to provide the buyer with the promised amount of the commodity atthe promised price on a set date in the future (say, 15,000 pounds of frozen concentrated orange juice for $1,500 on July 1, 2007). Someone who believes that the market price for frozen concentrated orange juice will be $2,000 per 15,000 pounds might buy this hypothetical futures contract for $250, since if the guess about the future price turns out to be correct, the contract will save the purchaser $500 off the market price. Even people who don’t really want 15,000 pounds of frozen orange juice might buy such a contract, because they can then turn around and sell the money-saving contract to someone who actually does want it, and make a profit. The futures market is thus a place where some people buy futures contracts as a way of making money based on their bets about the future prices of commodities, and others buy contracts in order to protect themselves against fluctuations in the prices of commodities they need to run their businesses.
Futures contracts are sold in commodity exchanges, which are operated by a board of trade such as the respondent in this case, the Board of Trade of the City of New York. Much like the stock market, actual trades on the commodity exchanges are conducted through intermediaries, in this case, a commodity futures merchant. The merchant, like a stock broker, takes orders from customers and purchases or sells futures contracts on its customers’ behalf.
This whole process is governed by the rules of the relevant board of trade, which is required by the Commodities Exchange Act to promulgate and enforce rules governing exchanges on its market. The Act also provides a cause of action for violations of the Act, including suits against the boards themselves for failing to enforce their rules.
Among other things, the boards enact rules governing the sale of futures contracts “on margin.” As in the stock market, merchants can allow customers to buy futures contracts while giving the merchant only a small percentage of the full cost of the transaction. If the market price changes too much during the life of the contract, the customer may be subject to a “margin call” and required to pay the merchant more money in order to reduce the risk that the customer will not have enough money to pay any possible loss on the contract when it becomes due. If the margin call is not met, the merchant may immediately liquidate the customer’s holdings.
Whether or not a margin call is required is determined by the daily “settlement price” for the commodity. The settlement price approximates the market price for that day and is set by the board of trade. Because some commodities are infrequently traded, it is not always possible to simply look at the price for the commodity in that day’s trading in calculating the settlement price. Accordingly, some degree of judgment and expertise is required, a process that is subject to manipulation, which leads us to the facts of this case.
The lawsuit in this case arose from the alleged manipulation of the futures market process by an official of the respondent Board of Trade of the City of New York. According to the plaintiffs, the chairman of one of the board’s divisions owned a company that had purchased a lot of a specific futures contract through petitioner Klein & Co. Futures, a futures merchant on the Board of Trade of the City of New York. It turns out that this was a bad investment. When it looked like his company was going to be required to come up with substantial “margin call” payments or risk having their contracts liquidated at a lost, the chairman manipulated the daily settlement price for the futures. This worked for a while, but the scheme eventually fell apart, the settlement price readjusted to accurately reflect market conditions, and a $700,000 margin call was issued. The chairman’s company didn’t have the money to make the margin call, so Klein was forced to sell the futures, at a huge loss which Klein was required to absorb, leading to the collapse of that company as well.
Klein subsequently brought suit against the Board of Trade for failing to enforce its rules that should have prevented the chairman from manipulating the daily settlement price.
The issue before the Supreme Court is whether the Commodities Exchange Act permits a merchant (as opposed to its customers) from suing a board of trade for failing to enforce its rules. Section 25(b)(1) of the Act provides that “a licensed board of trade that fails to enforce any bylaw, rule, regulation, or resolution that it is required to enforce by the Commission, … by a person who engaged in any transaction on or subject to the rules of such registered entity to the extent of such person’s actual losses that resulted from such transaction and were caused by such failure to enforce or enforcement of such bylaws, rules, regulations, or resolutions.” The court of appeals held that merchants cannot sue under this provision because they do not “engage[] in any transaction” on the exchange; only their customers do, the court concluded. Klein contests this proposition, arguing that merchants in fact engage directly in exchanges in commodities markets on behalf of their customers and that Congress intended the Act to extend to both customers and their brokers. The Board of Trade has argued that Congress carefully worded the statute to limit the scope of the private right of action in a way that excludes merchants.
Petitioner is represented by Drew Days of Morrison & Forrester. Respondent is represented by Edmund R. Schroeder of Cadwalader, Wickersham & Taft.
[edit] Argument Preview
The following is by Steven C. Wu, and associate in Akin Gump's Supreme Court and appellate practice in Washington, DC.
Today in Klein & Co. Futures, Inc. v. Board of Trade of the City of New York (No. 06-1265), the Supreme Court will consider whether futures commission merchants have statutory standing under the Commodities Exchange Act, 7 U.S.C. § 25(b)(1), to sue a board of trade for failing to enforce its own rules. The case will turn on a careful consideration of the text and history of the Act.
Drew S. Days III, of Morrison & Foerster LLP in Washington, DC, will argue on behalf of petitioner Klein & Co. Futures, Inc. Assistant to the Solicitor General Malcolm L. Stewart will argue for the United States as an amicus in support of petitioner Klein. Andrew J. Pincus, of Mayer Brown LLP in Washington, DC, will argue on behalf of respondent Board of Trade of the City of New York, Inc. The briefs of both parties, along with the amicus brief of the United States, are available here.
Briefly: A commodities future is a contract to sell a particular commodity at some future date at a price set by the contract. Such futures are sold in commodity exchanges. Generally, however, investors -- i.e., the actual purchasers and sellers of commodities futures -- do not deal directly with these exchanges. Rather, most transactions are conducted through commodities futures merchants, such as petitioner Klein, which take orders from investors and purchase or sell futures contracts on their behalf.
Commodity exchanges are operated by boards of trade, such as the respondent in this case, the Board of Trade of the City of New York (NYBOT). The Commodities Exchange Act requires such boards to promulgate and enforce rules governing exchanges on its market. A provision of the Act, 7 U.S.C. § 25(b)(1), states that "a licensed board of trade that fails to enforce any bylaw, rule, regulation, or resolution that it is required to enforce by the Commission . . . shall be liable for actual damages sustained by a person who engaged in any transaction on or subject to the rules of such registered entity to the extent of such person's actual losses that resulted from such transaction and were caused by such failure to enforce or enforcement of such bylaws, rules, regulations, or resolutions."
In this case, Klein sued the NYBOT alleging that the board had failed to enforce its own rules to prevent price manipulation by a chairman of one of its divisions -- who happened to own a company that was a customer of Klein's. The question before the Supreme Court is whether a futures commission merchant such as Klein -- as opposed to its customers, the investors -- has a cause of action under § 25(b)(1).
In support of standing, Klein argues that it has "engaged in any transaction on or subject to the rules" of the NYBOT, despite not purchasing or selling any futures contracts on its own behalf, because it facilitated such transactions between the actual purchasers and sellers (a procedure known as "clearing"). Klein notes that, in clearing futures contracts, it is required under NYBOT's own rules to enter into and assume all such contracts.
Klein points to the broad language of § 25(b)(1) ("any transaction"), compared to the more limited language of § 25(a)(1)(D), which limits the cause of action therein to a person who "purchased or sold a contract." Klein argues that § 25(b)(1) and § 25(a), by using distinct language, reflect different types of private suits, and that therefore § 25(b)(1) should not be read to incorporate the narrower language of § 25(a). In addition, Klein notes that other provisions of the Commodities Exchange Act with similar language -- in particular, 7 U.S.C. § 6 -- confirm its reading of the statute.
The United States, as amicus curiae supporting Klein, repeats many of the same arguments, emphasizing the distinction between § 25(b)(1) and § 25(a) and engaging in a detailed discussion of the specific transactions that place Klein within the ambit of § 25(b)(1). In its analysis of § 25(b)(1)'s language, the United States places greater weight on the broad meaning of "engaged in" rather than "any transactions."
In response, the NYBOT argues that § 25(b)(1)'s use of the terms "transactions" and "on or subject to the rules of" (among others) is intended to refer only to investors' trades of futures contracts. To support this interpretation, the NYBOT notes that other provisions of the Commodities Exchange Act use those terms for that narrower meaning. It also notes that § 25(b)(1) was enacted shortly after, and against the background of, the Supreme Court's Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353 (1982), which focused only on investors' claims. Finally, it notes that the legislative history of § 25(b)(1) referred repeatedly to claims by "investors" and "customers."
The NYBOT also argues that Klein's interpretation of § 25(b)(1) would lead to absurd results. By allowing both investors and merchants to bring actions against boards of trade, the NYBOT contends, Klein's interpretation would lead to duplicative claims and inconsistent awards of recoverable damages.
At the end of its brief, the NYBOT raises an alternative argument not addressed in Klein's or the United States' briefs. According to NYBOT, Klein's complaint should be dismissed even if it has standing because it did not allege a necessary element of a cause of action under § 25(b)(1): namely, "actual losses that resulted from" its activities "on or subject to the rules of" a contract market and that "were caused by" the contract market's failure to enforce its rules. In reply, Klein argues that this issue is not properly before the Supreme Court and is, at any rate, insupportable.
[edit] Oral Argument Recap
[edit] Dismissal
Lyle Denniston originally posted the following on SCOTUSblog.
The Supreme Court on Friday dismissed the case Klein & Co. Futures v. New York City Board of Trade (06-1265), which was being deliberated after an argument on Oct. 29. The case, granted review last May 21, sought to test whether futures commission merchants have a right to sue for losses they claim to have suffered in futures trading. The Commodity Exchange Act provides an express private right of action for actual losses in trading on a commodity futures market.
The case was dismissed under the Court’s Rule 46.1, which provides for such action when both sides in a pending case notify the Court’s Clerk in writing that they agree on dismissal. The Clerk carries out the dismissal without referring the matter to the Court. Ordinarily, Rule 46 dismissals result from agreements by the parties to settle the underlying dispute.
