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Deaktor v. Schreiber

May 21, 1973

DARRYL B. DEAKTOR
v.
L.D. SCHREIBER & CO., ET AL.; AL PHILLIPS, JR., ET AL., PLAINTIFFS-APPELLEES, V. THE CHICAGO MERCANTILE EXCHANGE, ET AL., DEFENDANTS-APPELLANTS.



Author: Sprecher

Before CASTLE, Senior Circuit Judge, PELL and SPRECHER, Circuit Judges.

SPRECHER, Circuit Judge: These interlocutory appeals are from orders of the district court denying motions by defendant Chicago Mercantile Exchange and various other defendants to stay action in the district court pending the exercise of primary jurisdiction by the Commodity Exchange Commission.

Darryl B. Deaktor, plaintiff in Nos. 71-1890 and 71-1893, brought a class action against the Chicago Mercantile Exchange and various members of the Exchange alleging that the defendant members manipulated and cornered the July, 1970 frozen pork bellies futures contracts market, forcing up the price of those contracts and injuring traders, such as the plaintiff, who sold short and had not liquidated their positions prior to the defendants' manipulation and thus were required to cover their positions by the purchase of contracts at inflated prices. This conduct was alleged to be in violation of 7 U.S.C. § 1 et seq. of the Commodity Exchange Act. The Exchange was sued on the ground of failing to exercise reasonable care in compliance with 7 U.S.C. § 7a(8), and thus failing to be aware of and to promptly halt the unlawful activities of the defendants. Various member defendants and the Chicago Mercantile Exchange moved for a stay of proceedings on the ground that plaintiff should first be required to seek relief from the Commodity Exchange Commission. The district judge denied these motions on August 23, 1971. On October 14, 1971, he certified this order for interlocutory appeal under 28 U.S.C. § 1292(b).

The plaintiffs in No. 71-1892, Al Phillips, Jr., et al., are twenty-four traders who sued the Chicago Mercantile Exchange, certain of its officers and members of its Business Conduct Committee, charging the defendants with monopolizing trading in March, 1970 fresh eggs, causing the price to fall and forcing sales at artificially depressed market prices. This conduct was alleged to violate the notice and hearing provisions in Rule 217(D) of the Rules of the Chicago Mercantile Exchange, 7 U.S.C. §§ 7a(8) and 13(b) of the Commodity Exchange Act, and sections 1 and 2 of the Sherman Act, Defendants' motion for a stay in proceedings was denied by the district court on September 17, 1971. This Court accepted interlocutory appeals in these cases and consolidated them.

The sole issue in these appeals is whether the district court could take jurisdiction of these actions or whether the Commodity Exchange Commission properly has primary jurisdiction over these proceedings. The defendants-appellants contend that the issue is decided, in their favor, by Ricci v. Chicago Mercantile Exchange, 409 U.S. 289, 93 S. Ct. 573, 34 L. Ed. 2d 525, 41 U.S.L.W. 4097, - U.S. - (January 9, 1973). We have concluded that Ricci does not control these cases and that the district court was correct in refusing to stay proceedings to allow the exercise of primary jurisdiction by the Commodity Exchange Commission.

The Chicago Mercantile Exchange is a board of trade designated as a "contract market" by the Secretary of Agriculture pursuant to 7 U.S.C. § 7. Designation as a contract market is required before trading in contract futures can be conducted.In order to qualify as a contract market, the Chicago Mercantile Exchange was required to file with the Secretary its rules, regulations and bylaws, including rules "for the prevention of manipulation of prices and the cornering of any commodity by the dealers or operators upon such board." 7 U.S.C. § 7(d). It was required to

"enforce all bylaws, rules, regulations, and resolutions, made or issued by it or by the governing board thereof or any committee, which relate to terms and conditions in contracts of sale to be executed on or subject to the rules of such contract market or relate to other trading requirements, and which have not been disapproved by the Secretary of Agriculture ..." 7 U.S.C. § 7a(8).

Pursuant to this requirement, the Chicago Mercantile Exchange Rule 217(C) provided that the Business Conduct Committee be charged with the duty and authority to prevent manipulation of prices and the cornering of any commodity. Rule 217(D) gives the Business Conduct Committee authority to investigate the transactions and financial condition of members, to examine their books, to prescribe capital requirements, and to issue cease and desist orders, after notice and hearing, to members found to be engaging in conduct which is "unfair or unjust."

No specific private remedy for violations of these provisions is provided. The Act does make it a felony

"for any person to manipulate or attempt to manipulate the price of any commodity in interstate commerce, ... or to corner or attempt to corner any such commodity, or knowingly to deliver ... false or misleading or knowingly inaccurate reports concerning crop or market conditions that affect or tend to affect the price of any commodity in interstate commerce." 7 U.S.C. § 13(b).

Other provisions authorize the Secretary of Agriculture and the Commodity Exchange Commission to take preventive and remedial action. Thus, 7 U.S.C. § 8 authorizes the Commission, after notice and hearing,

"to suspend for a period not to exceed six months or to revoke the designation of any board of trade as a 'contract market' upon a showing that such board of trade is not enforcing or has not enforced its rules of government ... or that such board of trade, or any director, officer, agent, or employee thereof, otherwise is violating or has violated any of the provisions of this Act or any of the rules, regulations, or orders of the Secretary of Agriculture or the Commission thereunder."

Provision is also made for the Commission to enter cease and desist orders against any contract market, director, officer, agent or employee who violates any provision of the Act or rules thereunder. Failure to obey the order is declared to be a misdemeanor. 7 U.S.C. § 13a. The Secretary of Agriculture is authorized to disapprove any bylaw, rule, regulation or resolution issued or proposed by a contract market which relates to terms and conditions in contracts of sale if he finds that it will violate any of the provisions of the Act or rules thereunder. 7 U.S.C. § 12a(7).

The Supreme Court considered this statutory scheme in the context of an antitrust suit alleging a conspiracy to restrain trade in the transfer of an Exchange membership in Ricci v. Chicago Mercantile Exchange, supra . The Court decided that in the circumstances there presented, the Commodity Exchange Commission should be given an opportunity to exercise jurisdiction prior to continuing the proceeding in the antitrust court. Although recognizing that the Commission could decide to refuse jurisdiction*fn1, the majority of the Ricci Court felt that the combination of three factors present in that case outweighed this uncertainty. Those factors were (1) that it would be "essential for the Antitrust Court to determine whether the Commodity Exchange Act or any of its provisions are 'incompatible with the maintenance of the antitrust action,' ...; (2) that some facets of the dispute between Ricci and the ...


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