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Case & Co. v. Board of Trade

decided: September 12, 1975.

CASE & COMPANY, INC., INDIVIDUALLY AND ON BEHALF OF THOSE WHO AT THE CLOSE OF TRADING ON JANUARY 18, 1973 HELD FUTURE CONTRACTS TO SELL JANUARY 1973 SOYBEANS ON THE BOARD OF TRADE OF THE CITY OF CHICAGO, PLAINTIFF-APPELLANT,
v.
THE BOARD OF TRADE OF THE CITY OF CHICAGO AND OWEN H. NICHOLS, FREDERICK G. UHLMANN, LAWRENCE J. BLUM, EVERETT E. KLIPP, HERMAN S. KOHLMEYER, SR., PAUL F. MCGUIRE, BEN RASKIN, CHARLES L. SCHULTZE, EDWARD S. DONNELL, THOMAS A. GELDERMANN, DAVID F. GOLDBERG, WALTER M. GOLDSCHMIDT, WILLIAM D. HAGERTY, JR., CLAYTON W. JOHNSON, DANIEL G. KELLY, ROBERT B. PARROTT, ARCH J. RIEMANN, JAMES M. ROCHE, HOWARD A. STOTLER, DONALD B. WALKER, INDIVIDUALLY AND IN THEIR OFFICIAL CAPACITIES WITH THE BOARD OF TRADE OF THE CITY OF CHICAGO, DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division - No. 73 C 1457 PRENTICE H. MARSHALL, Judge.

Cummings, Stevens and Tone, Circuit Judges.

Author: Tone

TONE, Circuit Judge.

This appeal concerns the authority of the governing board of the Board of Trade of the City of Chicago to suspend temporarily a board rule limiting daily price fluctuations in soybean futures contracts. Plaintiff, a trader who was in a "short" position at the time of the rule suspension, sues the Board and the members of its governing body for damages alleged to have been incurred as a result of higher prices caused by the suspension. The District Court entered summary judgment for defendants, which we affirm.

The Board of Trade of the City of Chicago (herein sometimes called "the Board"), a membership organization governed by a board of twenty directors (herein sometimes called "the directors"), is a "contract-market" subject to the Commodity Exchange Act, 7 U.S.C. § 1, et seq. The Act requires each contract-market to enforce its rules and regulations relating to trading requirements (section 5a(8), 7 U.S.C. § 7a(8)), and "promptly [to] furnish . . . copies . . . of all changes and proposed changes" to the Secretary of Agriculture (section 5a(1), 7 U.S.C. § 7a(1)), who is authorized to disapprove any rule or regulation which he finds to violate any provision of the statute or of any rule, regulation or order thereunder (section 8a(7), 7 U.S.C. § 12a(7)). The Secretary has delegated his duties under the Act to the Act Administrator of the Commodity Exchange Authority. 17 C.F.R. § 140.1, et seq.

"Rules" adopted by the Board's membership and "regulations" adopted by its directors govern trading in commodities futures on the exchange and are incorporated into every contract. Cargill, Inc. v. Hardin, 452 F.2d 1154, 1156 (8th Cir. 1971), cert. denied, 406 U.S. 932, 92 S. Ct. 1770, 32 L. Ed. 2d 135 (1972). The Board's rule 83 provides that the directors, upon ten hours notice, may provide by regulation for price limits on futures contracts in terms of fluctuations from the average closing price of the preceding business day. At the time of the events in issue in the case at bar, regulation 1823, adopted by the directors pursuant to rule 83, limited fluctuations in the price of soybean futures contracts to ten cents per bushel above or below the closing price on the previous business day. Rule 251, as it stood at that time, stated certain actions the directors were empowered to take "by reason of any emergency or otherwise." The Board's rule 70 is a broader provision authorizing the directors to adopt any regulations not in conflict with the rules and gives the regulations the same effect as rules.

The January 1973 soybean futures contract involved in this case was a standard agreement traded on the Board of Trade in which a seller agreed to deliver and the buyer agreed to pay for 5,000 bushels of soybeans during the month of January 1973. The seller, who of course did not have the future soybeans in hand, was "short" by the amount he had agreed to deliver to the buyer, who in turn was "long" by that amount.

Trading in January 1973 futures contracts on the Board began in about February of 1972 and continued until the final seven business days of the month of January 1973. Until the first day of that month, a "long" or a "short" could leave the market only by "offsetting" his contracts by acquiring opposite contracts in the same commodity. See Board of Trade v. Christie Grain and Stock Co., 198 U.S. 236, 248-250, 49 L. Ed. 1031, 25 S. Ct. 637 (1905). After January 1, 1973, and before the last seven trading days in that month, the contract could be satisfied by either offset or delivery of the grain. In the last seven trading days of January, the contract could be satisfied only by delivery of the grain. Thus a "short" who wanted to deliver could do so at any time during January, and a "long" wanting delivery could obtain it by remaining in that position until the last seven trading days.

On January 18, 1973, plaintiff Case & Company, Inc. was "short" twenty January 1973 soybean futures contracts, calling for a delivery of a total of 100,000 bushels of soybeans, with only two trading days left before the last seven trading days of the month. The "cash" market price of soybeans was well above the futures prices, soybeans having been made scarce by high export demands. The situation at that time was described by the Regional Director of the Commodity Exchange Authority as follows:

"At the close of business on Thursday, January 18, the Board was faced with a very difficult situation. Prices of the January future had been up the limit at the close on the three previous days, with unsatisfied bids at the top price each day. The Board had to consider the possibility that with a 10-cent fluctuation limit for the final two trading days, shorts might not be able to cover their contracts."

After trading closed on that day, the chairman of the board of directors called a special meeting of the directors to be held the next morning, two hours before the opening of trading, for the purpose of determining the action to be taken in view of the divergence between the market and futures prices of soybeans. At the meeting the directors present voted ten to two to suspend the portion of regulation 1823 applying to soybean futures, thereby removing the ten-cent limitation on the amount soybean futures could rise or fall in a trading day. The decision was posted, i.e., made known to traders, at the close of the meeting, which was less than one hour before trading was scheduled to start.

During the day the secretary of the board of directors mailed written notice of the directors' action to the Commodity Exchange Authority in Washington, D.C. According to his affidavit filed in support of the motion for summary judgment, he also telephoned the Act Administrator of the C.E.A. shortly after the meeting to advise him orally of the action taken. Since, however, the Administrator, in his affidavits filed in this case, did not mention this telephone conversation, and plaintiff argues that this raises doubts as to whether it occurred, we treat the oral notice as disputed and disregard it.

The trading limits having been removed, the price of January 1973 soybean futures contracts rose from $4.69 1/2 per bushel at closing on January 18 to $4.95 per bushel at the opening on January 19. The price at closing that day was $4.98-$5.00 per bushel and on January 22, the last trading day for January 1973 soybean futures, it closed at $4.95-$4.99. Case & Company liquidated its position on January 19 for just under $4.92 per bushel and claims to have lost $22,000 as a result of the suspension of the soybean trading limits.

Case filed this action on behalf of itself and, purportedly, others who at the close of trading on January 18, 1973 held futures contracts to sell January 1973 soybeans on the Board, naming as defendants the Board of Trade and the members of its board of directors. The defendants were alleged to have violated section 5a(8) of the Act, which requires obedience to the Board's own rules and regulations, because they failed to give the ten hours advance notice of their action which Case contended was required by rule 83; and to have violated section 5a(1) of the Act by failing promptly to notify the Secretary of the proposed change and the actual change in regulation 1823. The parties submitted the case to the District Court on cross motions for summary judgment, supporting their respective motions with affidavits. The District Court entered summary judgment for the defendants, holding that, assuming rule 83 applied, the defendants did not ...


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