United States District Court, Northern District of Illinois, E.D
February 23, 1984
WILLIAM HAGSTROM, VICTOR BERGER, EDWIN FALLOON AND EDUARDO NIJENSOHN, PLAINTIFFS,
MARTIN E. BREUTMAN, MEB INVESTMENTS, LTD., AND BEVERLY ASSOCIATES, DEFENDANTS.
The opinion of the court was delivered by: Will, District Judge.
In something less than a subtle attempt to avoid our previous
order remanding this action to arbitration, plaintiffs now move
for leave to file an amended complaint and to vacate the
October 3, 1983 order staying these proceedings pending
arbitration. For the reasons hereinafter stated, we deny
plaintiffs' motion to file their amended count X, alleging
excessive trading and churning, we grant plaintiffs' motion to
file count XII, alleging a Rule 10b-5 claim, and we decline to
vacate our stay. All the plaintiffs' claims, except for count
XII, should proceed forthwith to arbitration. We stay
resolution of count XII, pending arbitration.
We previously discussed the facts of this case in our October
3, 1983 Memorandum Opinion. 572 F. Supp. 692 (N.D.Ill. 1983). We
will, therefore, merely reiterate some of the essential facts.
On January 24, 1983, plaintiffs filed a complaint pursuant to
section 4b of the Commodity Exchange Act, 7 U.S.C. § 6b,
alleging that defendants had committed fraud. This allegation
was based on certain conduct allegedly engaged
in by Martin E. Breutman ("Breutman") and MEB Investment, Ltd.
On July 15, 1978, in an Agreement of Limited Partnership of
Beverly Associates, plaintiffs formed a limited partnership
with Breutman and MEB as general partners for the purpose of
investing in commodity futures. The general partners were to
have exclusive management and control of the partnership.
Article XVI of the Agreement contained an arbitration clause
which we held to be applicable to this action under C. Itoh &
Co. (America), Inc. v. Jordan International Co., 552 F.2d 1228
(7th Cir. 1977). See also Tamari v. Bache & Co. (Lebanon)
S.A.L., 565 F.2d 1194 (7th Cir. 1977), cert. denied,
435 U.S. 905, 98 S.Ct. 1450, 55 L.Ed.2d 495 (1978) (arbitration is
proper in a suit based upon alleged fraud in violation of the
CEA); Romnes v. Bache & Co., 439 F. Supp. 833 (W.D.Wis. 1977)
(arbitration is available to resolve disputes concerning a
partnership agreement the purpose of which was to trade
commodity future contracts).
From 1978 through January 21, 1981, the general partners,
Breutman and MEB, used the limited partners' assets to trade
commodities on the Chicago Mercantile Exchange, the Chicago
Board of Trade, and the Commodity Exchange through Rufenacht,
Bromagen & Hertz, Inc., with Breutman and MEB acting as the
sole account executives.
On October 3, 1983, we found that plaintiffs failed to plead
churning with the requisite specificity and granted defendants'
motion to dismiss count X, without prejudice. The proposed
amended count X is similarly defective. In pleading a churning
claim, a plaintiff must identify the securities involved, the
nature, amount, and dates of the transactions in issue, as well
as sufficient facts to allow for a determination of the
turnover rate in the account and/or the percentage of the
amount paid in commissions. Shelley v. Noffsinger,
511 F. Supp. 687, 692 (N.D.Ill. 1981). Further, churning with
respect to commodities trading, in which there is usually more
activity due to the essential volatility of the subject matter
of the trading, requires factual allegations in addition to
just the trades involved, sufficient to constitute a basis for
concluding that the volume of trades was not for sound trading
purposes, but for the purpose of generating excessive
Plaintiffs have again failed to plead churning with the
requisite specificity. To improve the previously dismissed
count X they add only one paragraph, paragraph 54, which states
that "Exhibit F is an account statement showing the
transactions involved, the nature, amount, and dates of the
transactions, and the commissions paid." This allegation doubly
fails; first, there is no Exhibit F attached either to the
proffered second amended complaint or to the January 24, 1983
complaint, and second, there are still not sufficient factual
allegations to support a conclusion that the volume of trades
was generated to seek commissions, rather than for sound
trading purposes. Where a complaint alleges no new facts
requiring a court to reconsider its earlier decision, a motion
to file an amended complaint is properly denied. Stebbins v.
Weaver, 537 F.2d 939, 942 (7th Cir. 1976).
In count XII, plaintiffs allege that Breutman and MEB cheated
and defrauded them in violation of sections 10(b) and 27 of the
Securities Exchange Act of 1934 and Rule 10b-5. Defendants
contend that this pleading fails to state a Rule 10b-5 claim
because allegations of fact in the complaint relate to
commodities transactions and commodities are not securities.
However, a limited partnership interest, such as in the one
formed here, can
constitute a security in certain circumstances. See Goodman v.
Epstein, 582 F.2d 388, 406 (7th Cir. 1978), cert. denied,
440 U.S. 939, 99 S.Ct. 1289, 59 L.Ed.2d 499 (1979). The Supreme
Court has enunciated the basis test for defining a security.
The Howey/Forman test for determining the existence of a
security has three elements: (1) an investment in a common
venture; (2) premised upon a reasonable expectation of profits;
(3) to be derived solely from the entrepreneurial or managerial
efforts of others. United Housing Foundation, Inc. v. Forman,
421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975); SEC v.
Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946).
A limited partner's interest in a limited partnership
established under Illinois law meets, on its face, all of these
requirements. See Goodman, supra, 582 F.2d at 406.
The Agreement between the parties here evidences a common
venture, the association of general and limited partners to
invest in commodity futures; it is reasonable to assume that
the Agreement was premised on a reasonable expectation of
profits; and, lastly, MEB and Breutman, as general partners,
were to have exclusive management and control of the
partnership business. Thus, count XII, though far from being a
model of pleading a securities law violation, when fairly read
in connection with paragraphs 1 through 20 which it
incorporates and with the Agreement, alleges sufficiently, if
barely a possible violation of federal securities law.
In allowing plaintiffs to file count XII, we do not intend to
suggest that plaintiffs will eventually prevail on this
self-styled "securities" count. Nor can we fail to observe that
the addition of this count appears to be a futile attempt to
keep the dispute between the parties out of arbitration.
Plaintiffs also ask us to vacate our stay of the proceedings
pending arbitration. We decline to do so. It is clear that
arbitration is proper in a suit based upon alleged fraud in
violation of the CEA. See, e.g., Tamari v. Bache & Co.
(Lebanon) S.A.L., 565 F.2d 1194 (7th Cir. 1977), cert.
denied, 435 U.S. 905, 98 S.Ct. 1450, 55 L.Ed.2d 495 (1978).
While federal policy generally favors arbitration as a method
of dispute resolution, Prima Paint Corp. v. Flood & Conklin
Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967),
there are judicially created exceptions to the Federal
Arbitration Act, 9 U.S.C. § 1, et seq., in cases involving
federal protective legislation. One of these exceptions applies
to federal securities law. Wilko v. Swan, 346 U.S. 427, 74
S.Ct. 182, 98 L.Ed. 168 (1953) (invalidating broker-customer
agreements to arbitrate controversies involving claims under
the Securities Act of 1933).
In our previous opinion, we declined to extend Wilko to
claims arising under the CEA, based upon the fact the CEA
itself does not bar the use of arbitration and in the face of
the broad arbitration agreement which was apparently entered
into freely by all the parties to this suit. The addition of
count XII does not change our disposition of this case. The
entire controversy between the parties, except for count XII,
is arbitrable and should be submitted to arbitration pursuant
to the arbitration clause of the Agreement. A district court
may not refuse to enforce an agreement to arbitrate because of
the addition of a non-arbitrable claim, even where a bifurcated
resolution may result in an assertedly inefficient or delayed
resolution of the entire dispute. Dickenson v. Heinhold
Securities, Inc., 661 F.2d 638, 646 (7th Cir. 1981). Here, the
arbitration will, in all probability, dispose of the 1934 Act
We deny plaintiffs' motion to vacate the October 3, 1983 Stay
Order. We deny plaintiffs' motion to file an amended count X.
Plaintiffs may file count XII as part of a second amended
complaint. We stay the resolution of count XII pending
arbitration. An order consistent herewith will enter.