The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
Daniel McCarthy ("McCarthy") sues Paine Webber, Inc.
("PaineWebber") and Paine Webber Account Executive Thomas Downs
("Downs") under Commodity Exchange Act ("Act") § 4b(A) ("Section
4b(A)"), 7 U.S.C. § 6b(A) (actionable under Act § 22(a)(1),
7 U.S.C. § 25(a)(1)), seeking damages for harm suffered as a result
of defendants' allegedly fraudulent mismanagement of his
commodities account. McCarthy's Amended Complaint (the
"Complaint")*fn1 also includes two pendent state law counts, one
seeking recovery for common law fraud and the other under the
Illinois Consumer Fraud and Deceptive Business Practices Act
("Illinois Consumer Fraud Act"), Ill.Rev.Stat. ch. 121 1/2, §§
Defendants now move to dismiss McCarthy's Complaint under
Fed.R.Civ.P. ("Rule") 12(b)(6) for failure to state a claim upon
which relief can be granted. For the reasons stated in this
memorandum opinion and order, defendants' motion is granted in
part and denied in part.
On the basis of those representations McCarthy opened an
account with PaineWebber in Company's name July 27, 1982,
executing a commodity hedge letter and a commodity authorization
letter. On signing the hedge letter, McCarthy stressed to Downs
that trading on Company's account was limited to legitimate hedge
transactions. Downs also agreed he would make trades on the
account only with prior authorization, either specific or in the
form of an agreed-upon trading strategy.
Relying on Downs' representation of an opportunity for profit
with little risk, McCarthy sold April 1983 live cattle and feeder
cattle futures on several dates in late December 1982 and early
January 1983. Once the trades had been made McCarthy told Downs
the prices obtained were not profitable for Company, so he did
not want to hold the short positions for very long. Downs assured
McCarthy prices would fall in January and the positions could
then be offset at a profit. Profits did fall slightly on various
dates in January (compare Complaint ¶ 13 with Complaint Ex. A)
but Downs did not buy out the short positions, later telling
McCarthy he "froze." Though prices rose through February and
March, Downs continued to hold the positions, telling McCarthy on
at least two occasions that the market would soon break so as to
allow profitable offsets. Defendants finally offset the positions
on March 24, 29 and 30 at a loss to McCarthy of nearly $230,000,
including over $5,000 in commissions.
Throughout March Downs continued to trade on Company's account.
By the end of the month 416 trades had been made on the account,
generating commissions totalling $11,000 and yielding losses
(including commissions) of over $38,000. At some point before
April 13 Downs also bought long positions in April cattle that he
failed to offset with corresponding short positions, against
McCarthy's instructions that he never wanted to be in a position
of having to take delivery on futures contracts. As a result of
Downs' failure to respect his wishes, McCarthy was required to
take delivery in Sioux City, Iowa on April 13 of seven loads
(each at 40,000 pounds) of live beef cattle. McCarthy incurred a
loss of approximately $7,000.
Against that factual background McCarthy asserts various
claims, the first five counts being grounded in Section 4b(A) and
the other two looking to state law:
1. Count One charges defendants with cheating and
defrauding McCarthy in connection with short
positions opened in late December 1982 and early
January 1983 and finally closed in late March 1983.
2. Count Two claims unauthorized trading in
connection with the positions opened on May 27 and
June 1, 1983 while McCarthy was out of town.
3. Counts Three and Five charge churning in
connection with (a) the trades forming the basis of
Count Two and (b) the 416 trades in Company's account
during March 1983.
4. Count Four asserts cheating and defrauding that
resulted in McCarthy's having to take delivery of
live beef cattle in April 1983.
5. Counts Six and Seven advance pendent state law
claims (a) for common law fraud and (b) under the
Illinois Consumer Fraud Act.
Defendants ask dismissal of Counts One, Four, Six and Seven,
1. Count One is barred by the two-year limitations
period prescribed by Act § 22(c).
2. Both Counts One and Four fail to allege scienter
on defendants' part, a necessary element of a Section
3. Count Six fails to allege the elements necessary
to state a claim for common law fraud under Illinois
law. In any case PaineWebber cannot be liable for
punitive damages under Count Six simply on the basis
of respondeat superior.
4. Count Seven (under the Illinois Consumer Fraud
Act) must be dismissed because that state statute has
been preempted by the Act's comprehensive federal
scheme regulating commodities trading.
This opinion considers each of those arguments in turn.
Act § 22(c), part of the section that expressly creates a
private right of action for Act violations, says:
Any such action must be brought within two years
after the date the case ...