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September 11, 1985


The opinion of the court was delivered by: Shadur, District Judge.


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, §§ 261-272.

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.

In May 1983 McCarthy told Downs he was leaving town and there was to be no trading in the account during his absence without his authorization. Before leaving May 26 McCarthy gave Downs dates, places and telephone numbers where he could be reached while he was away. Late on June 7, the day of McCarthy's return, Downs called to say he had to see McCarthy that evening. They met in McCarthy's office, and Downs revealed that on May 27 and June 1 he had sold 56 futures contracts for June 1983 cattle on Company's account at prices ranging from $65.30 to $66.70. He admitted he made no effort to reach McCarthy before taking the short positions, but he had thought June 1983 contracts would be trading at $62 to $63 before the contracts closed. Because things had not worked out Downs said PaineWebber would take over the short positions. In fact PaineWebber refused to take over the positions, and they were offset June 20 at a loss to McCarthy of over $35,000, including nearly $3,400 in commissions.

Contentions of Parties

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, claiming:

    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
  4b(A) claim.
    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.

Statute of Limitations

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 ...

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