action against Conti for a breach of any of these.
It does not follow, however, that Conti could not be found
liable. The CEA makes brokerage firms vicariously liable for
the CEA violations of their agents, whether authorized or not,
as long as the agent was "acting for" the firm at the time.
7 U.S.C. § 4; Poplar Grove Planting and Refining Co. v. Bache
Halsey Stuart, Inc., 465 F. Supp. 585 (M.D.La.), remanded on
other grounds 600 F.2d 1189 (5th Cir. 1979). The Supreme Court
in Curran specifically held that the implied right of action
under the CEA includes actions for fraud, deceit or
misrepresentation. 7 U.S.C. § 6b; Curran, 456 U.S. at 389-90,
102 S.Ct. at 1844-45. If Thomas were found liable for
commodities fraud, Conti would also be liable.
The § 6b action, however, requires intentional or reckless
conduct similar to the scienter element of common law fraud.
Since the term "willfully" occurs four times in § 6b, and since
its function roughly parallels that of the antifraud provision
of the Securities Exchange Act, 15 U.S.C. § 78j(b), which has
already been construed to cover only intentional
misrepresentation, most courts construing the CEA have found
that liability for commodities fraud must be based on more than
negligence. See McIlroy v. Dittmer, 732 F.2d 98 (8th Cir.
1984); CFTC v. Savage, 611 F.2d 270 (9th Cir. 1979). While the
broker or house need not have had a demonstrably evil motive or
an affirmative intent to injure customers — a fiduciary's
breach of duty in appropriate circumstances is constructive
fraud — nevertheless most courts, before finding a § 6b
violation, look for at least knowing and deliberate conduct.
See Marchese v. Shearson Hayden Stone, Inc., 734 F.2d 414 (9th
Cir. 1984); Silverman v. CFTC, 549 F.2d 28, 31 (7th Cir. 1977);
Haltmier v. CFTC, 554 F.2d 556 (2d Cir. 1977). The standard for
private actions in both the Ninth and the First Circuits is
intentional or willful conduct, including acting with knowledge
of a false statement or an omission, or acting with reckless
disregard of the falsity or omission. Yopp v. Siegel Trading
Co., Inc., 770 F.2d 1461, 1464 (9th Cir. 1985); First Commodity
Corp. of Boston v. CFTC, 676 F.2d 1, 6 (1st Cir. 1982).
Recklessness has been defined in this context as conduct which
"departs so far from the standards of ordinary care that it is
very difficult to believe that the speaker was not aware of
what he was doing." First Commodity, 676 F.2d at 7. Such a
standard closely parallels the standard in the Seventh Circuit
for securities fraud actions, Sundstrand Corp. v. Sun Chemical
Corp., 553 F.2d 1033, 1044 (7th Cir.), cert. denied,
434 U.S. 875, 98 S.Ct. 225, 54 L.Ed.2d 155 (1977), and so would probably
be adopted here for commodities fraud as well. See Crook v.
Shearson Loeb Rhoades, Inc., 591 F. Supp. 40 (N.D.Ind. 1983).
But see Gordon v. Shearson Hayden Stone, Inc., Comm.Fut.L.Rep.
(CCH) ¶ 21,016 (CFTC 1980) (CFTC uses negligence standard).
2. Unauthorized Trading
A genuine issue of fact exists as to whether Thomas' conduct
in trading the bank's account could be characterized as
intentional or reckless. Thomas, as the bank's broker, owed it
a fiduciary duty, and that is a factor in the analysis.
Marchese, 734 F.2d at 418; Crook, 591 F. Supp. at 48. A breach
of a broker's fiduciary duty is not in every instance also a §
6b violation, Hagstrom v. Breutman, 572 F. Supp. 692, 697
(N.D.Ill. 1983), but when the breach appears intentional or
reckless, and seems to benefit the broker at the expense of the
client, as in the case at bar, it usually is grounds for a § 6b
recovery. Crook, 591 F. Supp. at 48. For example, ignoring a
client's express trading instructions is conduct so far from
the ordinary standard of care that it must be either
intentional or reckless. When a broker promised his customer
that he would trade a discretionary account in a particular
manner, and then repeatedly failed to do so, the conduct was
both a breach of fiduciary duty and a violation of the CEA.
McIlroy, 732 F.2d at 103-04. It is undisputed that Thomas
initially promised to hedge the Evanston
Bank account. Despite Thomas' reluctance to characterize the
1982 trades as speculative, there can be no genuine issue that
they were. For the bank, any net long position was speculative
and its account was $27,000,000 long. Unless a trier of fact
found that Christiansen's agency, or a ratification theory,
worked to release Thomas from that promise, it could infer
unauthorized trading from these facts.
Also, a conscious decision not to disclose an objectively
obvious danger to a client is reckless non-disclosure, which
for a fiduciary amounts to misrepresentation or deceit.
Sundstrand, 533 F.2d at 1047-1048. A trier of fact could infer
that Thomas knew that the trades he made after January 1982
presented an obvious danger to the bank, given the FDIC policy
with which he was at least somewhat familiar, and consciously
decided not to inform his principal of that danger. If the
agency issues were resolved against Conti, then a trial could
find that Thomas breached his duty through unauthorized trading
and reckless nondisclosure, and Conti would be liable as well.
A similar analysis holds for count II. Churning has been
defined as excessive trading in an account over which the
broker has control for the primary purpose of generating
commissions. Yopp, 770 F.2d at 1465. Churning is a particular
species of unauthorized trading which provides a separate and
additional claim when high commission charges stem from an
amount of trading that exceeds what is appropriate for the
client's investment goals. Such trading, of course, breaches a
broker's fiduciary duty. Id. Churning was part of the
"contemporary legal context" in 1974 and is therefore included
in the implied right of action for fraud, misrepresentation or
deceit under § 6b. Curran, 456 U.S. at 381, 389, 102 S.Ct. at
1840, 1844. See, e.g., Hagstrom, 572 F. Supp. at 698; Booth v.
Peavey Co. Commodity Services, 430 F.2d 132 (8th Cir. 1970);
Johnson v. Arthur Espey, Shearson, Hammill & Co., 341 F. Supp. 764
(S.D.N.Y. 1972). The elements of an action for churning a
commodities account are the same as in securities transactions.
While there is no single test or formula, generally a plaintiff
must show (1) broker control of the account, and (2) excessive
trading of the account which was (3) intentional or willful,
i.e., for the purpose of generating unnecessary commissions or
at least with reckless disregard for the client's interest. See
Yopp, 770 F.2d at 1466, applying Mihara v. Dean Witter & Co.,
619 F.2d 814 (9th Cir. 1980); Costello v. Oppenheimer & Co.,
711 F.2d 1361, 1368 (7th Cir. 1983); Armstrong v. McAlpin,
699 F.2d 79, 91 (2d Cir. 1983). Usually the intent or recklessness
will be implicit in the nature of the conduct. Armstrong, 699
F.2d at 91.
The facts before the court, at the very least, could raise an
inference of churning. Since the account was discretionary,
Thomas presumptively had control. Cf. Yopp, 770 F.2d at 1466;
Costello, 711 F.2d at 1368. The amount of trading in 1982
massively exceeded that of 1981. It generated commissions
described by plaintiff's expert as "atypically high," charged
at a rate which Thomas admits was significantly higher than
that which other customers with similar activity levels paid.
Liability then would turn on whether the trading was consistent
with the client's objectives. Compare Costello, 711 F.2d at
1368 with Fey v. Walston & Co., 493 F.2d 1036, 1045, 1048 (7th
Cir. 1974). That question is a question of fact. In this case
it can only be answered after a resolution of the same agency
questions that apparently control count I: whether a change in
the bank's objectives was authorized, either by Christiansen or
through a ratification by silence. As in count I, if these
questions were resolved against Conti and Thomas, they could be
The bank also seeks triple damages from Conti through civil
RICO. The provisions of this statute have been interpreted to
cover a range of conduct substantially
wider than the popular conception of "racketeering." RICO
unquestionably reaches many types of "garden variety fraud,"
including some commodities fraud. See Sedima, S.P.R.L. v. Imrex
Co., 473 U.S. ___, ___, 105 S.Ct. 3275, 3283, 3287, 87 L.Ed.2d
346 (1985). Under 18 U.S.C. § 1964(c), a plaintiff may recover
treble damages for an injury to his business or property which
results from a violation of 18 U.S.C. § 1962. One violates §
1962 by conduct of an enterprise through a pattern of
racketeering activity. Racketeering activity, defined in
18 U.S.C. § 1961(1), includes mail fraud, 18 U.S.C. § 1341, and
wire fraud, 18 U.S.C. § 1343. By the terms of
18 U.S.C. § 1961(5), at least two acts of such racketeering activity must
fall within a ten-year period. These individual acts are
usually called the "predicate offenses." Sedima, 105 S.Ct. at
3285; Haroco, Inc. v. American National Bank and Trust Co. of
Chicago, 747 F.2d 384, 386 (7th Cir. 1984), aff'd 473 U.S. ___,
105 S.Ct. 3291, 87 L.Ed.2d 437 (1985). The conduct must also
comprise a "pattern." 18 U.S.C. § 1962(c).
The question is whether civil RICO will stretch to cover
these commodities offenses. At a minimum, the predicate
offenses must exist before RICO liability is triggered.
Sedima, 105 S.Ct. at 3281; Haroco, 747 F.2d at 397-398. To
support an offense of mail fraud, a mailing must have been "in
furtherance of the scheme," meaning the mailing must have been
at least "incidental to an essential part of the scheme."
United States v. Wormick, 709 F.2d 454, 462 (7th Cir. 1983);
see also United States v. Murphy, 768 F.2d 1518, 1530 (7th Cir.
1985). Mailings which conflict with the purposes of the scheme
do not meet this test. Wormick, 709 F.2d at 462; United States
v. Staszcuk, 502 F.2d 875, 880 (7th Cir. 1974). The bank
attempts, in its complaint, to use the daily confirmation
statements, monthly statements, margin notices and general
correspondence sent to the cashier as mailings in furtherance
of the scheme. No one suggests that these materials were
themselves fraudulent or even inaccurate. Whatever one finds as
to the impact of these mailings for a possible ratification
argument, this court thinks that regular, accurate and truthful
reports of transactions cannot further a scheme to defraud.
Indeed, they would appear to conflict with its purposes. There
is therefore no evidence that the mails were used to further
The bank also alleges wire fraud. Under the law of this
circuit, use of the telephone constitutes wire fraud if that
use is for "the purpose of executing" a scheme to defraud,
Sutliff, Inc. v. Donovan Companies, 727 F.2d 648, 653 (7th Cir.
1984), or at least "in furtherance of the scheme," United
States v. Freeman, 524 F.2d 337, 339 (7th Cir. 1975). The bank
alleges that Thomas used the telephone to make various
misrepresentations to Christiansen, and made non-disclosures by
way of the telephone.
This allegation provides the needed predicate offenses. A
fiduciary's misrepresentations or non-disclosures would be
fraudulent. See United States v. Dial, 757 F.2d 163, 168 (7th
Cir. 1985); United States v. Feldman, 711 F.2d 758, 763 (7th
Cir.), cert. denied, 464 U.S. 939, 104 S.Ct. 352, 78 L.Ed.2d
317 (1983). Thomas, of course, denies any misrepresentations or
non-disclosures on the telephone or anywhere else, and that
testimony is unrebutted. But he admits to using the telephone
to discuss transactions, and he admits that the motive behind
some day trades was to avoid margin calls. The bank
specifically argues that such use of day trades was
concealment. By avoiding margin calls, these trades avoided
events which would have disclosed the true nature and size of
the bank's position to the board. And indeed, if a trier of
fact found, for example, a scheme to churn the account, it
could reasonably find that the use of day trades was a
concealment which furthered the scheme. Two telephone calls
about day trades within ten years would then satisfy the
requirement of predicate offenses.
The racketeering activity which causes injury must also flow
from a "pattern" of such activity. Since the only RICO
which gives any content to the term "pattern," § 1961(5), is
the same one which speaks of two acts of racketeering activity
within ten years, some courts have held that two telephone
calls or two mailings meet this "pattern" requirement even when
they support only one episode of fraud. See, e.g., United
States v. Starnes, 644 F.2d 673 (7th Cir. 1981); Sedima, 105
S.Ct. at 3293, 3295 (Marshall, J., dissenting). The Supreme
Court in Sedima, however, expressly noted that the courts have
failed to develop a meaningful concept of "pattern." 105 S.Ct.
at 3287. An alternative view, supported by both the ordinary
meaning of the word "pattern" and a close reading of Sedima, is
that it takes at least two fraudulent schemes or episodes,
related by common purposes, methods or results, to make up a
"pattern of racketeering activity." Northern Trust Bank/O'Hare,
N.A. v. Inryco, Inc., 615 F. Supp. 828 (N.D.Ill. 1985); see
Sedima, 105 S.Ct. at 3285 n. 14. Under this approach, a firm
would not find itself vicariously liable for triple damages
merely because one of its agents engaged in his own fraud.
Inryco, 615 F. Supp. at 828. If, however, similar schemes
appeared within different branches of the same enterprise, a
trier of fact could reasonably conclude that the firm itself
engaged in a pattern of racketeering activity.
Here the existence of a "pattern" is an issue under either
view. If one episode of fraud suffices, then two uses of the
telephone in support of a scheme to churn the account are a
"pattern." The bank's complaint, however, also refers to
accusations of CEA violations against Conti by several
participants in its sugar arbitrage program. These complaints
have arisen in this district and in other areas of the United
States, in accounts handled by different brokers, and have led
to several lawsuits, e.g., Walbert v. ContiCommodity Services,
Inc., No. 84 C 10455 (N.D.Ill.) If a "pattern" requires at
least two episodes of racketeering activity, two schemes of
commodities fraud may be sufficiently related to establish a
pattern. Unless the trading was authorized, then, the RICO
count also survives summary judgment.
B. Fraud and Deceptive Practices under Illinois Law
1. Fraudulent Misrepresentation
The bank also makes three claims under Illinois law,
beginning with count III for fraudulent misrepresentation and
concealment. When the account was opened, Thomas assured the
bank of commission charges equivalent to those of Conti's other
financial institution customers. The account designation itself
stated in writing that all trades would be hedges, and Thomas
promised they would be well within banking regulations. The
bank asserts that he then not only speculated, but concealed
the speculation by using day trades which avoided margin calls.
These, it argues, amount to fraud.
Common law fraud is an action with potential pitfalls at
every step. In general, the plaintiff can recover for fraud in
Illinois when he is damaged through acting in justifiable
reliance on a false statement of material fact which the
defendant made, knowing or believing it to be false and
intending to induce plaintiff to act. Soules v. General Motors
Corp., 79 Ill.2d 282, 402 N.E.2d 599, 37 Ill.Dec. 597 (1980).
Courts often break that rule down into a numerical list of
elements of fraud, but the lists differ, and there is case law
construing nearly every word whether it is a separate element
on the list or not. See generally Mother Earth, Ltd. v.
Strawberry Camel, Ltd., 72 Ill. App.qd 37, 390 N.E.2d 393, 28
Ill.Dec. 226 (1st Dist. 1979). Actually, "there is no general
rule for determining what facts will constitute fraud. Rather,
its existence depends upon the particular facts of each case."
Carey Electric Contracting, Inc. v. First National Bank of
Elgin, 74 Ill. App.3d 233, 236, 392 N.E.2d 759, 762, 30
Ill.Dec. 104, 107 (2d Dist. 1979).
a. Difficulties: future promises and justifiable
The pitfalls on the particular facts of this case come
especially in the areas of falsity, knowledge of falsity and