Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, Nos, 83 C 7841, 84 C 527, 82 C 5910, 82 C 6611, George N. Leighton, Judge.
Wood, Jr. and Posner, Circuit Judges, and Grant, Senior District Judge.*fn*
This unwieldy commodities-fraud case, rich in parties and issues, comes to us after a five-week trial that produced a record of several thousand pages. However, the essential facts are simple (and we shall make them even simpler, to the extent this can be done without distorting our analysis), and many of the issues require little or even no discussion.
At the heart of the fraud was Robert Serhant, who between 1980 and 1982 offered investors a "Hedge-Spread Program" that he said would work as follows. For every $100,000 invested, Serhant would use $97,000 to buy a 90-day U.S. Treasury bill having a value at maturity of approximately $100,000 (this was a period of high interest rates) and would invest the remaining $3,000 in Treasury bill futures traded on the Chicago Mercantile Exchange, of which he was a member. He told investors that their risk would essentially be limited to the interest on the Treasury bill, because, at worst, at the end of 90 days they would have $100,000 (more or less) -- the $97,000 principal of the Treasury bill plus interest thereon for 90 days. They would have lost only the interest they would have earned if the full $100,000 rather than $97,000, had been invested in Treasury bills. The "Program" was a gimmick, of course; the investors would be no better off than if they gave Serhant just $3,000 each. And it was misleading, as we shall see, to suggest that an investor could lose no more than the amount of the investment used to buy futures.
To do the actual trading of the futures Serhant needed the services of both a clearing member of the Exchange, whose function is to guarantee that each party to a trade will make good on his commitment, and a futures commission merchant, who acts as custodian of the investors' funds. (On the mechanics of commodities trading, and especially the role of the clearing member, see United States v. Dial, 757 F.2d 163, 164-66 (7th Cir. 1985); Bernstein v. Lind-Waldock & Co., 738 F.2d 179, 181 (7th Cir. 1984); Leist v. Simplot, 638 F.2d 283, 286-88 (2d Cir. 1980), aff'd under the name of Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353, 72 L. Ed. 2d 182, 102 S. Ct. 1825 (1982); Fishman, Commodities Futures: An Introduction for Lawyers, 65 Chi. Bar Record 306, 309 (1984); Chicago Board of Trade, Commodity Trading Manual (1982).) For most of the period of the fraud, Serhant used K & S Commodities, Inc. (owned by Messrs. Schiller and Krumhorn) as both his clearing agent and futures commission merchant.
Serhant's scheme was fraudulent in three respects. First, he invested not 3 percent but almost 100 percent of the investors' money in Treasury bill futures, thus making the investments far riskier than the investors had originally supposed they would be. Erroneously predicting trends in short-term interest rates, Serhant lost $21 million of the $51 million invested in the Hedge-Spread Program. He didn't pocket the money; he just lost it in trading.
Second, he tried to conceal the losses from the investors by various dishonest tricks such as "allocating" profits to investors who had suffered losses. Suppose Serhant made a "block" sale (that is, a consolidated sale of futures contracts held in different accounts, see United States v. Dial, supra, 757 F.2d at 165, in this case accounts of different customers) of two futures contracts, at a price of $2 a contract. And suppose that he had paid $3 for one of the contracts and $1 for the other and that the first contract had been bought for the account of an investor who had later suffered large losses and the second contract for the account of a new investor, who had suffered no losses; Serhant might switch the accounts so that the account of the first investor would show a profit (of $1) that offset some of that investor's losses. As in a Ponzi scheme, Serhant was using newly invested money to make old investors think they were earning profits rather than losing their shirts.
Third, Serhant exaggerated the degree to which the Hedge-Spread Program, had it been implemented as represented, was secure. In commodities trading you can lose more money than you invest, even if you ignore margin calls. A futures contract is a contract to buy or sell a commodity or a financial instrument at a specified price on a specified date, and should an investor be unsuccessful in unloading the contract as the price shifts against him (he might be unsuccessful because the price changed precipitately or simply because his broker failed to offset the contract), he may end up having to ante up more than he invested.
For these various frauds Serhant is now serving an 11-year prison sentence.
The investors whom he fleeced brought this civil suit (actually suits, but we'll suppress that irrelevant detail to simplify the opinion) against a variety of individuals and institutions. Many of the defendants settled before trial, to the tune of more than $8 million. Some did not settle -- Serhant, and companies owned by him which he used as vehicles for the fraudulent scheme; K & S, and one of its co-owners, Krumhorn; the Chicago Mercantile Exchange; and the First Bank of Schaumburg. The district court granted summary judgment for the exchange and for the bank but allowed the case to go to the jury against the other defendants, which is to say against the Serhant and K & S groupings. The jury, asked to assess compensatory damages separately against each defendant, returned a verdict that awarded total damages -- after some trebling under RICO, see 18 U.S.C. § 1964(c), which Serhant and his companies were held to have violated -- of about $3.3 million. Most of the assessment is against the Serhant group of defendants. Only $120,001 was assessed against K & S and $60,001 against Krumhorn. Schiller, the co-owner of K & S, had settled before trial for $350,000.
The plaintiffs appeal from the judgment in favor of the exchange and the bank, and from the district court's refusal to set aside the damage judgment against the other defendants as being too low. Those defendants cross-appeal, contending that they should have had judgment in their favor. We discuss the liability of the Mercantile Exchange first, then the adequacy of the damages judgment, then the liability of K & S and Krumhorn and the bearing of the settlements generally, and last the liability of the First Bank of Schaumburg. There are a few other issues worthy of some discussion and we'll tuck them in at convenient places.
The plaintiffs seek to rope in the Exchange under either of two sections of the Commodity Exchange Act. Section 5a(8), 7 U.S.C. § 7a(8), as it read in the period relevant to this case, required each exchange to "enforce all by-laws, rules, regulations, and resolutions, made or issued by it . . ., which relate to terms and conditions in contracts of sale . . ., and which have been approved by the [Commodity Futures Trading] Commission . . . " Section 13c(a), 7 U.S.C. § 13c(a), provided that "any person who . . . willfully aids, abets, counsels, . . . [etc.] a violation of any of the provisions of this [Act] . . . may be held responsible in administrative proceedings under this [Act] for such violation as principal." The Act nowhere expressly authorized private damages suits against violators of either section. The Futures Trading Act of 1982 changed this, see 7 U.S.C. § 25(b)(1)(A); 7 U.S.C. § 13c(a), but the parties agree that the changes are inapplicable to this case. Proceeding under the unamended statute, the district court held that a private right of action is implicit in section 13c(a) (aiding and abetting) but not in section 5a(8) (failure to enforce rules), and so dismissed the section 5a(8) claim. Then he granted summary judgment for the defendants on the aiding and abetting claim, on the ground that there was insufficient evidence to create a triable issue.
The whole question of "implied" rights of action is deeply vexed. It lies at the crux of a series of debates over statutory interpretation. Those judges who believe that most statutes are comprises between rival interest groups hesitate to create implied rights of action no matter how defective a statute's remedial scheme is without them, for they believe that in all likelihood the absence of effective remedies was a part of the compromise that enabled the statute to be passed, and they rightly do not want to undo the compromise. Those who believe that a regulatory statute should be viewed not as the point of balance ...