The opinion of the court was delivered by: HART
WILLIAM T. HART, UNITED STATES DISTRICT JUDGE
This multidistrict litigation is presently before the court on various motions for summary judgment. Motions have been filed in 13 of the remaining 15 cases.
The motions have been fully briefed and the court heard oral argument on the motions on October 27, 1989. This opinion will discuss all the pending motions and will be referred to as the "Summary Judgment Opinion" or "SJO". The discussion in this case is generally organized by parties. A separate order will be issued in each case making reference to the SJO and specifically stating the ruling as to the individual case.
This litigation centers around trading activity at the ContiArbitrage-Houston office ("CAH") of ContiCommodity Services, Inc. ("Conti"). Conti is a fully owned subsidiary of Continental Grain Company ("Continental"). David Ragan was a vice president of Conti and the manager of CAH. CAH was open from August 1981 until May 1984. Conti was a futures commission merchant registered with the Commodity Futures Trading Commission ("CFTC"). During the relevant time period, I.C. Hemmings; C.P. Brown; B & H Investment Services, Ltd. ("B & H"); H & B Investment Services, Ltd. ("H & B"); W. Paul Harris; Richard Sanborn; Grayson Whitehurst; Paul Sarpi; SSJ Associates, Inc.; Marc Enright; Floyd Bender; Dorothy Bender; Joe Ragan; Cynthia Frakes; and Owen Frakes maintained accounts at Conti and authorized David Ragan to trade for their accounts.
David Ragan was to conduct arbitrage trading for the customers. Arbitrage trading is the simultaneous purchase and sale of the same or equivalent securities or commodities in different markets or on different exchanges at different prices, in order to profit from the price differences between markets. The arbitrage trading relevant to this case primarily involved playing the cash market against the futures market in United States government securities. Purchase of the cash government securities (treasury bills, bonds, notes) were financed by repurchase agreements ("repos") and reverse repos. A repo is a short term collateralized loan. The seller of the security agrees that, after a negotiated period of time, the seller will repurchase the security from the original buyer for a different price which includes interest. A reverse repo is a purchase/resale agreement whereby a buyer agrees to resell a purchased security to the original seller at a price which also reflects interest. Trading of this type involved a large amount of debt that had to be reflected in the financial statements of Conti and Continental.
Certain customer parties complain that David Ragan acted improperly in that he did not conduct the type of trading promised, made intercustomer trades, made prearranged trades, made block trades, and failed to timely and properly allocate to specific customers the trades he was making. They seek to hold Conti, Continental, and certain officers of Continental and Conti
liable on theories of agency, piercing the corporate veil, and personal involvement. Certain customer parties also complain that Continental required Conti to close out accounts in a short period of time resulting in large losses and lost profits. Certain customer parties claim they were damaged in that they had actual losses and interest expenses, lost profits, and lost tax advantages. The Frakes and Joe Ragan claim that Conti did not distribute the entire balances remaining in their accounts when CAH was closed down. The Frakes and Joe Ragan do not accuse David Ragan of any wrongdoing. Conti, on the other hand, claims the customer parties conspired with David Ragan to have profitable trades allocated to them and that this resulted in Conti having to reimburse customers who received the loss side of the trades. Conti has also brought suit against David Ragan for the damages he allegedly caused, including to customers not parties to this suit. Ragan has countersued Conti for breach of contract, interference with contractual relations, and other claims.
A number of other parties are also involved in this litigation. Arthur Andersen & Company ("Andersen") audited the books of Continental and Conti. Certain customers claim Andersen is liable to them for failing to reveal to them the improprieties Andersen allegedly found at Conti. Prescott, Ball & Turben, Inc. ("PBT") and its former employee John Luikart allegedly conducted prearranged trades with Conti for which PBT received a certain percentage of profit that was in essence a commission. PBT claims it did not know the trades were for Conti customers, not Conti itself. Certain customers claim PBT is responsible for some of their damages in that some of the prearranged trades were assigned to them. Conti claims PBT improperly conspired with David Ragan and obtained commissions it was not entitled to. After CAH was closed, David Ragan was employed by Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") and certain customers transferred their accounts there. Improper practices allegedly continued and certain customers also brought suit against Merrill Lynch. Conti purchased a fidelity bond from Reliance Insurance Company ("Reliance") in 1984. Conti has brought suit to collect on the bond based on liabilities it has incurred as a result of trading at CAH. Also joined in this litigation are tax refund suits brought by certain customers and which involve the deductibility of losses claimed from trading at CAH.
In resolving each motion for summary judgment, the entire record is considered with all reasonable inferences drawn in favor of the nonmovant and all factual disputes resolved in favor of the nonmovant. Mid-State Fertilizer Co. v. Exchange National Bank of Chicago, 693 F. Supp. 666, 669 (N.D.Ill. 1988), aff'd, 877 F.2d 1333 (7th Cir. 1989). As regards choice of law issues, where the parties have not made any argument as to which state's law applies, it is assumed that the law of the state of the district where the case was filed applies. However, where there is no citation to that state's law, it is further assumed that the state's law is the same as Illinois. Similarly, where no law is cited from other circuits where cases are filed, it will be assumed that the applicable law is the same as that in the Seventh Circuit.
II. CUSTOMER PARTIES AND CONTI PARTIES
The Conti parties have moved for summary judgment dismissing all the claims of the customer parties on the ground they have shown no damages. Continental also moves to dismiss all claims on the ground its corporate veil cannot be pierced. Conti individual defendants also move to dismiss all claims on the ground their personal involvement has not been shown. All the Conti parties also argue that certain specific claims cannot be proven. Conti has not moved for summary judgment on any of its claims against the customer parties. The customer parties generally oppose the motions of the Conti parties, but do concede certain claims should be dismissed. The customer parties also move for summary judgment on some of their claims against Conti and move to dismiss some of Conti's claims against them. All the cases involving claims between the customers and Conti parties were brought in Texas except for Conti's suit against the Brown & Hemmings parties and the claims between Conti and the Frakes. The latter are Illinois cases.
At the outset of this case, defendants objected to certain customers' complaints on the grounds that Fed.R.Civ.P. 9(b) required that the customers specify which particular trades were improper. Certain customer parties asserted that they would be unable to specify which trades were improper without discovery. Accordingly, the court did not require trade specificity in the pleadings. During the course of discovery the defendants asked certain customer parties to specify which trades were under attack. Certain customer parties again failed to respond and informed the court of their inability to identify which trades were improper. During pretrial proceedings, certain customer parties were informed that they would be required to specify which trades they contended were improper, "bad", or a sham.
Previous orders of this court have required that any party making a claim based on bad or sham trades specifically identify each such trade upon which the claim rests. See, e.g., Orders dated April 27, 1987; October 22, 1987; May 15, 1989; June 8, 1989; August 25, 1989; September 11, 1989. On September 11, 1989, this court dismissed the customer parties' claims to the extent the claims were based on bad or sham trades because the customers had failed to identify such trades. No attempt was made at that time to identify which particular claims that order applied to. The Conti parties argue all claims should be dismissed for failure to identify trades. Certain customer parties again argue the trades cannot be identified.
The claims of the Frakes and Joe Ragan are not based on allegations of bad trades. Their claims, therefore, cannot be dismissed based on failure to identify trades. It is also clear that there is a factual dispute as to whether they suffered any damages. Account statements exist showing that they were entitled to a larger distribution than they actually received from their accounts.
Certain customer parties have failed to identify any claim against the Conti parties that does not involve alleged bad or sham trades. With the exception of a few examples identified by the certain customer parties and trades Conti has identified as bad trades, certain customer parties have not identified specific bad trades. They continue to argue that it is impossible to identify the bad trades and that they can show damages without specifying the bad trades. This court has previously ruled that the customers had to identify bad trades and struck any claims based on bad trades for failure to identify the trades. See Order dated September 11, 1989. That ruling shall essentially remain in effect. At trial certain customer parties will not be permitted to prove any damages based on specific trades except for the specific examples already identified by them or Conti. Also, in proving liability and damages at trial, certain customer parties will not be permitted to identify any specific bad trades other than those already identified.
The customer parties will not be precluded from attempting to prove liability and damages by other means. Therefore, they will be permitted to attempt to show that David Ragan and Conti failed to follow the trading program promised and that, if they had, the customers would have avoided an overall loss and instead have made a profit. They have presented evidence to support this theory and therefore a disputed issue of fact exists as to whether damages can be shown. The projection of potential earnings from a properly followed program must be computed to an appropriate date. Alternatively, those customers who sustained overall losses can obtain damages equal to their losses (including commission expenses) to the extent they can prove specific improper practices requiring the rescission of any trading agreement or the reimbursement of losses. To the extent actual injury and causality can be shown, certain customer parties may also obtain damages for tax advantages lost due to specific improper practices. These, plus nonduplicative damages arising from the few bad trades that have been specifically identified, are the only damages that certain customer parties will be permitted to present at trial. Certain customer parties will not be permitted to obtain any additional damages based on damages specifically arising from a late allocation, prearranged trade, intercustomer trade, block trade, premature closing of positions, or the shutdown of Conti except as to those few bad trades that have been specifically identified.
It must also be noted that certain allegations, e.g. misrepresentations, may involve discrete actions. For example, except to the extent it is proven to be part of a previously existing scheme or conspiracy, a misrepresentation made in 1983 can only cause subsequent injury. If a customer can only show the net loss or lost profits suffered during the entire investment period, the customer cannot assert damages prior to a proven act of wrongdoing.
C. Liability of Continental
The customers have presented the following evidence in support of their claim that Continental can be liable as an alter ego of Conti: (1) Continental owns substantially all of Conti's stock; (2) Conti's chairman of the board was an executive vice-president of Continental; (3) Conti borrowed only from Continental and Continental provided significant capital infusions; (4) Conti was undercapitalized for short periods during 1982 and 1984 and may presently have funds insufficient to satisfy any judgment that may be entered against it; (5) Continental closed Conti and Conti is presently a nonfunctioning shell with a $ 35,000,000 reserve; (6) Continental controlled decisions at Conti including reducing positions, shutting down CAH, restricting certain trading practices, and approving capital expenditures over $ 100,000; (7) Continental and Conti had consolidated financial statements; (8) funds of the two corporations were commingled to a limited degree; (9) Continental guaranteed some of Conti's debts; (10) Continental was involved in the hiring and firing of some Conti employees; and (11) Continental was kept informed of internal matters at Conti.
Under Texas and Illinois law, the corporate veil can be pierced where the parent so controls the subsidiary that the subsidiary is a mere instrument or tool and adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice. Miles v. AT & T, 703 F.2d 193, 195 (5th Cir. 1983); Van Dorn Co. v. Future Chemical & Oil Corp., 753 F.2d 565, 569-70 (7th Cir. 1985); FMC Finance Corp. v. Murphree, 632 F.2d 413, 422 (5th Cir. 1980). The customers have pointed to sufficient evidence of control, undercapitalization, and other factors to prevent the entry of summary judgment. If Conti is ultimately found to be liable, it may be an injustice to permit Continental to order Conti closed down and left with funds insufficient to satisfy liabilities and not have Continental be liable for injuries caused in part by a practice of Conti ordered or approved by Continental.
The customers have generally put in separate counts their various theories for holding Continental liable. Continental argues that these other theories are legally or factually deficient. Most of Continental's other arguments, however, fall to the side in light of there being facts to support piercing the corporate veil. It is therefore unnecessary to consider further whether the other counts should be dismissed. The issue of whether or not Conti was the alter ego of Continental must be tried.
D. Liability of Conti Individual Defendants
It is argued that there is no evidence of personal involvement by the Conti individual defendants in commission of the alleged improprieties. It is also argued that there is insufficient evidence of intent. The exhibits cited by the customers in response to the summary judgment motions have been examined and sufficient direct or inferential evidence of individual involvement and scienter has been found to require a trial on the issue of individual responsibility. Claims may be pursued against the Conti individual defendants.
The Conti parties initially argued the customers could not identify a "person" distinct from the "enterprise" as required under 18 U.S.C. § 1962(c). See Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1306-07 (7th Cir. 1987), cert. denied, 492 U.S. 917, 106 L. Ed. 2d 588, 109 S. Ct. 3241 (1989). The customers responded that Conti, Continental, and CAH in combination are the enterprise and that those individual entities and the individual defendants are persons distinct from the enterprise. See Fustok v. ContiCommodity Services, Inc., 618 F. Supp. 1074 (S.D.N.Y. 1985). In their reply, the Conti parties concede the validity of the customers' position, but argue it is not the enterprise alleged in the complaints. The case, however, is now before the court on summary judgment. To the extent the pleadings are inconsistent, they can be amended to conform to the evidence. The § 1962(c) claims will not be dismissed for failure to identify an enterprise.
The Conti parties also argue the customers have no standing to bring a § 1962(a) RICO claim because there is no showing of injury from the use or investment of racketeering income. Although apparently a minority view, this court has held that § 1962(a) contains no such requirement. See Mid-State Fertilizer, 693 F. Supp. at 671-73. The Seventh Circuit, and apparently the Fifth Circuit as well, have not yet decided this issue. See Mid-State Fertilizer, 877 F.2d at 1340 n. 1 (Ripple, J., concurring). Subsequent to this court's decision in Mid-State Fertilizer, two circuit courts reached the contrary conclusion. See Rose v. Bartle, 871 F.2d 331, 357-58 (3d Cir. 1989); Grider v. Texas Oil & Gas Corp., 868 F.2d 1147, 1149-51 (10th Cir. 1989), cert. denied, 493 U.S. 820, 107 L. Ed. 2d 43, 110 S. Ct. 76 (1989). The position taken in Mid-State Fertilizer, however, is still found to be more persuasive. The § 1962(a) claims will not be dismissed for lack of standing.
Conti and Continental argue they cannot be vicariously liable under RICO. The scope of such liability is unclear in this circuit. See D & S Auto Parts, Inc. v. Schwartz, 838 F.2d 964, 966-68 (7th Cir.), cert. denied, 486 U.S. 1061, 108 S. Ct. 2833, 100 L. Ed. 2d 933 (1988); Liquid Air, 834 F.2d at 1307. A recent case makes clear, though, that D & S Auto Parts ' exclusion of respondeat superior liability can apply only to corporations that are also the RICO enterprise. Ashland Oil, Inc. v. Arnett, 875 F.2d 1271, 1281 (7th Cir. 1989). As already discussed above, Conti and Continental are not the enterprise for purposes of the § 1962(c) claim. To the extent either of them is still alleged to be the enterprise for a § 1962(a) or (b) claim, those claims can still proceed on a respondeat superior theory since there is evidence that at least some of the allegedly improper employee acts were intended to benefit the corporations, not just the employee.
None of the RICO claims are dismissed on their merits.
F. Statute of Limitations
The Conti parties move for summary judgment on the Commodity Exchange Act, Rule 10b-5, and state law claims of certain customer parties. It is agreed that the applicable period for each of these claims is two years and that the claims were not brought within two years. The customers, however, argue that discovery of the claims did not occur until less than two years before they filed their complaints. On the record presented, whether the complaints were filed within two years of discovery and whether the customers exercised reasonable diligence is a question of fact that cannot be resolved on the motions for summary judgment.
G. Commodity Exchange Act
The customers have brought claims under § 22(a) of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 25(a), which expressly provides a private right of action under the CEA. Continental and the Conti individual defendants argue that statute does not apply to them. Section 22(a)(1) provides that any person (other than specified organizations not involved in this case) who violates the CEA or who willfully aids, abets, counsels, induces, or procures the commission of such a violation shall be liable for actual damages resulting from one or more of four enumerated transactions (see § 22(a)(1)(A)-(D)) and caused by the CEA violation. Section 22(a)(2) provides, except as to those circumstances enumerated in § 22(b) and not argued to be applicable here, that this is the exclusive remedy under the CEA. The plain language of this statute makes clear that there is only a private right of action where the damages are caused by one of the transactions enumerated in § 22(a)(1)(A)-(D) and the only reported case on the subject so holds. Grossman v. Citrus Associates of New York Cotton Exchange, Inc., 706 F. Supp. 221, 230-231 (S.D.N.Y. 1989). The customers argue "numerous courts" have held to the contrary. They, however, cite no court cases in support of that assertion, only CFTC reparation actions under § 14 of the CEA, 7 U.S.C. § 18. Those cases are not on point. To make a claim under § 22(a), the customers must show damages resulting from one of the transactions enumerated in the statute.
The customers argue that their damages arose from a transaction described in § 22(a)(1)(B) in that Continental and the Conti individual defendants made a "contract of sale of [a] commodity for future delivery." They argue these parties ordered the fiscal year end wind-downs and shutdown at Conti. The customers concede, however, that these were not the closing out of futures, but the close out of cash positions. They argue, nevertheless, that the closing of cash positions affected trading in commodity accounts. Although not fully set forth in § IV(A) of their brief, the customers' argument apparently is as follows. The customers made or purchased futures contracts through Conti. The activity of Conti allegedly violated various provisions of the CEA. This alleged scheme involved the sale and purchase of both cash and futures positions. The wind-downs and shutdown ordered by Continental and the Conti individual defendants are also claimed to be part of this scheme and therefore those defendants aided, abetted, or induced the scheme of Conti which involved the making or sale of futures contracts. Continental and the Conti individual defendants are claimed to be liable as aiders and abetters.
Continental and the Conti individual defendants, however, point to the plain language of subsections (A) through (D) of § 22(a)(1) and argue that "such person" as used in each of those subsections must also be the violator. Since "such person" in this case can only be Conti or David Ragan, it is argued Continental and the Conti individual defendants cannot be liable under § 22(a). Looking solely to § 22(a), this argument appears correct and is fully consistent with the plain language of the statute. Grossman, 706 F. Supp. at 230, is in accord with this argument. This argument, however, ignores 7 U.S.C. § 13c(a) which provides:
(a) Any person who commits, or who willfully aids, abets, counsels, commands, induces, or procures the commission of, a violation of any of the provisions of this chapter, or any of the rules, regulations, or orders issued pursuant to this chapter, or who acts in combination or concert with any other person in any such violation, or who willfully causes an act to be done or omitted which if directly performed or omitted by him or another would be a violation of the provisions of this chapter or any of such rules, regulations, or orders may be held responsible for such violation as a principal.
It is this statute which enables an injured party to bring a court suit against an aider, abetter, inducer, combiner, etc. who was not the "such person" under § 22(a)(1)(A)-(D). See H.R.Rep. No. 565, 97th Cong., 2d Sess., pt. I, at 104-05, 142, reprinted in 1982 U.S. Code Cong. & Admin. News 3953-54, 3991. The customers have claims against Continental and the Conti individual defendants under the CEA.
The Conti parties argue the CEA claims based on breach of fiduciary duty should be dismissed. However, to the extent the breach involves misrepresentations, a claim can be made under the CEA. See United States v. Dial, 757 F.2d 163, 168 (7th Cir.), cert. denied, 474 U.S. 838, 88 L. Ed. 2d 95, 106 S. Ct. 116 (1985). Cf. Disher v. Information Resources, Inc., 691 F. Supp. 75, 86 (N.D.Ill. 1988), aff'd, 873 F.2d 136 (7th Cir. 1989). As the Conti parties point out, there may be no real distinction between the claims labeled fiduciary breach claims and those labeled as being fraudulent misrepresentations in violation of the CEA, but the lack of distinctive elements for a claim does not require that one be dismissed.
The customers' claim for failure to supervise in violation of CFTC Regulation 166.3 will be dismissed. Claims for violation of CFTC regulations can only be pursued in reparation proceedings under § 14 of the CEA, not in civil actions for damages pursuant to § 22. Khalid Bin Alwaleed Foundation v. E.F. Hutton & Co., 709 F. Supp. 815, 819-20 (N.D.Ill. 1989). Accord Khalid Bin Talal Abdul Azaiz Al Seoud v. E.F. Hutton & Co., 720 F. Supp. 671, 676 (N.D.Ill. 1989).
The customers have brought common law conspiracy claims against Conti and Continental. Relying primarily on Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 81 L. Ed. 2d 628, 104 S. Ct. 2731 (1984), Conti and Continental argue a subsidiary and parent cannot conspire with each other. That decision, however, is limited to the context of antitrust actions. Ashland Oil, 875 F.2d at 1281. Texas common law, which governs most of the claims, recognizes conspiracies between parents and subsidiaries. Metropolitan Life Insurance Co. v. La Mansion Hotels & Resorts, Ltd., 762 S.W.2d 646, 652 (Tex. Ct. App. 1988). Under Illinois law, an agent cannot conspire with a principal. Salaymeh v. Interqual, Inc., 155 Ill. App. 3d 1040, 508 N.E.2d 1155, 1158, 108 Ill.Dec. 578 (1987). As the Conti parties have argued on another issue, though, a subsidiary is not necessarily an agent of its parent. Conti and Continental also argue at length that they are distinct entities. To the extent the customers fail to pierce the corporate veil or hold Continental liable on agency principles, they may still be able to prove a conspiracy between Conti and Continental. Compare Thomas v. Rohner-Gehrig & Co., 582 F. Supp. 669, 673 (N.D. Ill. 1984). The civil conspiracy claims will not be dismissed.
I. Tortious Interference with Contract
The customers have dropped any claim that the Conti parties interfered with a contract between the customers and David Ragan. The parties now agree that the contract allegedly interfered with was one between the customers and Conti. Conti argues it cannot be liable for interfering with a contract it is a party to. Continental and the Conti individual defendants argue that, as Conti's parent and officers of Conti or its parent, they were qualifiedly privileged to take the actions they took. Conti, however, can be liable for interfering with the contract to the extent it conspired with Continental and Continental's acts were not privileged. See Boyles v. Thompson, 585 S.W.2d 821, 836 (Tex. Civ. App. 1979). Whether or not a parent or corporate officers were qualifiedly privileged depends on a variety of factors and the particular circumstances. Maynard v. Caballero, 752 S.W.2d 719, 721 (Tex. Ct. App. 1988); Frank Coulson Inc.-Buick v. General Motors Corp., 488 F.2d 202, 206 (5th Cir. 1974); Langer v. Becker, 176 Ill. App. 3d 745, 531 N.E.2d 830, 833-34, 126 Ill.Dec. 203 (1988), appeal denied, 125 Ill. 2d 566, 537 N.E.2d 810 (1989). This includes questions of good faith and malice. See Sakowitz, Inc. v. Steck, 669 S.W.2d 105, 109 (Tex. 1984); Langer, 531 N.E.2d at 833-34. The question of privilege is not one that can be resolved on summary judgment on this record.
Relying on a privilege argument the same as that made regarding tortious interference with contract, Continental and the Conti individual defendants move to dismiss the inducing breach of duty claims. As discussed in § II(I), there are factual disputes which preclude summary judgment.
K. Fraudulent Concealment
Continental argues it had no duty to disclose facts and, even if it did, the requisite intent cannot be shown. There is, however, evidence from which it can be inferred Continental may have intentionally covered up the closing out of positions. Whether or not Continental had a duty to disclose turns on the question of whether Conti was Continental's alter ego or agent. Since the latter cannot be resolved on summary judgment, neither can the former. Summary judgment cannot be granted on the fraudulent concealment claims. It is noted, however, that, to the extent this claim is not proven as part of an overall scheme affecting the customers' trading activity, no claim can be shown since the customers have not identified the closed out positions and therefore cannot prove any damages arising solely from the closing out of positions.
Conti argues that the conversion claims against it are governed by Illinois law and that the property allegedly converted was intangible property to which Illinois conversion law does not apply. The customers argue Texas law applies and, even if Illinois ...