The opinion of the court was delivered by: Virginia M. Kendall, United States District Judge
Judge Virginia M. Kendall
MEMORANDUM OPINION AND ORDER
Plaintiff U.S. Commodity Futures Trading Commission ("the Commission") brought suit against Edward Sarvey ("Sarvey") and David Sklena ("Sklena"), alleging that they engaged in a series of non-competitive trades at the Chicago Board of Trade ("CBOT"). The Commission impled Lawrence-Bonfitto Trading Company ("Bonfitto Trading") and Joseph Bonfitto ("Bonfitto") as relief or nominal defendants, alleging that they hold funds resulting from Sklena's non-competitive trading in which they have no legitimate ownership interest. Bonfitto and Bonfitto Trading filed a Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(1), arguing that they are not properly before the Court as nominal defendants.
Sarvey and Sklena were floor brokers in the Five-Year Treasury Note futures pit at the CBOT. Bonfitto Trading was Sklena's clearing firm. Complaint at ¶ 49. As such, Bonfitto guaranteed Sklena's trades and was obligated by contract and CBOT rule to pay whatever amount Sklena could not to the Clearing House to settle Sklena's losses. Motion to Dismiss at 2 citing CBOT Rule 333.00(a).
On March 5, 2004, Sklena suffered large losses in his trading account resulting in a $300,000 debit balance at the end of the day. Bonfitto Testimony at 144:14-18. Sklena was only able to satisfy his debt to Bonfitto Trading by selling his CBOT seat and then mortgaging his house to buy a new seat. Id. at 145:2-10. Bonfitto, fed up with Sklena's large trades, told him to reduce the size of his trades, especially when unemployment numbers were released. Id. at 146:16-20.
Trading in the five-year note pit is very active when the Department of Labor's Bureau of Labor Statistics ("BLS") releases its monthly "Employment Situation" report because the employment number is an important factor in the market value of Treasury Notes and Treasury Note futures contracts. Cmplt. at ¶¶ 27-29. The BLS released an employment report on April 2, 2004 at 7:30 am. Id. at ¶¶ 29, 32. After the release, the price of June 2004 Note futures contract prices broke sharply, dropping more than a point in approximately one and one-half minutes. Id. at ¶ 32. The low price in the pit of 111.050 occurred at 7:31:35 am, and the low price on the CBOT's electronic trading platform of 111.045 occurred at 7:31:23 am. Id. at ¶ 32. The market subsequently rallied and was quoted at a point higher at 7:36 am. Id. at ¶ 33. Specifically, the price in the pit hit 112.050 at 7:36:07 am, and the price on the electronic platform hit 112.055 at 7:36:03 am. Id.
Both Sarvey and Sklena were trading in the pit prior to the release. Id. at ¶¶ 34-35. Between 7:31:51 am and 7:37:14 am, Sarvey noncompetetively sold 2,274 contracts to Sklena at 111.065, a price that was a few "ticks" above the market low and that was last active before 7:31:51 am. Id. at ¶ 40. At the time Sarvey sold these contracts to Sklena, the market was trading within a range of 111.230 to 112.055. Id. at ¶ 41.
At about the same time as Sarvey noncompetitively sold the 2,274 contracts to Sklena at 111.065, he competitively bought back 485 contracts for his personal trading account from Sklena at 111.070, also a price near the market low. Id. at ¶ 43. Sklena offset his net purchase of 1,879 contracts by selling them at higher prices ranging from 112.015 to 112.065 in the prevailing market on April 2, 2004. Id. at ¶ 44. An analysis of Sklena's account shows that this required eighty-two separate transactions, ranging from ten to one hundred and fifty contracts per sale, both in the CBOT pit and on CBOT's electronic trading platform. William McLean Testimony 206:21 - 209:23; Arbitration Exhibit A. In doing so, he made a profit of approximately $1.65 million. Cmplt. at ¶ 44. However, Bonfitto and Bonfitto Trading note that if the market had dropped 1 and 21/32's, as it had earlier in a similar amount of time, he could have lost $2,515,781. MTD at 4.
Bonfitto learned via telephone that Sklena had taken a long position of at least 2,200 contracts, in direct contravention of his instructions, and that at the beginning of the trading day, Sklena had only $21,000 in his clearing account. Bonfitto Test. at 152:6-16; 157:2-4; Sklena Daily Acct. Statement. Thus, Sklena's risk of loss far exceeded his financial resources. Bonfitto had his employees set up a meeting between him and Sklena for the next morning. Bonfitto Test. at 155:16-23; 157:5-9.
In the meantime, Bonfitto spoke to the CBOT legal department, which informed him that CBOT Regulation 333.03 authorizes a CBOT clearing firm to freeze funds in the event of reckless activity by a broker. Id. 157:11 - 158:8; CBOT Reg. 333.03. As such, when Bonfitto met with Sklena, he argued that Bonfitto Trading was entitled to all of Sklena's profits obtained in the reckless trades. Bonfitto Test. at 162:2-5 Sklena told Bonfitto that he did not have anything to worry about because he had a cushion of the trade. Id. at 159:11-16. This did not aleviate Bonfitto's concern, however, because when the market was moving so quickly, one could easily lose disatrous amounts of money. Id. at 154:16-155:15; 159:17-160:8.
Bonfitto and Sklena negotiated an agreement by which Sklena would receive $1,000,000 and Bonfitto would retain the balance as payment for exposure to potentially large risk of loss. Id. at 161:22-163:6. Bonfitto allowed Sklena to withdraw $500,000 immediately to pay off loans but maintained the remaining funds in Bonfitto Trading's account. Id. at 163:13-17. Bonfitto had a written agreement prepared for Sklena's signature. Id. at 168:21-169:13.
Sklena did not sign the agreement and instead continued to take large trading positions. Id. at 170:6-21. Eventually, he told Bonfitto that he did not intend to sign the agreement. Id. at 171:4-6. At that point, Bonfitto terminated Sklena's trading privileges and froze the balance in his account - approximately $160,000. Id. at 171:18-20.
After an exchange of attorney letters, Sklena filed an arbitration claim against Bonfitto Trading seeking the return of approximately $778,000 of Sklena's April 2, 2004 profits and later added the $160,000 that remained in Sklena's account. Sklena Statement of Claim. Bonfitto Trading, in turn, argued that it was placed at a considerable risk of loss as a result of the large postions Sklena took when he lacked the resources to cover his losses. Bonfitto Answer. Following a two-day arbitration, a CBOT arbitration panel issued an order requiring Bonfitto Trading to ...