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In Re: Rough Rice Commodity Litigation

November 15, 2012

IN RE: ROUGH RICE COMMODITY LITIGATION


The opinion of the court was delivered by: Judge John W. Darrah

AMENDED MEMORANDUM OPINION AND ORDER

Plaintiffs Gregory Galan, Jeffrey Laydon, and The Rice Corporation ("TRC") have filed a Consolidated Amended Class Action Complaint against Defendants Andrew Daniels; Edward Taylor; Robert Courson; Glenn Swanson; Global Asset Advisors, LLC d/b/a Daniels Trading ("Global Asset"); and Daniels Trading Group, LLC ("DTG"). The Consolidated Amended Class Action Complaint alleges violations of the Commodity Exchange Act, 7 U.S.C. § 1, et seq. ("CEA"), arising from an alleged scheme to manipulate the price of rice futures contracts from October 1, 2007 through July 31, 2008 (the "Class Period"). Before the Court are two Motions to Dismiss: one filed by Courson and another filed by all other Defendants -- Daniels, Taylor, Swanson, Global Asset, and DTG.*fn1 On February 9, 2012, the Court previously granted without prejudice Defendants' Motion to Dismiss Plaintiffs' Consolidated Complaint (the "2/19/12 Order").

BACKGROUND

Parties

The following facts are drawn from Plaintiffs' Amended Consolidated Complaint, which are accepted as true for purposes of the Motion to Dismiss. See Reger Dev., LLC v. Nat'l City Bank, 592 F.3d 759, 763 (7th Cir. 2010).

Galan entered into two Chicago Board of Trade ("CBOT") transactions during the Class Period. (Am. Compl. ¶ 22(a).) First, on November 30, 2007, Galan sold three January 2008 Chicago Board of Trade ("CBOT") rough rice futures contracts. (Id.) On December 7, 2007, Galan purchased three January 2008 CBOT rough rice futures contracts. (Id.) Galan lost $2,700 on this transaction. Second, on March 20, 2008, Plaintiff Galan sold one May 2008 rough rice futures contract. (Id.) On April 15, 2008, Plaintiff Galan purchased one May 2008 CBOT rough rice futures contract. (Id.) Plaintiff Galan lost $8,660 on the foregoing transaction. (Id.)

Laydon entered into one Chicago Board of Trade ("CBOT") purchase transaction during the Class Period. (Id. ¶ 22(b).) On October 11, 2007, Plaintiff Laydon purchased ten January 2008 CBOT rough rice put options. (Id.) Those options expired worthless on December 21, 2007. (Id.) Laydon lost $1,000 on this transaction. (Id.)

TRC is a privately-held, full-servicing trading and processing corporation. TRC "paid the artificially high prices caused by Defendants on July 8, 2008, to liquidate/cover a short position of six November 2008 rice futures for a loss in excess of $40,000, and on July 15, 2008, to liquidate a short position of four November 2008 rice futures for a loss in excess of $25,000." (Id. ¶ 23(c).)

Daniels is the founder and Chief Executive Officer of Global Asset, which is registered with the Commodities Futures Trading Commission ("CFTC") as an introducing commodity broker. (Id. ¶ 23.) Daniels is also a manager of DTG, a trading company. (Id.) Taylor is not registered with the CFTC and has a 0.02 per cent membership interest in DTG. (Id.) Courson has a 49.98 per cent interest in DTG. (Id. ¶ 25.) Courson was the member and manger of DTG; as a member, Courson received updates regarding DTG's trading strategies in the CBOT rice futures and rice cash markets and monthly profit and loss statements. (Id.) Swanson is the President and Chief Operating Officer of Global Asset. (Id. ¶ 26.)

Commodity Futures Contracts

CBOT is designated by the CFTC as a board of trade. (Id. ¶ 30.) The CBOT applies to the CFTC for permission to trade each commodity in which the CBOT offers a contract. (Id.) A commodity futures contract is a standardized bilateral executory agreement for the purchase and sale of a particular commodity. (Id. ¶ 32.) The sellers, referred to as "shorts," are one-half of the bilateral futures contracts and the buyers are the other one-half, and are referred to as "longs." (Id.) One of the futures contracts created by the CBOT and approved by the CFTC is the CBOT rough rice futures contract. (Id. ¶ 40.) Rough rice futures contracts are transacted electronically on the Chicago Mercantile Exchange ("CME") Globex electronic trading platform and also through open outcry on the trading floor of the CBOT. (Id. ¶ 41.)

Plaintiffs' Claims

In Count I, Plaintiffs allege that all Defendants, except Global Asset, violated the prohibition of manipulation in Section 9(a) of the CEA by manipulating rice futures and options prices. Count II claims the same conduct but alleges that Daniels, Taylor, DTG are each responsible for the acts of the others and Global is responsible for the acts of Swanson, based on principal-agent liability under section 2(a)(1)(B) of the CEA. 7 U.S.C. § 2(a)(1)(B). Count III claims that all Defendants are liable for aiding and abetting the manipulation under section 13(a) of the CEA, 7 U.S.C § 13c(a). The Amended Complaint contains 201 paragraphs, many of which contain several sub-paragraphs. The following are certain specific allegations regarding Plaintiffs' claims.

From early October 2007 through July 2008, Defendants manipulated the rice futures market by taking large positions. (Id. ¶ 1.) CBOT rough rice futures contracts were subject to the position limits*fn2 established by the CBOT and approved by the CFTC. (Id. ¶ 47.) Prior to April 14, 2008, the speculative limit for any month other than the spot month*fn3 was 1,000 contracts. (Id. ¶ 62(a).) Prior to April 14, 2008, the speculative limit for all contract months combined was 1,000 contracts. (Id. ¶ 62(b).) Throughout the proposed class period, the speculative limit for the spot-month contract ...

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