Opinion
No. 061265
March 14, 2007.
Jeffrey Plotkin, Lorraine Bellard, Day Pitney llp, New York, NY.
Drew S. Days III, Counsel of Record, Beth S. Brinkmann, Seth M. Galanter, Brian R. Matsui, Jeny Maier, Morrison Foerster llp, Washington, DC, Counsel for Petitioner.
PETITION FOR A WRIT OF CERTIORARI QUESTION PRESENTED
The Commodity Exchange Act provides an express private right of action for actual losses to a person who "engaged in any transaction on" or "subject to the rules of" a commodity board of trade against that board of trade if the board, in bad faith, engaged in illegal conduct that caused the person to suffer the actual losses, 7 U.S.C. § 25(b)(1).
The question presented is:
Whether the court of appeals erred in concluding that futures commission merchants lack statutory standing to invoke that right of action because, in the court's view, they do not engage in such transactions, despite the statutory requirement that the merchants enter into and execute their transactions on, and subject to the rules of, a board of trade and the fact of the merchants' financial liability for the transactions.
PARTIES TO THE PROCEEDING
Petitioner is Klein Co. Futures, Inc. The respondents to the proceeding in the court whose judgment is sought to be reviewed are the Board of Trade of the City of New York, Inc.; the New York Clearing Corporation; the New York Cotton Exchange, Inc.; and the New York Futures Exchange.
Mark D. Fichtel; Albert Weis; Jeff Soman; Charles Sweeney; Al Peres; Chris Meek; George Haase; Lawrence Gulitti; Bryan Sayler; Nitesh Trivedi; Joseph O'Neill; Walter Fair; Evan Thomas; and Joseph Jach also were appellees in the court below, but petitioner does not seek review of the court of appeals' ruling affirming their dismissal from the dispute.
Norman Eisler and First West Trading, Inc. were defendants in the proceedings before the United States District Court, but petitioner did not appeal their dismissal from the dispute.
RULE 29.6 CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 29.6 of the Rules of the Supreme Court, petitioner Klein Co. Futures, Inc. hereby states that it has no parent company, and no public company owns 10% or more of its stock.
TABLE OF CONTENTS
en banc
QUESTION PRESENTED ............................................ i PARTIES TO THE PROCEEDING ............................... ii RULE 29.6 CORPORATE DISCLOSURE STATEMENT ii TABLE OF AUTHORITIES ........................................... vi PETITION FOR A WRIT OF CERTIORARI ................. 1 OPINIONS BELOW .................................................. 1 JURISDICTION .................................................... 1 STATUTORY PROVISIONS INVOLVED ....................... 1 INTRODUCTION .................................................... 2 STATEMENT OF THE CASE ....................................... 4 1. Statutory And Regulatory Framework 4 2. Factual And Procedural Background ................. 9 REASONS FOR GRANTING THE PETITION ............. 14 THE COURT OF APPEALS' RULING DISRUPTS THE COMMODITY EXCHANGE ACTS CAREFULLY CRAFTED FRAMEWORK OF EXPRESS PRIVATE RIGHTS OF ACTION THAT PROTECT AGAINST MARKET MANIPULATION IN A CRITICAL SEGMENT OF THE NATIONAL ECONOMY ............... 14 A. The Ruling Below Will Have A Profoundly Adverse Effect On The Futures Industry, A Critical Segment Of The National Economy ..... 15 B. The Court Of Appeals Plainly Misread The Scope Of The Statutory Private Right Of Action And Misconstrued The Critical Role Played By Futures Commission Merchants, Contrary To The Decisions Of Other Circuits And The Commodity Futures Trading Commission .................................................. 21 1. The ruling below stands in irreconcilable conflict with the language of Section 6(a)(1), that futures commission merchants can lawfully conduct business only so long as they enter into or execute transactions on, or subject to the rules of, a board of trade ..... 21 2. The ruling below conflicts with decisions of other circuits and the CFTC that correctly interpret the role of futures commission merchants as critical principals who engage in transactions on, and subject to the rules of, the boards of trade 23 C. The Decision Below Fails To Give Meaning To Congress's Express Inclusion Of Certain Standing Requirements In One Right Of Action But Not In Another 26 D. The Second Circuit's Ruling Is Contrary To Congress's Important Purpose In Creating The Section 25(b)(1) Private Right Of Action ............ 28 CONCLUSION .................................................... 30 Appendix A: Opinion of the United States Court of Appeals for the Second Circuit, filed September 18, 2006 ...................... 1a Appendix B: Memorandum and Decision of the United States District Court for the Southern District of New York, filed February 18, 2005 ................................ 16a Appendix C: Order of the United States Court of Appeals for the Second Circuit denying petition for rehearing and re- hearing , filed November 14, 2006 ...................................................... 35a Appendix D: Relevant portion of the Commodity Exchange Act 37a TABLE OF AUTHORITIES CASES: American Agriculture Movement Inc. v. Board of Trade, 977 F.2d 1147 (7th Cir. 1992) ................. 29 Barnhart v. Sigmon Coal Co., Inc., 534 U.S. 438 (2002)......................................................... 26 Bernstein v. Lind-Waldock Co., 738 F.2d 179 (7th Cir. 1984)..............................................15, 25, 29 Bibbo v. Dean Witter Reynolds, Inc., 151 F.3d 559 (6th Cir. 1998).................................................25 Bosco v. Serhant, 836 F.2d 271 (7th Cir. 1987).........25 INS v. Cardoza-Fonseca, 480 U.S. 421 (1987)............26 Lachmund v. ADM Investor Servs., Inc., 191 F.3d 777 (7th Cir. 1999).............................................22 Lopez v. Gonzales, 127 S. Ct. 625 (2006)...............26 Merrill Lynch, Pierce, Fenner Smith, Inc. v. Curran, 456 U.S. 353 (1982).....................7, 16, 25 Nagel v. ADM Investor Servs., Inc., 217 F.3d 436 (7th Cir. 2000).............................................14, 24 Omni Capital Int'l, Ltd. v. Rudolf Wolff Co., 484 U.S. 97(1987)...................................................28 Russello v. United States, 464 U.S. 16 (1983)......26, 27 Scott v. Prudential Sec., Inc., 141 F.3d 1007 (11th Cir. 1998), cert. denied, 525 U.S. 1068 (1999).........25 United States v. Dial, 757 F.2d 163 (7th Cir.), cert. denied, 474 U.S. 838 (1985)............................18 United States v. Wong Kim Bo, 472 F.2d 720 (5th Cir. 1972)......................................................26 7 U.S.C. § 1 et seq.: 28 U.S.C. § 1254 28 U.S.C. § 1367 97-444 96 Stat. 2294 Baker v. Edward D. Jones Co. 1981 WL 26078 Matter of Norman Eisler 2004 WL 77924 Matter of New York Futures Exch., Inc. available at http://www.cftc.gov/files/enf/01orders/enfnyfe.pdf In the Matter of W. Fin. Mgmt. 1983 WL 29657 Conflicts of Interest in Self-Regulation and Self-Regulatory Organizations 72 Fed. Reg. 6936 17 C.F.R. pt. 38 Futures Statistics by Major Commodity Group, All Markets Combined for FY 1999 — FY 2005, available at http://www.cftc.gov/files/dea/ Report on Lessons Learned from the Failure of Klein Co. Futures, Inc. Selected FCM Financial Data as of November 30, 2006, available at http://www.cftc Amicus Curiae En Banc Klein Co. Futures Inc. Amicus Curiae En Banc Klein Co. Futures, Inc. STATUTES: Commodity Exchange Act (CEA), § la(20)...............................................5,22 § 5(a)................................................16,21 § 6(a)(1).................................5, 15, 22, 23, 24 § 6d(a)(1)................................................5 § 6f(a)...................................................5 § 7..................................................passim § 7(b)....................................................5 § 7(b)(3)..............................................5,22 § 7(b)(5).............................................6, 10 § 13a-1(e)...............................................28 § 25.......................................1, 9, 13, 27, 28 § 25(a)(1)...........................................passim § 25(a)(2)................................................9 § 25(b)(1)...........................................passim § 25(b)(2).............................................9,27 § 25(b)(3)..........................................9,12,27 § 25(b)(4)................................................9 § 25(b)(5)................................................9 (1)...................................... 1 (c)....................................... 12 Futures Trading Act of 1982, Pub.L. No. , (1982) ...................................... 8 ADMINISTRATIVE MATERIALS: , CFTC No. R 76-4, (C.F.T.C. Jan. 27, 1981) ........................ 17 , CFTC No. 01-14, (C.F.T.C. Jan. 20, 2004) ................ 6, 10, 11, 20 , CFTC No. 01-13 (C.F.T.C. July 11, 2001), ...10 , CFTC No. 81-18, (C.F.T.C. Oct. 14, 1983) .................. 26 CFTC, , (Feb. 14, 2007) (to be codified at ) ... 16,20 CFTC, Dmostat_fy05.pdf .............................................. 15 CFTC, (July 2001) .. 7, 19, 20 CFTC, . gov/files/tm/fcm/tmfcmdata0611.pdf ........................... 15 MISCELLANEOUS: Brief of Futures Industry Association Inc. as In Support Of Petition For Rehearing and Rehearing Of Appellant Klein Co. Futures, Inc., , , No. 05-1374 (2d Cir. 2006) ......................18 H.R. Rep. No. 565, Part I, 97th Cong., 2d Sess. (1982) .........................................................29 Motion of Futures Industry Association, Inc. For Leave To File Brief As In Support Of Petition For Rehearing and Rehearing Of Appellant Klein Co. Futures, Inc., , No. 05-1374 (2d Cir. 2006).......................................................18, 19 NYCC Rules 501-504.............................................. 7PETITION FOR A WRIT OF CERTIORARI
Klein Co. Futures, Inc. (Klein) respectfully petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Second Circuit.
OPINIONS BELOW
The opinion of the United States Court of Appeals for the Second Circuit (App., infra, la-15a) is reported at 464 F.3d 255 (2006). The opinion of the United States District Court for the Southern District of New York granting respondents' motion for summary judgment (App., infra, 16a-34a) is unreported.
JURISDICTION
The court of appeals entered its judgment on September 18, 2006. A petition for rehearing and rehearing en banc was denied on November 14, 2006. Justice Ginsburg, on January 31, 2007, granted an extension of time within which to file a petition for a writ of certiorari to and including March 14, 2007. This Court's jurisdiction is invoked under 28 U.S.C. § 1254(1).
STATUTORY PROVISIONS INVOLVED
The Commodity Exchange Act, 7 U.S.C. § 1 et seq., as in effect on July 26, 2000, when this case was filed, provides in relevant part:
The statute was amended on December 21, 2000 but the amendments to this section of the statute were merely technical.
Sec. 25 Private rights of action
* * *
(b) Liabilities of organizations and individuals; bad faith requirement; exclusive remedy
(1)(A) A contract market or clearing organization of a contract market that fails to enforce any bylaw, rule, regulation, or resolution that it is required to enforce by sections 7(a)(8) and 9 of this title,
(B) a licensed board of trade that fails to enforce any bylaw, rule, regulation, or resolution that it is required to enforce by the Commission, or
(C) any contract market, clearing organization of a contract market, or licensed board of trade that in enforcing any such bylaw, rule, regulation, or resolution violates this chapter or any Commission rule, regulation, or order,
shall be liable for actual damages sustained by a person who engaged in any transaction on or subject to the rules of such contract market or licensed board of trade to the extent of such person's actual losses that resulted from such transaction and were caused by such failure to enforce or enforcement of such bylaws, rules, regulations, or resolutions.
Other relevant provisions of the Commodity Exchange Act are set forth in the appendix to this brief at App., infra, 37a-41a.
INTRODUCTION
Almost two billion contracts are traded in the United States futures market annually, and more than $100 billion of equity is invested in this market. Congress, in enacting the Commodity Exchange Act, recognized that a stable commodities futures market is vital to the financial well-being of the nation. If left unreviewed, the ruling below will impose significant costs on trading on the futures markets and undermine those markets' stability.
The court of appeals below denied to futures commission merchants, who are statutorily authorized market participants, a private right of action against the boards of trades and clearinghouses that operate the markets. Congress created that private right of action as a means to protect against market manipulation. The inability of these merchants to recover actual losses caused by a board of trade's bad faith violation of the governing statute, regulation, or rules will substantially undermine enforcement of those laws. Without the right of action, the risk of economic loss rests on the merchants rather than on the wrongdoers who cause or are required to enforce rules designed to prevent the actual losses. That risk of loss will be spread to investors, which will contribute to a more inelastic and expensive commodities market that ultimately will be more susceptible to price manipulation.
The ruling below stands in conflict with other circuits on the role of futures commission merchants under the statutory framework. The court of appeals' denial to futures commission merchants of their private right of action is rooted in that court's fundamental misunderstanding of the role of such merchants as federally regulated entities in a multi-faceted enforcement scheme constructed by Congress. By contrast, the Seventh Circuit (the other jurisdiction in which many commodity exchanges are concentrated) and other circuits correctly recognize the role that Congress intended these merchants to play as entities that engage in transactions subject to the rules of a board of trade.
This Court should grant the petition for a writ of certiorari to address this issue of national economic importance and reverse the clearly erroneous interpretation of the Commodity Exchange Act that undermines the regulation of the nation's futures markets.
STATEMENT OF THE CASE
1. Statutory And Regulatory Framework
a. A futures contract is an agreement to buy or sell on a commodity exchange a quantity of a particular commodity in the future. The parties to a futures contract agree on a price for the commodity to be delivered, or paid for, at a set time in the future, known as the "settlement date." Most futures contracts are closed prior to the delivery date, however. Thus, the commodity exchange serves, in essence, as a market where investors trade futures contracts to shift the inherent market risks of price increases and decreases onto others who are willing to assume that market risk for profit opportunity.
Option contracts also are traded on the commodity exchanges. An option contract gives an investor the option ( i.e., the right but not the obligation) to enter a particular futures contract on a given day at a particular price. Although the instant dispute involves both futures and option contracts, for the purposes of this petition the distinctions between the two make no difference and we use the term "futures contracts" to refer to both.
A commodity exchange is operated by a board of trade, such as respondent, the Board of Trade of the City of New York, which operates a market for, inter alia, certain sugar, coffee, and cocoa; and cotton and orange juice contracts. See http://www.nybot.com (last visited Mar. 7, 2007). A clearinghouse, such as respondent, the New York Clearing Corporation, works with a board of trade to clear the trades on the exchange.
In order to protect the public from price manipulation on these robust, high-volume markets, Congress has subjected boards of trade and their participants to extensive oversight, through the Commodity Exchange Act (CEA), 7 U.S.C. § 1 et seq. Congress has ensured compliance in this self-regulatory statutory scheme through the threat of public and private enforcement. Congress established the Commodity Futures Trading Commission (CFTC) as the primary regulator of boards of trade under the CEA. A board of trade has a statutory obligation to establish rules to prevent market manipulation and to ensure fair and equitable trading on its exchanges. Id. § 7(b). Congress has specified that any commodity futures transactions must be "conducted on or subject to the rules of a board of trade." 7 U.S.C. § 6(a)(1).
b. Investors do not buy and sell futures on a commodity exchange. Rather, futures commission merchants ("merchants") engage in and are financially liable for the transactions on a commodity exchange. Futures commission merchants are defined by Congress as individuals or entities that "solicit or * * * accept orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market." 7 U.S.C. § la(20)(A). Merchants may "accept any money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom." 7 U.S.C. § la(20)(B).
A commodity exchange and its board of trade are also known as a "contract market." 7 U.S.C. § 7.
Congress authorized boards of trade to establish rules that allow futures commission merchants "to enter into or confirm the execution of a contract for the purchase or sale of a commodity for future delivery if the contract is reported, recorded, or cleared in accordance with the rules of the contract market or a derivatives clearing organization." 7 U.S.C. § 7(b)(3)(C). Merchants use floor brokers to execute the trades on the floor of the exchange. Both merchants and floor brokers must be registered with the CFTC. See 7 U.S.C. § 6d(a)(1), f(a).
A futures transaction is an ongoing relationship among the investor, the futures commission merchant, and the board of trade and its clearinghouse. An investor who holds an account with a merchant must make a minimum "margin payment" on its contracts, and the level of margin required is established by the rules of the board of trade in accordance with CEA and CFTC regulations. The payment generally is a relatively small percentage of the value of the investor's market position ( i.e., the price of the futures multiplied by the quantity of the futures), which allows the investor to leverage his funds.
Settlement prices of commodity contracts are used to determine whether additional margin payments in connection with open contract positions are required. The settlement prices are calculated, on a daily basis, by the board of trade and its clearinghouse for whatever contracts are then being held in the accounts of futures commission merchants who are also clearing members. Settlement prices reflect the daily closing value of the contract and often are at, or very near, the price of the last trade. In thinly traded markets — i.e., where there is infrequent trading — however, there can be a significant difference between the settlement price and the price of the most recent trades. As required by the CEA to maintain the financial integrity of all transactions, each board of trade maintains rules as to how settlement prices are calculated at closing. See 7 U.S.C. § 7(b)(5).
A number of other factors can contribute to the determination of a settlement price. See In the Matter of Norman Eisler and First West Trading, Inc., CFTC No. 01-14, 2004 WL 77924 at *1-2 (C.F.T.C. Jan. 20, 2004).
If an investor's contracts increase in value during the day, the clearinghouse credits the merchant's account, which, in turn, credits the account that the investor has with the merchant. Conversely, if the investor's contracts lose value during the day, the clearinghouse debits the merchant's account, which, in turn, debits the investor's margin account. See, e.g., NYCC Rules 501-504. This relationship occurs because the clearinghouse transacts only with the clearing member futures commission merchant in a single account, irrespective of the number of accounts that merchant might have with individual investors.
If the balance of an investor's margin account with the merchant declines below the board of trade's minimum margin level, the futures commission merchant requires the investor to provide additional funds to the account to restore the initial margin level to its required percentage of the settlement value of his contract. Failure by an investor to meet such a margin call within the allotted period of time (which can be as little as one hour) permits a merchant to immediately liquidate the investor's contract positions in order to reduce the margin deficiency and risk. If an investor's position is liquidated at a loss, the investor is liable to the merchant for the deficiency. Significantly, however, it is the merchant that is legally liable to the board of trade for the difference. See CFTC, Report on Lessons Learned from the Failure of Klein Co. Futures, Inc. at 2 (July 2001) ("Clearinghouses look to the funds and credit of clearing FCMs [futures commission merchants] for satisfaction of trading obligations rather than to the actual floor broker, floor trader, or other customer.").
c. In Merrill Lynch, Pierce, Fenner Smith, Inc. v. Curran, 456 U.S. 353 (1982), this Court held that there was an implied private right of action for a violation of the CEA's statutory prohibition against fraudulent and deceptive conduct and its provisions designed to prevent price manipulation.
Shortly after that ruling, Congress enacted express private rights of action for violation of the statute, the implementing regulations, or the rules of a board of trade.
See Futures Trading Act of 1982, Pub.L. No. 97-444, § 235, 96 Stat. 2294, 2322-2324 (1982). Two primary rights of action are set forth in 7 U.S.C. § 25(a)(1) and 25(b)(1).
Section 25(a)(1) provides a private right of action for actual damages against a person (other than a board of trade or futures association) that violates the statute, e.g., an action against merchants and brokers. The right of action is conferred only on four categories of persons: (A) any person that received trading advice from the alleged wrongdoer; (B) any person that made a contract of sale through the alleged wrongdoer or deposited funds with him; (C) any person that purchased from, sold to, or placed an order for purchase with or through the alleged wrongdoer for an option not sold on a board of trade, contract, or interest in a commodity pool; and (D) any person that purchased or sold a contract if the violation by the alleged wrongdoer constitutes a manipulation of the price of the contract or underlying commodity. 7 U.S.C. § 25(a)(1)(A)-(D). The most common action under Section 25(a)(1) is a suit by an investor against a merchant or a broker due to a trading loss by the investor.
Section 25(b)(1) provides a private right of action for actual damages against any board of trade designated as a contract market who fails to enforce any bylaws, rules, regulations or resolutions that the entity is charged by statute with enforcing; against a licensed board of trade that fails to enforce any bylaw, rule, regulation or resolution it is required by the CFTC to enforce; and against any board of trade that enforces such provisions in a manner that violates the statute or a CFTC rule, regulation or order.
That Section 25(b)(1) right of action — the right of action at issue here — is not conferred only on the four categories of persons in Section 25(a)(1)(A)-(D). Rather, it is conferred on any person "who engaged in any transaction on" or "subject to the rules of" the board of trade or clearinghouse, but only "to the extent" of that person's "actual losses that resulted from such transaction and were caused by such failure to enforce or enforcement of such bylaws, rules, regulations, or resolutions." 7 U.S.C. § 25(b)(1).
The statute confers other specific rights of actions for bylaw or rule violations by registered futures associations, 7 U.S.C. § 25(b)(2), and for violations by individual officers, directors and the like of boards of trade, clearinghouses, or futures associations. 7 U.S.C. § 25(b)(3). Those rights of action are conferred only on the four categories of persons specified in Section 25(a)(1)(A)-(D).
Congress provided that the statutory rights of action are exclusive remedies under the statute in most circumstances. 7 U.S.C. §§ 25(a)(2), 25(b)(5). Congress also specified that a person seeking to hold liable a board of trade or futures association or its officer, director or the like, must establish bad faith on the defendant's part in failing to act or in acting, and that such failure to act or action caused the loss. 7 U.S.C. § 25(b)(4).
2. Factual And Procedural Background
a. Petitioner Klein Co. Futures, Inc. (Klein) brought this action under 7 U.S.C. § 25 against the various respondents, including the Board of Trade of the City of New York (the Board of Trade), its clearinghouse and various individuals. The case arose out of price manipulation by Norman Eisler who was the chairman of the New York Futures Exchange (the Exchange), which is a division of the Board of Trade, both of which are contract markets under the statute. Eisler was a member of the Exchange's settlement committee.
Eisler owned a company, First West Trading, Inc. (First West), that invested heavily in P-Tech futures — a futures traded on the Exchange. From approximately August 1999 through May 12, 2000, Eisler, as the member of the Exchange's settlement committee who determined the daily settlement prices of P-Tech futures, manipulated the daily settlement prices of those futures to ensure that his company's contracts appeared profitable and avoided margin calls. See Matter of Norman Eisler, 2004 WL 77924 at *2-3.
The CFTC ultimately found that Eisler's deliberate miscalculation of the settlement prices falsely inflated the value of First West's account by, on average, approximately $2 million each day. Matter of Norman Eisler, 2004 WL 77924 at *4; see also id. at *6. The CFTC found that the Exchange unlawfully failed to enforce its own rules in permitting this manipulation to occur, Matter of New York Futures Exch., Inc., CFTC No. 01-13 (C.F.T.C. July 11, 2001), available at http://www.cftc.gov/files/enf/ 01orders/enfnyfe.pdf (last visited Mar. 7, 2007).
Petitioner Klein was First West's futures commission merchant and, as such, entered into and executed the transactions involving the P-Tech futures and was financially liable for the transactions. Petitioner was required by the rules of the Board of Trade and its clearinghouse, as mandated by the CEA, see 7 U.S.C. § 7(b)(5), to determine whether First West's account met petitioner's margin requirements by using the settlement prices issued by the Exchange, prices which, unbeknownst to petitioner Klein, were being manipulated by Eisler. Because of the Board of Trade's failure to follow its rules, the margin requirements due by Eisler to petitioner were, on an ongoing basis, insufficient to cover First West's accounts based on an actual unmanipulated, settlement price. Compl. ¶ 61.
Beginning in March 2000, various affiliates, officers, and agents of the respondent Board of Trade and Exchange received, or became aware of, complaints from various floor trading members of the Exchange regarding the miscalculation of P-Tech futures settlement prices. Respondents, in bad faith, never conducted any inquiry into the facts underlying the complaints, however, or placed members of the industry on notice of the possible miscalculation of the settlement prices. Their bad faith failure in these respects violated the CEA, the CFTC's regulations, and the Board of Trade's own rules. Compl. ¶¶ 64-73.
By May 2000, the P-Tech futures market became too volatile for Eisler to sufficiently manipulate the settlement price. Matter of Norman Eisler, 2004 WL 77924 at *12. Thus, despite Eisler's manipulation efforts, on May 11, 2000, the First West account with petitioner was subject to a margin call of approximately $700,000. Neither Eisler nor First West could meet the margin call and petitioner ordered Eisler to liquidate First West's position. Compl. ¶¶ 80-84.
A day later, on May 12, petitioner contacted an executive vice president of the respondent Board of Trade, who was the officer responsible for financial futures for the Board of Trade and the Exchange. Petitioner expressed concern over Eisler's inability to meet his margin call and the illiquidity of the P-Tech futures market and requested that the Board of Trade take emergency action to halt trading in P-Tech futures. No action was taken, and the market for P-Tech futures became illiquid and collapsed. Compl. ¶¶ 89-91.
On May 15, 2000, the Board of Trade suspended the membership of Eisler. In his absence, the Exchange settlement committee recalculated the settlement price, resulting in a surprisingly and grossly divergent settlement price from the previous trading day's settlement price. Under the new settlement price, First West's margin account debit with petitioner ballooned to $4.5 million. Again, neither Eisler nor First West could meet the margin call and petitioner, as the merchant that engaged in the transactions, was required to take a charge against its net capital in the amount of Eisler's margin call deficiency. The capital charge put petitioner below the CFTC's and the Board of Trade's minimum regulatory requirements and, thus, out of business. Compl. ¶¶ 99-107.
b. Petitioner brought the instant action on July 26, 2000, in the United States District Court for the Southern District of New York against Eisler, First West, and the several respondents, alleging violations of, inter alia, the Commodity Exchange Act, 7 U.S.C. § 25(b)(1).
Petitioner also sued under 7 U.S.C. § 25(a)(1) and brought actions under 7 U.S.C. § 25(b)(3) against the individual respondents, Mark D. Fichtel; Albert Weis; Jeff Soman; Charles Sweeney; Al Peres; Chris Meek; George Haase; Lawrence Gulitti; Bryan Sayler; Nitesh Trivedi; Joseph O'Neill; Walter Fair; Evan Thomas; and Joseph Jach, but petitioner does not seek review of the court of appeals' ruling as to those defendants. Klein did not appeal the dismissal of his complaint against Eisler and First West.
The district court dismissed the case, holding that petitioner lacked standing. App., infra, 24a. The court failed to acknowledge that the different rights of action under 7 U.S.C. § 25(a)(1) and under 7 U.S.C. § 25(b)(1) have different standing requirements. Instead, the court applied the standing requirements of Section 25(a)(1) to Section 25(b)(1) as well, incorrectly declaring generally that "Section 22 of the CEA requires that a plaintiff stand in at least one of four possible relationships with defendant" codified at 7 U.S.C. § 25(a)(1)(A) through (D). App., infra, 23a.
The district court further held that petitioner failed to meet the requirement of Section 25(b)(1) that it be a person "who `engaged in any transaction on or subject to the rules' of such contract markets or licensed boards of trade." App., infra, 23a. The court ruled that petitioner could not meet that requirement because, in the court's view, petitioner was not a purchaser or a seller of P-Tech futures and "did not suffer its damages in the course of its trading activities on a contract market." App., infra, 25a.
Klein also alleged that respondents' conduct gave rise to state common law causes of action. The district court exercised its discretion to dismiss those claims without prejudice pursuant to 28 U.S.C. § 1367(c), once it dismissed the federal claims. App., infra, 26-27a. The court of appeals affirmed that exercise of discretion in light of an appeal by respondents that the district court should have dismissed the state law claims with prejudice because they were preempted by the CEA. Id. at 13a-15a. That portion of the lower courts' opinion is not the subject of this petition.
c. The court of appeals affirmed. App., infra, 2a. The court acknowledged that Congress created different private rights of action under 7 U.S.C. § 25. The court explained that Section 25(a) "relates to claims against persons other than registered entities and registered futures associations," whereas Section 25(b) "deals with claims against those entities and their officers, directors, governors, committee members and employees." App., infra, 7a. But the court ignored the explicit textual differences regarding standing under the two different rights of action and held that all the rights of action, including under Section 25(b)(1), are limited to the four categories of persons described in Section 25(a)(1)(A) through (D).
The court of appeals denied a petition for rehearing and rehearing en banc on November 14, 2006. App., infra, 35a-36a.
This petition seeks review of the court of appeals' clearly erroneous statutory construction, which is based on a view that futures commission merchants do not engage in transactions on, or subject to the rules of, a board of trade, and which conflicts with the conclusions of other circuits.
REASONS FOR GRANTING THE PETITION
THE COURT OF APPEALS' RULING DISRUPTS THE COMMODITY EXCHANGE ACT'S CAREFULLY CRAFTED FRAMEWORK OF EXPRESS PRIVATE RIGHTS OF ACTION THAT PROTECT AGAINST MARKET MANIPULATION IN A CRITICAL SEGMENT OF THE NATIONAL ECONOMY
The decision below rests upon an obvious and fundamental misreading of the Commodity Exchange Act (CEA) and conflicts with the decisions of other courts and the pertinent administrative agency.
The issues presented here are of substantial importance to the futures markets and the economy of the United States because the court of appeals' ruling will have significant adverse consequences for an industry that involves trading worth hundreds of billions of dollars annually. The Commodity Futures Trading Commission (CFTC), which regulates the national futures market, has recognized that the underlying dispute between petitioner and respondents is of great significance to the markets.
The court of appeals denied to futures commission merchants the express right of action conferred by Congress to recover actual losses suffered as a result of the bad faith failure of a board of trade to enforce the statute, bylaws, rules, regulations or resolutions that it is required to enforce by law. Directly contrary to the plain language of the statute, the court of appeals inexplicably grafted standing requirements from one right of action onto a different right of action. Moreover, the court of appeals erred in broadly concluding that futures commission merchants do not meet the statutory requirement of having "engaged in [a] transaction on" or "subject to the rules of" a board of trade despite the statutory requirement that such merchants enter into and execute the transactions and bear financial liability for them. Nagel v. ADM Investor Servs., Inc., 217 F.3d 436, 439 (7th Cir. 2000).
Indeed, Congress enacted the Commodity Exchange Act specifically to require that futures contracts be subject to such rules and to regulate such transactions, 7 U.S.C. § 6(a), which unquestionably include the nearly two billion transactions in which futures commission merchants such as petitioner engage each year.
The ruling below by the Second Circuit conflicts with the longstanding decisions of the Seventh Circuit, the other jurisdiction in which commodity exchanges are concentrated, as well as decisions of other circuits and administrative adjudications of the Commodity Futures Trading Commission (CFTC). Those other courts plainly recognize that futures commission merchants engage in commodity futures transactions and, moreover, are indispensable principals in every futures contract. See, e.g., Bernstein v. Lind-Waldock Co., 738 F.2d 179, 181 (7th Cir. 1984).
A. The Ruling Below Will Have A Profoundly Adverse Effect On The Futures Industry, A Critical Segment Of The National Economy
The ruling below is fraught with error and yields a result with grave implications for the national economy.
1. The futures industry is a critical driving force behind the economy of the United States and the world. The success of the futures industry and its positive effect is reflected by the shear volume and breadth of transactions that occur annually. In 2005, a staggering 1.55 billion futures contracts were traded in the United States. See CFTC, Futures Statistics by Major Commodity Group, All Markets Combined for FY 1999 -FY 2005, at 1 available at http://www.cftc.gov/files/dea/dmostat_fy05.pdf (last visited Mar. 7, 2007). And, according to the CFTC, over $110 billion is currently invested in the futures markets of the United States. See CFTC, Selected FCM Financial Data as of November 30, 2006, at 6, available at http://www.cftc.gov/files/tm/fcm/tmfcmdata0611.pdf (last visited Mar. 7, 2007).
Accordingly, it should come as little surprise that the federal government recognizes that boards of trade "are not just typical commercial enterprises, but are commercial enterprises affected with a significant national public interest. Actions that distort prices or otherwise undermine the integrity of the futures markets have broad, detrimental implications for the economy as a whole and the public in general." CFTC, Conflicts of Interest in Self-Regulation and Self-Regulatory Organizations, 72 Fed. Reg. 6936, 6938 (Feb. 14, 2007) (to be codified at 17 C.F.R. pt. 38). Futures markets "provide an important hedging vehicle to individuals and firms in a myriad of industries, resulting in more efficient production, lower cost for consumers, and other economic benefits." Ibid.; see also 7 U.S.C. § 5(a) (finding that "[t]he transactions subject to this Act * * * are affected with a national public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities.").
The futures industry thus serves as a critical means for vital sectors of the economy — from agriculture to manufacturing — to protect themselves, through hedging, from unpredictable price shifts. See Merrill Lynch, 456 U.S. at 359 ("A farmer who takes a `short' position in the futures market is protected against a price decline; a processor who takes a `long' position is protected against a price increase."). "Such `hedging' is facilitated by the availability of speculators willing to assume the market risk that the hedging farmer or processor wants to avoid. The speculators' participation in the market substantially enlarges the number of potential buyers and sellers of executory contracts and therefore makes it easier for farmers and processors to make firm commitments for future delivery at a fixed price." Ibid.
2. The decision below will disrupt this important segment of the United States economy. If not corrected, the Second Circuit's holding will mean that many who need to hedge against price fluctuations will find the necessary transactions more expensive or so thinly traded as to not provide an accurate indication of the actual value of the underlying commodity.
Under the court of appeals' decision, the futures commission merchants that engage in the 1.5 billion futures transactions annually and bear the ultimate risk of loss in such transactions, are denied their federal cause of action to seek legal redress against a board of trade or clearinghouse that violates in bad faith the laws put in place by Congress to prevent against price manipulation. The ruling thereby shifts market risk onto futures commission merchants away from the very self-regulating entities — the boards of trade and clearinghouses — who have control over enforcement of the rules that prohibit the misconduct that creates this market risk.
Because the ruling below makes commodity exchanges unaccountable to futures commission merchants for bad faith violations of law, merchants will likely mitigate their risk of exposure to losses on such markets. Either of the two primary methods for merchants to accomplish this goal will make the markets less efficient. First, merchants may refuse to participate in riskier markets. That will make those markets more inelastic and reduce the ability of investors to hedge volatile positions. See Baker v. Edward D. Jones Co., CFTC No. R 76-4, 1981 WL 26078, at *3-4 (C.F.T.C. Jan. 27, 1981). As these risky markets become more inelastic (and more costly in which to transact), hedging investors will lose valuable means of protecting themselves from price fluctuations, which will distort the actual prices for the underlying commodities and make those futures more prone to price manipulation. Farmers and manufacturers in these risky markets will be forced to pay a premium to hedge against price declines and price increases.
Second, futures commission merchants may mitigate their increased exposure to economic loss stemming from the decision below by demanding higher margins from all or some investors. This approach will make trading more costly, which will make the futures markets as a whole less liquid, particularly if market participants exit certain market segments. Cf. United States v. Dial, 757 F.2d 163, 169 (7th Cir.) ("Trading without margin also shifts the risk from the trader to the broker, * * * which would have had to make good on any losses."), cert. denied, 474 U.S. 838 (1985). Even minor increases in margins, particularly in more risky segments of the market, will unquestionably affect prices.
This concern is not idle speculation. The instant dispute has garnered substantial attention from many components of the commodities futures industry. For example, the Futures Industry Association, Inc., which has as its members most of the industry's futures commission merchants as well as the exchanges that are subject to suit ( including respondents Board of Trade and its clearinghouse), has argued that its "clearing firm members [ i.e., futures commission merchants] and the futures industry as a whole [will] be harmed significantly" by the court of appeals' ruling in this case because that ruling "nullifies an important statutory remedy for the bad faith breach of legal duties by self-regulatory organizations for the futures markets." C.A. Motion of Futures Industry Association, Inc. For Leave To File Brief As Amicus Curiae In Support Of Petition For Rehearing and Rehearing En Banc Of Appellant Klein Co. Futures, Inc., Klein Co. Futures, Inc., No. 05-1374 (2d Cir.) at 2.
Both respondents Board of Trade and New York Clearing Corporation are associate members of the Futures Industry Association, Inc. See www.futuresindustry.org/memberfi-2147.asp (last visited Mar. 7, 2007). The Futures Industry Association, Inc.'s "clearing firm members handle at least 90% of the customer business on U.S. futures exchanges." C.A. Motion of Futures Industry Association, Inc. For Leave To File Brief As Amicus Curiae In Support Of Petition For Rehearing and Rehearing En Banc Of Appellant Klein Co. Futures, Inc., Klein Co. Futures, Inc., No. 05-1374 (2d Cir. 2006) at 2.
Notwithstanding this broad coalition of members who face potential liability, the Futures Industry Association, Inc. has unequivocally asserted that the decision below is wrong and needs to be reversed. See Brief of Futures Industry Association Inc. as Amicus Curiae In Support Of Petition For Rehearing and Rehearing En Banc Of Appellant Klein Co. Futures, Inc., Klein Co. Futures, Inc., No. 05-1374 (2d Cir. 2006) at 8.
See also C.A. Motion of Futures Industry Association, Inc. For Leave To File Brief As Amicus Curiae In Support Of Petition For Rehearing and Rehearing En Banc Of Appellant Klein Co. Futures, Inc., Klein Co. Futures, Inc., No. 05-1374 (2d Cir. 2006) at 3-4 (faced with the denial of their right of action under Section 25(b)(1) "some firms could reasonably decide to reduce their capital exposure in futures clearing systems. If they do, futures markets would become less liquid causing exchange trading to become more costly and even diverting trades to less transparent (and less regulated) over-the-counter markets.").
Indeed, as a result of this underlying dispute, the federal government reevaluated the market risk facing merchants and their customers. Immediately following petitioner's failure, but before the full extent of the underlying unlawful market manipulation was brought to light, the CFTC investigated the incident to prevent recurrences. The government counseled that merchants should find ways to acceptably manage risks. But the CFTC also cautioned that "[m]argin is not designed to cover all possible losses, because if margin levels were set high enough to do so, the products would not be economically viable," CFTC, Report on Lessons Learned from the Failure of Klein Co. Futures, Inc. at 3 (July 2001), which is a plain acknowledgment by the federal government that total mitigation of risk by merchants can and will adversely affect the futures market. Accordingly, the CFTC primarily advocated that contract markets engage in greater merchant oversight, see id. at 13-16, 18-19, a result which does nothing to protect merchants from the sort of contract market malfeasance that was subsequently revealed in this case. See Matter of Norman Eisler, 2004 WL 77924 at *2. Private enforcement of the CEA for bad faith contract market rule violations thus provides the only means for merchants to protect their financial interests without distorting the futures markets.
The decision below comes at a particularly inopportune time for the futures industry. The CFTC has found it increasingly difficult for boards of trade to maintain adequate self-regulation in the face of increased conflicts of interest. As the CFTC has explained, when boards of trade "were first entrusted with * * * extensive regulatory responsibilities, they were almost exclusively member-owned, not-for-profit exchanges facing little competition for customers or in their prominent contracts." 72 Fed. Reg. at 6938. Today, that is no longer the case and boards of trade
now face potential conflicts of interest between their critical self-regulatory responsibilities and their powerful commercial imperatives. Specifically, [boards of trade] must: defend and expand their markets against others offering similar products or services; generate returns for their owners; and provide liquid markets where their members and customers may profit. At the same time, they must continue to meet fundamental public interest responsibilities through vigorous and impartial self-regulation.
Ibid.
The CFTC's immediate investigation into petitioner's failure due to respondents' illegal actions and the broad industry support for petitioner are clear indications of the importance of this case. The federal government's concern over the underlying dispute and attendant issues reflected in the CFTC's report, its administrative actions against Eisler and the Exchange, and its issuance of new rules to eliminate contract market conflicts of interest, also demonstrate a substantial interest of the United States in this case.
B. The Court Of Appeals Plainly Misread The Scope Of The Statutory Private Right Of Action And Misconstrued The Critical Role Played By Futures Commission Merchants, Contrary To The Decisions Of Other Circuits And The Commodity Futures Trading Commission
The decision below is premised upon a fundamental misreading of the Commodity Exchange Act because the court of appeals adopted a narrow interpretation of the statutory language, "transactions on" or "subject to the rules of" a board of trade, which would render the Act internally inconsistent and lead to absurd results.
1. The ruling below stands in irreconcilable conflict with the language of Section 6(a)(1), that futures commission merchants can lawfully conduct business only so long as they enter into or execute transactions on, or subject to the rules of, a board of trade
Congress made clear in the CEA that futures commission merchants must conduct their business by engaging in transactions on, or subject to the rules of, a board of trade. This requirement is an important consumer protection provision that ensures that merchants abide by the rules that Congress requires in order to protect against market manipulation. A transaction that is not subject to such rules is unlawful.
Congress specified that it is:
unlawful for any person to offer to enter into, to enter into, to execute, to confirm the execution of, or to conduct any office or business anywhere in the United States, its territories or possessions, for the purpose of soliciting, or accepting any order for, or otherwise dealing in, any transaction in, or in connection with, a contract for the purchase or sale of a commodity for future delivery * * * unless —
(1) such transaction is conducted on or subject to the rules of a board of trade which has been designated or registered by the Commission as a contract market * * *.
7 U.S.C. § 6(a)(1) (emphasis supplied).
Transactions which do not fall within 7 U.S.C. § 6(a) are outside the scope of the CEA. Lachmund v. ADM Investor Servs., Inc., 191 F.3d 777, 786 (7th Cir. 1999).
Moreover, Congress defined futures commission merchants as the entities that solicit or accept orders for futures subject to the rules of a board of trade, 7 U.S.C. § la(20)(A), and authorized such merchants to accept "money, securit[y], or property" or to extend credit "to margin, guarantee, or secure" any trades or contracts that result from such orders. 7 U.S.C. § la(20)(B). Congress expressly authorized boards of trade to establish rules to authorize futures commission merchants "to enter into or confirm the execution of a contract for the purchase or sale of a commodity for future delivery if the contract is reported, recorded, or cleared in accordance with the rules of the contract market or a derivatives clearing organization." 7 U.S.C. § 7(b)(3)(C).
The ruling below ignores this statutory framework. In direct conflict with the clear import of those statutory provisions, the court below held that future commission merchants do not "engage in any transaction on," or "subject to the rules of," a board of trade, which, of course, is the statutory requirement for the private right of action under 7 U.S.C. § 25(b)(1) at issue in this case. According to the court below, petitioner was not engaged in a transaction on, or subject to the rules of, a board of trade because it did not trade or own the contracts at issue, see App., infra, 11a, and acted only as a guarantor of the underlying transaction, see App., infra, 12a. The court thus viewed a futures commission merchant as an entity which financially facilitates, but is ultimately unnecessary to, futures transactions.
But the view of the court below cannot be correct because 7 U.S.C. § 6(a)(1) provides that a futures commission merchant must engage in such transactions to lawfully participate in the market, as they do nearly two billion times annually. Under the court of appeals' rationale, all futures commission merchants' transactions in connection with "a contract for the purchase or sale of a commodity for future delivery" would be unlawful because the transactions would not be "on or subject to the rules of a board of trade." 7 U.S.C. § 6(a). Clearly, Congress did not intend or contemplate such an interpretation.
2. The ruling below conflicts with decisions of other circuits and the CFTC that correctly interpret the role of futures commission merchants as critical principals who engage in transactions on, and subject to the rules of, the boards of trade
Not surprisingly, the narrow construction by the court below of the role of futures commission merchants in the futures industry plainly conflicts with the longstanding interpretation of the CEA by other circuits and the CFTC. Those other jurisdictions recognize that the merchants engage in the trades on the exchange as buffering intermediaries between the investors and exchanges. The contrary view of the court of appeals in this case on the role of future commission merchants in the statutory framework creates a conflict of greater importance than is typical because it involves the two courts of appeals with jurisdiction over cases arising out of Illinois and New York, where the nation's most significant commodity exchanges are located and thus where most CEA actions are filed.
The largest U.S. exchanges are the Chicago Mercantile Exchange, Chicago Board of Trade, Chicago Board Options Exchange, NYBOT, and New York Mercantile Exchange (NYMEX). NYMEX is physically the largest commodity futures exchange in the World. See NYMEX, Who We Are, available at http://www.nymex.com/intro.aspx (last visited Mar. 7, 2007).
a. The Seventh Circuit correctly understands that futures commission merchants must engage in futures transactions on, or subject to the rules of, a board of trade in order for the trades to be lawful. See Nagel, 217 F.3d at 439 ("The Commodity Exchange Act requires that futures contracts be sold through commodity exchanges and the futures commission merchants registered on those exchanges, 7 U.S.C. § 6(a) * * *. The section just cited declares futures contracts not sold through commodity exchanges and registered futures commission merchants unlawful.") (emphasis supplied, internal citation omitted).
Moreover, the Seventh Circuit repeatedly has recognized that clearing member futures commission merchants are the key intermediaries between contract markets and individual investors. Because Congress provided that an individual investor cannot directly engage in a transaction with an exchange, "the contract of sale is actually between the floor trader's clearing member * * *, and the buyer's clearing member." Bernstein, 738 F.2d at 181. Those clearing members are the futures commission merchants. As such, it is the futures commission merchant that actually suffers any loss, because it "will have to honor the contract whatever the price." Ibid. (emphasis supplied).
The fallacy of the contrary decision by the court below in the instant case is underscored in Bosco v. Serhant, 836 F.2d 271 (7th Cir. 1987), cert. denied, 486 U.S. 1056 (1988), where the Seventh Circuit correctly recognized that a futures transaction cannot occur without the "services of both a clearing member of the Exchange * * * and a futures commission merchant * * *," id. at 273, which in the instant case were both provided by petitioner.
Other circuits agree with the Seventh Circuit that it is the futures commission merchants that actually engage in the transactions. See Bibbo v. Dean Witter Reynolds, Inc., 151 F.3d 559, 560 (6th Cir. 1998) ("Futures trades are executed on a customer's behalf by an FCM.") (emphasis supplied). Scott v. Prudential Sec., Inc., 141 F.3d 1007, 1013 n. 10 (11th Cir. 1998) ("The Commodity Exchange Act regulates those who participate in transactions involving commodity futures. Persons who actively participate in that industry, including futures commissions merchants, * * * must register under the CEA.") (internal citation omitted), cert. denied, 525 U.S. 1068 (1999). Cf. Merrill Lynch, 456 U.S. at 359-360 ("[T]here are the futures commission merchants, the floor brokers, and the persons who manage the market; they also are essential participants, and they have an interest in maximizing the activity on the exchange.").
b. The decision below is also inconsistent with the CFTC's understanding of the necessary services provided by futures commission merchants (abbreviated by the CFTC as FCM) in futures transactions. Like the Seventh Circuit, the CFTC, in administrative adjudications, has recognized that "[a]n FCM * * * occupies a unique position in the scheme of futures regulation. * * * [A]n FCM is the one who actually trades futures for the investing public * * * [and] carries out its daily routine through the instrumentalities of the national futures exchanges." In the Matter of W. Fin. Mgmt., CFTC No. 81-18, 1983 WL 29657 at *11 (C.F.T.C. Oct. 14, 1983).
For the reasons discussed above, whether merchants engage in transactions on, or subject to the rules of, a contract market is a significant issue that is inextricably tied to the CEA's scope and directly affects who is vested with a private right of action under 7 U.S.C. § 25(b)(1) to deter statutory, regulatory, and rules violations by boards of trade.
C. The Decision Below Fails To Give Meaning To Congress's Express Inclusion Of Certain Standing Requirements In One Right Of Action But Not In Another
The Second Circuit compounded its erroneous interpretation of the statutory text in this case by ignoring one of the most basic canons of statutory construction: "[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion." Russello v. United States, 464 U.S. 16, 23 (1983) (quoting United States v. Wong Kim Bo, 472 F.2d 720, 722 (5th Cir. 1972)); see also Lopez v. Gonzales, 127 S. Ct. 625, 631 (2006); Barnhart v. Sigmon Coal Co., Inc., 534 U.S. 438, 454 (2002); INS v. Cardoza-Fonseca, 480 U.S. 421, 431 (1987).
The court of appeals concluded that petitioner's action under 7 U.S.C. § 25(b)(1) against the Board of Trade could not go forward because petitioner does not fall within any of the four categories of persons described in 7 U.S.C. § 25(a)(1)(A) through (D). App., infra, 9a. But Section 25(b)(1) includes no such requirement or even mention of those subdivisions. It is only Section 25(a)(1) and other subparagraphs of Section 25(b), all of which involve actions against different types of defendants, that limit the rights of action to the four categories of persons described in Section 25(a)(1)(A) through (D), not Section 25(b)(1) actions against boards of trade.
Section 25(b)(1) expressly vests a private right of action in a person who engaged in "any" transaction on, or subject to the rules of, a board of trade. That stands in contrast to the text of Sections 25(b)(2) and (3) which provide for suits against registered futures associations and certain employees of registered futures associations and boards of trade. 7 U.S.C. § 25(b)(2), (3). Unlike Section 25(b)(1), these other two sections do not have such an expansive provision regarding what persons may bring suit. Rather, the texts of Sections 25(b)(2) and (3) limit the right of action to persons who engaged in a "transaction specified in subsection (a)," i.e., Section 25(a)(1)(A)-(D). Ibid. That makes sense because Congress would want to provide more expansive liability under Section 25(b)(1) for the entities which are the most responsible — boards of trade and their clearinghouses — for protecting the transparency of the market. As such, by subjecting a board of trade or clearinghouse to liability for actual losses arising from any transaction due to their bad faith failure to enforce the CEA, the CFTC's regulations, and their own rules that prohibit market manipulation, Congress ensured that those entities will have a substantial incentive to comply with those provisions.
Accordingly, the court of appeals was wholly unjustified in holding that it was merely congressional inadvertence when Congress decided not to incorporate the requirements for a right of action against brokers, merchants and advisors under Section 25(a)(1)(A) through (D) into the right of action against contract markets under Section 25(b)(1). See Russello, 464 U.S. at 23 (counseling against assuming that such differences are "a simple mistake in draftsmanship").
The court of appeals' error here is all the more egregious in light of the fact that this Court previously has analyzed the same statutory construction doctrine in the context of this very statute. In Omni Capital Int'l, Ltd. v. Rudolf Wolff Co., 484 U.S. 97 (1987), this Court held that Congress's omission of a provision in 7 U.S.C. § 25 that exists elsewhere in the CEA does not implicitly incorporate that provision into Section 25. Accordingly, in addressing whether the nationwide service of process provisions set forth in 7 U.S.C. § 13a-1(e) for actions to enjoin or restrain violations also apply to private rights of action brought under Section 25, this Court held that the silence in Section 25 on service of process
contrasts sharply with the other enforcement provisions of the CEA * * *. We find it significant that Congress expressly provided for nationwide service of process in those sections but did not do so in the new [ 7 U.S.C. § 25]. It would appear that Congress knows how to authorize nationwide service of process when it wants to provide for it. That Congress failed to do so here argues forcefully that such authorization was not its intention.
484 U.S. at 106 (internal citation omitted).
D. The Second Circuit's Ruling Is Contrary To Congress's Important Purpose In Creating The Section 25(b)(1) Private Right Of Action
The legislative background and purpose of the private rights of action under 7 U.S.C. § 25 further demonstrate that Congress conferred on futures commission merchants a private right of action against a board of trade for actual losses due to bad faith misconduct by the board. The House Conference Report explains that "the amendment [authorizing a private right of action] essentially would authorize private rights of action by market participants but not by members of the public who did not particulate in the market and claimed to be injured in their commercial transactions by declines in commodity prices." H.R. Rep. No. 565, Part I, 97th Cong., 2d Sess. 57 (1982). Accordingly, Congress made a reasoned judgment to allow those who directly engage in transactions on commodity exchanges to sue the board of trade for bad faith conduct that causes actual losses.
Thus, contrary to the ruling below, the Seventh Circuit correctly has recognized that the principal distinction between those who have statutory standing under Section 25(b)(1) and those who do not, is whether the putative plaintiffs actually participated in the market instead of having merely been affected by it. In American Agriculture Movement Inc. v. Board of Trade, 977 F.2d 1147 (7th Cir. 1992), that court held that the plaintiffs — an association of soybean farmers who lost money when the price of their crops declined due to fluctuations on the contract market — lacked standing under 7 U.S.C. § 25(b)(1) against the contract markets because their suit was "for speculative damages to assets that are affected by fluctuations in prices on the commodity market but which are not the subject of transactions on such market." Id. at 1153 (quoting H.R. Rep. No. 565, Part I, 97th Cong., 2d Sess. 57 (1982)). As such, non-traders, including the farmers and their associations, are "foreclose[d]" from any remedies under Section 25(b)(1) because they did not participate in the futures market, ibid., an impediment that does not apply to merchants such as petitioner. Bernstein, 738 F.3d at 181 ("the contract of sale is actually between the floor trader's clearing member * * *, and the buyer's clearing member").
In sum, the ruling below defeats the express intent of Congress that private rights of actions under the CEA serve to help prevent manipulation of the market. As discussed above, futures commission merchants are the entities with the institutional interest and means for bringing actions against a board of trade for bad faith violations of the CEA, CFTC regulations, and board rules because the merchants are the ones who bear the economic loss of such misconduct. There is no indication in the statutory text or history that Congress somehow intended to carve them out of the rights of action it created, and it would make no sense for Congress to have done so in light of the purpose of the statute.
CONCLUSION
For the foregoing reasons, the petition for a writ of certiorari should be granted.