Grossman v. Citrus Associates of New York Cotton Exchange, Inc.
1990 WL 102348, 1990 U.S. Dist. LEXIS 9014, 742 F. Supp. 843 (1990)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
To state a claim for bad faith against a commodities exchange for failing to take emergency action under the Commodity Exchange Act, a plaintiff must allege specific facts showing not only that the exchange acted with an ulterior motive, but also that it acted with actual knowledge of the alleged market manipulation.
Facts:
- Plaintiff Gerald Grossman, a commodities trading advisor specializing in Frozen Concentrate Orange Juice (FCOJ) futures, took short positions in the FCOJ market for himself and his clients between December 12 and December 17, 1985.
- During this period, several private weather forecasting firms predicted a major freeze in Florida's orange-producing areas, causing the price of FCOJ contracts to rise significantly.
- Grossman, a meteorologist himself, analyzed official government weather data on December 16 and concluded that there was no chance of a freeze, believing the market was being driven by unsubstantiated rumors.
- Despite Grossman's analysis, the market price for FCOJ contracts continued to accelerate upward on December 16 and 17.
- On December 16, William Mailers of First American Discount Corporation, a broker, demanded additional margin from Grossman and threatened to liquidate part of Grossman's position if the market opened higher.
- On December 17, the market opened higher, and Mailers liquidated half of the short positions in one of Grossman's accounts.
- Shortly thereafter on December 17, Frank Pusateri, another business associate, demanded that Grossman cover the remaining short positions for a large account.
- Grossman complied with these demands, covering his and his clients' remaining short positions at very high prices, which resulted in substantial financial losses.
Procedural Posture:
- Plaintiff Gerald Grossman filed a lawsuit against the Citrus Exchange and six other defendants in the U.S. District Court for the Southern District of New York.
- Grossman served a first amended complaint alleging market manipulation and conspiracy in violation of the Commodity Exchange Act.
- Upon motions from the defendants, the trial court granted summary judgment for one defendant and dismissed the complaint against the other defendants for reasons including failure to state a claim and improper venue.
- The court granted Grossman leave to file a second amended complaint against certain defendants, including the Citrus Exchange.
- Grossman filed a second amended complaint, this time naming only the Citrus Exchange as a defendant and alleging a bad faith failure to regulate the FCOJ market.
- The Citrus Exchange, as the sole remaining defendant, filed a motion to dismiss the second amended complaint for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a complaint adequately allege a claim of bad faith against a commodities exchange for failing to suspend trading when it pleads on 'information and belief' that the exchange knew of a price manipulation and was motivated by self-interest?
Opinions:
Majority - Haight, District Judge
No. A complaint does not adequately state a claim for bad faith against a commodities exchange where it fails to plead sufficient facts to support the allegation that the exchange had knowledge of a market manipulation. To establish a bad faith claim under 7 U.S.C. § 25(b)(4), a plaintiff must allege two elements: first, that the exchange acted or failed to act with knowledge, and second, that this action or inaction was the result of an ulterior motive. The plaintiff's allegation that the Citrus Exchange 'knew or had reason to believe' of a price distortion, made merely on 'information and belief,' is a conclusory legal statement, not a well-pleaded fact. An exchange is not a weather forecaster and has no duty to determine the 'truth' among conflicting market data or opinions that drive trading. Without knowledge of a manipulation or a conscious avoidance of such knowledge, the Exchange had no duty to take corrective action, and its failure to do so cannot constitute bad faith. Furthermore, the court noted that the plaintiff's losses were more directly caused by his own decision to panic and cover his short positions, rather than any inaction by the Exchange.
Analysis:
This case establishes a high pleading standard for bad faith claims against commodities exchanges, making it difficult for plaintiffs to survive a motion to dismiss. The decision emphasizes that simply reciting the legal standard for bad faith (e.g., alleging an 'ulterior motive' that was the 'sole or dominant reason') is insufficient without concrete factual allegations to support each element, particularly the element of the exchange's knowledge. By rejecting allegations made on 'information and belief' regarding the defendant's state of mind, the court reinforces the requirement for plaintiffs to plead specific facts giving rise to a plausible inference of wrongdoing. This ruling protects exchanges from litigation based on mere speculation by traders who suffer market losses, reinforcing the principle that such losses are an inherent risk of trading and not typically actionable against the market regulator itself.
