Klein & Co. Futures, Inc. v. Board of Trade of the City of New York

PETITIONER: Klein & Co. Futures, Inc.
RESPONDENT: Board of Trade of the City of New York et al.
LOCATION: Earthquake Park

DOCKET NO.: 06-1265
DECIDED BY: Roberts Court (2006-2009)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 552 US 1085 (2007)
GRANTED: May 21, 2007
ARGUED: Oct 29, 2007
DECIDED: Dec 28, 2007

Andrew J. Pincus - on behalf of the Repondents
Drew S. Days, III - on behalf of the Petitioner
Malcolm L. Stewart - on behalf of the United States, amicus curiae supporting Petitioner

Facts of the case

In his role as chairman of a settlement committee of the Board of Trade of the City of New York, Norman Eisler allegedly manipulated the daily settlement prices of commodities futures in order to conceal bad investments. During this period Eisler's company purchased futures contracts through its broker, the commodity futures merchant Klein & Co. Futures, Inc., but the alleged price manipulation distorted Klein's appraisal of Eisler's ability to pay. When the scheme unravelled, Eisler's company could not meet its obligations and Klein was forced to absorb the loss.

Klein sued Eisler and the Board of Trade under Section 22 of the Commodities Exchange Act (CEA), claiming that the Board of Trade failed to enforce rules that would have prevented the manipulation. The CEA requires boards of trade to set rules governing the market, and Section 22 allows private parties to sue for failure to enforce the rules as long as the party was "engaged in any transaction" subject to the board's rules.

The U.S. District Court dismissed Klein's claim for lack of standing to sue, and the U.S. Court of Appeals for the Second Circuit affirmed. The Second Circuit interpreted Section 22 as including buyers and sellers of futures contracts but excluding the commodity futures merchants who conduct the actual trades on behalf of their customers. The court ruled that Klein's financial loss was not sufficient to grant it standing, because the loss was suffered in the aftermath of the futures trading and not during the trading itself.


Do futures commission merchants, who buy and sell futures contracts on behalf of others, "engage[] in [...] transaction[s]" subject to the rules of a commodity board of trade and therefore have standing to sue under Section 22 of the Commodities Exchange Act?

Media for Klein & Co. Futures, Inc. v. Board of Trade of the City of New York

Audio Transcription for Oral Argument - October 29, 2007 in Klein & Co. Futures, Inc. v. Board of Trade of the City of New York

John G. Roberts, Jr.:

We'll hear argument first this morning in case 06-1265, Klein & Co. Futures v. Board of Trade of the City of New York.

Mr. Days?

Drew S. Days, III:

Mr. Chief Justice, and may it please the Court: A clearing futures commodity merchant, an FCM, such as Petitioner, has standing to sue contract markets and clearing organizations of contract markets under Section 25 (b)(1) of the act for their bad faith failure to enforce rules that are required by the act and by the Commodity Futures Trading Commission.

The court of appeal's contrary ruling should be reversed for three reasons, because it's contrary to the text of 25(b)(1), it ignores the essential rule of clearing FCM's such as Petitioner recognized by the Commodity Exchange Act, as well as long-standing industry rules and practices... an assessment with which the expert Federal agency, the Commodity Future Trading Commission concurs... and it's in cross purposes with the goal that Congress sought to achieve in enacting an express private right of action in 25(b)(1) against contract markets, namely to ensure the existence of fair and orderly markets through a system of effective subregulation.

The plain language of the Commodity Exchange Act confers statutory standing on Petitioner to bring this private right of action against Respondents.

25(b)(1) makes no reference to buyer or seller but instead confers standing on any person who engaged... a person who engaged in any transaction on or subject to the rules of a contract market or licensed board of trade.

Ruth Bader Ginsburg:

Mr. Days, can I interrupt you there, and ask, if you would--

Drew S. Days, III:

Yes, Justice Ginsburg.

Ruth Bader Ginsburg:

--if you would define the transactions... the particular transactions on which you rely to come within that provision and what rules of the exchange or the clearinghouse do you say was violated?

Drew S. Days, III:

Justice Ginsburg, we view this as several subsidiary transactions that ultimately end in the consummation of the contract, but with respect to the rules that we have in mind... first of all Rule 6 (a) talks about... that can be found in the blue brief at 1a... that such contract executed or consummated by or through a member of such contract market.

This is a clearing FCM that does this.

And 6 (a), along with the knife rule, that is the contract markets rule 121(f) and 306(i)(2), essentially indicate the following arrangement: No contract can be dealt with or entered into on a contract market without a guarantee from the clearing FCM.

The FCM becomes the buyer and seller with respect to that particular contract.

It assumes that contract and then, after assuming that contract, has to clear it immediately, indeed, within one hour.

So that's... those are the rules under the statute and with respect to the contract market.

With respect to the clearing organization, Rule 401(a), which is found at the red brief at 6a, indicates that the clearing point, the clearing FCM is the point that deals with the clearing organization.

And at that point, there's no communication, no contact... no contract between the investor and the clearing organization.

The clearing organization becomes the buyer and seller.

In other words, the contract is between a clearing FCM on one side of the contract and a clearing FCM on the other side of the contract.

The clearing organization becomes the buyer and seller, but before that happens, it's clear that the clearing organization views the clearing FCM as the party to the contract.

It is not the investor.

It is not any other party.

The important thing also about this process is that the clearing FCM is always financially liable from the very beginning of this transaction, this process, to the very end.

That is, from the... executing the contract and the consummation of the contract.

For the Court of Appeals to talk about buyer or seller and treat a clearing FCM as a mere creditor or agent really misses entirely the role that clearing FCM's play in this process.

Ruth Bader Ginsburg:

You think you--

Drew S. Days, III:

I think--

Ruth Bader Ginsburg:

--You've talked about the transaction, but I also ask you, what were the rules that the Defendants violated, the rules of the statute?

Drew S. Days, III:

--Well, it's... it is clear, as I indicated with respect to the rule of the contract market, that the clearing FCM is required to clear that particular order or contract.

And, therefore, at that point, the clearing requires some information about the settlement price.