These obviously insane people trade commodities.

A very nice ABA person asked Blawgletter to write an item for the Preview of United States Supreme Court Cases. She specified a case — did she call it glamorous? — involving a private cause of action under the Commodities Exchange Act.  How could we resist?  Writing and pork bellies. Woo-hoo! So wrote we did. And today’s oral argument in Klein & Co. Futures v. Board of Trade of the City of New York, No. 06-1265, appears here and our Preview opus below.


May a Futures Commission Merchant Sue a Board of Trade for Failure to Keep a Commodities Exchange Honest?

by Barry Barnett
Barry Barnett grew up in Nacogdoches, Texas; graduated from Yale and Harvard; and practices business trial law at Susman Godfrey L.L.P. in Dallas, Texas. His writing projects include a law blog, Blawgletter, and a newsletter, award-winning Barnnett’s Notes on Commercial Litigation. You can reach him at or 214-754-1903.

In this case the Court is being asked to decide to either broaden or restrict the class of persons who may sue commodity boards of trade under the Commodity Exchange Act. If the class is broadened, not only people who bought or sold commodity contracts could recover losses but also those who process such trades under the arrangements peculiar to commodity exchanges.

Klein & Co. Futures, Inc. v. Board of Trade of the City of New York, et al. Docket No. 06-1265

Argument Date: October 29, 2007

From: The Second Circuit

The Commodity Exchange Act provides an express private right of action to recover actual losses to a person who “engaged in any transaction” that was on or “subject to the rules of” a commodity 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).


Did the court of appeals in this case err in concluding that futures commission merchants lack statutory standing to invoke the right of action contained in 7 U.S.C. § 25(b)(1)?


Norman Eisler used Klein & Co. Futures, Inc., a futures commission merchant (FCM), to buy futures contracts, in a Pacific Stock Exchange Technology Index (P-Tech), for his firm, First West Trading, Inc. First West purchased the contracts “on margin” – with a loan from Klein & Co. At the same time, Eisler exploited his positions as chairman of the New York Futures Exchange and as a member of the P-Tech Futures and Options Settlement Committee to manipulate the end-of-day value (or “settlement price”) of all P-Tech futures and options contracts. He did this to hide big losses on the First West positions during 1999 and 2000.

Or so Klein & Co. alleged after Eisler’s scheme collapsed, killing the firm.

The derailment went like this: In May 2000, people started complaining about settlement prices for P-Tech contracts. The gripes led to Eisler’s ouster from the NYFE and the P-Tech committee and a fresh look at the values of P-Tech contracts. Recomputation produced – surprise! – far lower assessments and a $4.5 million deficit in First West’s trading account at Klein & Co. A now-frantic Klein & Co. called on First West for more collateral, but First West of course defaulted – and took Klein & Co. down with it.

But why did First West’s demise likewise kill Klein & Co.? The answer may hold the key to the Supreme Court’s decision in this case.

Let us start our journey by defining some terms. You already know about commodities – just about anything that the imagination of mankind can conceive of standardizing, packaging, and trading in. Stuff like pork bellies, barrels of sweet crude oil, and (yes) even futures and options contracts. A futures contract obligates the buyer to purchase or sell the relevant commodity on a date certain – the “strike date.” An options contract, on the other hand, entitles the buyer to do the same thing but doesn’t require him to do so.

Commerce in options and futures amounts to risky-but-legal gambling. The buyer of a contract – for, say, 100 pounds of choice white grease – bets that the market grease price will go up between the purchase date and the strike date. If the price of grease does rise, he pockets the difference between what he agreed to pay on the strike date and the market price at which he may now sell the oleaginous substance. Vice versa if the price tumbles.

Eisler and First West gambled on the value of P-Tech futures and options, but they lost. And their crapshoot brought down Klein & Co. because the resulting charge pushed its net capital below the minimum necessary for it to maintain trading privileges with the New York Clearing Corporation (NYCC) and the New York Mercantile Exchange (NYMEX). Suspensions by NYCC and NYMEX put the nails in Klein & Co.’s coffin. Klein & Co. sued the Board of Trade of the City of New York (NYBOT), NYCC, Eisler, and others under sections 25(a) and (b) of the Commodity Exchange Act (CEA), 7 U.S.C. § 25. After dismissing Klein & Co.’s CEA claims, the district court declined to exercise supplemental jurisdiction over state law claims and tossed them without prejudice. Klein & Co. Futures, Inc. v. Board of Trade of the City of New York, 2005 WL 427713 (S.D.N.Y. Feb. 18, 2005).

The Second Circuit affirmed. Klein & Co. Futures, Inc. v. Board of Trade of the City of New York, 464 F.3d 255 (2d Cir. 2006). The two-judge panel – a third judge recused himself – first concluded that Klein & Co. lacked standing to sue under the CEA. The court opined that all four subdivisions in section 25(b) “limit claims to those of a plaintiff who actually traded in the commodities market” and therefore do not cover non-traders. Id. at 260. Because Klein & Co. acted solely as an FCM of the NYCC, it did not “actually trade” in the P-Tech contracts and thus could not bring a claim under the CEA. The court also upheld the district court’s discretionary dismissal of Klein & Co.’s state law claims in light of the absence of federal question jurisdiction. The Supreme Court granted Klein & Co.’s petition for a writ of certiorari and granted leave for the Solicitor General to participate. The United States and the Futures Industry Association, Inc., have both filed amicus briefs in support of the Klein & Co. position.


At first glance, Klein & Co. Futures, Inc. v. Board of Trade presents a straight question of statutory construction. Section 25(b) of the CEA provides:

§ 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 section 7a(8) and section 7a(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.

Section 25(b)(4) adds a bad faith element. 7 U.S.C. § 25(b)(4) (requiring that defendant “acted in bad faith in failing to take action or in taking such action as was taken.”).

The statutory question resolves into what phrase “a person who engaged in any transaction” means. Klein & Co. takes it to signify “an indispensable party to” a commodities transaction in the sense either of the actual trader or of a “clearing member” (like Klein & Co.) who processes the trade. Brief of Petitioner at 8. The petitioner emphasizes that commodity exchange rules make it far more than a mere participant in trades. The rules also mandate “that any contract made on the exchange ‘shall be made on behalf of a clearing member,’ such as petitioner, ‘who shall be the buyer or seller of said contract on the terms set forth therein’ and that the clearing member shall assume as its own the futures contracts on the exchange.” Id. (quoting New York Futures Exchange Rule 306(i)(2)) (emphasis added). The Solicitor General makes much the same point. Brief of the United States as Amicus Curiae Supporting Petitioner at 20-24.

The respondents see things quite differently. They urge that the plain language of section 25(b)(1) – plus several other factors – limits the class of people with standing to actual traders on a commodity market. They portray Klein & Co. and amici as arguing that “any transaction” in section 25(b)(1) covers “any activity governed in any way by the rules of a contract market.” Brief of Respondents at 21. They then cite three statutory snippets that, they contend, use the term “transaction” to refer only to something that traders do.


The outcome of the case will, in the narrow sense, either broaden or restrict the class of persons who may sue under the CEA. If the class is broadened, not only people who bought or sold commodity contracts could recover losses but also those who process the trades under the arrangements peculiar to commodity exchanges. The latter of course include clearing member FCMs such as Klein & Co. A broadening of potential liability through a reversal in Klein & Co. seems modest. How often, really, will a clearing member choose to sue a commodity exchange, on whose goodwill its business depends? Plus the requirement of proving bad faith looks tough. The case of Klein & Co. thus appears to be an outlier.

Let us note here that Klein & Co. doesn’t involve a circuit split. It doesn’t embody a fact pattern that one expects to see on a reality television show. So why did the Court reach out for it?

The true significance of Klein & Co. may consist in its pairing this Term with Stoneridge Inv., LLC v. Scientific-Atlanta, Inc., 06-43 – probably the most important securities case before the Court so far this decade. Stoneridge offers the justices a chance to limit liability under federal securities law to companies and individuals who actually make misrepresentations on which investors rely in buying securities. Allowing clearing members to sue quasi-regulators under the CEA for what amounts to bad faith failure to prevent commodities fraud might seem like an elegant way to contrast the two statutory schemes. We shall see.


For Klein & Co. Futures, Inc. (Drew S. Days III (202) 887-1500)

For Board of Trade of the City of New York, et al. (Andrew J. Pincus (202) 263-3220)


In Support of Klein & Co. Futures Inc. Futures Industry Association, Inc. (Christopher Landau (202) 879-5000) United States (Paul Clement (202)-514-2217)

Barry Barnett

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