Argument preview: Klein & Co. Futures v. Bd. of Trade of NYC

Argument Preview

The following is by Steven C. Wu, and associate in Akin Gump’s Supreme Court and appellate practice in Washington, DC.

Today in Klein & Co. Futures, Inc. v. Board of Trade of the City of New York (No. 06-1265), the Supreme Court will consider whether futures commission merchants have statutory standing under the Commodities Exchange Act, 7 U.S.C. § 25(b)(1), to sue a board of trade for failing to enforce its own rules. The case will turn on a careful consideration of the text and history of the Act.

Drew S. Days III, of Morrison & Foerster LLP in Washington, DC, will argue on behalf of petitioner Klein & Co. Futures, Inc. Assistant to the Solicitor General Malcolm L. Stewart will argue for the United States as an amicus in support of petitioner Klein. Andrew J. Pincus, of Mayer Brown LLP in Washington, DC, will argue on behalf of respondent Board of Trade of the City of New York, Inc. The briefs of both parties, along with the amicus brief of the United States, are available here.

Briefly: A commodities future is a contract to sell a particular commodity at some future date at a price set by the contract. Such futures are sold in commodity exchanges. Generally, however, investors — i.e., the actual purchasers and sellers of commodities futures — do not deal directly with these exchanges. Rather, most transactions are conducted through commodities futures merchants, such as petitioner Klein, which take orders from investors and purchase or sell futures contracts on their behalf.

Commodity exchanges are operated by boards of trade, such as the respondent in this case, the Board of Trade of the City of New York (NYBOT). The Commodities Exchange Act requires such boards to promulgate and enforce rules governing exchanges on its market. A provision of the Act, 7 U.S.C. § 25(b)(1), states that “a licensed board of trade that fails to enforce any bylaw, rule, regulation, or resolution that it is required to enforce by the Commission . . . shall be liable for actual damages sustained by a person who engaged in any transaction on or subject to the rules of such registered entity 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.”

In this case, Klein sued the NYBOT alleging that the board had failed to enforce its own rules to prevent price manipulation by a chairman of one of its divisions — who happened to own a company that was a customer of Klein’s. The question before the Supreme Court is whether a futures commission merchant such as Klein — as opposed to its customers, the investors — has a cause of action under § 25(b)(1).

In support of standing, Klein argues that it has “engaged in any transaction on or subject to the rules” of the NYBOT, despite not purchasing or selling any futures contracts on its own behalf, because it facilitated such transactions between the actual purchasers and sellers (a procedure known as “clearing”). Klein notes that, in clearing futures contracts, it is required under NYBOT’s own rules to enter into and assume all such contracts.

Klein points to the broad language of § 25(b)(1) (“any transaction”), compared to the more limited language of § 25(a)(1)(D), which limits the cause of action therein to a person who “purchased or sold a contract.” Klein argues that § 25(b)(1) and § 25(a), by using distinct language, reflect different types of private suits, and that therefore § 25(b)(1) should not be read to incorporate the narrower language of § 25(a). In addition, Klein notes that other provisions of the Commodities Exchange Act with similar language — in particular, 7 U.S.C. § 6 — confirm its reading of the statute.

The United States, as amicus curiae supporting Klein, repeats many of the same arguments, emphasizing the distinction between § 25(b)(1) and § 25(a) and engaging in a detailed discussion of the specific transactions that place Klein within the ambit of § 25(b)(1). In its analysis of § 25(b)(1)’s language, the United States places greater weight on the broad meaning of “engaged in” rather than “any transactions.”

In response, the NYBOT argues that § 25(b)(1)’s use of the terms “transactions” and “on or subject to the rules of” (among others) is intended to refer only to investors’ trades of futures contracts. To support this interpretation, the NYBOT notes that other provisions of the Commodities Exchange Act use those terms for that narrower meaning. It also notes that § 25(b)(1) was enacted shortly after, and against the background of, the Supreme Court’s Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353 (1982), which focused only on investors’ claims. Finally, it notes that the legislative history of § 25(b)(1) referred repeatedly to claims by “investors” and “customers.”

The NYBOT also argues that Klein’s interpretation of § 25(b)(1) would lead to absurd results. By allowing both investors and merchants to bring actions against boards of trade, the NYBOT contends, Klein’s interpretation would lead to duplicative claims and inconsistent awards of recoverable damages.

At the end of its brief, the NYBOT raises an alternative argument not addressed in Klein’s or the United States’ briefs. According to NYBOT, Klein’s complaint should be dismissed even if it has standing because it did not allege a necessary element of a cause of action under § 25(b)(1): namely, “actual losses that resulted from” its activities “on or subject to the rules of” a contract market and that “were caused by” the contract market’s failure to enforce its rules. In reply, Klein argues that this issue is not properly before the Supreme Court and is, at any rate, insupportable.