DePaul Law Review Volume 34 Issue 1 Fall 1984 Article 3 Commodities Litigation: The Impact of RICO Michael S. Sackheim Francis J. Leto Steven A. Friedman Follow this and additional works at: https://via.library.depaul.edu/law-review Recommended Citation Michael S. Sackheim, Francis J. Leto & Steven A. Friedman, Commodities Litigation: The Impact of RICO , 34 DePaul L. Rev. 23 (1984) Available at: https://via.library.depaul.edu/law-review/vol34/iss1/3 This Article is brought to you for free and open access by the College of Law at Via Sapientiae. It has been accepted for inclusion in DePaul Law Review by an authorized editor of Via Sapientiae. For more information, please contact [email protected]. COMMODITIES LITIGATION: THE IMPACT OF RICO Michael S. Sackheim* Francis J. Leto** Steven A. Friedman*** INTRODUCTION The number of private actions commenced against commodities brokers and other professionals in the futures area has increased dramatically in the last few years. Although these lawsuits primarily have been based on viola- tions of the Commodities Exchange Act (CEAct),' the complaints have fre- quently included allegations that the federal Racketeering Influenced and Cor- rupt Organization Act (RICO)2 was also violated by the subject defendents. In invoking the racketeering laws, the plaintiff often seeks to take advantage of the treble damage provision of RICO.3 This article will analyze the application of the racketeering laws to com- mon, garden-variety commodities fraud cases. Specifically, this article addresses those cases where a brokerage firm is sued because of the illegal acts of its agents. It is the authors' contention that the treble damages pro- vision of RICO should not be applied to legitimate brokerage firms who are innocently involved in instances of commodities fraud through the acts of their agents. Part I of this article discusses the history and regulation of the futures markets in the United States. In part II, the evolution of the private cause of action based on violations of the CEAct is discussed. Part III provides a discussion of the various approaches the courts have taken in applying RICO to civil investment fraud actions. Part IV analyzes the application of the RICO remedies to lawsuits which involve allegations of violations * Commodities Counsel, Dean Witter Reynolds Inc.; B.A., 1969, Queens College; M.A., 1972, New School for Social Research; J.D., 1974, Brooklyn Law School; LL.M., 1979, New York University. ** Law Clerk, Hon. Vincent A. Cirillo, Pennsylania Superior Court.; B.A., 1981, St. Joseph's University; J.D., 1984, Delaware Law School (Cum Laude). *** Associate, Parker, McCay, & Criscuolo, P.A., Marlton, N.J.; B.A., 1976, Tulane Univer- sity; J.D., 1984, Delaware Law School (Cum Laude). 1. 7 U.S.C. §§ 1-26 (1982). 2. 18 U.S.C. §§ 1961-1968 (1982). 3. 18 U.S.C. § 1964(c) (1982) provides that: Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therfore in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee. Id. 24 DEPA UL LAW REVIEW [Vol. 34:23 of anti-fraud provisions of the federal commodities laws. This article con- cludes with arguments against the application of RICO to innocent com- modities firms unknowingly involved in commodities fraud through their agents' illegal acts. I. BACKGROUND A. Development of Futures Trading Commodity futures' and options markets' have been the subject of ever 4. Commodity futures are the intangible rights to a particular commodity at some future date. In analyzing the nature of futures trading, it has been stated that, [tlhe forum for futures trading is a Commission-designated contract market where trading takes place, not in commodities, but in executory contract rights to pur- chase and sell commodities at a later date. Futures trading does not consist of sales of a commodity for later delivery. It consists, rather, of formation of con- tracts for later sale of a commodity. Clark, Genealogy and Genetics of "Contract of Sale of a Commodity for Future Delivery" in the Commodity Exchange Act, 27 EMORY L.J. 1175, 1175 (1978). A commodity futures contract has been defined as a contractual agreement "to buy or sell a fixed amount and grade of a certain commodity on some specified date." CFTC v. Crown Colony Commodity Options, Ltd., 434 F. Supp. 911, 913-14 (S.D.N.Y 1977); accord Leist v. Simplot, 638 F.2d 283, 286 (2d Cir. 1980), aff'd sub norn. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353 (1982); SEC v. Commodity Options Int'l, Inc., 553 F.2d 628, 629-31 (9th Cir. 1977); CFTC v. United States Metals Depository Co., 468 F. Supp. 1149, 1154-55 (S.D.N.Y. 1979); see also Clark, supra, at 1175 n.4 (defines a commodities futures contract as occurring when "one party agrees to sell and deliver and the other party agrees to buy and receive a specified quantity of wheat at a specified price in a designated month in the future"); Sackheim, Parameters of Express Private Rights of Action for Violations of the Commodity Exchange Act of 1982, 28 ST. Louis U.L.J. 51, 51 n.2 (1983) (defines a com- modities futures contract as "[tihe formation of a standardized contractual obligation to pur- chase or sell a fixed amount and grade of a specified commodity, to be delivered by a designated date or through a contract market designated as such by the Commodity Futures Trading Com- mission") [hereinafter cited as Private Rights of Action]; Van Smith, Preventing the Manipula- ton of Commodity Futures Markets: to Deliver or Not'to Deliver?, 32 HASTINGS L.J. 1569, 1569 n.3 (1981) ("A commodities futures contract is a contract between a buyer and a seller in which the seller promises to deliver a particular commodity at an established future date"). While the term "commodity futures" is left undefined in the Commodity Exchange Act (CEAct), the Commodity Futures Trading Commission (CFTC) has attempted to define futures contracts as "[a] firm commitment to deliver or to receive a specified quantity and grade of a commodity during a designated month with price being determined by public auction among exchange members." COMMODITY FUTURES TRADING COMMISSION, GLOSSARY OF SOME TERMS COM- MONLY USED IN THE FUTURES TRADING INDUSTRY 13 (1980) [hereinafter cited as GLOSSARY]. Commodity futures must be distinguished from actual commodities. Commodities are tangible, physical products such as barley, beef, cattle, chickens, cocoa, coffee, copper, corn, currencies, gold, hogs, lumber, palladium, pork bellies, rye, silver, soybeans, sugar, wheat, and a number of other products. See T. Russo, REGULATION OF THE COMMODITIES FUTURES AND OPTIONS MARKETS § 1.01, at 1-4 to 1-5 (1983). 5. An option refers to the contractual obligation to buy or sell either a specified com- modity or a commodity futures contract within a certain time period at a given price. See British Am. Commodity Options Corp. v. Bagley, 552 F.2d 482, 484-85 (2d Cir.), cert. denied, 434 U.S. 938 (1977); see also CFTC v. United States Metals Depository Co., 468 F. Supp. 1984] COMMODITIES LITIGA TION AND RICO increasing federal regulation. 6 Trading of consumable commodities was introduced in America in the late 1700's, 7 and generally was limited to eggs, butter, vegetables, and grain traded in cash markets for immediate, or "spot" delivery.' Spot delivery, however, failed to take into account that when farmers brought their goods to market, supply sometimes exceeded the market demand.9 This system gradually gave way to a system of forward contracting,'" which involved the sale of a commodity on a spot market with delivery deferred to a future date. Although this innovation protected farmers from delivering excessive amounts of goods to market, forward contracting was not without its problems. For example, farmers who bargained for future delivery of a given quantity of goods assumed the financial risk of events such as crop failures and shipping disasters." In response to these continuing problems, during the latter half of the nineteenth century commodity "futures" trading developed in the United States. Futures trading involves a contractual obligation to buy or sell a specified quantity of goods at a specified future date.' 2 In effect, 1149, 1154-55 (S.D.N.Y. 1979), which discusses the difference between futures contracts and option contracts. The federal government has defined an option as "a unilateral contract which gives the buyer the right to buy or sell a specified quantity of a commodity at a specific price within a specified period of time, regardless of the market price of that commodity." GLOSSARY, supra note 4, at 19-20. 6. See infra notes 23-76 and accompanying text. 7. S. REP. No. 495, 97th Cong., 2d Sess. 1 (1982) [hereinafter cited as S. REP. No. 4951. 8. S. REP. No. 850, 95th Cong., 2d Sess. 5 (1978) [hereinafter cited as S. REP. No. 850]. 9. As one commentator has noted: At harvest time, literally tons of grain arrived in the port cities by wagon, barge, or railroad car. This vast influx inevitably created a glutted market and forced prices to decline sharply. During the off seasons, on the other hand, available grains were in very short supply and were widely sought. Prices were inflated, as commission men and merchants tried to procure the grain that was needed by millers for production of the flour required by an increasing population. J. LURIE, THE CHICAGO BOARD OF TRADE 1859-1905, THE DYNAMICS OF SELF REGULATION 24 (1979).