TOM LACHMUND, Plaintiff-Appellant, v. ADM INVESTOR SERVICES, INCORPORATED, a Delaware Corporation, A/C TRADING COMPANY, an Indiana general partnership doing business as A/C TRADING 2000, and DEMETER INCORPORATED, an Indiana corporation, Defendants-Appellees.
No. 98-3467
United States Court of Appeals, Seventh Circuit
Argued February 23, 1999. Decided September 13, 1999.
191 F.3d 777
Before COFFEY, RIPPLE and ROVNER, Circuit Judges.
Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. 97 C 92—James T. Moody, Judge.
Tom Lachmund brought this action against three businesses under the Commodity Exchange Act (“CEA“), the Racketeering Influenced and Corrupt Organizations Act (“RICO“), and state law. He alleged a conspiracy of fraudulent misrepresentation with respect to certain contracts for the sale of grain. Pursuant to
I
BACKGROUND
A. Hedge-to-Arrive Contracts
A hedge-to-arrive contract (“HTA“) is an agreement between a farmer and a grain elevator for the sale of a fixed quantity of grain for delivery at a specific time in the future. The parties agree to a price per bushel set by reference to the Chicago Board of Trade (“CBOT“) futures price for a particular month, plus or minus a basis (an adjustment that reflects local variables, such as the cost of transportation, storage, labor, and utilities). The futures reference price is fixed at the time of contracting, but the basis floats until the farmer decides to fix it, sometime before an agreed upon pricing deadline. If the farmer does not fix the basis within the specified time, it will be set automatically by the terms of the HTA. See Eby v. Producers Co-op, Inc., 959 F. Supp. 428, 430 n.1 (W.D. Mich. 1997); Farmers Co-op. Co. v. Lambert, No. LACV305569, 1999 WL 177473, at *3 (Iowa Dist. Ct. 1999); Matthew J. Cole, Note, Hedge-To-Arrive Contracts: The Second Chapter of the Farm Crisis, 1 Drake J. Agric. L. 243, 246 (1996).
HTA contracts benefit farmers by permitting them to lock in a particular price and to guarantee themselves a buyer for their grain prior to delivery. They face a risk, however, that grain prices will rise and that they will be committed to selling their grain at an agreed price below the current market value. By the same token, the elevator faces a risk that the futures reference price will fall, leaving the elevator locked into a price above the current market price. Each party can hedge against these risks by establishing a position in the futures market that is opposite to its contract position. For example, the elevator would hedge its risk when it contracts with a farmer by simultaneously establishing a “short” position (an obligation to sell) in the futures market for the month of delivery to offset its obligation to buy from the farmer. See Eby, 959 F. Supp. at 430 n.1; Lambert, 1999 WL 177473, at *4; Cole, supra, at 246.
Some HTA contracts (or the parties’ practice under such contracts) allow the farmer to “roll” the delivery obligation to some future date, either to accommodate shortfalls in the crop yield or to allow the farmer to sell the grain on the “spot” (cash) market for a better price. When a farmer opts to roll an HTA to a later month, the elevator cancels or offsets its futures hedge in the original delivery month (by entering an obligation to buy the same quantity that it is obligated to sell) and then rehedges by establishing a new short position in the new delivery month. The price difference, as of the date of the roll, between the new and old futures months—the “spread“—is then added to the price per bushel of the original HTA. The farmer thus absorbs this spread, whether it is positive or negative. See Eby, 959 F. Supp. at 430 n.1; Lambert, 1999 WL 177473, at *4-5; Cole, supra, at 250.
B. Facts Pertaining to Mr. Lachmund‘s Claims
ADM Investor Services, Inc. (“ADMIS“) is a corporation registered with the Commodity Futures Trading Commission (“CFTC“) as a Futures Commission Merchant. A/C Trading Co. (“A/C“) is an Indiana general partnership registered with the CFTC as an Introducing Broker (“IB“).1 A/C Trading 2000 (“A/C 2000“) is an Indiana general partnership run by James Gerlach and engaged in the business of agricultural consulting. Demeter, Inc. (“Demeter“) is a corporation operating a grain elevator. Plaintiff Tom Lachmund is an Indiana farmer.
When Mr. Lachmund‘s crop yield fell short of the contract amounts, he was able to roll the undelivered amounts forward to later crop futures months, even to the next crop year. After a series of rolls, however, Demeter informed Mr. Lachmund in 1996 that it would no longer allow HTA contracts to be rolled beyond the end of a crop year so that each HTA contract had to be settled at the end of the crop year, either by delivery of grain or by cash transaction. Demeter then charged Mr. Lachmund‘s account with a debit of $304,597.26. Meanwhile, the options Mr. Lachmund had purchased failed to buffer his losses on the HTA contracts.
Mr. Lachmund brought this action under the CEA, RICO, and state law, alleging a conspiracy of fraudulent misrepresentation with respect to his contracts with Demeter. In his complaint, Mr. Lachmund claims that ADMIS, A/C, and other entities conspired to evade the CFTC‘s futures market regulations by engaging in off-exchange futures market activities through HTA contracts with farmers. The purpose of this alleged conspiracy, according to Mr. Lachmund, was to attract business to ADMIS and its IBs by misrepresenting the HTA contracts as a risk-free method of selling future crops. The HTA contracts were in fact, Mr. Lachmund claims, illegal off-exchange futures contracts because the grain purportedly sold by the contracts did not have to be delivered within the crop year. That the purpose of the contracts was not to transfer actual grain, he alleges, is evidenced by the fact that farmers were encouraged to enter into HTAs for grain quantities greater than they could produce in a crop year, that many HTAs did not specify a delivery date, that the farmers could engage in unlimited rolling of their delivery obligations, and that the contracts could be settled by a cash buy-out at any time.
Mr. Lachmund claims that Gerlach failed to inform him of various material facts concerning the risks involved in the contracts and options program. He claims that Gerlach falsely led him to believe that the only risk would be the price of the options purchased to hedge against the risk of price movement between the time of contracting and the time of delivery. Gerlach failed to inform him of the risk of unlimited liability for inverse crop year spreads in a program in which shortfalls are rolled into the next year. Had the defendants informed him of the actual risks associated with the HTA contracts, Mr. Lachmund asserts, he would not have entered into the contracts, and he would not have opened a trading account with ADMIS.
C. Holding of the District Court
The district court granted the defendants’ motions to dismiss Mr. Lachmund‘s RICO and CEA claims and his state law fraud claim against ADMIS.3 The district court first held that Mr. Lachmund had not stated a claim for fraud against ADMIS because the complaint did not adequately plead agency between Gerlach and ADMIS. The court noted that the complaint pleaded no facts indicating that ADMIS knew of Mr. Lachmund‘s grain contracts or that it cloaked Gerlach, A/C, or A/C 2000 with actual or apparent authority to act on ADMIS‘s behalf with respect to such contracts or any futures transactions. The court concluded that the allegation of a guarantee agreement between ADMIS and A/C was insufficient to plead agency, even under the liberal pleading requirements of the federal rules.
Finally, the district court held that Mr. Lachmund did not adequately plead a claim under the CEA because the HTA contracts were cash forward contracts that are exempt from regulation under the CEA. Because the contracts were between a farmer and a grain elevator and contemplated the physical transfer of actual grain, and because the complaint did not contain allegations that the parties’ intentions were purely speculative or any other indication that the contracts were “futures contracts” as opposed to cash forward contracts for the exchange of actual grain, the court held that the contracts were classic cash forward contracts exempt from the CEA.
II
DISCUSSION
A. Standard of Review
This case comes to us on appeal from the district court‘s decision to dismiss the complaint for failure to state a claim upon which relief can be granted. See
In reviewing the sufficiency of Mr. Lachmund‘s complaint, we must be mindful that the Federal Rules of Civil Procedure have established a heightened pleading requirement for allegations of fraud: “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.”
B. Agency and the State Law Fraud Claim
We turn now to the district court‘s decision to dismiss Mr. Lachmund‘s state law fraud claim against defendant ADMIS. The district court dismissed this claim on the ground that the complaint did not adequately plead agency between ADMIS and Gerlach, A/C, or A/C 2000. The first question we must address is whether a plaintiff alleging fraud by a principal through the actions of an agent must plead the agency relationship under the general standards set forth in
Agency may be established in a variety of ways. However, when the plaintiff relies upon the same circumstances to establish both the alleged fraud and the agency relationship of a defendant, the reasons for more particularized pleading that animate
Here, Mr. Lachmund submits that his complaint adequately pleads agency because it alleges the specific fact that A/C is a guaranteed IB of ADMIS. However, we agree with the CFTC that this status, by itself, is not sufficient to give an IB the status of an agent. See Violette v. First Options of Chicago, Inc., No. 95-R128, 1997 WL 71438, at *3 (CFTC Feb. 20, 1997). Mr. Lachmund also relies on the allegations of conspiracy in his complaint to allege an agency relationship between any of the other defendants and ADMIS. In this respect, he depends, of course, on the substantive allegations of fraud to establish the agency relationship. We must hold that such general allegations do not contain the requisite particularity necessary to show that ADMIS had vested actual or apparent authority in A/C, A/C 2000, or any other entity to act on its behalf with respect to the grain contracts.
We therefore affirm the district court‘s decision to dismiss the state law fraud claim against ADMIS.
C. RICO Claims
The district court dismissed Mr. Lachmund‘s RICO claims for violations of
1. 18 U.S.C. § 1962(c)
In Count I of his complaint, Mr. Lachmund alleges that ADMIS violated
2. 18 U.S.C. § 1962(d)
In Count II of his complaint, Mr. Lachmund alleges a conspiracy among ADMIS, A/C, and others in violation of
As set forth in the facts herein previously alleged, ADM . . . and A/C in violation of
18 U.S.C. § 1962(d) , entered into a conspiracy to commit mail and wire fraud as a means of participating in the affairs of . . . Demeter, the CBOT and Plaintiff‘s farming operation, through a pattern of racketeering activity as defined by18 U.S.C. § 1962(c) .
R.48 at 26-27. However, nothing in that paragraph nor any other portion of the complaint pleads any facts indicating an act of agreement among the alleged conspirators or what roles the various defendants would play in the conspiracy.11 The complaint also lacks any specific allegation that the defendants agreed to the commission (by someone) of two specific predicate acts in furtherance of the alleged conspiracy.12 Absent such particular pleadings, Mr. Lachmund‘s complaint contains nothing more than “conclusory, vague and general allegations of a conspiracy” that are insufficient to state a claim under
3. 18 U.S.C. § 1962(a)
Mr. Lachmund alleges in Count III of his complaint that ADMIS and A/C violated
D. Commodity Exchange Act Claim
1.
The CEA14 prohibits transactions involving contracts for the purchase or sale of a commodity for “future delivery” unless such transactions are conducted on or subject to the rules of a board of trade designated by the CFTC as a “contract market” for that commodity.
Because the [CEA] was aimed at manipulation, speculation, and other abuses that could arise from the trading in futures contracts and options, as distinguished from the commodity itself, Congress never purported to regulate “spot” transactions (transactions for the immediate sale and delivery of a commodity) or “cash forward” transactions (in which the commodity is presently sold but its delivery is, by agreement, delayed or deferred). . . . Transactions in the commodity itself which anticipate actual delivery did not present the same opportunities for speculation, manipulation, and outright wagering that trading in futures and options presented. From the beginning, the CEA thus regulated transactions involving the purchase or sale of a commodity “for future delivery” but excluded transactions involving “any sale of any cash commodity for deferred shipment or delivery.”
7 U.S.C. § 2 . The distinction, though semantically subtle, is what the trade refers to as the difference between “futures,” which generally are regulated, and “cash forwards” or “forwards,” which are not.
Id. at 970-71.
In contrast to cash forward contracts, futures contracts are mechanisms used to shift price risk and generally do not contemplate or result in the physical transfer of the underlying commodity:
[A futures contract] is generally understood to be an executory, mutually binding agreement providing for the future delivery of a commodity on a date certain where the grade, quantity, and price at the time of delivery are fixed. To facilitate the development of a liquid market in these transactions, these contracts are standardized and transferrable. Trading in futures seldom results in physical delivery of the subject commodity, since the obligations are often extinguished by offsetting transactions that produce a net profit or loss. The main purpose realized by entering into futures transactions is to transfer price risks from suppliers, processors and distributors (hedgers) to those more willing to take the risk (speculators). Since the prices of futures are contingent on the vagaries of both the production of the commodity and the economics of the marketplace, they are particularly susceptible to manipulation and excessive speculation.
Id. at 971 (footnote omitted).
Mr. Lachmund‘s claim for violations of the CEA is premised on the conclusion that the HTA contracts between him and Demeter are off-exchange futures contracts and not cash forward contracts exempt from the CEA. Although cash forward contracts and futures contracts are easily distinguishable in theory, it is frequently difficult in practice to tell whether a particular arrangement between two parties is a bona fide cash forward contract for the delivery of grain or whether it is a mechanism for price speculation on the futures market. Our task, therefore, is to establish a methodology for determining whether a particular contract is a cash forward contract exempt from regulation under the CEA or a futures contract subject to the requirements of the CEA.15 We then must apply that test to the facts of the case before us to determine whether Count IV of Mr. Lachmund‘s complaint states a claim for violation of the CEA.
2.
This list of factors characterizing cash forward contracts, however, is neither exhaustive nor definitive. Indeed, because the CEA regulates transactions, it is often necessary to look beyond the written contract. See Andersons, 166 F.3d at 319-20 (cautioning that “self-serving labels” that parties place on their contracts are not dispositive on the issue whether a contract is a cash forward contract or a futures contract); Co Petro, 680 F.2d at 581 (noting that “no bright-line definition or list of characterizing elements is determinative“). In order to gain the fullest understanding possible of the parties’ agreement and their purpose, we often must consider the course of dealings between the parties and the totality of the business relationship. See id. (“The transaction must be viewed as a whole with a critical eye toward its underlying purpose.“).
We note that the CFTC—the agency charged with administering the CEA—advocates such an approach that considers the totality of the circumstances. See Amicus Br. at 4 (“[A] court must look beyond the four corners of a written agreement and take into account all relevant circumstances in deciding the issue of the underlying nature of the transaction.“); see also CFTC Interpretive Statement, Characteristics Distinguishing Cash and Forward Contracts and “Trade” Options, 50 Fed. Reg. 39,656, 39,657 (1985) (noting that both courts and the Commission “have required that the contract‘s terms and the parties’ practice under the contract” indicate that both the buyer and seller deal in and contemplate future delivery of the actual commodity (emphasis added)); see also id. at 39,658 (noting that “the courts and the Commission have examined whether the parties to the contracts are commercial entities that have the capacity to make or take delivery and whether delivery, in fact, routinely occurs under such contracts” (emphasis added)). Other courts have adopted a similar approach, looking not only at the characteristics of the contracts themselves but also at the history of dealings between the parties. See, e.g., Andersons, 166 F.3d at 320 (including as a consideration whether “delivery and payment routinely occurred between the parties in past dealings“); Co Petro, 680 F.2d at 581; Farmers Co-op. v. Lambert, No. LACV305569, 1999 WL 177473, at *12 (Iowa Dist. Ct. 1999) (“Past actual delivery patterns and course of dealing between the parties are relevant . . . .“).
3.
With these principles in mind, we turn now to the facts in the case before us. We begin by examining the terms of the HTA contracts between Mr. Lachmund and Demeter. First, the contracts, on their faces, clearly contemplate the actual delivery of grain. Several terms, which appear in each HTA contract, indicate that the purpose of each agreement is the physical transfer of actual grain (or soybeans): Term 4 governs the circumstance in which the grain delivered is of an improper grade or is out of condition or unmerchantable; term 5 governs the time of shipment; term 6 allows the buyer to route the grain to an alternate destination if it is unable to receive the grain at the time of delivery; term 7 allows the seller to fulfill the contract requirements with not only grain from his own production but also grain from a different source; term 9 requires that the grain delivered conform to Pure Food and Drug regulations; term 10 requires the seller to warrant that the grain is free and clear of all liens; and the payment term provides that payment will be made “upon delivery and pricing.” These terms clearly contemplate actual delivery, rather than mere speculation on price movements in the market for grain.
Third, the contracts provide a definite time of delivery.17 For example, the May 1995 corn contract provided for delivery in October 1995; the February 1996 corn contract provided for delivery in October 1996. The soybean contracts similarly provided for specific times of delivery. The terms of the contracts also require actual delivery and do not allow delivery obligations to be rolled to a future date, let alone rolled indefinitely into the future. Term 5 provides:
It is expressly understood that the grain herein mentioned is to be shipped as specified and be bought in or canceled only at the option of the buyer. The time of shipment can be extended by the buyer only. When grain is not shipped within specified time, this contract remains in force until the grain is shipped, or the contract canceled by the buyer.
Although a section labeled “remarks” in each contract states that “if buyer and seller mutually agree, they may continue to amend this contract until” a specific date subsequent to the delivery date, no term explicitly allows rolling of any kind.
Finally, the contracts are individualized with respect to such terms as the quantity of grain, the grade and type of grain, the time of delivery, the point of delivery, and which weights and grades will govern.
The HTA contracts, on their faces, contain all of the features characteristic of a cash forward contract for the physical transfer of actual grain. The contracts’ terms contemplate actual delivery of the grain and reflect the parties’ intention and purpose to buy and sell grain rather than to engage in price speculation on the futures market.
The contract terms, however, do not end our inquiry. Mr. Lachmund alleges that the parties engaged in a course of dealing not reflected in the written contracts that indicates a purpose other than the purchase and sale of actual grain. Mr. Lachmund‘s complaint alleges that the contracts’ speculative nature is apparent from the parties’ course of dealings outside of the contracts’ written terms: The farmers could engage in unlimited rolling of their delivery obligations, and the contracts could be settled by a cash buy-out at any time.
As to whether parties engaged in a course of dealing that allowed unlimited and indefinite rolling of delivery obligations, Mr. Lachmund‘s own pleadings contradict this allegation. Although he avers that he and Demeter agreed to several rolls outside of the original terms of the contract,18 he also alleges that Demeter refused, in May or June of 1996, to allow continued rolling across crop years and demanded settlement of the contracts. It is thus clear that the parties did not engage in a course of dealing consisting of unlimited and indefinite rolling of delivery obligations to the point where it can be said that no actual delivery obligation existed.
In sum, Mr. Lachmund‘s pleadings concerning the parties’ course of dealing are insufficient to overcome the written contracts’ unambiguous character as cash forward contracts for the transfer of grain. We hold, therefore, that the HTA contracts at issue in this case are cash forward contracts exempt from the purview of the CEA and that, accordingly, Count IV of Mr. Lachmund‘s complaint does not state a claim for violations of the CEA.
Conclusion
For the foregoing reasons, the judgment of the district court is affirmed.
AFFIRMED
Notes
(a) Claims for Relief. A pleading which sets forth a claim for relief, whether an original claim, counterclaim, cross-claim, or third-party claim, shall contain (1) a short and plain statement of the grounds upon which the court‘s jurisdiction depends, unless the court already has jurisdiction and the claim needs no new grounds of jurisdiction to support it, (2) a short and plain statement of the claim showing that the pleader is entitled to relief, and (3) a demand for judgment for the relief the pleader seeks. Relief in the alternative or of several different types may be demanded.
Fed. R. Civ. P. 8(a).(b) Fraud, Mistake, Condition of the Mind. In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.
Fed. R. Civ. P. 9(b).It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise‘s affairs through a pattern of racketeering activity or collection of unlawful debt.
ADM[IS] sent confirmations, monthly statements and other commodity futures contracts purchased through the mail and sold on the CBOT to offset the various HTA and other hybrid grain contracts solicited by . . . A/C . . . and Demeter. ADM[IS] through its co-conspirator agents used the mails to entice farmers other than Plaintiff to attend various “presentations” intended to lure them into this fraudulent scheme.
R.48 at 24-25.Paragraph 61 of the amended complaint alleges:
ADM[IS] made use of interstate telephone transmission lines to effectuate the commodity futures contracts purchased and sold on the CBOT to offset the various hybrid grain contracts solicited by . . . A/C . . . and Demeter. In addition, ADM[IS] caused the use of interstate telephone lines by A/C and Demeter to solicit hedge-to-arrive and other hybrid grain contracts with Plaintiff.
R.48 at 25.It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt in which such person has participated as a principal within the meaning of section 2, title 18, United States Code, to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.