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Katara v. D.E. Jones Commodities Inc.

decided: December 14, 1987.

SHIV B. KATARA, AS ADMINISTRATOR OF MANISHA SPORTSWEAR, INC., DEFINED PENSION TRUST, PLAINTIFF-APPELLEE,
v.
D.E. JONES COMMODITIES, INC., AND ALPHA O. NICKELBERRY, DEFENDANTS-APPELLANTS



Appeal from a judgment for plaintiff after a jury trial in a diversity action bsed upon common law fraud and breach of contract, and from the denial of defendants' motion for judgment n.o.v. or for a new trial.

Kaufman, Meskill and Mahoney, Circuit Judges.

Author: Mahoney

MAHONEY, Circuit Judge.

This appeal is taken from a judgment entered upon a jury verdict in the United States District Court for the Southern District of New York, Kevin T. Duffy, Judge, awarding $296,195 in compensatory damages and $150,000 in punitive damages to plaintiff in a diversity case based upon common law fraud and breach of contract and dismissing defendants' counterclaims and third party claims against plaintiff, and from order denying defendants' motion for judgment notwithstanding the verdict or for a new trial. We affirm in part, reverse in part, and reverse and remand in part.

Background

On May 11, 1983, Shiv B. Katara came to the offices of D.E. Jones Commodities, Inc. ("Jones") to discuss opening an account. Katara apparently had been heavily recruited by Jones personnel. He returned the next day and opened an account for the Manisha Sportswear, Inc. Defined Pension Trust (the "Trust"), of which he was administrator.

Katara opened the account to allow him to trade Standard & Poor's 500 Index Future Contracts. Each such contract (an "S&P") is a "bet" on the future on the Standard & Poor's 500 composite stock price index, which is based upon the market value of the common stock of 500 different companies. Chicago Mercantile Exchange, S&P 500, at 4 (1986). S&P's are traded on the Chicago Mercantile Exchange (the "Exchange"). In theory, one who sells an S&P undertakes to deliver, and one who buys to accept delivery of, a portfolio of stocks represented by the Standard & Poor's 500 Index at a specified date for a specified price. Delivery, however, takes the form of cash settlement of the difference between the original transaction price and the final price of the index at the termination of the contract. A "long" position holder, who had bought an S&P, profits from a rising futures price and contract value. Id. at 6. The value of an S&P is determined by multiplying the futures price by $500 (e.g., a contract with a price of 185.50 would have a value of $492,750). Id. at 5. A trader can use a position in S&P's to hedge his position in the stock market or for speculation. See N. Dunnan, Dun & Bradstreet's Guide to Your Investments: 1986, at 183, 186-88 (1986); The Almanac of Investments 423, 425 (A. Crittendan ed. 1984).

Persons investing in S&P's are required to have cash or equivalent "margin" in their accounts as a guarantee of fulfillment of the contract. The initial margin requirement for each S&P is $6,000, a minimum amount set by the Exchange. Thereafter, if the market moves in the directions unfavorable to the investor's position, so that his equity falls to or below $2,500 (as a result, for example, of a decline in the market reducing the value of the "long" position of a purchaser of an S&P),*fn1 a level denominated as maintenance margin, a deposit of cash or its equivalent must be made to restore the position to the level of original margin, $6,000. The process of notifying the customer to make the required additional deposit is a "margin call."

Under Jones' practice at all relevant times, if the value of an account fell below the maintenance margin, the customer was required to increase the value of the account to the initial margin. Katara claims, however, that he was told by his account manager, Alpha O. Nickelberry, that he would not have to meet initial margin requirements if his account fell below the maintenance margin.

When Katara opened his account with Jones, he signed a Customer's Agreement on May 12, 1983 which provided that margins must be maintained, authorized Jones to liquidate the customer's positions under stipulated circumstances, and gave notice of the risk involved in commodities trading. The agreement, signed by Katara for the Trust, provided in relevant part ("you" or "your" refers to Jones; "the undersigned" refers to Katara):

1. The undersigned acknowledges that commodity futures trading is speculative, involves a higher degree of risk and is suitable only for persons who can assume the risk of substantial losses. The undersigned understands that because of the low margin normally required, commodity futures trading may result in losses substantially in excess of funds on deposit.

6. The undersigned will at times maintain and keep its accounts fully margined (as to both original and maintenance margin) in accordance with your requirements as from time to time are in effect. Such margin requirements established by you, in your sole and absolute discretion, amy exceed the margin set by Exchange or Cleaning House.

7. Whenever the undersigned has failed to make any payment to you when due, or has failed to maintain and keep its accounts with ou fully margined, or at such other time as you, in you sole and complete discretion, deem it necessary or advisable for your protection, you are authorized in you sole discretion to cover any short positions or liquidate any longer position the undersigned may have with ou through purchase or sale on any Exchange, and/or to sell as best you deem appropriate any collateral deposited by the undersigned with you, whether or not the undersigned received notice of you intention to effect either or both of the foregoing. . . .

20. This Agreement is not subject to oral modifications and the execution hereof revokes any and all other agreements made with ou by the undersigned.

Thereafter, on September 12, 1983, Katara signed a Risk Disclosure Statement which provided in relevant part:

The risk of loss in trading commodity futures contracts can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade, you should be aware of the following:

(1) You may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish to maintain a position in the commodity futures market. If the market moves against you position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain you position. If you do not provide the required funds within the prescribed time, you position may be liquidated at a loss, and you will be liable for any resulting deficit in your account.

(2) Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market makes a "limit move."

(3) Placing contingent orders such as "stop loss" or "stop limit" order [sic] will not necessarily limit you losses to the intended amounts, since market conditions ...


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