Evanston Bank v. Conticommodity Servs. - 623 F. Supp. 1014 (N.D. Ill. 1985)

Rule:

Churning is a particular species of unauthorized trading which provides a separate and additional claim when high commission charges stem from an amount of trading that exceeds what is appropriate for the client's investment goals. Such trading breaches a broker's fiduciary duty. Churning was part of the "contemporary legal context" in 1974 and is therefore included in the implied right of action for fraud, misrepresentation, or deceit under 7 U.S.C.S. § 6b. The elements of an action for churning a commodities account are the same as in securities transactions. While there is no single test or formula, generally a plaintiff must show (1) broker control of the account, and (2) excessive trading of the account which was (3) intentional or willful, i.e., for the purpose of generating unnecessary commissions or at least with reckless disregard for the client's interest.

Facts:

In late May of 1982 the board of directors of the Evanston Bank discovered that the bank had lost over $1,200,000 in about one year of trading in commodities, while paying over $270,000 in commissions. Evanston Bank brought an action for commodities fraud against ContiCommodity Services, Inc. (Conti), the futures commission merchant through which it traded in commodity futures, and Ted Thomas, the broker who handled its account. Evanston Bank alleged violations of the Commodity Exchange Act (CEA), 7 U.S.C. § 1 et seq., specifically that Conti and Thomas used the bank's account for unauthorized trading and "churned" it (traded it excessively) to generate unnecessary commissions. Conti, however moved for summary judgment in its favor.

Issue:

Should Conti’s motion for summary judgment on the issues of commodities fraud which included violations under the CEA, unauthorized trading and churning, be granted?

Answer:

No

Conclusion:

The court found that genuine issues of material fact were present that prevented summary judgment on the issues of commodities fraud which included violations under the CEA, unauthorized trading and churning. Similarly the court found triable issues of fact on the RICO and wire fraud claims. For similar reasons the court found issues to exists under the state fraudulent misrepresentation and deceptive business practices claims. The court found that the commissions merchant and broker could only avoid trial on the matters if they were able to prove that the bank authorized the alleged activities. The court examined the available theories of agency including express and implied authority of agents. The court found issues of fact as to the agency principles as well, including whether or not knowledge existed or could have been implied, and whether there was ratification, either express or implied. Finally the court found that the allegations of negligence similarly raised triable issues which prevented summary judgment. The court did grant summary judgment on the mail fraud claims because the bank presented no supporting evidence.