Kelley v. Carr

Founded in mid-1976, Lloyd, Carr & Company (Lloyd, Carr) (defendant) engaged in the business of selling options on commodity futures contracts. These options gave investors the right to purchase futures contracts at specified prices within specified time frames. The options were inherently risky. There existed a significant possibility of total loss in the event that the commodity prices did not increase substantially. The increase in prices also had to surpass the costs of the broker premiums in order for the trades to avoid a total loss. Lloyd, Carr hired salespersons who were typically untrained in the industry. The salespersons were encouraged to use high-pressure tactics to sell options to individual investors through cold calling. Through the implementation of sales quotas and the offering of commissions, salespersons were encouraged to make sales regardless of any misrepresentations required to do so. Salespersons were not given significant training in the commodities industry. Training focused mainly on sales tactics. In a typical transaction, a salesperson would first qualify the prospective customer by determining his finances and level of interest. Sales calls then emphasized potentially enormous profits and minimal risk, often through misrepresentations. Written literature was mailed to prospective customers that described Lloyd, Carr as an established firm with an impeccable reputation, well-known expertise, and a high standard of ethics, despite the firm being only six months old, the lack of salesperson training, and the utilization of high-pressure sales tactics. When sales were made, Lloyd, Carr charged mark-up fees vastly in excess of standard industry commissions. Lloyd, Carr did provide customers with disclosures regarding the risks of options investing, intended to comply with Commodity Futures Trading Commission (CFTC) Rule 32.5. The disclosures, however, did not provide information regarding the fees and commissions and emphasized profits while downplaying risks. The attorney general of Michigan (Michigan) (plaintiff) sued Lloyd, Carr in Michigan state court for violations of Michigan law and the antifraud provisions of the Commodity Exchange Act (CEA). Lloyd, Carr removed the case to federal court, and the CFTC intervened as a plaintiff. Michigan then moved for a preliminary injunction to enjoin Lloyd, Carr from further sales activity.