Klein & Co. Futures, Inc. v. Board of Trade of the City of New York

Klein & Co. Futures Inc. (Klein) (plaintiff) operated as a futures commission merchant (FCM) on the Board of Trade of the City of New York (Board of Trade) (defendant) and served as a clearing member of the New York Clearing Corporation (defendant). One of Klein’s customers, First West Trading Inc. (First West), was controlled by Norman Eisler (defendant). Through his position as a member of the relevant committee on the New York Futures Exchange (NYFE), Eisler allegedly manipulated the price of derivatives relating to an index of stocks on the Pacific Stock Exchange, known as P-Tech contracts. Eisler also traded in P-Tech contracts through First West’s account with Klein. The price manipulation resulted in Klein miscalculating First West’s margin requirements. Meanwhile, the Board of Trade received complaints about irregularities in P-Tech settlement prices but failed to take action. Ultimately, when Eisler was unable to post the required margin, which was based on incorrect settlement prices, Klein asked the NYFE to halt trading in P-Tech contracts, but the NYFE failed to do so. To cover the margin requirements, Klein was required to charge against its net capital, which caused it to fall below the capitalization amounts required for members of the New York Clearing Corporation and the New York Mercantile Exchange. Klein thus collapsed. Klein then brought suit in federal district court against the Board of Trade, the New York Clearing Commission, Eisler, and others, alleging violation of various provisions of the Commodity Exchange Act (CEA). The Board of Trade, the New York Clearing Corporation, and Eisler moved to dismiss on the basis that Klein lacked standing under the CEA because Klein did not purchase or sell derivatives, but instead merely operated as an FCM. The federal district court granted the motion to dismiss, reasoning that Klein’s damages were not caused by trading activities on the contract market. Klein appealed, arguing that it had standing under the CEA on the ground that its status as an FCM and clearing member caused it to be a forced purchaser and seller of securities because Klein had to guarantee its customers’ trades.