United States Court of Appeals,
Fifth Circuit.
No. 95-60447.
Pat TATUM, as trustee for Oxford Insurance Agency, Inc. Profit
Sharing Plan and Trust; Waller Funeral Home; Patricia M. Miller;
Winn Walcott, M.D.; Bernie L. Smith, Jr.; Lucille J. Smith,
Plaintiffs-Appellants,
v.
LEGG MASON WOOD WALKER, INC., Legg Mason Howard Weil Division,
formerly Howard, Weil, Labouisse, Friedrichs, Inc.; J.C. Bradford
and Company; Howard, Weil, Labouisse, Friedrichs, Inc.,
Defendants-Appellees,
and
Institutional Financial Services, Inc., doing business as Bernie
L. Smith & Associates; Bernie L. Smith, Defendants.
May 20, 1996.
Appeal from the United States District Court for the Northern
District of Mississippi.
Before WISDOM, EMILIO M. GARZA and PARKER, Circuit Judges.
PER CURIAM:
Defendant Bernie L. Smith III ("Smith") ran a financial
advising and planning business. Plaintiffs Pat Tatum, Waller
Funeral Home, Patricia M. Miller, Dr. Winn Walcott, and Smith's
parents—Bernie L. Smith, Jr., and Lucille J. Smith—invested funds
with Smith's business. Smith originally invested these funds in
stock and mutual funds. Then he began speculating in the
commodities market. Smith became affiliated with Defendant Howard,
Weil, Labouisse, Friedrichs, Inc., ("Howard Weil") a commodities
brokerage firm. When his commodities accounts performed poorly,
Smith attempted to cover his losses by liquidating Plaintiffs'
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stock and mutual fund investments without Plaintiffs' knowledge or
permission. Smith later moved his commodities accounts to
Defendant J.C. Bradford & Company ("J.C. Bradford").1 Smith
continued to raid Plaintiffs' funds in order to cover his losses.
Smith was eventually convicted of five counts of mail fraud and was
sentenced to forty-two months' imprisonment. Plaintiffs filed suit
against Smith, Smith's business, Howard Weil, and J.C. Bradford,
alleging federal claims under the Commodities Exchange Act, the
Securities Exchange Act, and the civil RICO Act. Plaintiffs also
alleged state law claims under the Mississippi Securities Act and
the common law of negligence and respondeat superior. Howard Weil
and J.C. Bradford filed motions for summary judgment, which the
district court granted. Upon motion of the Plaintiffs, the
district court certified its summary judgment order as a final
judgment, pursuant to Rule 54(b) of the Federal Rules of Civil
Procedure. Plaintiffs timely filed their notice of appeal,
challenging only the dismissal of their Commodities Exchange Act
claims for strict liability, their Commodities Exchange Act claims
for "aiding and abetting" liability, and their Mississippi common
law claims for negligence and respondeat superior. We review a
district court's grant of summary judgment de novo, applying the
same standards as the district court. Lindsey v. Sears Roebuck and
Co., 16 F.3d 616, 617-18 (5th Cir.1994).
1
The Commodities Futures Trading Commission ("CFTC")
regulates the commodity markets. Both Howard Weil and J.C.
Bradford are Futures Commission Merchants, and are thus subject
to the provisions of the Commodities Exchange Act and the
regulations of the CFTC.
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Plaintiffs first assert that the district court erred in
dismissing their claims under the Commodities Exchange Act. A
Futures Commission Merchant is strictly liable for the Commodities
Exchange Act violations of its brokers if such violations occur
within the scope of employment. 7 U.S.C. § 4; Stewart v. GNP
Commodities, Inc., 851 F.Supp. 283, 285 (N.D.Ill.1994), aff'd in
part and vacated in part sub nom., Cunningham v. Waters Tan & Co.,
65 F.3d 1351 (7th Cir.1995). A plaintiff establishes a commodities
violation for fraud by a commodities broker only if such fraud is
perpetrated "in connection with" an order for the sale of a
commodity on behalf of the plaintiff. 7 U.S.C. § 6b(a); Kearney
v. Prudential-Bache Securities, Inc., 701 F.Supp. 416, 421
(S.D.N.Y.1988).2 Plaintiffs in this case never intended to
purchase commodities. Smith liquidated their securities
investments to cover his losses in the commodities market without
Plaintiffs' knowledge or permission. Plaintiffs were never parties
to an order for the sale of a commodity, and thus they do not
satisfy the "in connection with" requirement of § 6b(a). See
Crummere v. Smith Barney, Harris Upham & Co., Inc., 624 F.Supp.
751, 755 (S.D.N.Y.1985) (holding that plaintiff had not established
the "in connection with" requirement under § 10b where the
misrepresentations alleged were unrelated to the actual securities
traded). Smith's actions may give rise to a common law claim for
2
In interpreting the "in connection with" requirement of the
Commodities Exchange Act, courts generally look to
interpretations of the "in connection with" requirement of §
10(b) of the Securities Exchange Act. Kearney, 701 F.Supp. at
424.
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conversion, but Plaintiffs do not thereby state a claim for relief
under the Commodities Exchange Act.3 The district court did not
err in granting summary judgment for Howard Weil and J.C. Bradford
on Plaintiffs' claims under the Commodities Exchange Act.
Plaintiffs next assert that the district court erred in
dismissing their claims against Howard Weil and J.C. Bradford under
the Mississippi common law doctrines of respondeat superior and
negligence. Under Mississippi law, a broker-dealer may be held
vicariously liable under the doctrine of respondeat superior for
the tortious acts of a representative who converts investors' funds
for his own use only if the representative was acting within the
scope of his representative status. FSC Securities Corp. v.
McCormack, 630 So.2d 979, 985-86 (Miss.1994). Plaintiffs have
presented no evidence to establish that Smith was acting within the
scope of his representative status when he converted their
securities investments. As indicated above, Smith converted
Plaintiffs' investments without their knowledge or permission.
Smith never held himself out to Plaintiffs as a representative of
Howard Weil or J.C. Bradford. Nor is there any evidence that
Plaintiffs thought that Smith was acting as a representative of
3
In order to recover damages from a secondary party in an
action for "aiding and abetting" liability under the Commodities
Exchange Act, a plaintiff must first prove that a primary party
committed a commodities violation. See Abbott v. Equity Group,
Inc., 2 F.3d 613, 621 (5th Cir.1993) (stating elements of cause
of action for "aiding and abetting" liability under the
Securities Exchange Act). Because we hold that Plaintiffs have
not stated a claim against Smith under the Commodities Exchange
Act, we must also necessarily hold that Plaintiffs have not
stated a claim against Howard Weil and J.C. Bradford for "aiding
and abetting" liability.
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Howard Weil or J.C. Bradford in connection with their investments.
Accordingly, Plaintiffs have not presented a genuine issue of
disputed fact with regard to their common law claims against Howard
Weil and J.C. Bradford under the doctrine of respondeat superior.
Under Mississippi law, a broker-dealer operating a
non-discretionary account has no duty to determine the suitability
of a customer's trades or to prevent the customer from losing
money. Puckett v. Rufenacht, Bromagen & Hertz, Inc., 587 So.2d
273, 279 (Miss.1991). Smith's accounts with both Howard Weil and
with J.C. Bradford were non-discretionary accounts. Since Howard
Weil and J.C. Bradford owed no duty to Smith, they necessarily owed
no duty to Plaintiffs. Accordingly, Plaintiffs do not state a
cause of action against Howard Weil or J.C. Bradford for
negligence. Accordingly, the district court did not err in
granting summary judgment for Howard Weil and J.C. Bradford on
Plaintiffs' claims brought under Mississippi common law.
Based on the foregoing, we AFFIRM.
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