The Supreme Court of the United States has agreed to review Klein & Co. Futures Inc.’s lawsuit against the New York Board of Trade (Nybot) and its subsidiaries, which was dismissed by the New York Second Circuit Court of Appeals, upholding a lower court dismissal.
The lawsuit stemmed from a scandal involving the manipulation of settlement prices on options in the Pacific Stock Exchange Technology Index by Norman Eisler, who at the time was chairman of the New York Futures Exchange (NYFE), a subsidiary of Nybot. This issue came to a head in the spring of 2000 as Eisler failed to meet a margin call, leading to huge losses by Klein, Eisler’s clearing firm, forcing it out of business.
The lawsuit charged Nybot with failing in bad faith to enforce rules that protect participants in futures markets from manipulation and fraud. A similar lawsuit by a group of traders on NYFE was dismissed and a lawsuit by hedge fund manager Jim Moore was dropped after the Commodity Futures Trading Commission (CFTC) would not divulge information to the court according to Moore. The CFTC found in a 2004 order that Eisler had manipulated option settlement prices in the index; it also found in a 2001 order that the NYFE and Nybot violated the Commodity Exchange Act by not following its own market oversight rules.
Klein is being supported by the Futures Industry Association (FIA), which filed an Amicus brief in support of the petitioner. The FIA states in the brief that, “The second circuit clearly erred, and destabilized the Nation’s Futures Industry by stripping futures commission merchants of their statutory cause of action against registered entities.”
Klein’s counsel, Drew Days III, says, “Our clients are confident that when their claims are heard they will prevail.” Oral arguments are tentatively scheduled for early October. If Klein prevails the case most likely will revert to the original trial court.
