## Facts

- Citrus Associates of the New York Cotton Exchange, Inc. operated a contract market on which frozen concentrated orange juice (FCOJ) futures were traded.
- Gerald Grossman, a commodities trading advisor, and other plaintiffs traded FCOJ futures and alleged substantial losses during a December 12–17, 1985 price run-up.
- Plaintiffs held short FCOJ positions and alleged that prices rose sharply on heavy volume due to rumors and forecasts predicting an imminent Florida freeze.
- Plaintiffs alleged the freeze did not occur and that the information driving the rally was false or misleading.
- Plaintiffs alleged the Exchange knew or should have known the market was reacting to unreliable or manipulated information but failed to halt trading or impose additional restraints beyond existing daily price limits.
- Plaintiffs sued under the Commodity Exchange Act (CEA) and related duty theories, asserting the Exchange acted in bad faith in its regulatory and supervisory role.
- The Exchange moved to dismiss under Rules 12(b)(6) and 9(b) and sought Rule 11 sanctions.

## Issues

1. Whether a commodity exchange may be liable under the CEA for failing to halt or further limit futures trading during unusual volatility allegedly fueled by false weather rumors.
2. Whether the complaint plausibly alleged the Exchange acted in “bad faith” (or with willful disregard of statutory/rule duties) in making regulatory judgments about trading halts or limits.
3. Whether fraud-adjacent allegations of manipulation and false rumors were pleaded with the particularity required by Rule 9(b).
4. Whether plaintiffs’ counsel’s filing warranted Rule 11 sanctions.

## Decision

- The court granted the Exchange’s motion to dismiss for failure to state a claim.
- The court held the complaint did not allege facts supporting a plausible inference of bad faith or willful disregard by the Exchange in deciding not to halt or further restrict trading.
- The court found Rule 9(b) was not satisfied to the extent plaintiffs relied on manipulation or false-rumor theories, because the complaint lacked specifics as to speakers, statements, timing, and the Exchange’s direct involvement or knowing tolerance.
- The court denied the Exchange’s motion for Rule 11 sanctions, concluding the claims were not so baseless as to justify sanctions.

## Legal Principles

- A contract market’s liability under the CEA for actions taken in a regulatory or supervisory capacity generally requires well-pleaded bad faith or willful disregard of statutory or rule-based duties; negligence or poor judgment is insufficient.
- Decisions about suspending trading or imposing additional limits are regulatory judgments, and a plaintiff must allege concrete facts indicating improper motive, conscious disregard, or comparable intentional misconduct to overcome dismissal.
- When claims rest on fraud-like allegations (e.g., manipulation via false rumors), Rule 9(b) requires particularized allegations identifying the specific misrepresentations and connecting the defendant to them.

## Conclusion

The court dismissed CEA-based claims arising from an FCOJ futures price spike because plaintiffs alleged, at most, inadequate regulatory responses to volatility rather than facts showing the Exchange acted in bad faith or with willful disregard of its duties; it nonetheless declined to impose Rule 11 sanctions.


Grossman v. Citrus Ass’n of the N.Y. Cotton Exch., Inc., 742 F. Supp. 843 (S.D.N.Y. 1990)