## Facts

- Investors placed funds into a commodity trading pool run by Chuck Kohli, N. Swamy Ramchandran, and related “Sigma” entities.
- Sigma pooled investor funds and traded commodity futures and options through accounts carried and cleared at multiple futures commission merchants (FCMs).
- The FCMs executed trades and sent confirmations and account statements to Sigma entities rather than to the individual pool participants.
- The trading program allegedly sustained significant losses; investor withdrawal requests were allegedly paid with later investors’ funds, creating a Ponzi-like appearance of profitability.
- Kohli later pleaded guilty to federal criminal charges connected to the scheme, and Ramchandran filed for bankruptcy, limiting investors’ recovery from the primary actors.
- Investors sued the FCMs under the Commodity Exchange Act (CEA), asserting (i) primary liability based on an agency theory linking investors to the FCMs through Sigma, and (ii) secondary liability for willfully aiding and abetting Sigma’s fraud.

## Issues

1. Whether investors in a commodity pool may state a primary CEA fraud claim against FCMs under 7 U.S.C. § 6b by alleging that the pool operators acted as the investors’ agents, thereby treating investors as the FCMs’ “customers.”
2. Whether the complaint stated a CEA aiding-and-abetting claim under 7 U.S.C. § 25(a) by plausibly alleging the FCMs’ actual knowledge of the primary violation and intentional, substantial assistance.
3. What pleading and relationship requirements govern private CEA suits against FCMs based on misconduct by commodity pool operators.

## Decision

- The Third Circuit affirmed dismissal under Rule 12(b)(6).
- The court held that the investors failed to plead a direct customer relationship with the FCMs, and the proposed agency theory did not convert pool participants into FCM customers for § 6b purposes.
- The court held that the aiding-and-abetting allegations did not plausibly show the FCMs’ actual knowledge of Sigma’s fraud or intent to further it; allegations of suspicious circumstances and failures to investigate suggested, at most, negligence.

## Legal Principles

- For certain private CEA claims, liability is tied to a direct broker-customer relationship; investors in a pool are ordinarily customers of the pool operator, not customers of the FCM carrying the pool’s accounts.
- An agency theory does not, without more, impute the pool operator’s customer status to pool participants to create primary CEA liability against an FCM.
- CEA aiding-and-abetting liability requires a primary violation, the defendant’s actual knowledge of that violation, and substantial assistance given with intent to further the wrongdoing; negligence or failure to detect fraud is insufficient.
- Allegations of “red flags,” unusual account activity, or inadequate monitoring do not state aiding-and-abetting liability absent concrete facts supporting knowledge and purposeful assistance.

## Conclusion

The Third Circuit limited FCM exposure for commodity pool fraud, holding that pool participants could not sue FCMs as primary violators without a direct customer relationship and could not proceed on aiding-and-abetting theories without plausible allegations of actual knowledge and intentional assistance.


Nicholas v. Saul Stone & Co. LLC, 224 F.3d 179 (3d Cir. 2000)