## Facts

- Ping He (Hai Nam) Co. Ltd., a Chinese corporation, opened a commodity futures trading account in 1993 with NonFerrous Metals (U.S.A.) Inc., a New York futures commission merchant.
- To secure the account, Ping He provided a $350,000 cash deposit and caused Agricultural Bank of China to issue two letters of credit totaling $800,000 in NFM’s favor.
- Ping He alleged NFM fraudulently induced it to open the account, executed trades that Ping He did not authorize, concealed the account’s status, misappropriated Ping He’s funds, and later generated false documents (including an invoice) to obtain payment.
- NFM asserted the trading was authorized and that Ping He owed more than $650,000 in account losses.
- NFM sought to draw on the letters of credit; Bank of China refused to honor the draws, citing fraudulent and/or nonconforming documents.
- Two federal actions in the Southern District of New York were consolidated for decision: Ping He sued NFM under the Commodity Exchange Act (CEA) and common law; NFM sued Bank of China for refusing to honor the letters of credit.
- Ping He moved for summary judgment to recover the $350,000 deposit; Bank of China moved for summary judgment to uphold dishonor; Ping He and Bank of China jointly sought Rule 11 sanctions against NFM and its counsel.

## Issues

1. Whether the record established, as a matter of law, that NFM violated the CEA and related duties through fraudulent inducement, unauthorized trading, misappropriation of customer funds, and falsified documents, entitling Ping He to summary judgment and return of its deposit.
2. Whether Bank of China lawfully dishonored NFM’s letter-of-credit presentations because the documents were fraudulent or materially nonconforming under the fraud exception to letter-of-credit independence.
3. Whether Rule 11 sanctions were warranted against NFM’s counsel for maintaining positions and filings lacking evidentiary support.

## Decision

- The court granted Ping He’s motion for summary judgment against NFM.
- The court granted Bank of China’s motion for summary judgment against NFM, upholding the bank’s refusal to honor the letters of credit.
- The court imposed Rule 11 sanctions on NFM’s counsel.

## Legal Principles

- Under the CEA and implementing regulations, a futures commission merchant may be liable for fraud and unauthorized trading, including executing trades without customer authorization, misrepresenting account status, and misusing customer funds.
- Summary judgment is appropriate when no genuine dispute of material fact exists and the nonmovant fails to produce competent evidence supporting its version of events.
- Letter-of-credit law generally requires honor upon facially compliant documents (independence principle), but an issuing bank may dishonor when the beneficiary’s presentation is fraudulent or materially nonconforming (fraud exception).
- Rule 11 permits sanctions when counsel submits papers without a reasonable factual inquiry or maintains claims or defenses lacking evidentiary support.

## Conclusion

The court resolved the consolidated disputes on summary judgment by finding that NFM’s conduct toward Ping He constituted CEA violations and related wrongdoing warranting return of the customer’s deposit, that Bank of China properly dishonored NFM’s letter-of-credit draws due to fraudulent or nonconforming presentations, and that NFM’s counsel’s litigation conduct justified Rule 11 sanctions.


Ping He (Hai Nam) Co. Ltd. v. NonFerrous Metals (U.S.A.) Inc., 22 F. Supp. 2d 94 (S.D.N.Y. 1998)