Rosee v. Board of Trade (43 Ill. App. 3d 203, 1976)

Mr. PRESIDING JUSTICE GOLDBERG

delivered the opinion of the court:

After a lengthy and complicated hearing before the circuit court without a jury, Bernhard Rosee (plaintiff) recovered a judgment for actual damages of *339,139.42 against Baggot, Morrison and Haywood, jointly and severally; and judgments for exemplary damages of *150,000 each against Morrison and Haywood. At the close of plaintiff’s case, the trial court entered a judgment in favor of the Board of Trade of the City of Chicago, an Illinois corporation (Board), six individuals constituting members of the Committee of Arbitration of the Board and a number of other individuals who were officials of said Board. Defendants Baggot, Morrison and Haywood filed separate notices of appeal. Plaintiff appealed from the judgment in favor of the Board and the various individuals associated therewith. With leave of court, defendant Haywood has adopted the briefs of Baggot and Morrison and has also filed a brief of his own. We will consider all of these appeals in this opinion.

In this court, defendant Morrison urges that the defendants did not receive a fair trial so that the judgment against him must be reversed; the trial court misapprehended the meaning of margins and the settlement process as applicable to Board of Trade transactions; the judgment is not justified by the evidence; an award made by the Committee of Arbitration of the Board is final in the absence of fraud; plaintiff failed to sustain his burden of proving fraud and that the trial court erred in awarding damages to plaintiff upon a remote, conjectural and speculative basis. In this last contention, Morrison deals with the status of Rosee’s account with Baggot and Morrison (B & M): the alleged loss of profit by plaintiff; the value of plaintiff’s Board of Trade membership and the allowance of punitive damages.

In his separate brief, Baggot urges that plaintiff failed to prove by clear and convincing evidence that Baggot conspired to remove plaintiff from membership on the Board of Trade or otherwise engaged in fraudulent conduct resulting in damage to plaintiff. In this section of his argument, Baggot contends that the evidence clearly established that he was not part of any conspiracy to deprive plaintiff of his membership; the evidence established that Baggot could not have profited from the fraudulent conduct he was charged with; by his conduct plaintiff admitted that he was indebted to B & M; the evidence demonstrated that account No. 35 belonged to plaintiff; the accuracy of records maintained by B & M and the validity of a claim prosecuted by Morrison against plaintiff before the Committee of Arbitration were confirmed by independent investigations made by experts in the field of commodity trading and that the evidence upon which plaintiff relies is weak and misleading. Baggot also contends that the award of the Committee of Arbitration was final and decided the entire controversy; the trial court erred in interfering with this award in the absence of proof of extrinsic fraud and the trial court improperly awarded speculative, remote and uncertain damages. In this final point, Baggot considers the alleged net equity position in plaintiff’s account with B & M, plaintiff’s alleged loss of profits and the loss of plaintiff’s membership on the Board of Trade.

Plaintiff has filed an answer to the separate briefs of defendants Baggot and Morrison. By way of introduction, plaintiff sets forth the proper standard for review; the existence of a fiduciary relation between plaintiff and defendants and the proof required to establish fraud and conspiracy. Plaintiff maintains that defendants improperly relied on an opinion rendered by a judge of the United States District Court for the Northern District of Illinois, Eastern Division. Plaintiff then urges that the overwhelming weight of the evidence supports the judgment of the trial court against Baggot, Morrison and Haywood; the arbitration proceedings before the Board were a sham and that there was no trial error which would warrant a new trial. In this connection plaintiff disputes the contentions that the trial court was prejudiced against defendants and failed to understand margins and the settlement process and plaintiff contests the argument raised by defendants regarding the length and lack of continuity in the trial proceedings. Plaintiff finally defends the award of damages on the ground that this result was founded upon a firm evidentiary basis and was not palpably erroneous.

Plaintiff has also filed a separate brief in connection with his appeal from the final orders dismissing James J. Coughlin, the Board of Trade, its officers and members of its Committee of Arbitration. Plaintiff here urges that he established a prima facie case against the Board defendants and that the arbitration proceedings were conducted in an arbitrary and illegal fashion so that the decision of the Committee of Arbitration as confirmed by the Committee of Appeals of said Board of Trade was void and illegal.

The Board and remaining associated individuals in response to plaintiff’s brief contend that plaintiff has shifted his theory on appeal and that he has failed to show by clear and convincing evidence that the Board defendants conspired and committed acts of fraud against him. These defendants further urge that the judgment in their favor is not manifestly contrary to the weight of the evidence so that it should be affirmed; plaintiff’s contentions that the arbitration proceedings were a sham and illegal are without merit; the judgment in this regard is supported by the weight of the evidence; there is no evidence of conspiracy or fraud on the part of the Board and the individuals and plaintiff has no claim against them even if the arbitration award were erroneous. These defendants finally contend that plaintiff has admitted that he produced no evidence against them at trial.

Our study and analysis of the voluminous record and consideration of all of the arguments raised by counsel have convinced us that we need not pass upon each and all of the contentions above outlined to reach what we believe to be a proper disposition of this appeal. However, a recital of the pertinent facts is essential.

Plaintiff has been a trader in commodities since 1925. He has had considerable trading experience in commodities on various exchanges in New York City, in Liverpool and London, on the Winnipeg Grain Exchange and on the Chicago Board of Trade. He has been a member of the Board of Trade since 1944. The defendants Baggot and Morrison were members of the Board and their partnership, known as Baggot & Morrison (B & M), was a clearing member of the clearing corporation of the Board. During all times material hereto, commencing about March 1958, plaintiff did business with B & M who cleared his trading transactions. Defendant Harris Haywood was employed by B & M and, starting in 1958, acted as office manager.

Plaintiff alleged in his complaint filed in the circuit court that his membership in the Board gave him various valuable rights and privileges including the right to pay a far lower commission for his trades than would be charged in corresponding transactions carried out for nonmembers of the Board. Plaintiff also alleged that, commencing during 1956, certain defendants (Julius Mayer, Thomas E. Hosty, Wilbert E. Huge, Robert L. David, Robert C. Liebenow, Warren W. Lebeck) entered into a conspiracy with the Board for the purpose of depriving plaintiff of his membership in the Board and destroying his business and livelihood. Plaintiff alleged that in 1959 the defendants Baggot, Morrison and Haywood, and other unknown persons, joined in this conspiracy and broadened its scope to include the embezzlement and conversion of plaintiff’s funds. The complaint described various overt acts allegedly performed in furtherance of the conspiracy including the charge that defendants knowingly caused a false claim to be filed against plaintiff with the Board of Trade and then compelled plaintiff to submit to proceedings before the Committee of Arbitration.

Plaintiff alleged that the individual defendants comprising the Committee of Arbitration (Sidney C. Hamper, Martin H. Milek, Roy C. Loftus, Richard Rose, Raymond A. Comenzó and Thomas E. Herr), along with Board member James J. Coughlin, also joined in this conspiracy about July 1960 and that they performed various overt acts alleged in the complaint. The complaint alleged that these defendants caused an award to be entered against plaintiff in favor of defendant Morrison which they knew was false and fraudulent. As a result of this award, plaintifFs membership privileges were suspended and, in July 1963, his membership in the Board was sold by the defendants. Plaintiff claimed damages of *44,537.75 allegedly owed to him by the firm of B & M, *8800 as the value of his membership in the Board, and also profits of *300,000 which he would have earned during his natural life expectancy, together with punitive damages of *1 million.

In a second count to the complaint, plaintiff further alleged that the claim filed against him by defendant Morrison was known by said defendant and by the arbitrators to be false and fraudulent but that the claim was submitted to arbitration pursuant to Rule 130 of the rules and regulations of the Board. Plaintiff alleged that the arbitration proceedings and the ensuing award were unlawful and therefore wholly null and void for various specified reasons. Plaintiff alleged that after the award had been made he appealed to the Committee of Appeals of the Board which affirmed the award. This decision was alleged to be unlawful. Plaintiff sought a declaration that the award, his suspension and the sale of his membership in the Board, were unlawful, null and void. Plaintiff prayed aUowance against the Board and the individual defendants associated therewith of the same amount of damages and punitive damages claimed in the first count of the complaint.

This complaint was filed in the circuit court on July 12, 1963. Prior thereto, after denial of plaintiff’s appeal by the Committee of Appeals (on February 15, 1961), plaintiff filed other proceedings in the circuit court (then the superior court) and in the United States District Court for this district. The various appeals taken after the disposition of this other litigation were resolved adversely to plaintiff. Plaintiff had originally joined as defendants in his complaint in the circuit court, two individuals, Albert W. Kibby and Sam Gordon, who were agents and employees of the Commodity Exchange Authority of the United States. As will later be shown, this agency had made an audit of the books of B & M. Plaintiffs complaint had alleged that the defendants Kibby and Gordon had refused to take action even though they had full knowledge that B & M had converted plaintiff’s funds and charged trades made by other persons to plaintiff’s account.

The United States Attorney appeared in circuit court in behalf of defendants Kibby and Gordon. On his motion the cause was removed to the United States District Court, Northern District of Illinois, Eastern Division. After extensive discovery in that court, a motion for summary judgment was made in behalf of defendants Kibby and Gordon. On June 13, 1966, the court entered an order granting the motion of said defendants for summary judgment. This was done on the theory that the record did not disclose any basis for asserting a claim against the United States or any facts which would give rise to an action against Federal officials. In a lengthy opinion the district court expressly refrained from passing on other issues presented by the pleadings and, under principles of limited Federal jurisdiction, remanded the balance of the cause to the circuit court.

In this court, defendant Morrison in his brief quoted portions of the opinion of the district court. He filed an appendix to his brief which included, as the first 78 pages thereof, a copy of the opinion of the district court. In plaintiff’s brief he described the use of the district court proceedings as “an apparent flagrant attempt to prejudice” this court. Plaintiff submitted that any reference to the opinion of the district court was unwarranted and would “unduly mislead this Court.”

Subsequently, plaintiff filed a written motion requesting the court to take judicial notice of an order entered in the proceedings in the district court on June 24, 1976. This order contained a supplemental finding modifying the district court’s opinion in support of the remandment order entered ten years earlier and was entered “for the limited purpose of amending said opinion to clarify the original finding * In the order, the district court stated that the deficits of plaintiff referred to in the court’s original opinion were contained in and based upon a false and fraudulent document tendered to the court by the government. There was no finding or showing that defendants participated in the preparation or submission of this document.

Plaintiff also filed a motion that this court take judicial notice of a transcript of proceedings, a copy of which was appended to the motion. These proceedings consist of 116 pages of typewritten material certified by the official court reporter for the United States District Court, reflecting extensive argument of counsel and some testimony submitted to the district court on October 17,1973, which resulted in the entry of the aforesaid order on June 24, 1976. Defendants Baggot and Morrison filed objections to these motions. Thereafter plaintiff filed a supplemental brief in response to the objections of these defendants.

By these latest documents the positions of counsel became completely reversed. Defendants now take the position that this court should not consider the tendered transcript of proceedings before the district court on October 17, 1973, or the order entered June 24, 1976. On the other hand, plaintiff now contends that this court should consider the subsequent statements made by various counsel to the district court as reflected in the transcript as well as the subsequent order entered by the district court. We have examined this entire mass of material and the legal arguments advanced by counsel.

The entire opinion of the district court was directed to the issue before that court as to whether the motion of the defendants Albert W. Kibby and Sam Gordon for summary judgment should be granted. As shown, the district court granted this motion and then, acting upon proper principles of limited Federal jurisdiction, expressly abstained from passing upon any of the remaining issues in the case which were later heard in the circuit court and are presently before this court. The district court simply remanded the cause to the State court. The proceedings held in the district court on October 17, 1973, and the order of modification entered on June 24,1976, were both entered long after the proceedings in the circuit court had been completed. It is, therefore, our duty simply to review the result reached by the circuit court in accordance with the law of Illinois. In so doing we will neither consider nor be influenced by any of the proceedings taken or orders entered in the United States District Court.

As another preliminary matter, we note that, in the separate brief filed by defendant Haywood pursuant to permission from this court, he raised the point regarding his alleged lack of mental competency. This brief described the testimony of Haywood in the circuit court as being contradictory and confused and took the position that a hearing should have been conducted regarding his competency. The brief also urged that the issue of Haywood’s competence had not been waived. Plaintiff has filed a response to this brief stating in strong language that the issue of competency has been waived and that it was never presented to the trial court through the entire trial proceedings. As will later appear, the view which we take of this entire record and the result which will be stated in this opinion make it unnecessary for us to consider these contentions.

As another preliminary matter, it is necessary that we state a summary of the esoteric facts relating to the operation of the Board of Trade and the business of B & M in relation to the activities of traders such as plaintiff. Futures contracts are originally bought and sold by word of mouth complemented by a series of hand signals transmitted upon the floor of the exchange by various traders. These futures contracts, originating as verbal agreements, are initially recorded on trading cards. Each trader has a trading card for each day upon which he lists all completed transactions. The cards are printed on both sides. One side is blue for recording of purchases of futures contracts and the other side is red for listing sales. If properly filled out and completed, the card should show as to each and every transaction the name of the executing trader, the number of bushels involved, the grain or other commodity involved, the maturity month of the contract in question, the price, the name of the firm which is the other principal in the transaction and the initials of the other brokers. A busy trader who engaged in a number of transactions might use more than one card. These cards are generally executed on the floor of the trading pit by both individuals and then are given to the clearing members of both of the individual traders. Thus the buyer and seller in any given transaction would each have a card, with information in one case on the red side and the other on the blue, reflecting the transaction. This practice is essential because every trade must be confirmed by two clearing members of the clearing corporation which is operated by the Board. All of the trading cards are retained as a permanent record by the clearing firm. There is evidence that on busy days the firm of B & M might accumulate 60 or 70 of these cards.

In the usual coruse of business of B 6t M, at the close of trading each day information from the trading cards was transferred to work sheets and other accounting records. One type of work sheet shows individual traders by name or account number, the product involved in their futures contracts and the quantities held and traded. Every trader’s open commodity positions as of the start of the day’s trading session are listed at the bottom of this sheet for trades that had been cleared through B & M. The day’s trades are all reflected in figures at the top portion of the sheet.

Every morning each floor trader was given a “position card” which reflected his open position, the quantity of each commodity that he held as an unliquidated trade. This position was either long or short depending upon the status of the trader’s account. Thus, a trader who had sold 100,000 bushels of soybeans on one day and had bought 50,000 bushels on that same day would have an open position in that he would still be 50,000 bushels short on soybeans. This information would be reflected on the position card.

In addition, every floor trader who dealt with B & M received a purchase and sales slip (P & S) which would reflect loss or gain on all completed transactions. Thus, floor traders would receive a P & S slip for every day upon which an open position was liquidated. Outside customers, who were not also floor traders, would receive monthly statements instead. These P & S slips were prepared in duplicate, one white and one pink. They were originally bound together in a book. The white original was removed and given to the trader and the pink copy remained bound in the book.

In due course all of the information from the trades would be posted in other accounting records such as a street book and a position journal. The street book has records divided according to the commodity which would show the quantity involved in the transaction, the price, the other clearing members involved in the transaction and the name of the person for whom the trade was accomplished so that in each instance both seller and buyer were necessarily identified. The position journal reflects the status of the account of each customer of the firm by listing each sale or purchase, identifying the commodity and reflecting the quantity and price in each instance. It was necessary for every participating firm, including B & M, to furnish the clearing corporation with the complete information regarding price and amount involved as to every trade so that all trades by and through all members of the clearing corporation could be cleared at the close of each day.

A differentiation must be made between the clearing corporation itself and its clearing members. The corporation is an instrumentality of the Board of Trade. The clearing corporation in turn has a number of participating clearing members including all brokers, such as the firm of B & M, who handled Board of Trade transactions. Each open contract is held simultaneously by two opposite clearing members, one holding the selling or short position, and the other occupying the buying or long position. Each day, at the close of business, a settlement is made between the clearing corporation and each clearing member who held an open position or who participated in the market that day. The settlement is a cash payment representing the difference between the day’s closing market price for the particular commodity and the price at which the individual futures contract in that commodity was bought. The corporation collects this settlement amount from the clearing firm holding the position which lost value in relation to the closing market price and transfers this same amount to the firm occupying the position which increased in value. The clearing corporation thus acts as a conduit for these cash adjustments and ends its daily transactions with a zero cash balance. Clearing members whose accounts for the day show a profit receive payment that day. Clearing members presenting transactions which have resulted in losses are obliged to pay these amounts to the clearing corporation every day.

Other matters of importance regarding the records of B & M require attention. The firm maintained a ledger sheet for each account of every customer, showing the name of the trader, number of the account, the date of every transaction, the source of every entry such as the number of the P & S slip which reflected the transaction, the amount of debit or credit resulting from each transaction, and finally the current balance of the account, either debit to indicate a loss, or credit to reflect a profit. The firm employed several bookkeepers and all of the books were under the supervision of defendant Harris Haywood.

It is no exaggeration to state that the record shows that Haywood suffered from a devastating problem with alcoholism which in later years, after completion of all of the transactions here involved, resulted in a degree of impairment of his mental abilities. This case was tried in late 1971 and early 1972. Haywood was a patient at Hazelton Alcoholic Rehabilitation Institute in Minnesota during spring and summer of 1971. Plaintiff and his attorney made a personal visit to Haywood during this time. The trial judge was aware of Haywood’s infirmity and mental condition during the trial.

Commencing in 1959 the B & M firm adopted a system of maintaining two separate ledger sheets reflecting each customer account. One ledger was labeled as a trading sheet. It indicated the status of the trading account as above pointed out. The other ledger sheet maintained separate records of the so-called drawing account which reflected only cash amounts deposited to the account of the customer or cash withdrawn or debited to the account.

Haywood also maintained a memo ledger which was identical to the original trading and drawing ledgers kept by the firm’s bookkeeper, Edwin Sprandel. Haywood testified that he needed up-to-date ledgers to record customer ledger balances on the daily position cards. The firm bookkeeper occasionally fell behind in posting entries in the B & M ledgers. Therefore, Haywood maintained a set of parallel ledgers which he kept current. The records kept by the firm bookkeeper were the official ledgers of B & M and other firm documents were based thereon. Both types of these ledger records were received in evidence. We will later have occasion for further consideration of this particular situation.

The accepted procedure of the Board of Trade concerning deposit of margins to secure trades in futures contracts requires consideration. The Board requires deposit of margins by clearing members in connection with operation of the clearing corporation. Margin requirements are based upon an amount for each bushel or unit of the commodity in question. The amount per bushel is fixed by the board of governors and the so-called Margin Committee of the Board. The clearing corporation does not deal with individual traders but only with its own members such as B & M. A margin is not required to cover each and every trade but only the net positions of each clearing member at the end of each business day. As shown, the net long or net short position of each member of the clearing house is calculated at the close of each day and this is the amount to which the margin requirements pertain. In general practice, the required margin is not deposited with the clearing corporation each day but is deposited with area banks. These depositaries furnish evidence of the deposit of money or securities which stand to guarantee the margin requirement of the clearing member. In all cases the margins posted in this manner by the clearing members are a lump sum and they are not subdivided or designated with reference to the identity of any customer of the trading firm.

In compliance with Board rule, clearing members, such as the firm of B & M, required deposit of margins for security from their customers. But, the record shows definitely that members of the Board of Trade who engaged in individual trades for their own accounts were exempt from margin requirements. Thus, B & M did not require deposit of margins from plaintiff who was, at the time of his trading activities, a member of the Board. B & M was required to consider the daily net position of plaintiff in connection with any trades that he made in calculating the amount of its margin requirements in its daily reports to the clearing corporation. The firm could and did depend upon the equity and credit of plaintiff to make certain that trades which he made on his own account were adequately secured.

In this connection, a clear differentiation must be made between two types of records maintained by trading firms such as B & M. The customers’ segregated funds account was the firm bank account in which funds deposited by customers were kept. For example, this account reflected total drawing account deposits and withdrawals as well as profits and losses from the daily settlement process with the clearing corporation. The account also served to segregate customer funds from those of the firm which were kept in a separate house account. The bank statements for this segregated funds account reflected total customer funds and did not contain names of individual traders or any itemized information regarding any single trade.

The second type of record, the daily segregation statement, was issued every day by all clearing members. The purpose of this record was to provide information as to the net amount of funds that the clearing member would owe all of its commodity customers on the date in question if all of them were simultaneously to liquidate their positions and demand payment of the net credits in their respective accounts. This statement also indicated the amount of money the firm had available to pay its customer equities as well as the location of those segregated funds. These daily segregation statements did not reflect the commodity position or transactions of any individual customer. However, the statement would reflect the identity of each customer’s account which had a net debit at the close of the market day.

The trading firm is required to segregate and have available sufficient assets to liquidate the account of every customer if required. Where the amount of customers’ funds held in segregation by a firm does not contain sufficient cash and securities thus to liquidate and pay each and all of its total customers’ equities, the firm is said to be in an undersegregated condition. This requirement of segregation of funds has been established by Federal law. (See the Commodity Exchange Act. 7 U.S.C. §§1 et seq. (1958), as amended 7 U.S.C. §§1 et seq. (Supp. V 1975).) Under the rules and regulations adopted pursuant to this statute, the making of these reports and the establishment and maintenance of the segregated fund in good order was a mandatory requirement. As will later be shown in detail, B & M did not comply with these requirements of the law. In addition, as we will later show, the Daily Segregation Statements which were required to be kept by them were never produced before the trial court.

It is undisputed that plaintiff was a customer of B & M commencing about January 1958 and continuing until the firm closed its doors in May of 1960. During the existence of this relationship, various transactions took place between plaintiff and B & M which were the subject of considerable evidence by both sides before the Committee of Arbitration and the trial court. We will next summarize the facts pertaining to these matters.

Plaintiff’s Guarantors

From time to time, several persons deposited funds with B & M to guarantee plaintiff’s transactions. On March 5, 1958, a friend of plaintiff named Bernard Shulman wrote to B & M. He requested that the firm open an account in his name which would stand as a guarantee for the trading account of plaintiff up to and including the amounts on deposit in the guarantor account from time to time. A cashier’s check for *10,393.17 was enclosed with the letter. This amount was reflected in the records of B & M as a credit to Shulman’s drawing account. Thereafter another check for *4000 was deposited in this account. Plaintiff testified that most of this money was the property of plaintiff’s nephew, Fred Freigher, who had supplied the funds to Shulman. Only a small portion of the funds actually belonged to Shulman. However, Shulman made no trades in this account at any time and the funds were always retained to the credit of plaintiff.

A. L. Schiffman was another guarantor of plaintiff’s trades. Schiffman wrote two letters to B & M, one on March 16,1959, and one on June 22, 1959. In each of these letters a check for *3000 was enclosed. The first letter stated that the funds were to guarantee trades to be made by plaintiff in a special account that plaintiff would open with B & M. In the second letter, Schiffman stated that the entire *6000 “will guarantee any and all trades for Mr. Bernhard Rosee.” Plaintiff testified that he had introduced Mr. Schiffman to B & M as a favor and that from time to time Haywood had requested plaintiff to execute various orders in behalf of Schiffman on the floor of the exchange. Plaintiff’s ledger account as kept by B & M shows a debit of *6674.45 three days prior to the date of the earliest letter. Plaintiff’s ledger debit about the date of the second letter was *4957.80. Plaintiff testified that his financial position at B & M was not in a debit condition when the first letter was received. He stated that he was going to enter the perfume business, he needed money for the purchase of oils and these deposits were only intended to be a reserve to protect plaintiff against fluctuations of the market in the event that he was away for a few hours. Plaintiff testified that he received this money from Schiffman, “like a loan”; he had borrowed the money and intended to pay it back.

There is a conflict in the evidence concerning an account carried by B & M under the name of Emil Acciari. Plaintiff testified that he introduced Acciari to the firm and that he never initiated or controlled any transaction for Acciari’s account and did not pay any money to Acciari as a result of any trading transaction. Plaintiff stated that he had executed orders for trades in the Acciari account which he had received from the defendant Haywood. Haywood denied that he had ever ordered plaintiff to execute such trades and stated that he had never received a trading order from Acciari but that the account had been handled and controlled by plaintiff. Acciari testified that plaintiff had handled his account for him at B & M commencing in 1959 and that plaintiff had similarly handled two previous market accounts at other brokers commencing in 1956. Acciari further testified that he never gave any person specific instructions concerning transactions in his account with particular reference to Haywood and plaintiff. He stated that plaintiff was in full control of the account without specific instructions from him and that he had never met Baggot, Morrison or Haywood until 1960.

The Hirsch Soble Transaction

On October 19,1959, plaintiff executed a trade on the exchange through B & M. This transaction purported to be made in the name of Hirsch Soble, an attorney. On October 20,1959, Soble wrote to B & M. He stated that he had received a confirmation of this transaction regarding a short sale of November soybeans; he had not placed this order and would not be responsible. On October 22, 1959, Haywood responded to this letter with another letter in which he stated that the order had been placed by plaintiff for Soble’s account with directions that any debit should be entered against plaintiff but that any credit was to be applied to the Soble account. In the letter Haywood also stated that this transaction would be transferred to plaintiff’s account and that Soble would be cleared of any possible liability. Plaintiff testified that apparently he did not execute the Soble trade because he was not at the market that day but that otherwise he would have executed it. The arbitrators found that Rosee was responsible for the Soble trade.

The James Near Transaction

In January 1958, plaintiff called defendant Baggot from Washington, D.C., and requested that B & M sell short 50,000 bushels of March wheat. He directed that this transaction was to be reflected in the account of “James Near.” Prior to that date B & M had no such account. Baggot testified that plaintiff expressly guaranteed the account in this conversation and told Baggot that he would supply Near’s address. The Near transaction turned out to be unprofitable. Baggot testified that plaintiff personally instructed him to put the transaction in plaintiff’s own account. He stated that plaintiff told him that there was a relationship of some kind between James Near and a congressman.

Plaintiff denied this version of the transaction and denied the existence of any oral guarantee of the account by him. Plaintiff testified that he told Baggot to send a confirmation to James Near, in care of a cousin of Near’s who was the son of the congressman. He testified that the account was for the congressman’s son and Baggot was told of this fact. Plaintiff testified that he did not give Baggot Near’s address but only the address of the congressman’s son. Plaintiff testified that a confirmation of the transaction was sent to the congressman’s son and that he saw such confirmation in the latter’s office. These facts were expressly denied by Baggot.

At the arbitration, Baggot testified that the account remained short 50,000 bushels of March wheat until that quantity of wheat was purchased by Baggot on plaintiff’s instruction. Since the price of this commodity had increased in the interim, the entire transaction ended in a loss of *4411.25. The evidence in behalf of defendants is that plaintiff was asked to pay the loss. Plaintiff testified that he was never asked to pay the loss. In handling this transaction, the records of B & M show that the loss in the Near account was debited against plaintiff’s guarantor Shulman.

The firm sent a letter to Shulman on January 1,1959, reflecting this loss. Shulman responded by letter dated January 6, 1959, in which he stated that he would not accept the loss. Thereafter defendant Haywood wrote to Shulman and conceded that Shulman’s account should not have been debited. Instead, plaintiff’s account with B & M (carried under account No. 11) was debited with the Near loss.

The trial court expressed the opinion that plaintiff had “welched” in this matter so that the loss was properly debited against plaintiff’s account. However, in the calculation of damages in favor of plaintiff, the court allowed recovery of *4411.25 which had been debited against plaintiff because of this transaction. As we will later show, the Arbitration Committee concluded that B & M did not exercise due diligence in handling the account and the fact that the account remained on their books in Near’s name for approximately 10 months indicated the opinion of defendants that the account was actually that of James Near. The Committee accordingly gave plaintiff a credit in the total amount of the debit.

Plaintiff’s Accounts No. 11 and No. 15

The ledger accounts of B & M commencing January 2, 1959, refer to plaintiff’s account as No. 11. The latest entry on any of the ledger sheets for this account was November 17, 1959. This was the last transaction made by plaintiff in that account. The entry to the trading account shows a loss or debit on November 17, 1959, of *4903.75. On that same date, plaintiff opened a new trading account with B & M which was given No. 15. At that time plaintiff’s previous account No. 11 was completely closed out. The new account No. 15 was opened by a deposit of *2000 by Fred Freigher, plaintiff s nephew. This guarantee was restricted in that it was to be applied only to any deficit that might occur in the new account.

As of the end of 1959, B & M records show that a profit of *6166 resulted in this new account from transactions carried out by plaintiff. However, a total of *2142.84 was debited against this net position leaving a credit in the amount of *4023.16. The debit reflected in part two separate checks drawn to Security Benefit Life Insurance Company. These checks and the transaction they represent will be the subject of later comment. On December 17,1959, plaintiff signed a letter directed to B & M in which he agreed to the application of any existing credits from his special trading account, identified as No. 15, to guarantee any existing debits in his regular trading account No. 11 until these losses had been paid in full. Plaintiff testified that he had signed this letter but he did so only because B & M promised him they would give him records which he never received. Plaintiff referred to various trades which he contends he had executed which did not appear in the records of B & M.

Plaintiff testified that his trading operations were profitable in 1959. His “close calculations” showed that he had an equity or credit of approximately *60,000 on September 17, 1959. This amount was in addition to credits due him by virtue of funds deposited by his guarantors. Plaintiff introduced no ledger sheet or other record of his own to substantiate this figure. In fact, he also testified concerning these calculations, “I did not keep any records.” Plaintiff received a statement from B & M showing that he lost *46,778.74 from his 1959 trading. Plaintiff used this figure in the income tax return which he filed for 1959. He testified that he sent a letter to Internal Revenue Service with this return. He stated therein that he was not responsible for the figures in the return, and that “[W]hen I have my records I will correct this income tax.” Plaintiff did not produce a copy of this letter.

Other Transactions

In this regard, plaintiff had reference to the period from August 13, 1959, through September 9,1959. Plaintiff’s testimony is that he made “big trades” on each of these dates but that he was never able to trace these transactions in the records of B & M. Plaintiff testified that he never attempted to examine P & S slips in this regard because of the trust he placed in defendants Baggot and Morrison. Plaintiff further testified that on August 12, 1959, he sold 180,000 bushels of November beans but that he was unable to find any record of this trade in his account. Plaintiff testified that he had copies of P & S slips which would prove that these transactions were credited to other accounts but such slips were never introduced.

Plaintiff further testified that the work sheet of B & M for August 12, 1959, only credits him with a sale of 60,000 bushels of November beans but that he actually sold 180,000 bushels of this commodity as reflected on four trading cards. These cards were all printed in plaintiff’s name but three of them had plaintiff’s name stricken and the initials W.O.C. were written in. Haywood testified that plaintiff brought the cards to him and told him that the transactions reflected thereon were for the account of William O’Connor and that he accordingly struck out plaintiff’s name as printed on the card and inserted the initials W.O.C. These cards involved the sale of 120,000 bushels of the commodity. This quantity of beans, sold short on August 12, was bought in on August 13,1959. The trading cards for this transaction were completely written by plaintiff and bore his name. Upon each card plaintiff’s name was scratched out and plaintiff had written instead “Bill O’koner” [sic].

The Loan Made By Plaintiff

B & M maintained a customers’ segregated fund account. As shown, this was for the purpose of making certain that in the event all customers of the firm wished to liquidate their accounts and withdraw all net credits, sufficient cash would be available for this purpose. The firm also maintained funds on deposit as required by the clearing corporation to secure margin requirements.

It is undisputed that three checks, to a total of *20,000, were drawn by B & M against the customers’ segregated fund account. On August 7, 1959, the first check for *8000 was drawn from the drawing account payable to plaintiff. It was endorsed by plaintiff and then was deposited in the office account of B & M. The amount of the check was credited to the personal trading account of defendant Baggot. The second check was drawn August 10, 1959, for *5000 payable to B & M. It bears the firm’s endorsement and was deposited in the personal account of defendant Baggot. Plaintiff testified that at the time he had no knowledge of the issuance of this check. The third check dated September 17,1959, was for *7000 payable to plaintiff. It was also endorsed by plaintiff and then deposited in the office account of B & M but credited to the personal account of defendant Baggot. The check stub bears a handwritten note showing *7000 as a credit to defendant Baggot from account No. 11 which was the number of plaintiff’s drawing account.

Plaintiff testified that on November 5, 1959, defendant Morrison tendered a letter to him stating that the loan of *20,000 was a personal loan made to Baggot and did not affect B & M. This letter acknowledged the total of the three loans. It was written on plaintiff’s stationery, some of which had been kept in the B & M office. Plaintiff testified that Morrison told him the letter was for the purpose of showing government agents to prevent disclosure of the existence of a loan to B & M from a customer. Plaintiff first refused to sign the letter but then agreed. Plaintiff also testified that he did not read the letter before signing it and that he had unlimited trust in Baggot. Defendant Baggot testified that he borrowed a total of *20,000 from plaintiff and repaid this amount and that this help was volunteered to him by plaintiff.

As will later be noted, the Arbitration Committee considered the circumstances of this loan. Baggot testified at the hearing that the loan was not to him individually but that it was repaid by the firm. Baggot testified at trial that he repaid the loan to plaintiff and that he borrowed money from his sister to do so. The record shows that the money was actually repaid on November 16, 1959, by checks to a total of *20,000 issued by defendant Baggot personally and deposited in the B & M firm account. On that date, plaintiff’s drawing account was credited with *20,000. On the next day the money was replaced in the firm’s customers’ segregated fund account by a check drawn upon the house account of the firm.

Ownership of Account No. 35

Another complicated and disputed issue of fact arises in connection with a trading account on the books of B & M designated as account No. 35, opened during September of 1959. Haywood testified that the new account was requested by plaintiff in behalf of a friend of his and at that time plaintiff informed Haywood that he would furnish the name for the account at a later date. Haywood also testified that he suggested to plaintiff that the account be known as Rosee Account No. 2 but plaintiff refused. Haywood admitted that he was familiar with a provision of the Federal regulations governing commodity exchanges which provide that the name, address and occupation of every customer was to be recorded in permanent form. Haywood testified at trial that plaintiff identified his friend as being a person from Washington or Canada. At the arbitration hearing he testified that plaintiff “indicated” that the new account was for an official in Washington. Haywood also testified that trading cards with plaintiff’s name were used in connection with the account on at least two occasions. In his testimony at trial, as well as at the arbitration, plaintiff denied knowledge of the account at any previous time.

Defendant Morrison testified that he made the initial trade in account No. 35 at the request of plaintiff. This trade was evidenced upon a trading card with Morrison’s name imprinted thereon and he delivered the card to plaintiff. Plaintiff testified to the contrary that he executed the trade on his own trading card at the request of defendant Morrison but that Morrison then destroyed the card and wrote the transaction on his own card.

On the B & M work sheet for September 14,1959, a transaction appears for the short sale of 100,000 November beans for account No. 35. This transaction was reflected from the trading card with Morrison’s name printed thereon. On September 15, 1959, Morrison was hospitalized as a result of an accident. He instructed Baggot to close out his position in November beans. At that time, Morrison had a short position of 150,000 bushels of beans. This order was followed but the existing short sale of 100,000 beans reflected on Morrison’s trading card for account No. 35 was not terminated by a purchase at that time.

On September 21, 1959, 95,000 bushels of November beans were sold short according to a trading card with Baggot’s name printed and account No. 35 written thereon. The transaction was noted in Baggot’s handwriting. As regards account No. 35, Baggot testified that the figures were in plaintiff’s handwriting. Plaintiff testified that these numbers were written by Baggot.

There is similar conflicting testimony regarding a number of other trades purportedly made in account No. 35. Plaintiff denied he executed any of these trades although a number of the trading cards bear his handwriting. Regarding these situations, plaintiff testified that he executed the trades and filled in the cards at the request of defendant Haywood but Haywood denied that he ever made such requests to plaintiff in connection with account No. 35.

Haywood testified that on September 30, 1959, he gave plaintiff monthly statements on accounts Nos. 11 and 35 and that he had no further conversations with plaintiff regarding these statements. At the time, the statements reflected a debit or deficit in the total amount of *54,486.76. Plaintiff denied that he received these statements until October of 1960 when he saw them for the first time at the arbitration. At trial, plaintiff testified that his trading position as reflected in account No. 11 was correct but that the amount of the deficit was fraudulent and untrue.

The work sheets made up by employees of B & M listed house accounts separately from customers’ accounts in separate sections. Account No. 35 was always carried as an item in the customers’ section. P & S slips were not issued for house accounts of B & M. Such slips were issued concerning all trades reflected in account No. 35.

In this connection, the Commodity Exchange Authority required written reports reflecting ownership or control in any single quantity in excess of 200,000 bushels. A market trader is required to file a report referred to as No. 201, whereas a commodity broker is required to file report No. 203 whenever he has a customer with an interest above the stated limit. On certain dates during the period that account No. 35 was active, the combined soybean holdings in Rosee’s regular account No. 11 and account No. 35 were sufficient to invoke the requirement that B & M file a No. 203 report. The record shows that only one such report was filed and it was cancelled by B & M on the next day. During arbitration and at trial, defendants contended that reports on the total holdings in accounts Nos. 11 and 35 were not filed because Rosee had said that account No. 35 belonged to someone else.

Account No. 35 was closed out on November 10, 1959. At closing, the deficit or debit was *19,027.50. On November 17, 1959, plaintiff left the market so that he had no open position as regards account No. 11. At that time, calculation of the total debit or deficit pertaining to accounts Nos. 11 and 35, after making due allowance for all of the funds supplied by the guarantors for plaintiff, showed a net loss or deficit of *29,809.84.

At a point close to the termination of the arbitration hearings, on November 1, 1960, an attorney acting in plaintiff’s behalf wrote to the Commodity Exchange Authority and made a detailed complaint against B & M. This letter includes a number of charges of a serious nature including manipulation of plaintiff’s account, failure to supply proper memo cards, lack of monthly account statements and other allegations. However, no mention was made in this letter regarding the ownership of account No. 35 or of any alleged wrongful manipulations in this regard.

Insurance On Plaintiff’s Life

It is agreed that plaintiff signed various applications for insurance upon his own life and that premiums paid on this insurance by B & M were debited against plaintiff’s account. However, there is a complete conflict of testimony regarding the reason for the issuance of the policies. The first of these applications for insurance was signed by plaintiff on November 19,1959. This date is nine days after the closing of account No. 35 and two days after the closing of account No. 11. Also, the face amount of the life insurance, *30,000, was arithmetically close to the total amount of the net deficit concerning both of these accounts.

The testimony of three insurance agents was brought out at trial. The first, Gregory L. Quinn, testified by evidence deposition that he came to a meeting at the B & M office with Baggot, Morrison and plaintiff at the request of Morrison. This was in late November of 1959. Quinn testified that Morrison stated the insurance was to be upon plaintiff’s life for *30,000 because plaintiff was indebted to B & M in that amount. Plaintiff made no objection to this statement and requested that several different policies be issued so that he could transfer them back to himself as the indebtedness was lowered. Plaintiff agreed that he was present at such a meeting but denied that any indebtedness by him to B & M was ever mentioned. The policies were issued effective December 9,1959. One was for *15,000 and three additional policies were each for *5000. The agent testified that after plaintiff’s physical examination the policies were issued on an increased premium basis. He stated that plaintiff requested a reduction of these premiums but this was refused.

Plaintiff testified that Baggot and Morrison first approached him in August 1959 and agreed that they would pay the premiums on a policy. They said they wanted the insurance before he went to the hospital for some surgery and asked him if he had any objection. Plaintiff testified that he never agreed to pay the premiums. On the contrary, he testified that defendants Morrison and Baggot were gambling on his life for their own purposes and they told him that they would pay the premiums on the life insurance provided they were made beneficiaries. At the time the insurance applications were made, a check was drawn on the B & M office account for *250 which amount was debited to plaintifFs drawing account. This check was used for part payment of premiums. In December of 1959, B & M paid an additional premium of *1292.84 by check which was drawn on the firm’s customers’ segregated fund account and also debited to plaintiff s special drawing account. Plaintiff testified at the arbitration that he saw this debit entry on the date it was made and after conversation with Morrison the total amount of both of the above checks was credited to plaintiff’s special drawing account but was then debited to his regular account without his authorization. After payment of these premiums, which covered a period of six months, the policies were allowed to lapse.

Joseph K. Dennis, another insurance agent, testified that plaintiff contacted him by telephone during December of 1959 and requested information about some life insurance because he had an obligation with a firm at the Board of Trade and wanted to make them beneficiary. He testified that plaintiff then came over to his office and spoke about *30,000 of insurance but said that *20,000 might be enough as “[w]e will probably be paying off a part of this * * He and plaintiff went down to the insurance company where plaintiff made an application for a *20,000 policy. The agent testified that the policy was not accepted by plaintiff and no premium was ever paid. In January of 1960, this agent wrote a letter to defendant Morrison in which he alluded to Morrison’s interest in coverage on plaintiff’s life and stated that he_ had secured *30,000 of insurance which plaintiff should be interested in continuing as he could change the beneficiary when the. obligation to the firm had been paid.

The last agent, Walter R. Brailsford, testified by evidence deposition that he met with plaintiff, Baggot and Morrison in May of 1960. Morrison stated that plaintiff owed money to B & M and plaintiff agreed to apply for the insurance. Plaintiff then made application for an ordinary life policy for *20,000 but the contract was refused by the company after his medical examination. The agent testified that shortly thereafter he talked to Morrison about a type of creditor-debtor policy which required no medical examination and then spoke to plaintiff on this subject on the floor of the exchange. Plaintiff then made a telephone call in his presence to some person he called “Don” to whom plaintiff repeated what Brailsford had said about the creditor-debtor policy. Plaintiff then signed an application for *20,000 of the so-called creditor-debtor insurance with B & M as beneficiary and plaintiff’s own estate as contingent beneficiary. Thereafter four policies of *5000 each were issued pursuant to the application. The agent testified that this type of insurance was limited to that amount as the maximum of any single policy.

Plaintiff pointed out that Joseph K. Dennis knew Baggot for some 20 years prior to January 1960. Dennis had handled group insurance programs for some members of the Board. Gregory L. Quinn had been a member of the Board since 1940. He referred to Baggot and Morrison as personal friends. He handled insurance for some five or six members of the Board including Baggot and Morrison. Walter R. Brailsford referred to Morrison as a business and social friend for whom he had written insurance.

The Arbitration Committee considered the liability of plaintiff on account No. 35. The Committee noted in its written findings that the rate of commission charged on the account was that applicable to a member of the Board of Trade which is lower than commissions ordinarily charged. Also, plaintiffs handwriting appeared on certain of the trading cards, one of the P & S slips in connection with the account was issued in plaintiff’s name and the figures “35,” in at least one case, were written by plaintiff. The Committee therefore determined that account No. 35 was in fact plaintiff’s account. The Committee also concluded that there was a factual interrelation between ownership of account No. 35 by plaintiff and the fact that insurance policies for which plaintiff applied aggregated *30,000. The conclusions of the Arbitration Committee point out that without considering the debit resulting in account No. 35 the net debit of plaintiff after considering the funds of his guarantors “nowhere approached the *30,000 insurance figure ” * The Committee concluded that plaintiff was liable for the total amount of premiums in connection with this insurance. The trial court concluded that plaintiff was not the owner of account No. 35 but that it was actually a house account of B & M.

Federal Investigation of B & M

At all relevant times, the operations of the Board of Trade and of all member brokers thereof were subject to the Federal Commodity Exchange Authority (CEA). Various audits of the books and records of B & M were made by the CEA. As a result of these audits, the firm was suspended by order entered on May 26, 1960. Defendants Baggot and Morrison were charged by complaint with failing to treat customers’ funds as belonging to them; failing properly to segregate these funds and use of funds of certain customers to margin and guarantee the trades of others. The suspension order found that the firm was undersegregated at various times from October 31, 1958, through February 29, 1960. This condition was almost continuous from October 27, 1959, through December 31, 1959, in amounts ranging from *291 to approximately *37,416.

Defendants Baggot and Morrison waived hearing of the charges made by CEA. They consented to an order suspending registration of B & M for three months and suspending their own trading privileges for 30 days. They then wound up and liquidated their partnership and retired from the business. At that time the ledger records of the firm showed a net deficit or debit due from plaintiff in the amount of *27,308.83. This was a net amount after application of all remaining funds of plaintiff’s guarantors to reduce the debit.

The Arbitration Hearing

We will next consider the proceedings before the Arbitration Committee as this matter is, in our opinion, extremely important to decision of the case before us. After B & M had ceased its business activities, its records showed that plaintiff was indebted to the firm in the amount of *27,308.83. Morrison and Baggot were each half owners of the firm so that the share of each in this item of alleged indebtedness was *13,654.41. Baggot never took any action to collect his portion of this indebtedness. He testified that he felt he had a better chance of obtaining payment of the money if plaintiff continued with his trading activities.

At that time, the Board of Trade had a Committee of Arbitration for the purpose of hearing disputes between members. Morrison elected to press a claim for his share of the alleged indebtedness through the arbitration procedure of the Board.