Daneshrad v. Trean Grp., LLC

57 F.4th 587

Jacob DANESHRAD, Joseph Daneshrad, and Hassan Blurfrushan, Plaintiffs-Appellants,

v.TREAN GROUP, LLC, Nancy Stubenrauch, and Mark Frantz, Defendants-Appellees.

No. 22-1421

United States Court of Appeals, Seventh Circuit.

Argued December 2, 2022

Decided January 11, 2023

Joseph Daneshrad, Attorney, Daneshrad Law Firm, APC, Los Angeles, CA, for Plaintiffs-Appellants.

Lukas Sosnicki, Attorney, Thompson Coburn LLP, Los Angeles, CA, Holly H. Campbell, Attorney, Bryan Cave Leighton Paisner LLP, Chicago, IL, for Defendants-Appellees.

Before Easterbrook, Kirsch, and Lee, Circuit Judges.

Easterbrook, Circuit Judge.

Several affiliated traders set up four accounts with Trean Group, an introducing broker at the Chicago Mercantile Exchange. An introducing broker manages the customer side of the futures-trading business. The trading side is the province of a futures commission merchant, which for these traders was FCStone (a part of what is now called StoneX Group, Inc.). On the traders' behalf, Trean and Stone bought and sold futures contracts on the Standard & Poor's 500 Index. The traders wanted to engage in naked trading—that is, to speculate rather than hedge—and Stone set a high margin accordingly. (In the futures business, margin is money on deposit for the security of the broker and merchant, should the market price move against the trader and the trader fail to cover the loss; this differs from the meaning of margin in securities trading.) Stone, as the futures commission merchant, was a principal in all trades and together with the clearing house bore the immediate economic risk; Trean, as the introducing broker, guaranteed Stone's positions and shared in its commissions. The traders were liable to Stone and Trean, but not to the counterparties on the futures contracts.

The traders started in fall 2018 with a kitty slightly exceeding $1 million, which enabled them to buy a substantial number of futures contracts. They went long. That is, they stood to gain if the S&P 500 Index rose and to lose if it fell, with the effect magnified by the leverage built into futures contracts. But the market did not cooperate. As the S&P 500 Index fell, Stone demanded more margin. The traders were reluctant to comply, seeking to adjust their holdings instead as a means to reduce Stone's exposure. The traders also proved reluctant to discuss their positions with Trean, even though Trean was on the hook for any loss that Stone incurred. Between December 3 and December 22, 2018, the S&P 500 Index declined 13%, and Trean learned that the traders had not met Stone's margin call during the window allowed by the Exchange. Because the traders were not cooperating with Stone, and Trean was not happy with the degree of cooperation it was receiving, it told the traders on December 31 that it would close their accounts. It added that they were free to deal directly with Stone. Trean thus cut its own risk without necessarily closing the traders' positions.

Stone responded to this development by telling the traders on January 2, 2019, that their accounts had been put on "liquidation only" status. This meant that the traders must wind up their positions by purchasing offsetting short futures contracts. (The traders' S & P 500 Index contracts would not expire until spring 2019, but a trader can close a futures contract by buying an exactly offsetting one.) Stone had a contractual right to demand that the traders liquidate for any reason that Stone deemed sufficient. At the traders' request, however, Stone promptly modified its directive to allow them to keep their contracts and hedge to reduce risk, but Stone prohibited any trades that would increase the holdings' net risk. Stone also increased the traders' margin to 150% of their open positions. The traders responded by immediate liquidation. Of the $1,020,000 with which they began, they had lost $548,000.

In this suit, the traders want Trean to compensate them for this loss. They contend that their contract with Trean did not allow it to cease dealing with them for the reason it did (or perhaps that the reason Trean gave was not the real one). They acknowledge that Trean did not require Stone to close their positions but contend that Trean's decision led Stone to impose conditions that they found unacceptable, even for the time that the traders would have needed to find another introducing broker. Observing that the S&P 500 Index began to rise again in January 2019, and by February 2019 had recovered most of the losses from December, the traders contend that Trean should be liable for the amount that they could have recouped had they maintained their long positions during January and February.

But the district court granted summary judgment to Trean. 585 F. Supp. 3d 1100 (N.D. Ill. 2022). Without deciding whether Trean violated a duty it...