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Filed by Board of Trade of the City of Chicago, Inc. (CBOT)
Subject Company -- Board of Trade of the City of Chicago, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
File No. 132-01854
* * * *
The following letter was distributed to CBOT members on December 8, 2000 and is
currently available on the CBOT's intranet sites, MemberNet and OnBoard.
December 7, 2000
Dear Fellow Members:
When the Board of Directors asked Dennis Dutterer to take over the reins as
President and CEO in April, he made clear he was accepting those
responsibilities on an interim basis. Today, Dennis has informed me that he is
returning to his position as President and CEO of the Board of Trade Clearing
Corporation. Dennis will remain at the CBOT through January 15, 2001 to ensure a
smooth transition.
When he accepted the position, Dennis told the Board of Directors he had three
objectives: 1) maintaining the continued operations of the CBOT with minimal
disruptions during a transition period, 2) ensuring the on-time deployment of
the new a/c/e trading system, and 3) assisting in the restructuring process.
Dennis achieved all of these objectives.
Dennis worked closely with the Board of Directors and management to position the
CBOT for success in the years ahead. Even in the face of a significant staff
reduction, the Exchange has maintained ongoing operations while significantly
reducing expenses. A budget for 2001 has been approved that provides the CBOT
with opportunities to take advantage of our significant strengths and the ever-
changing markets.
Under Dennis' watch, the a/c/e electronic trading system was launched on time by
management and has generated significant volume during its limited operations
and with a growing customer base. Dennis also has played a significant and
active role in moving the restructuring process toward a favorable conclusion.
Dennis stepped forward at a difficult time, accepted these responsibilities, and
achieved the results. He worked well with our Board of Directors, with the users
of our markets, and with regulators and policy makers in Washington. Dennis'
counsel was in the best interests of the CBOT. He was willing to make the hard
choices and implement them because he believed in our members.
I hope all of you will thank Dennis for his service on behalf of the CBOT, and
take the time to congratulate him for a job well done.
Sincerely,
/s/ David P. Brennan
David P. Brennan
The CBOT urges its members and membership interest holders to read the
Registration Statement on Form S-4, including the proxy statement/prospectus
contained within the Registration Statement, regarding the CBOT restructuring
referred to herein or in connection herewith, when it becomes available, as well
as the other documents that the CBOT has filed or will file with the Securities
and Exchange Commission, because they contain or will contain important
information. CBOT members and membership interest holders may obtain a free
copy of the proxy statement/prospectus, when it becomes available, and other
documents filed by the CBOT at the Commission's web site at www.sec.gov, or from
the CBOT by directing such request in writing or by telephone to: Board of Trade
of the City of Chicago, Inc., 141 W. Jackson Blvd., Chicago, Illinois
60604-2994, Attention: Office of the Secretary, Telephone: (312) 435-3605,
Facsimile: (312) 347-3827. This communication shall not constitute an offer to
sell or the solicitation of an offer to buy, nor shall there be any sale of
securities in any state in which offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
state. No offering of securities shall be made except by means of a prospectus
meeting the requirements of Section 10 of the Securities Act of 1933, as
amended.
* * * *
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The following communication was made available to CBOT members in the Office of
the General Counsel of the CBOT on December 8, 2000.
Darlene JacksonDarlene Jackson Atty No. 90443
IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS
COUNTY DEPARTMENT, CHANCERY DIVISION
___________________________________________
)
Board of Trade of the City of Chicago, Inc.)
) In Chancery
Plaintiff, ) Declaratory Judgment
)
v. ) Civil Action No.00CH09725
) Judge Thomas P. Durkin
Chicago Board Options Exchange, Inc. )
)
Defendant. )
___________________________________________)
BOARD OF TRADE OF THE CITY OF CHICAGO'S
MEMORANDUM IN OPPOSITION TO CBOE'S 2-619 MOTION TO DISMISS
----------------------------------------------------------
On September 1, 1992, the Chicago Board of Trade and the Chicago Board
Options Exchange entered into a contract and expressly agreed that "either party
to this Agreement may bring suit (on its own behalf or on behalf of its members,
or both) to enforce the terms of this Agreement and to recover damages for any
breach of this Agreement." (Cmplt. Ex. B (S)6(c)). By letter dated June 20, 2000
and in recent filings with the Securities and Exchange Commission, the CBOE has
declared its intent to breach the 1992 Agreement. In its most recent filing with
the SEC, CBOE casts a cloud over not just the CBOT's imminent restructuring
(including becoming a Delaware for-profit corporation), but its current
electronic trading operations as well, claiming that they violate the 1992
Agreement and therefore nullify the Exercise Right. In this action, the CBOT
seeks a declaration that its current electronic trading operations and Steps One
and Two of its restructuring (including its move to Delaware and its becoming a
for-profit corporation) do not violate the 1992 Agreement. CBOT also seeks an
injunction prohibiting the CBOE from taking any action to the contrary, and
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prohibiting CBOE from continuing to unilaterally impose restrictions on the
Exercise Right not found in Article Fifth (b) or in the 1992 Agreement.
CBOE has moved to dismiss on preemption grounds, claiming that a 1982
decision involving the CBOT and the CBOE somehow erases the contract it
willingly executed ten years later, which expressly permitted both parties to
bring suit to enforce its terms. CBOE's claim is contrary to the explicit terms
it agreed to in 1992. In addition, it is contrary to the SEC's 1993 approval of
that Agreement as consistent with federal securities laws and established
precedent under the doctrine of preemption. The 1982 Buckley decision, which did
not involve a contract between the two exchanges, is not dispositive. And
because the facts and issues in Buckley were substantially different than those
here, collateral estoppel is not an issue.
CBOE also contends that this claim is not ripe for adjudication. Its
position, however, is undermined by its own attempts to impose new conditions on
the Exercise Right (see supra at 4-5). In correspondence to its members and in
Proposed Rule Changes filed with the SEC on August 30 and October 1, 2000, CBOE
takes the position that both the CBOT's current electronic trading operations
and its planned restructuring violate the 1992 Agreement and thus allow the
CBOE, at its whim, to extinguish the Exercise Right. Given that CBOE itself has
seen fit to bring this very controversy to the SEC for resolution, its claim
that there is no actual controversy is disingenuous.
FACTUAL BACKGROUND
THE EXERCISE RIGHT AND THE 1992 AGREEMENT
Since the Chicago Board of Trade created the Chicago Board Options
Exchange in 1972, Article Fifth (b) of the CBOE's Certificate of Incorporation
has specifically provided that CBOT members would be entitled to become members
of CBOE at no additional cost. That right,
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known as the Exercise Right, is a significant source of value to CBOT's Full
Members. According to Article Fifth(b) of CBOE's Charter, "every present and
future member" of the Board of Trade holds the Exercise Right. Today, close to
700 of the CBOT's 1,402 Full Members have exercised that right and become CBOE
members.
After the creation of the Exercise Right, the CBOT and CBOE had a
series of disputes about its definition and its scope. One such dispute gave
rise to Buckley v. CBOE, cited by the CBOE as "dispositive" of preemption.
Buckley arose out of a dispute whether the lessor or lessee of a leased Board of
Trade membership held the Exercise Right. But even after resolution of that
dispute, other disagreements between the exchanges about the Exercise Right
continued to arise.
To end such controversies, the CBOT and the CBOE entered into a
contract that both limits and reaffirms the Exercise Right under various
scenarios, including any future restructuring by the CBOT. In that 1992
Agreement, the exchanges expressly agreed that each party could bring suit to
enforce its rights under the Agreement. As the CBOE concedes, the Securities and
Exchange Commission approved the contract and the accompanying CBOE Rule
Amendments in 1993.
THE CBOE'S ATTEMPTS TO IMPOSE NEW CONDITIONS ON THE EXERCISE RIGHT
In order to meet serious competitive challenges, the Chicago Board of
Trade is in the midst of a business restructuring. Step One, approved by CBOT
members on June 28, 2000, resulted in the CBOT's reincorporation in Delaware as
a not-for-profit corporation and the creation of a wholly owned subsidiary
(eCBOT) intended to run the CBOT's electronic trading business.
Prior to the CBOT membership vote on Step One, the CBOE tried to
impose a new restriction on the Exercise Right that was not in the 1992
Agreement, declaring that the Exercise Right would be extinguished if the CBOT
changed its state of incorporation to Delaware. The
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CBOT filed a Complaint in Illinois Chancery Court seeking declaratory and
injunctive relief on June 30, 2000. At an August 3, 2000 hearing, the CBOE
reversed course and agreed that it would take no action to extinguish the
Exercise Right solely based on the CBOT's reincorporation. Based on this
judicial admission, the Court granted CBOE's Motion to Dismiss on the ground
that there was no justiciable controversy.(1) Though the CBOE was willing to
defer action at that time in order to avoid a decision on the merits by the
Court, CBOE was unwilling to admit that the CBOT's reincorporation in Delaware
did not eliminate the Exercise Right. Instead, CBOE reserved its right to use
the reincorporation in Delaware as a basis to extinguish the Exercise Right if
the CBOT took any future steps towards restructuring.
Now, once again, CBOE seeks to imposes new conditions on the Exercise
Right. Specifically, CBOE has stated that the CBOT's move to a for-profit
Delaware corporation, pursuant to Step Two of its restructuring, will violate
the 1992 Agreement. (Cmplt. Ex. A at 3 and Ex. D at 6, 10) Moreover, CBOE has
declared that the CBOT's current electronic trading operations violate the
Agreement, giving CBOE yet another basis to extinguish the Exercise Right.
Enough is enough. CBOT is entitled to confirmation that both its
current electronic trading operations and Steps One and Two of its
restructuring - which have been carefully designed to comport with the express
terms of the 1992 Agreement - will not endanger the Exercise Right of its Full
Members. And the CBOE should not be allowed to unilaterally impose conditions on
the Exercise Right that are not provided in the 1992 Agreement.
____________________
(1) At the August 3, 2000 hearing where the Court granted CBOE's motion to
dismiss, the Court noted that there was a "huge difference" between this case
and Buckley, indicating that CBOT's action was not preempted on Buckley grounds.
(Aug. 3, 2000 Tr., Ex. 1 at 38-39)
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I. THE SEC FOUND THE 1992 AGREEMENT, INCLUDING SECTION 6(C) WHICH PROVIDES FOR
SUITS TO ENFORCE ITS PROVISIONS, CONSISTENT WITH FEDERAL SECURITIES LAWS.
The CBOT and CBOE entered into the 1992 Agreement to resolve their
ongoing disputes about the meaning of the Exercise Right granted in Article
Fifth(b) of the CBOE's Articles of Incorporation. Despite CBOE's attempts to
mischaracterize the nature of the 1992 Agreement, the fact remains it is a
contract between the two exchanges - it is not a "rule" of the CBOE or of the
CBOT. In fact, this 1992 contract called for both the CBOT and the CBOE to file
appropriate rule changes with their respective regulatory agencies, the CFTC and
the SEC. (Cmplt. (P) 4(a)) These Rule Amendments were attached as exhibits to
the 1992 Agreement. (Cmplt. Ex. C at 9-12)(2)
Having had disputes both before and after the Buckley litigation, the
parties were careful to provide an explicit avenue for resolving future
disputes. Section 6(c) of the Agreement provides that "the parties mutually
agree that either party to this Agreement may bring suit (on its own behalf or
on behalf of its members, or both) to enforce the terms of this Agreement and to
recover damages for any breach of this Agreement." The Agreement nowhere
provides that either the SEC or the CFTC has jurisdiction to interpret the
contract or enforce its terms.
In filing this action, the CBOT simply seeks to enforce the 1992
Agreement as provided in (S)6(c). The CBOE, on the other hand, suggests that
this provision should be ignored by the Court (and by the SEC), claiming that
only the SEC can resolve disputes about the Exercise Right. But the SEC itself
found that the Agreement, including the enforcement provision in (S)6(c), was
consistent with federal securities law. As the CBOE admits (Def. Mem. at 4),
both the 1992
_______________________________
(2) The fact that both the CBOT and the CBOE submitted corresponding rule
changes to their regulatory agencies does not transform the contract itself into
a "rule" or make the contract itself subject to either SEC or CFTC jurisdiction.
It is only the amended rules, which adopt certain definitions taken from the
contract, that are subject to SEC and CFTC regulation.
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Agreement and the related Rule Changes to be implemented by the CBOE and the
CBOT (attached to the 1992 Agreement as exhibits A and B) were submitted for
agency approval. (Section 4(a))
Since the SEC approved the provisions of the 1992 Agreement -including
Section 6(c) which expressly gave both parties the right to sue in court to
enforce its terms - as consistent with the Securities Exchange Act, CBOE has no
basis for its primary contention that such suits would conflict with federal
securities laws. The SEC never indicated that suits under Section 6(c) to
enforce the Agreement intruded on its regulatory authority or conflicted with
federal securities laws. Enforcing the parties' contract rights here would be
entirely consistent with federal securities law, as the SEC found. And CBOE's
claim that only that SEC can resolve disputes under the Agreement ignores
Section 6(c), which allows the parties to seek damages for any breach of the
Agreement, since the SEC itself has no jurisdiction to award damages.
II. THERE IS NO CONFLICT BETWEEN FEDERAL SECURITIES LAW AND THE CBOT'S
CONTRACT.
Section 28(a) of the Securities Exchange Act makes clear that Congress
intended for state common law remedies to coexist with federal securities law:
"the rights and remedies provided by this chapter shall be in addition to any
and all other rights and remedies that may exist at law or in equity." 15 U.S.C.
(S) 78bb(a). Based on that Section, courts have held that Congress did not
intend the Act generally to displace state law (known as field preemption);
instead, the Act preempts state law only where an actual conflict exists
(conflict preemption). E.g. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware,
414 U.S. 117 (1973) (Congress intended "that state law continues to apply where
the Act itself does not"); Altair Corp. v. Harris, 110 Ill. App. 3d 993, 996,
443 N. E. 2d 631, 633 (1st Dist. 1982) (it is "universally recognized" that the
Act does not totally preempt the field
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relating to securities regulation).(3) As a result, a common law cause of action
for fraud under Illinois law is not preempted by the Act. Altair Corp., 110 Ill.
App. 3d at 996, 443 N.E. 2d at 633.
For purposes of federal preemption, an actual conflict between state
and federal law exists only when "compliance with both federal and state
regulations is a physical impossibility" or where the state law "stands as an
obstacle to the accomplishment and execution of the full purposes and objectives
of Congress." E.g. Pacific Gas & Electric v. State Energy Resources Comm'n., 461
U.S. 190, 204 (1983). Enforcing the 1992 Agreement will not result in any such
conflict.
Indeed, the parties here specifically wrote their contract to remove
any prospect for a conflict between the 1992 Agreement and federal securities
law. In Section 4(d) of the 1992 Agreement, "the parties mutually agree that it
is appropriate, and within the meaning and spirit of Article Fifth(b), for the
CBOE to interpret Article Fifth(b) in accordance with the provisions of this
Agreement." (Cmplt. Ex. C at 7) Since the provisions of the 1992 Agreement
govern how CBOE must interpret Article Fifth(b) and the SEC has found those
provisions to be consistent with the Securities Exchange Act, a conflict between
the contract and federal securities law is unfathomable. So long as CBOE adheres
to the contract, no conflict will exist.(4)
____________________________
(3) Nor did Congress intend for the Securities Exchange Act to generally
displace state law with respect to corporations. E.g. CTS Corp. v. Dynamics
Corp. of America, 481 U.S. 69, 91 (1987) (holding that it is "for States to
create corporations, to prescribe their powers, and to define the rights that
are acquired by purchasing their shares."); Herpich v. Wallace, 430 F.2d 792,
809 (5th Cir. 1970) (relying on Section 28(a) to hold that Congress did not
intend to displace state law regarding the management of corporations).
(4) Section 6(b) of the 1992 Agreement provides further assurance against a
conflict by confirming that "the Agreement shall be governed and construed in
accordance with the laws of the State of Illinois," except to the extent the
Agreement and accompanying rule changes are governed by federal law. (Cmplt. Ex
C at 7)
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Buckley v. CBOE, 109 Ill. App. 3d 462, 440 N.E. 914 (1st Dist. 1982),
does not support the existence of a conflict under the circumstances present
here. The substantive dispute in Buckley was whether CBOT lessors or lessees
held the Exerciser Right. There, the court reasoned that a conflict existed
because if the state court held that Buckley, the holder of a full CBOT
membership, retained his Exercise Right to become a CBOE member, Buckley's
lessee could have appealed to the SEC for administrative review and a differing
interpretation. On review, if the SEC had determined that the lessee, and not
Buckley, was the CBOT member with the Exercise Right, a conflict would have
existed. Buckley, 109 Ill. App. 3d at 470, 440 N.E. 2d at 919. Here, CBOE seeks
to impose new conditions on the Exercise Right of all Full Members and claims
the CBOT's restructuring will cause the Exercise Right to be extinguished for
all Board of Trade members. CBOE's view leaves no room for competing claims to
the Exercise Right as existed in Buckley.
In addition, the plain language of the 1992 Agreement itself confirms
the absence of any possible conflict arising out of this dispute. Section 3(d)
of the Agreement specifies three conditions that must be met in the event of
restructuring by the CBOT in order to preserve the Exercise Right. None of those
conditions prevent the CBOT from changing its state of incorporation, becoming a
for-profit corporation, or creating an electronic subsidiary.(5) None of these
conditions prevents a CBOT Full Member from exercising his or her right to trade
at the CBOE and, at the same time, trading CBOT products electronically (as CBOT
Full Members are able to, and do, today). Nor, of course, is there any policy
embodied in federal securities law to compel such a result. Accordingly, CBOE
has not established the prerequisites for federal conflict preemption.
_____________________________
(5) In fact, the corporate law of both Illinois and Delaware expressly
provide that a successor corporation assumes all of the rights and privileges
(as well as the obligations) of the merged corporation(s). 8 Del. C. (S) 259;
805 ILCS 105/111.50.
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III. BUCKLEY DOES NOT PREVENT THIS COURT FROM RULING ON THE MERITS OF THE CBOT'S
CONTRACT-BASED CLAIM.
Buckley was brought by both an individual CBOT member, Alan Buckley,
and the CBOT, seeking a declaration that the Exercise Right granted to "every
present and future" CBOT member in Article Fifth (b) was retained by Buckley
when he leased his CBOT trading privileges to another person. The CBOE claimed
that Buckley's lessee was the CBOT "member" who held the Exercise Right and had
already advised Buckley that his CBOE membership was terminated. Buckley, 109
Ill. App. 3d at 464-65, 440 N.E. 2d at 915-16. The Court found that the claim
was preempted by the Securities Exchange Act, because it constituted an attempt
to circumvent an ongoing membership proceeding and, as we have seen, could lead
to conflicting rulings by the state court and the Securities and Exchange
Commission on whether Buckley or his lessee held the Exercise Right. 109 Ill.
App. 3d at 470-71, 440 N.E. 2d at 919-20. Here, although the CBOE has filed a
"Proposed Rule Change" with the SEC in an effort to bolster its preemption
argument,(6) there is no membership proceeding ongoing at the CBOE or the SEC.
Nonetheless, CBOE claims that "[t]he question regarding the effect of
Plaintiff's reorganization on the Exercise Right is a question regarding
membership on a national securities exchange. Therefore Buckley is directly on
point." (Def. Mem. at 7) But CBOE completely ignores the key difference between
this case and Buckley; namely, unlike here, there was no specific, written
contract that expressly authorized either party to bring suit to enforce its
terms.
________________________
(6) When it signed the 1992 Agreement, however, CBOE gave up its right to
amend or modify the CBOE rules adopted pursuant to the 1992 Agreement without
first obtaining the CBOT's consent. (Cmplt. Ex. C, (P) 4(b) ("the CBOE rule
change shall not be amended or modified in any way by the CBOE without the
written consent of the CBOT")). As noted above, the SEC approved the Agreement,
including Section 4(b). SEC approval of CBOE's Proposed Rule Change would
therefore result in CBOE's breach of Section 4(b) of the Agreement.
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Here, the contract, negotiated between the two exchanges 10 years
after (and in light of) the decision in Buckley, could not be more clear.
Knowing full well of the decision in Buckley, the parties agreed in 1992 that
"either party to this Agreement may bring suit" to enforce the terms of their
Agreement. (Cmplt. Ex. C, (S)6(c)) Now the CBOE seeks to erase that provision
from the contract and, in doing so, to avoid its contractual obligations.
One final difference between this case and Buckley must be mentioned.
As the Buckley court recognized, Buckley had status as an "aggrieved person" to
seek SEC review of the CBOE's final membership termination decision under the
Securities Exchange Act. 109 Ill. App. 3d at 469, 440 N.E.2d at 918-19. In this
case, in contrast, the CBOT has no SEC remedy. The SEC has no jurisdiction to
hear breach of contract actions let alone to award damages as the 1992 Agreement
explicitly provided. If the CBOE's dismissal motion is granted, the CBOT will be
left without any remedy to enforce its 1992 contract with CBOE, and its planned
modernization and restructuring will be stymied, despite the specific
enforcement provisions agreed to by the parties.
IV. THE 1992 AGREEMENT ALSO ANSWERS CBOE'S COLLATERAL ESTOPPEL CLAIM.
The CBOE argues that the CBOT is collaterally estopped from
"relitigating" the issue decided in Buckley. (Def. Mem. at 10-11) This argument
fails at the outset because CBOE never explains how a 1982 lawsuit can estop
CBOT from an action to enforce a contract entered into ten years later.
In addition, CBOE's argument falls flat in light of the material
differences between this case and Buckley. The CBOE itself admitted in its
Buckley brief that the preemption analysis would have been different if there
had been a written contract: "if the CBOE entered into an ordinary commercial
contract, state law could govern the construction of the contract." (Ex. 2 at 25
n *) And
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the CBOE claimed that it had never suggested that it was exempt from state law
merely because it was a regulated entity. Id.
Yet CBOE now claims that Buckley estops the Board of Trade from
enforcing its later-negotiated contract rights under state law. Unlike Buckley,
however, this case involves a contract dispute between two parties who agreed
that each could bring suit to enforce that contract.
V. CBOE HAS DECLARED ITS INTENT TO BREACH THE 1992 AGREEMENT BASED ON THE
CBOT'S RESTRUCTURING, AND HAS DECLARED THAT THE CBOT'S CURRENT TRADING
ACTIVITIES VIOLATE THE 1992 AGREEMENT, RESULTING IN AN ACTUAL CONTROVERSY
RIPE FOR DETERMINATION.
The very purpose of the declaratory judgment statute is "to permit the
court to address a controversy one step sooner than normal, after a dispute has
arisen but prior to any action which gives rise to a claim for damages or other
relief." Bank of Chicago v. Park National Bank, 237 Ill. App. 3d 1085, 1096, 606
N.E.2d 72, 79 (1st Dist. 1992). The declaratory judgment remedy is designed to
fix the rights of a party before there has been an irrevocable change in
position of the parties and provides "security and relief against uncertainty so
as to avoid potential litigation." First America Bank v. Netsch, 166 Ill. 2d
165, 175, 651 N.E.2d 1105, 1109 (1995).
The CBOT's rights under the 1992 Agreement are clearly in
controversy.(7) First, in its Amended Proposed Rule Change filed with the SEC on
October 10, 2000, the CBOE suggests for the first time that the CBOT's current
electronic trading operations violate the 1992 Agreement, claiming that if CBOT
members (or their delegates) have "the ability to trade CBOT products at the
_____________________
(7) The CBOT Board of Directors is expected to vote on Step Two of the
restructuring transactions in December 2000. The CBOT anticipates calling a
membership vote on Step Two as soon as practicable in 2001. Swift resolution of
this contract dispute is therefore imperative, because the cloud cast over the
Exercise Right by CBOE could either force the CBOT to delay the membership vote
or could negatively impact the outcome of that vote and stymie restructuring.
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same time as they are trading on CBOE pursuant to the exercise right" the
Exercise Right may be extinguished. (Cmplt. Ex. D at 6, 11)
Second, none of the conditions the CBOE seeks to impose on the
Exercise Right are found in the 1992 Agreement between the parties. To the
contrary, the contract explicitly permits the CBOT to restructure while
preserving the Exercise Right. Yet despite the plain language of the 1992
Agreement, the CBOE continues to declare that implementation of Step One voids
the 1992 Agreement and may serve as a basis to extinguish the Exercise Right if
the CBOT takes further steps towards restructuring. (Cmplt. (P)(P) 6-7)
Moreover, CBOE has declared that Step Two of the CBOT's restructuring violates
the 1992 Agreement. (Cmplt. Ex. D at 9) In what is likely an attempt to again
avoid a decision on the merits of its position, CBOE hastens to add that
becoming a for-profit Delaware corporation will not, alone, cause it to
terminate the Exercise Right, "as long as CBOT takes no further action to erode
what had been the trading rights and privileges of its former members." (Id. at
10) The 1992 Agreement, however, defines the requisite "trading rights and
privileges" applicable to the Exercise Right. CBOE is not free to disregard
these contractual provisions in order to extinguish the Exercise Right based on
its unilateral determination that some action by the CBOT in connection with
restructuring erodes the rights of CBOT's Full Members.
Finally, after agreeing in Court not to take any action to extinguish
the Exercise Right based on the CBOT's reincorporation, the CBOE did just the
opposite. The CBOE promptly attempted to have this contract dispute resolved by
the SEC, filing a Proposed Rule Change on August 30, 2000 and an Amended
Proposed Rule Change on October 10, 2000. (Cmplt. (P) 10) It bears asking why
the CBOE felt it necessary to seek resolution of this very issue by the SEC, and
yet now contends that there is no actual controversy between the parties.
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VI. THE DOCTRINE OF PRIMARY JURISDICTION DOES NOT SUPPORT CBOE'S SUGGESTION
THAT THIS STRAIGHTFORWARD CONTRACT DISPUTE SHOULD BE DETERMINED BY THE SEC.
The CBOE's argument that the primary jurisdiction doctrine compels
dismissal (or in the alternative a stay) of this action is premised on a
fundamental mischaracterization of the CBOT's claim. The issue before this Court
is one of contract interpretation - and not one of interpretation of CBOE rules.
Fearing perhaps that the Court will recognize that there is no preemption, CBOE
nonetheless suggests that the SEC "should determine the correctness of CBOE's
interpretation of the Exercise Right's scope in this case." (Def. Mem. at 15)
However, the CBOE offers no reason why the SEC has some "special expertise" that
would enable it to ascertain the CBOE's obligations under the 1992 Agreement
better than this Court.
Under any circumstance, the doctrine of primary jurisdiction does not
serve to deprive the court of jurisdiction and is not a proper basis for
dismissal of this action. Rather, if - and only if - this Court determines that
the issue is "within the special competence" of an administrative agency, the
doctrine of primary jurisdiction would allow the court, at its discretion, to
stay these proceedings while an administrative ruling is obtained. Reiter v.
Cooper, 507 U.S. 258, 268-69 (1993), citing Carnation Co. v. Pacific Westbound
Conference, 383 U.S. 213, 222-23 (1966). Although certain factual determinations
may be ceded to an administrative agency pursuant to this doctrine, questions of
law, such as the one presented here, are the "province of the courts." E.g.
Employers Mutual Companies v. Skilling, 644 N.E.2d 1163, 1166 (Ill. 1994);
Segers v. Industrial Comm'n, 711 N.E. 2d 450, 453 (Ill. App. 1990), rev'd on
other grounds by 732 N.E. 2d 488 (Ill. 2000); Casualty Ins. Co. v. Kendall
Enterprises, Inc., 692 N.E. 2d 752, 755 (Ill. App. 1989). In addition, where an
administrative agency cannot provide the remedy sought by plaintiffs (as here,
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where the SEC cannot remedy contract damages), the doctrine of primary
jurisdiction is not applicable. Valiquet v. First Federal Savings & Loan Ass'n
of Chicago, 87 Ill. App. 3d 195, 198-99, 408 N. E. 2d 921, 924 (1st Dist. 1980).
The CBOE's attempt to characterize this dispute as a "membership"
dispute in order to bring it within the SEC's area of expertise is misleading.
The question before this Court does not concern eligibility requirements for
members of a national securities exchange under SEC rules. The issues here are
(i) whether the CBOT's current electronic trading operations and its planned
restructuring satisfies the three conditions specified in the 1992 Agreement;
and (ii) whether CBOE has the right to unilaterally impose conditions on the
Exercise Right that were not imposed by the 1992 Agreement. If the Court rules
that the Exercise Right is preserved, the CBOT's 1,402 Full Members will still
be required to meet the SEC's eligibility requirements to obtain membership, and
would, as CBOE members, be subject to CBOE's rules.(8)
In addition, the CBOE's argument begs the critical question why the
SEC would be the appropriate agency to address questions regarding "the
fundamental changes in [CBOT's] structure and trading procedures." (Def. Mem. at
15) The CBOT is a futures exchange, subject to regulation not by the SEC but by
the CFTC. (See Cmplt. Ex. C, (P) 4(a)) CBOE's own arguments against
restructuring suggest that if any administrative agency should be called upon to
render an opinion (which the CBOT does not agree), it should be the CFTC.
_____________________
(8) At the August 23, 2000 hearing on CBOE's motion to dismiss CBOT's earlier
complaint, the Court, in dicta, rejected CBOE's preemption argument and noted
that "[t]hey don't involve anything with regard to the qualifications of
individuals, particular individuals to exercise and be given member privileges
at the CBOE. That's determined strictly under federal law or under the
Securities Exchange Rule. We're solely talking about the relationship,
contractual relationship between the CBOT and its membership and the CBOE." (Ex.
1at 31)
14
<PAGE>
At its heart, the CBOE's various arguments against CBOT's
restructuring all boil down to the following: after restructuring, CBOT's Full
Members will not be "Eligible Full Members," under the Agreement, because Full
Members will no longer be "in possessions of all trading rights and privileges
appurtenant to such CBOT Full Membership." (Cmplt. Ex. D at 3) Put simply, if
CBOT's 1,402 Full Members remain in possession of all trading rights and
privileges in all contracts traded on the restructured CBOT, the CBOE's
arguments fail and the Exercise Right is preserved. CBOE cannot credibly
contend that the SEC has knowledge or expertise regarding the trading rights and
privileges that do exist, or will exist, for members of a futures exchange that
it does not regulate.
CONCLUSION
----------
The CBOT therefore requests that the Court deny the CBOE's Motion to
Dismiss.
Dated: December 7, 2000 Respectfully Submitted,
/s/Donna M. Welch
-----------------------
Garrett B. Johnson
Emily Nicklin
Donna M. Welch
Attorney No. 90443
KIRKLAND & ELLIS
200 East Randolph Drive
Chicago, Illinois 60601
(312) 861-2000
(312) 861-2200 (Facsimile)
ATTORNEYS FOR PLAINTIFF,
BOARD OF TRADE OF THE CITY OF CHICAGO
Carol A. Burke
Executive Vice President and General Counsel
15
<PAGE>
Board of Trade of the City of Chicago
141 West Jackson Boulevard, 6th Floor
Chicago, Illinois 60604
(312) 435-3726
(312) 341-3392 (Facsimile)
Edward T. Joyce
Edward T. Joyce & Associates PC
11 South LaSalle Street, Suite 1600
Chicago, Illinois 60603-1211
(312) 641-2600
(312) 641-0360 (Facsimile)
William J. Harte
William J. Harte, Ltd.
111 West Washington Street, Suite 1100
Chicago, Illinois 60602
(312) 726-5015
(312) 641-2445 (Facsimile)
Of Counsel
The CBOT urges its members and membership interest holders to read the
Registration Statements on Form S-4, including the proxy statement/prospectus
contained within the Registration Statements, regarding the CBOT restructuring
referred to herein or in connection herewith, when it becomes available, as well
as the other documents that the CBOT has filed or will file with the Securities
and Exchange Commission, because they contain or will contain important
information. CBOT members and membership interest holders may obtain a free copy
of the proxy statement/prospectus, when it becomes available, and other
documents filed by the CBOT at the Commission's web site at www.sec.gov, or from
the CBOT by directing such request in writing or by telephone to: Board of Trade
of the City of Chicago, 141 W. Jackson Blvd., Chicago, Illinois 60604-2994,
Attention: Office of the Secretary, Telephone: (312) 435-3605, Facsimile: (312)
347-3827. This communication shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of securities in
any state in which offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state. No
offering of securities shall be made except by means of a prospectus meeting the
requirements of Section 10 of the Securities Act of 1933, as amended.
16
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