Office of the General Counsel
The Office of the General Counsel (OGC) is the Commission's legal advisor. OGC attorneys represent the Commission in appellate litigation and certain trial-level cases, including bankruptcy proceedings that involve futures industry professionals. As legal advisor, OGC reviews all substantive regulatory, legislative, and administrative matters presented to the Commission. OGC advises the Commission on the application and interpretation of the Commodity Exchange Act (CEA) and other administrative statutes. Through its Opinions Program, OGC staff assists the Commission in performing its adjudicatory functions.
During FY 1997, 44 cases were pending before United States Courts of Appeals. Significant cases included the following.
Appellate Litigation Involving the Commission's Enforcement Program
Dunn v. CFTC, 117 S. Ct. 913 (1997). In this matter, the Supreme Court found that foreign currency options were ''transactions in foreign currency'' for purposes of the Treasury Amendment exclusion to the CEA, 7 U.S.C. § 2(ii). The Commission brought an enforcement action against Dunn and others for allegedly defrauding the general public in connection with the sale of foreign currency options. The district court rejected the defendants' argument that the Treasury Amendment excludes options involving foreign currencies from the scope of the CEA. On appeal, the Second Circuit held that an option was not a transaction in foreign currency until it is exercised and therefore not in the purview of the Amendment. The Supreme Court discarded that rationale and found that under the plain language of the statute, currency options represent transactions in foreign currency and are excluded by the Treasury Amendment unless traded on a board of trade. The Court, however, did not reach the question of what constitutes a board of trade.
Castellano v. CFTC, No. 96-4174 (7th Cir. 1996). A Commission administrative decision denied a former floor broker's application for registration as a floor trader and restoration of his floor broker registration. In his petition for review, Castellano argued that his evidence of rehabilitation was sufficient to rebut the presumption of his unfitness for registration. The presumption of unfitness stemmed from the Commission's prior revocation of his floor broker registration and his involvement in multiple exchange disciplinary proceedings. Castellano also argued that the Commission's denial of his registration application violated the Double Jeopardy Clause. The case is fully briefed and awaiting decision.
CFTC v. Frankwell Bullion, et al., 99 F.3d 299 (9th Cir. 1996), rehearing denied (9th Cir., Feb. 13, 1997). The Ninth Circuit affirmed a district court order dismissing a Commission enforcement action for lack of jurisdiction. The Commission action sought to enjoin several unregistered companies from selling and marketing off-exchange foreign currency futures contracts to the general public. The Court concluded that the Treasury Amendment excludes all off-exchange foreign currency transactions from the CEA.
Grossfeld and Stein v. CFTC, No. 96-5525 (11th Cir. 1996). This petition for review arose from an administrative enforcement complaint brought by the Commission against Grossfeld and Stein. The complaint charged Grossfeld and Stein with violations of the anti-fraud and supervisory provisions of the Act and CFTC regulations in connection with the solicitation of commodity option transactions and the maintenance of commodity option accounts. The Commission's opinion imposed a civil monetary penalty of $1.8 million against Grossfeld and $500,000 against Stein. In their appeal to the Eleventh Circuit, Grossfeld and Stein argue that the imposition of sanctions upon them by the Commission following a fine assessed them by the National Futures Association violates the Double Jeopardy Clause. The case is fully briefed and is awaiting decision.
LaCrosse v. CFTC, No. 97-1239 (7th Cir. 1997). LaCrosse, a floor broker, appealed a Commission administrative decision that found he had engaged in fraudulent conduct on the floor of the Chicago Board of Trade. The Commission imposed a cease and desist order, revoked his registration, and banned him from trading for a period of five years. LaCrosse had previously pled guilty to a felony violation and a misdemeanor violation of the Act in a criminal proceeding. The case represents one of the first enforcement actions brought by the Division of Enforcement implementing Section 9(b) of the CEA, 7 U.S.C. §13(b). The case is fully briefed and awaiting decision by the Seventh Circuit.
Ryan v. CFTC, No. 97-2120 (7th Cir. 1997). This petition for review arose from a Commission opinion and order in which the Commission concluded that Ryan failed to make a clear and convincing showing that his registration as a floor trader would pose no substantial risk to the public. Based upon evidence that Ryan is subject to statutory disqualification from registration under Section 8a(2) of the CEA, 7 U.S.C. §12a(2), the Commission denied his application for registration. The Commission also determined, based upon Section 9(b) of the CEA, 7 U.S.C. §13(b), that Ryan should be prohibited from trading for six years. In both instances, the Commission concluded that Ryan had failed to overcome the statutory presumption that, due to his four felony convictions (including three criminal violations of Section 4b of the Act, 7 U.S.C. §6b, and one felony wire fraud conviction) and one misdemeanor violation of the CEA, he would pose a substantial risk to the public. The matter has been fully briefed and is awaiting oral argument.
Wong v. United States of America, et al., No. 96-1998 (9th Cir. 1997). This is an appeal from an August 16, 1996, order entered by the United States District Court for the Central District of California. The court dismissed with prejudice the complaint filed by Wong against the Commission, a former CFTC regional counsel, and certain State of California parties on the grounds that the district court lacked jurisdiction over the subject matter of the action and the complaint failed to state claims upon which relief could be granted. In his complaint, Wong sought to vacate consent orders entered in two federal district court injunctive cases and a CFTC administrative enforcement action settling Wong's liability for his participation in the off-exchange sale to the public of foreign currency and precious metal futures contracts. Wong also sued to recover damages, contending that he had been fraudulently induced to enter into the settlements. On appeal, Wong argues that CFTC v. Frankwell Bullion Ltd. (discussed above), which held that the CEA's Treasury Amendment exempts off-exchange foreign currency futures transactions from Commission jurisdiction, should be applied retroactively to invalidate the settlements. The case is fully briefed and is awaiting decision.
Appellate Litigation Involving the Commission's Reparations Program
Gilbert v. CFTC, No. 96-70580 (9th Cir. 1996). This petition for review involves a customer's claim that a futures commission merchant (FCM) violated the anti-fraud provisions of the Act in connection with trading his account. The Commission issued an order affirming a judgment officer's dismissal of Gilbert's complaint on the basis that he failed to sustain his burden of proving that the FCM violated Section 4b of the Act in connection with filling an order. This case is fully briefed and awaiting decision by the Ninth Circuit.
Elek M. and Margaret Lehoczky v. CFTC, et al., No. 97-4181 (2d Cir. 1997). In this matter, the Second Circuit denied the Lehoczkys' petition for review of two Commission orders. The Commission orders dismissed two customers' reparations complaint against an FCM, an IB, and two associated persons (AP). In its two orders, the Commission found that the complainants did not prove their claims of churning, fraudulent solicitation, failure to supervise, unauthorized trading, bad faith margin calls, or misrepresentation of the risks of option trading. In its unpublished summary order, the Court held that the weight of the evidence supported the Commission's decisions and that the petitioners failed to demonstrate any procedural irregularities.
AVCO Financial Corp. v. CFTC, No. 96 Civ. 2853 (JGK) (S.D.N.Y. 1996), appeal withdrawn, No. 96-6330 (2d Cir. 1996). In this injunctive and declaratory judgment action, the publisher of computer software designed to chart foreign currency futures sought to enjoin a Commission investigation. The Commission was investigating whether the company acted as an unregistered commodity trading advisor (CTA) by marketing its currency trading system. The publisher asserted that its trading recommendations constituted impersonal investment advice exempt from regulation under the Act and that any effort to regulate its activities constituted an abridgement of its First Amendment right of free speech. The district court on June 5, 1996, denied the publisher's request for a preliminary injunction. The court found that the publisher had failed to establish irreparable injury to its business and that the Commission was entitled to complete its duly authorized investigation to ascertain all the facts surrounding the publisher's activities. 929 F. Supp. 714 (S.D.N.Y. 1996). Thereafter, on November 22, 1996, the district court dismissed the publisher's action in its entirety on the grounds that, under the doctrine of sovereign immunity, it lacked jurisdiction to review the Commission's investigation and that the publisher's claims were otherwise not ripe for adjudication.
Commodity Trend Service, Inc. v. CFTC, No. 97-C-2362 (N.D. Ill. 1997). This declaratory judgment action arose from a Commission investigation into whether Commodity Trend Service, Inc. (CTS) or its principals acted as unregistered CTAs or engaged in fraud. CTS sought a declaration that the CTA registration requirement of the CEA violates the First Amendment right of free speech. On July 29, 1997, the district court issued an order rejecting the request for a declaratory judgment on the basis that the issue was not ripe for judicial resolution in the absence of any administrative action having been taken by the Commission against CTS. The court also ruled that CTS could not bring a facial challenge to the CTA registration requirement because facial challenges on First Amendment grounds do not apply to commercial speech. On September 8, 1997, the district court denied CTS's request for reconsideration.
Peltz v. SHB Commodities, Inc., et al., No. 96-7401 (2d Cir. 1997). On May 15, 1997, the Second Circuit issued a decision affirming a district court's dismissal of Peltz's claims under the CEA against SHB, an FCM, and granting SHB's cross-claim. Peltz had claimed that SHB violated Commission Rule 166.2 by failing to obtain proper authorization to allow a third party to trade his account. The Second Circuit found that SHB was not liable for the trades since the third party had actual authority to trade Peltz's account. The Commission accepted the court's invitation to file an amicus brief and addressed two CEA-related issues regarding the scope of Rule 166.2, 17 CFR 166.2 (1997), and the issue of ratification. The Commission argued that neither Rule 166.2, by its terms, nor applicable case law supported Peltz's contention that an FCM was required to obtain written authority from a customer before executing trades from the customer's third party agent. On the issue of ratification, the Commission advised the court that under Commission case law ratification requires clear and unequivocal proof of a knowing adoption of wrongful conduct. In issuing its decision, the court stated that its ''views accorded with the CFTC's position.''
OGC monitors bankruptcy proceedings involving futures industry professionals and in some cases assists courts, trustees, and customers in carrying out the special Bankruptcy Code provisions pertaining to commodity firms. During FY 1997, OGC monitored 31 bankruptcy cases. Significant cases included the following.
In re Jay Lee Blevins, No. 96-08571-6BJ, Adversary Proceeding No. 97-179 (Bankr. M.D. Fla. 1996). On or about December 26, 1996, the debtor, Jay Lee Blevins, an AP of an unregistered CPO, filed a petition for relief under Chapter 13 of the Bankruptcy Code, converting the case shortly thereafter to a Chapter 7 liquidation. The Commission has a claim against Blevins based on a disgorgement judgment of $315,859, plus $61,758 in prejudgment interest, entered in its civil injunctive action, CFTC v. Dominick, et al., No. 94-CIV-ORL-18 (M.D. Fla. 1994) (holding, after a trial on the merits, that Blevins committed fraud in violation of the CEA, 7 U.S.C. §§ 6b and 6o). On this basis, on May 7, 1997 the Commission filed a proof of claim against Blevins for disgorgement of $377,616.51, plus post-judgment interest of 5.67 percent per year.
On May 9, 1997, the Commission initiated this proceeding seeking a determination that Blevins's disgorgement debt is nondischargeable under Bankruptcy Code Section 523(a)(2)(A) as money obtained by fraud and false misrepresentations and under Section 523(a)(4) as money obtained by fraud or defalcation while acting in a fiduciary capacity. Blevins responded by filing a motion to dismiss the Commission's proceeding. The Commission opposed the debtor's motion, arguing that, as the holder of a judgment of disgorgement, the CFTC is a creditor with standing to seek a determination of nondischargeability under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4). The court denied Blevins's motion to dismiss on August 4, 1997. The Commission intends to move for summary judgment in this adversary proceeding.
Significant Regulatory Activities
As the Commission's legal advisor, OGC drafts or reviews legal memoranda to the Commission, proposed regulations, enforcement actions, special reports to Congress, legislative proposals, responses to requests from other federal agencies, proposed interpretive and no-action letters, applications to trade futures and option contracts, and proposals to amend exchange bylaws or rules. In FY 1997, OGC reviewed more than 90 matters related to enforcement actions, investigations of illegal activity, and complaints in administrative or judicial actions; over 30 applications to trade futures or option contracts; and approximately 130 exchange rule amendments.
The growing international nature of futures and option markets continued to impact OGC's work. Through the review of numerous interpretive letters and Commission orders, OGC assisted the Division of Trading and Markets in implementing rules governing the offer and sale of foreign futures and option contracts in the United States. During FY 1997, OGC issued two no-action letters regarding the offer or sale within the United States of foreign futures contracts based on foreign stock indices. OGC also worked closely with the Division of Enforcement to establish information-sharing agreements with foreign financial market regulators and with the Divisions of Trading and Markets and Enforcement and the Office of International Affairs in their activities involving the International Organization of Securities Commissions (IOSCO).
Pursuant to exemptive authority granted to the Commission by the Futures Trading Practices Act of 1992, OGC has helped the Commission to analyze requests for exemptions from various requirements of the CEA and Commission regulations for certain exchange-traded futures and option contracts.
OGC helps to prepare, and comments on, proposed legislation that would affect the Commission. OGC also reviews all Commission congressional testimony. During FY 1997, OGC provided assistance with respect to: (1) regulatory reform bills titled the Commodity Exchange Act Amendments of 1996; (2) regulatory reform bills titled the Commodity Exchange Act Amendments of 1997; and (3) the Financial Services Competitiveness Act of 1997.
During FY 1997, OGC advised the Commission on issues raised under the Freedom of Information, Privacy, and Government in the Sunshine Acts. It also assisted the Commission in complying with the Regulatory Flexibility and Paperwork Reduction Acts.
OGC is responsible for all matters relating to the Commission's ethics standards and compliance with its Code of Conduct and the Office of Government Ethics (OGE) government-wide ethics regulations, including the provision of annual ethics training for CFTC employees as required by OGE regulations.
OGC continued to advise the Commissioners who chair the Commission's advisory committees on procedural and substantive matters. The Advisory Committee on CFTC-State Cooperation provides advice to the Commission on matters of joint concern to the states and to the Commission. The Agricultural Advisory Committee provides advice on issues affecting agricultural producers, processors, lenders, and others interested in or affected by the agricultural markets. The Financial Products Advisory Committee provides advice on issues concerning financial futures and option markets regulated by the Commission.
The Commission's appellate jurisdiction in adjudicatory matters includes:
(1) administrative cases prosecuted by the Division of Enforcement (Division) against alleged violators of the CEA or related regulations;
(2) reparations cases brought by futures customers to recover money damages from industry registrants; and
(3) adjudicatory actions by industry self-regulatory organizations.
Some of the Commission's significant decisions during the past fiscal year include the following cases.
Cases Involving Prohibitions on Trading Under Section 9(b) of the Act
The Commission brought administrative enforcement proceedings against traders and brokers on markets regulated by the Commission after their conviction and criminal sentencing by United States district courts. In these cases, the Commission for the first time applied the requirement in Section 9(b) of the Act that persons convicted of specific felonies shall be barred for five years or longer from participating in markets regulated by the Commission. In each case, on appeal from a decision of an Administrative Law Judge (ALJ), the Commission independently assessed the factual record, including evidence of the gravity of the wrongdoing, mitigation, and rehabilitation, and imposed sanctions accordingly.
Several of these Section 9(b) cases had their genesis in a sting operation conducted by the CFTC and the FBI during 1987-1988 in the Japanese Yen and Swiss franc futures pits of the Chicago Mercantile Exchange.
In In re Baker, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,065 (CFTC May 28, 1997), Baker appealed a decision of an ALJ. The ALJ found that, by reason of Baker's criminal conviction for a felony violation of Section 4b of the Act, he was statutorily disqualified from registration. The ALJ revoked Baker's registration as a floor broker and imposed a five-year trading ban. The Commission affirmed the revocation of the registration and ordered Baker to show cause why a seven-year trading ban should not be imposed.
In In re Crouch, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,114 (CFTC July 14, 1997), both the Division of Enforcement and Crouch appealed the initial decision revoking Crouch's registration as a floor broker and imposing a five-year trading ban based upon Crouch's criminal conviction of a violation of Section 4b of the Act. The Commission affirmed.
In In re Mosky, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,097 (CFTC June 25, 1997), the Division of Enforcement appealed from an ALJ's decision refusing to prohibit Mosky from trading on markets regulated by the Commission although Mosky was convicted of eight felonies. The Commission imposed a permanent trading ban on Mosky. Mosky appealed the Commission's decision, and the Court of Appeals dismissed. Mosky v. CFTC, No. 97-3193 (7th Cir., dismissed Sept. 11, 1997).
InIn re Smith, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,991 (CFTC Mar. 11, 1997), both respondent and the Division appealed from an ALJ's decision. The ALJ revoked Smith's registration as a floor broker and imposed a two-year trading ban. The Commission revoked Smith's registration and imposed a five-year trading ban. Smith appealed the Commission's decision, and the Court of Appeals dismissed. Smith v. CFTC, No. 97-1696 (7th Cir., dismissed June 16, 1997).
In re Marren, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,098 (CFTC June 26, 1997), also involved the yen and Swiss franc sting operation. The Division of Enforcement appealed from a decision of an ALJ revoking Marren's registration as a floor broker. The Division believed that the ALJ's decision as written could be interpreted to entitle respondent to reregistration after five years. The Commission held that a registration revocation continues until specifically terminated by the Commission after consideration of an application by the revoked registrant. The Commission also held that registration will be conferred only upon a revoked registrant who shows that he or she poses no threat to the markets.
Other Section 9(b) cases adjudicated by the Commission during FY 1997 originated with a sting operation conducted by the CFTC and the FBI during 1987-1988 in the soybean pit of the Board of Trade of the City of Chicago.
In In re Cox, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,939 (CFTC Jan. 17, 1997), the Division appealed the decision of an ALJ. In that decision, the ALJ refused to revoke Cox's floor broker registration and permanently to prohibit him from trading on markets regulated by the Commission even though Cox had been convicted of 46 felony violations. The Commission revoked Cox's floor broker registration and imposed a permanent trading prohibition. Cox has appealed the Commission's decision. Cox v. CFTC, No. 97-1225 (7th Cir., pet. for review filed Jan. 30, 1997).
In In re Fetchenhier, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH)¶ 27,055 (CFTC May 8, 1997), the respondent appealed from a decision of an ALJ denying him registration as a floor trader and imposing a five-year trading prohibition. In light of his conviction of four felonies, the Commission denied Fetchenhier's application for registration and ordered him to show cause as to why it should not impose a ten-year trading prohibition on him.
In In re Kenney, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,992 (CFTC Mar. 11, 1997), the Division appealed from an ALJ's decision. In that decision, the ALJ refused permanently to prohibit respondent from trading on markets regulated by the Commission, even though Kenney was convicted of ten felony and two misdemeanor violations of Section 4b of the Act. The Commission imposed a permanent trading ban.
In In re LaCrosse, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,944 (CFTC Jan. 21, 1997), both the respondent and the Division appealed from a decision of an ALJ imposing a three-year trading prohibition on respondent from trading on markets regulated by the Commission. The Commission imposed a five-year trading ban. LaCrosse has appealed the Commission's decision. LaCrosse v. CFTC, No. 97-1239 (7th Cir., pet. for review filed Feb. 3, 1997).
In In re Ryan, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,049 (CFTC Apr. 25, 1997), the Division appealed from an ALJ's decision granting respondent's application for registration as a floor trader and refusing to prohibit him from trading on markets regulated by the Commission. In view of Ryan's convictions of one misdemeanor and four felony violations, the Commission denied his floor trader registration application and imposed a trading ban of six years. Ryan has appealed the Commission's decision. Ryan v. CFTC, No. 97-2120 (7th Cir., pet. for review filed May 8, 1997).
In In re Schneider, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,959 (CFTC Feb. 13, 1997), Schneider appealed from an ALJ's decision permanently prohibiting him from trading on the markets regulated by the Commission due to his convictions for 14 felony violations of Section 4b of the Act. The Commission affirmed.
In In re Vercillo, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,071 (CFTC May 30, 1997), both the Division and respondent appealed from an ALJ's decision denying Vercillo's registration as a floor trader for five years and imposing a five-year trading ban. The Commission affirmed the floor broker registration revocation and cease and desist order, denied Vercillo's floor trader registration application, and imposed a permanent trading ban. Vercillo has appealed the Commission's decision. Vercillo v. CFTC, No. 97-2441 (7th Cir., pet. for review filed June 12, 1997).
Cases Involving Other Commission Enforcement Actions
In re Grossfeld and Stein, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,921 (CFTC Dec. 10, 1996). Respondents appealed a decision of an ALJ imposing civil money penalties as a sanction for their violations of the anti-fraud and supervisory provisions of the Act and the Commission's regulations. The Commission found that respondents were involved in a solicitation fraud scheme in which customers lost at least $2 million. The Commission also found that Grossfeld, as principal of the involved FCM and IB, was responsible for their fraudulent practices. The Commission performed its own assessment of the evidence. The Commission concluded that respondents had waived a net worth hearing and that the record supported the imposition of civil money penalties of $1.8 million on Grossfeld and $500,000 on Stein. Respondents have appealed the Commission's decision. Grossfeld and Stein v. CFTC, No. 96-5525 (11th Cir., pet. for review filed Dec. 24, 1996).
In re Clark, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,032 (CFTC Apr. 22, 1997), appeal pending, No. 97-4228 (2d Cir., filed Aug. 8, 1997). The respondent floor broker appealed from the ALJ's decision revoking his registration under Section 8a(3)(M) of the Act, a catchall provision authorizing adverse action against a registrant for ''good cause.'' The Division alleged that Clark was disqualified for registration based on nine exchange disciplinary actions of varying severity. The ALJ declined to give the exchange decisions collateral estoppel effect and required the Division to prove the underlying conduct. The ALJ's initial decision found that the underlying conduct proved in two of the nine exchange actions violated the antifraud provisions of Section 4b of the Act and were a sufficient basis to revoke Clark's registration. He found the other alleged misconduct unproved. On cross-appeals by Clark and the Division, the Commission affirmed the violations of Section 4b. However, the Commission also held that the ALJ erred in ruling that an exchange disciplinary action can never be given collateral estoppel effect to establish a statutory disqualification under Section 8a(3)(M). The Commission articulated that in Section 8a(3)(M) cases based on exchange disciplinary actions, a registrant is presumptively disqualified under Section 8a(3)(M) when he or she ''has been involved in a pattern [two or more] of exchange disciplinary actions over several years alleging serious rule violations and resulting in the imposition of significant sanctions . . . ''
In re Rousso, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,133 (CFTC Aug. 20, 1997). Respondents appealed an ALJ's decision finding them liable for 143 noncompetitive futures transactions in the New York Mercantile Exchange's crude oil contracts pit. The ALJ found that respondents operated a noncompetitive trading network for their own profit at the expense of customers. Based on its independent assessment of the record, the Commission concluded that the record supported the ALJ's liability findings and warranted revocation of respondents' registrations, imposition of ten-year trading bans on each of the respondents, and civil monetary penalties of $200,000 for respondent Rousso, $100,000 for respondent McGoldrick, and $50,000 for respondent Reidy. Respondents have appealed the Commission's decision. Rousso, et al. v. CFTC, No. 97-4232(L) (2d Cir., pets. for review filed Aug. 12 and 13, 1997).
In re Grain Land Cooperative, In re Roger J. Wright, In re Southern Thumb Co-op, Inc., CFTC Docket Nos. 97-1, 97-2, and 97-3 (CFTC Sept. 12, 1997). In these three related applications for interlocutory review, the Commission addressed ex parte communications and separation of functions issues. The respondents claim that Division attorneys improperly discussed the merits of the cases with the Commission between the time the Commission voted to authorize the complaint and the date on which the complaints were signed by the Commission's Secretary and filed with the Proceedings Clerk. The Commission held that no ex parte violations occurred under either the Administrative Procedure Act or the Commission's rules because the plain language of both prohibits only communications between Commission decisionmakers and persons ''outside'' the agency. The Commission held further that, while separation of functions rules prohibit contacts between prosecutorial employees and decisionmakers within an agency, those rules apply to prevent a prosecutor from participating in the decision of a case or from advising a decisionmaker. The Commission held that in the instant cases, the challenged communications occurred before the complaint had been filed and served and before any proceedings in the cases had occurred. Since the decisions in these cases would be made at a point in time remote from the challenged communications, the Commission ruled that no violation of separation of functions rules occurred. Based on this reasoning, the Commission granted the Division's application for review in Roger J. Wright (in which the ALJ had held that ex parte and separation of functions violations appeared to have occurred) and reversed the ALJ's holding. The Commission denied respondents' applications for review in Grain Land Cooperative and Southern Thumb Co-op (in which a different ALJ found no violations of these principles).
Cases Involving the Commission's Reparations Program
Williams v. Lind-Waldock & Company, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,111 (CFTC July 10, 1997). Respondent liquidated complainant's undermargined futures account over a holiday weekend through an exchange of futures for physicals (EFP) transaction. The ALJ awarded damages and respondent appealed. The sole issue on appeal was whether Lind-Waldock acted properly in using an EFP to liquidate the position. An EFP is a two-step transaction involving a futures purchase and sale, and a cash purchase and sale. EFPs are an exception to the general rule that all futures transactions must be openly and competitively executed. The Commission found that in this case the transaction used to liquidate complainant's position was not a bona fide EFP and violated Commission Rule 1.38 against noncompetitive trading. Accordingly, it affirmed the initial decision, while modifying the damage award.
Ahlstedt v. Capitol Commodity Services, Inc., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,131 (CFTC Aug. 12, 1997). The Judgment Officer (JO) dismissed complainant's wrongful liquidation claim. The Commission determined that the JO erred in finding that complainant had not mitigated his damages by failing to reenter the market. The Commission remanded the case to the JO to first determine whether there had been a wrongful or unauthorized liquidation and, if so, to assess damages.
Hinch v. Commonwealth Financial Group, Inc., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,056 (CFTC May 13, 1997). The Commission affirmed the JO's $13,651 damage award to complainants, whose commodity options account had been churned. The Commission determined that the AP who handled the account had exercised de facto control over the unsophisticated complainants' trading decisions. The Commission also concluded that the AP executed trades for the account without any regard for complainants' trading objectives and that the trades were motivated by the AP's desire to generate commissions. Under these circumstances, the Commission deemed the number of trades excessive. Finally, the Commission agreed with the JO that complainants' trading losses, rather than the amount they had paid in commissions, was the appropriate measure of damages because their account had been exposed to unnecessary market risk.
Cases Involving Adjudicatory Actions by the National Futures Association
Commonwealth Financial Group, Inc. v. National Futures Association, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,993 (CFTC Mar. 18, 1997), appeal pending, No. 97-4506 (11th Cir., filed Apr. 1, 1997). The NFA instituted a member responsibility action against Commonwealth based on allegations that for the two preceding years Commonwealth had aired deceptive radio advertisements and employed sales representatives who made deceptive telephone solicitations. A member responsibility action is a summary proceeding that allows the NFA to issue temporary remedial sanctions against a registrant to protect the public. The NFA can take such action without notice and a hearing if necessary. On appeal, Commonwealth argued that the NFA failed to show the existence of an imminent threat to the public or other emergency. The Commission held that the NFA gave Commonwealth fair notice and a sufficient hearing prior to the imposition of remedial sanctions. Finding that the evidence adduced at the hearing showed that Commonwealth had engaged in widespread, continuing customer fraud, the Commission held that Commonwealth's conduct warranted the use of a member responsibility action.
Grandview Holding Corp. v. National Futures Association, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,996 (CFTC Mar. 18, 1997). Petitioners appealed from an NFA decision holding that they could not withdraw their settlement offer after the NFA's hearing panel had orally accepted the offer. The NFA rules provide that the hearing panel must issue a written decision accepting an offer of settlement. The panel then furnishes the settlement offer to the NFA's president. A settlement offer becomes ''final and binding'' 15 days after the date the panel issues the offer unless the president refers the matter to the appeals committee for review. The Commission held that under the plain language of the NFA's rules, respondents could withdraw a settlement offer any time within the 15-day period following the issuance of the hearing panel's written decision. The Commission further held that if the president referred the matter to the appeals committee, the respondents could withdraw the offer at any time prior to that committee's final decision. Accordingly, it reversed the NFA's decisions, vacated the settlement, and remanded the matter for further proceedings.