Office of the General Counsel
The Office of the General Counsel (OGC) is the Commission's legal advisor. OGC represents the Commission in appellate litigation and in certain trial-level cases, including bankruptcy proceedings that involve futures industry professionals. Through its Opinions Program, OGC assists the Commission in performing its adjudicatory functions. As legal advisor, OGC reviews all substantive regulatory, legislative, and administrative matters presented to the Commission. OGC also advises the Commission on the application and interpretation of the Commodity Exchange Act (CEA) and other administrative statutes.
OGC represents the Commission before the U.S. Courts of Appeals in appeals of enforcement actions brought by the Commission, appeals from decisions by the Commission in cases brought under the agency's reparations program, and in other litigation, including constitutional and statutory challenges to Commission actions. OGC also defends the Commission in most cases when the Commission is sued in U.S. District Court.
During FY 1999, OGC handled a number of cases involving significant issues. These included constitutional issues involving the First Amendment; the Chicago Board of Trade's (CBOT) challenge to the Cantor-Fitzgerald market; issues involving futures on stock indices; interlocutory Federal court review of ongoing CFTC enforcement matters; fraudulent solicitation; the appropriateness of sanctions and remedies imposed by the Commission; the "in or in connection with" requirement of Section 4b of the CEA; jurisdiction under the collateral order doctrine; challenges brought under the Equal Access to Justice Act (EAJA); issues resulting from complex trade practice cases; hedge to arrive (HTA) contracts issues; the degree of deference to be accorded Commission decisions; the application to the Commission of principles of collateral estoppel; unauthorized trading; judicial appeals of a statutory disqualification proceeding and exchange disciplinary action; and matters involving bankruptcy issues. These matters are summarized below.
First Amendment Litigation
The CEA requires commodity trading advisors (CTAs) to register with the Commission. Registration primarily involves the filing of informational forms. The Commission, however, can deny registration to persons who do not meet statutory fitness requirements, such as persons with a record of violating the CEA or the securities laws. Based on the statutory definition of "commodity trading advisor," the Commission has interpreted the term to include advisors who provide advice through impersonal media such as newsletters, Internet websites and computer software, as well as advisors who manage customer trading accounts or provide one-on-one advice. During FY 1999, OGC was involved in several cases in which persons who provide commodity trading advice through newsletters, websites, or similar media asserted that the registration requirement violates the First Amendment. In some cases, CTAs brought actions against the Commission, seeking declarations that they did not have to register. In other instances, CTAs raised First Amendment issues defensively in enforcement cases brought by the Commission.
In Taucher v. Born, 53 F. Supp. 2d 464 (D.D.C. 1999), an action brought against the Commission by several publishers of commodity trading advice, the Commission argued in the U.S. District Court for the District of Columbia that commodity trading advice that provides guidance on specific trades, and that is intended to substitute for the customer's own judgment in making practical trading decisions, serves an economic function analogous to the advice given to clients by lawyers or other professionals. As a result, the Commission argued, persons in the business of giving this sort of advice engage in a form of professional activity and should be licensable by the government like other professionals. On June 21, 1999, following a three-day trial, the court took a different approach. Relying primarily on Lowe v. SEC, 472 U.S. 181 (1985), a case involving investment advisors in the securities field, the court held that, when applied to advisors who give identical advice and recommendations to every customer, never have any personal contact with customers, never make trades for customers and never supplement their general recommendations with specific recommendations directed at individual customers, the registration requirement constitutes an impermissible prior restraint on speech.
Issues similar to those in Taucher also were raised by publishers of commodity trading advice in suits brought against the Commission in Commodity Trend Service, Inc. v. CFTC, 149 F.3d 679 (7th Cir. 1998) and Agora, Inc. v. Born, No. 98-3453 (D. Md.). In Commodity Trend Service, the U.S. Court of Appeals for the Seventh Circuit, on July 17, 1998, held that the First Amendment issues raised by the plaintiffs were ripe for adjudication. On remand to the U.S. District Court for the Northern District of Illinois, the plaintiffs moved for summary judgment. In a decision issued on September 28, 1999, the district court agreed with the court in Taucher that the registration requirement was unconstitutional as applied to publishers of wholly impersonal commodity trading advice. The court, however, rejected the plaintiff's arguments that publishers of impersonal advice fall outside the statutory definition of "commodity trading advisor," and that the statutory definition would be unconstitutional if it applied to such publishers. "[W]e find that there is no basis for holding this provision unconstitutional," the court wrote, "because it does not require CTS to register or do anything else." The court further held that publishers of impersonal commodity trading advice fall within the scope of the anti-fraud provisions of Section 4o of the CEA and Commission Regulation 4.41, and that the Commission was entitled to investigate whether the plaintiff had violated these provisions.
In Agora, the U.S. District Court for the District of Maryland denied the Commission's motion to dismiss the complaint on March 26, 1999. Cross-motions for summary judgment were subsequently made during FY 1999 and are currently pending.
In CFTC v. AVCO Financial Corp., 28 F. Supp. 2d 104 (S.D.N.Y. 1998), the Division of Enforcement sued a seller of computer software that provided commodity trading advice, on grounds of fraud and failure to register as a commodity trading advisor. The U.S. District Court for the Southern District of New York held for the Commission and granted relief including disgorgement of profits and civil penalties. As part of its decision, the district court determined that the defendants provided personalized advice within the meaning of Lowe v. SEC and, therefore, could be subject to registration without violating the First Amendment. The court's determination was based on a combination of factors, including the specificity and immediacy of the trading advice provided by the respondent's software, the fact that the respondent referred customers to brokers authorized to use the respondent's software, and the fact that the respondent gave some customers trading advice directly in individual telephone conversations. The case was appealed to the U.S. Court of Appeals for the Second Circuit under the name CFTC v. Vartuli, Nos. 98-6280 and 98-6281 (2d Cir.) and briefed by OGC during FY 1999. The case was argued on September 13, 1999. In addition to the First Amendment, the appeal involves issues relating to the scope of Sections 4b and 4o of the CEA, the definition of "commodity trading advisor," and the proper method for determining the amount of profits to be disgorged by fraudulent enterprises as a remedy for violations of the CEA. No decision has been rendered by the Second Circuit.
CBOT's Challenge to the Cantor-Fitzgerald Market
The Commission's September 4, 1998 approval of the Cantor Financial Futures Exchange (CFFE) as a contract market in four U.S. Treasury bond futures contracts was upheld in the U.S. District Court for the Northern District of Illinois, in Chicago Board of Trade, et al. v. CFTC, No. 98cv5631 (N.D. Ill. Sept. 23, 1999). The Court rejected arguments by plaintiffs, competitors of CFFE, that the Commission erred in approving the CFFE contract markets. The CFFE, which was formed pursuant to an agreement between the New York Cotton Exchange and a subsidiary of Cantor Fitzgerald, LP, was authorized to engage in computer screen-based trading of the four bond futures contracts.
Plaintiffs, the CBOT, the Kansas City Board of Trade (KCBOT), and the Minneapolis Grain Exchange (MGE), challenged the creation of such electronic markets on various grounds, arguing that the Commission acted too quickly in its eight-month review and that the CFFE proposal was unsound. They moved for summary judgment on their claims. The Commission filed a cross-motion for dismissal and summary judgment. It argued that even if the Federal district court had jurisdiction to review the matter, the administrative record in this case, including a 118-page staff memorandum, reveals a fully reasoned decision which responded to all of the critiques of the three challenging exchanges. The Court, while rejecting the Commission's argument that Congress did not provide for Federal district court jurisdiction to review approvals of applications for contract market designation, agreed with the Commission that all of plaintiffs' four challenges to the Commission decision should be rejected.
Futures on Stock Indices: Interpreting the Shad-Johnson Accord
In Board of Trade of the City of Chicago v. SEC, 187 F.3d 713 (7th Cir. 1999), petition for reh'g denied, the Commission filed an amicus brief in support of the CBOT's position that the Securities and Exchange Commission (SEC) erred in denying the applications of the CBOT for designation to trade futures contracts on the Dow Jones Transportation Average (DJTA) and the Dow Jones Utility Average (DJUA). The CBOT challenged the SEC's determination that neither the DJTA nor the DJUA was "a widely published measure of, and [reflected], the market for all publicly traded equity or debt securities or a substantial segment thereof, or shall be comparable to such measure." 7 U.S.C. § 2a(ii)(III). The DJUA and the DJTA are composed of 15 and 20 stocks, respectively, and are designed to reflect broader market segments with capitalizations of $300 billion and $200 billion, respectively.
The Seventh Circuit concluded, consistent with the CFTC's interpretation of the Shad Johnson Accord, 7 U.S.C. § 2a(ii), that the well-capitalized stocks comprising each of these two Dow Jones averages did indeed reflect a substantial equity segment. It rejected the SEC's conclusion that the CEA and accompanying legislative history supported the SEC's statutory interpretation of the "substantial segment" requirement, which was that the stock index itself, and not just the market segment that the stock index reflects, must be "substantial." The Court observed that the published legislative history does "more to support the CFTC's position than to assist the SEC." The court found that the SEC could not properly block such futures contracts based on its disagreement with the CFTC as to how such contracts should be regulated, stating that "Congress has entrusted the CFTC with the task of regulating futures markets, and the SEC is not entitled to adopt a `my way or the highway' view by using its approval power under sec. 2a as a lever."
Interlocutory Federal Court Review of Ongoing CFTC Enforcement Matters
Several times during FY 1999, OGC has been called upon to defend in Federal court ongoing Division of Enforcement administrative proceedings or administrative subpoenas in Federal court. The Commission uniformly prevailed during FY 1999 in defeating these collateral attacks on the scope of its regulatory authority and enforcement prerogatives.
· Effort to use bankruptcy code to enjoin Commission enforcement proceedings. In In re Buckeye Countrymark, Inc., No. 97-34911 (Bankr. W.D. Ohio), the Federal Bankruptcy Court trustee sought to enjoin ongoing administrative enforcement proceedings brought by the Commission against the debtor-in-possession. In those proceedings, the Commission alleged that the debtor, in particular, sold HTA grain contracts that were, in fact, illegal, off-exchange futures contracts. The bankruptcy trustee relied upon various bankruptcy code provisions, including 11 U.S.C. § 362(a) and 11 U.S.C. § 557, as bases to stay the Commission's enforcement proceedings.
The Commission contended that the automatic stay provisions of 11 U.S.C. § 362(a) did not apply to its enforcement proceedings. Specifically, 11 U.S.C. § 362(b)(4) of the bankruptcy code states that Section 362(a) stays do not apply to a government agency's exercise of regulatory powers. The Commission argued that the Commission's ongoing proceedings against the debtor, in which the question of whether or not the debtor's HTA contracts were in fact illegal off-exchange futures contracts, was a duly authorized exercise of its powers. It contended that the Commission's ongoing exercise of its primary enforcement jurisdiction should not be disturbed by collateral Federal court proceedings. In an October 6, 1998, order the Bankruptcy Court ruled in the Commission's favor for the reasons stated above.
In support of its unsuccessful effort to stay Commission enforcement proceedings, the debtor grain elevator argued to the Bankruptcy Court that permitting the Commission to go forward in its enforcement phase to determine the legal status of the HTA contracts, while the Bankruptcy Court simultaneously addressed this question, would be wasteful and duplicative. Accordingly, the Bankruptcy Court requested briefing from the parties on why it should not abstain in further bankruptcy proceedings pending the outcome of Commission proceedings. The Bankruptcy Court then ruled that it would stay the Bankruptcy Court proceedings pending the outcome of the Commission enforcement proceedings. The presiding judge held that resolution of issues before the Bankruptcy Court would benefit from the expertise of the Commission in interpreting the CEA, as well as other rules and regulations governing commodities trading. In re Buckeye Countrymark, Inc., 227 B.R. 498 (Bankr. S.D. Ohio Nov. 16, 1998).
· Efforts in Federal district court to enjoin ongoing enforcement proceedings. In Great Plains Coop. v. CFTC, No. 98cv609 (D. Nebraska), pending appeal, No. 99-2268 (8th Cir.), Great Plains Coop, a grain elevator company, filed a Complaint in Federal district court, seeking to enjoin an administrative enforcement hearing before a CFTC Administrative Law Judge (ALJ) on whether Great Plains Coop's HTA contracts were illegal, off-exchange futures. The Commission moved to dismiss and on April 5, 1999, the district court dismissed the action, finding the request for a writ of mandamus to be moot. The court declined to exercise its discretionary declaratory judgment jurisdiction "based upon the [Commission's] clear statutory authority to conduct enforcement proceedings" under the CEA. Great Plains Coop has appealed that dismissal to the U.S. Court of Appeals for the Eighth Circuit. That appeal has been fully briefed and awaits the scheduling of oral argument.
In Arnold v. CFTC, 165 F.3d 39 (11th Cir. 1998), the plaintiffs sought to enjoin an administrative enforcement proceeding in which the Commission was considering charges that the plaintiffs had committed fraud and violated registration requirements in the conduct of their business as CTAs and commodity pool operators (CPOs). The U.S. District Court for the Southern District of Florida granted the Commission's motion to dismiss on the grounds that the U.S. Court of Appeals has exclusive jurisdiction to review Commission enforcement proceedings and that this exclusive jurisdiction extends to the interlocutory relief sought by the plaintiffs. Arnold v. CFTC, No. 97-08668-CV-ASG (S.D. Fla. Oct. 21, 1997). On November 25, 1998, the U.S. Court of Appeals for the 11th Circuit affirmed the district court's decision.
· Effort to block use of administrative enforcement subpoenas. In Monex Credit Company v. CFTC, No.99cv7824 (C.D. Cal. Sept. 20, 1999), Monex Credit Company sought to block compliance with CFTC administrative subpoenas issued to a nonparty bank in the course of an ongoing CFTC enforcement investigation of Monex Credit Company and its corporate affiliates. Monex Credit argued that the subpoenas did not comply with the Right to Financial Privacy Act, 12 U.S.C. §§ 3401 et seq., and should in any event be quashed. The Federal judge dismissed Monex Credit's claim, holding that the CFTC was conducting a legitimate law enforcement inquiry and that the subpoenaed bank records were relevant to the inquiry. The Federal court also held that Monex Credit, by virtue of having a corporation as one of its partners, was not entitled to Right to Financial Privacy Act protections such as notice of the subpoena or a Federal court cause of action.
Miller v. CFTC, No. 98-70360 (9th Cir.) is a petition for review which arose out of a Commission administrative decision imposing sanctions including a registration revocation, a permanent trading ban, and a $600,000 civil monetary penalty on an AP for fraudulently soliciting customers to buy and sell commodity options over a four-year period. On appeal Miller challenges the CFTC's imposition of the $600,000 civil monetary penalty. Briefing has been completed and the case is scheduled for oral argument before the Ninth Circuit in early November 1999.
The appropriateness of sanctions imposed by the Commission was a significant issue in several appeals pending and/or litigated during FY 1999.
OGC defended successfully challenges to the Commission's choice of sanctions in two cases involving charges of fraud, noncompetitive trading and other violations of the CEA against various traders and brokers. Mayer et al. v. CFTC, and Reddy and Sorkvist v. CFTC, 191 F.3d 109 (2d Cir. 1999). In both of these cases, the Commission found that the respondents had violated the CEA and imposed sanctions, including cease and desist orders, revocations of registration, civil monetary penalties, and trading bans. The U.S. Court of Appeals for the Second Circuit denied the petitions for review. The court held that its review of an agency sanction is highly deferential and that the sanction can be upset only where it is palpably disproportionate to the violation or where the agency has failed to provide a reasoned explanation for it. Another appeal raising similar issues, Guttman v. CFTC, No. 98-4178 (2d Cir.), was argued on August 10, 1998, and remains pending.
Sanctions also were challenged in two appeals involving fraudulent solicitation practices. In Commonwealth Financial Group, Inc. v. CFTC, No. 97-4506 (11th Cir. July 16, 1999), the U.S. Court of Appeals for the Eleventh Circuit upheld the Commission's decision to affirm the sanctions (including fines and a registration suspension) imposed by the National Futures Association (NFA) in a disciplinary action against a broker. In R&W Technical Services, Ltd. v. CFTC, No. 99-60182 (5th Cir.), OGC defended the Commission's imposition of civil monetary penalties and cease and desist orders against marketers of commodity futures advisory software.
In defending all of these appeals, OGC argued that the sanctions imposed by the Commission were reasonable in light of the relative gravity of the violations and were within the broad discretion of the agency. The Commission's choice of sanctions in these cases was attacked as inconsistent with those imposed in prior, allegedly comparable cases. The Commission's briefs emphasized that the sanctions in solicitation fraud cases and trade practice cases are governed by different principles under existing Commission case law. The Commission's briefs, as well as a supplemental letter brief in Guttman, demonstrated that the Commission has consistently imposed substantial sanctions in trade practice cases involving extensive violations. OGC also invoked the principle of administrative law that the choice of a sanction within the Commission's authority is not invalid even if it is more severe than sanctions imposed in other cases. The Second Circuit's holding in Mayer and Reddy did not address directly the issue of comparability; however, the court rejected the application of any rigid, formulaic calculation of civil penalties in favor of a rational relationship between the sanctions and the offenses.
Other sanctions issues common to these cases involved the Commission's retroactive application of a de novo standard of review of an ALJ's choice of sanctions and the Commission's sua sponte increase of those sanctions. Multiple appellants contended that these policies deprived them of the opportunity to defend their position under the new standard of review and improperly "chilled" appeals. The Second Circuit's Mayer and Reddy decision found no merit in these claims. The Court found that, under the Administrative Procedure Act, the Commission has all of the powers it would have in making the initial decision and that by altering its standard of review of sanctions, the Commission neither altered the parties' substantive rights nor created new legal obligations or liabilities. Thus, the court found that the new standard was applied properly to all cases pending at the time of the change.
Other appellate arguments focused on whether the Commission is required to explain why its choice of sanctions differed from that of an ALJ. In defense, OGC invoked the administrative law principle that judicial review of an agency decision looks not at whether the agency erred in overruling an ALJ's decision, but at whether the agency's own findings are reasonably supported by the record. Again, the Second Circuit's Mayer and Reddy decision found no merit to these challenges and upheld the Commission's opinions.
In contrast to these appeals, CFTC v. Carrington Financial Corp., et al., 178 F.3d 1132 (11th Cir. 1999), involved the propriety of a disgorgement order imposed by a U.S. district court. In its decision, the Eleventh Circuit affirmed the district court's findings that appellant Carrington Financial Corp. (Carrington) was liable for violating antifraud provisions of the CEA by fraudulently soliciting customers; that Marc Stephen Wuensch was liable, as an aider and abettor and as a controlling person, for the fraudulent solicitation of Carrington and Trinity Financial Group, Inc. (Trinity); that Carrington and Wuensch failed to supervise Carrington's employees; and that A. Francis Sidoti failed to register as a principal of Trinity. The court of appeals also affirmed the district court's issuance of a permanent injunction against further violations.
However, the court of appeals vacated the district court's order that Carrington, Wuensch, and Sidoti disgorge all of the profits of Trinity and Carrington received directly or indirectly by Sidoti and Wuensch from January 1, 1990, until September 29, 1997. After noting that the district court limited evidence at trial to pre-1995 conduct, the court of appeals held that the district court improperly ordered Carrington and Wuensch to disgorge post-1994 profits. As to Sidoti, the court of appeals held that disgorgement was improper because his failure to register as a principal was not causally related to any profits that he received and because there was no evidence that Sidoti was liable for fraud.
The "In or In Connection With" Requirement of Section 4b of the CEA
Another issue litigated during FY 1999 was the scope of the "in or in connection with" requirement of Section 4b of the CEA. This issue was litigated in Vartuli v. CFTC, No 98-6280 (2d Cir.) (argued September 13, 1999) and R&W Technical Services Ltd., et al. v. CFTC, No. 99-60182 (5th Cir.) (appeal pending as of September 30, 1999), both of which involve, among other issues, the applicability of the anti-fraud provision of the CEA to the sellers of futures advisory software. In both appeals, the private parties appealed decisions, by the Commission in R&W and by a Federal district court in Vartuli, that misrepresentations made in advertisements for futures advisory software constituted fraud "in or in connection with" futures contracts, within the meaning of Section 4b of the CEA. OGC defended these decisions by noting that the most reasonable interpretation of the statutory language is that the phrase "in or in connection with" extends to misrepresentations that relate to futures transactions indirectly. Furthermore, OGC pointed to broad interpretations of the "in or in connection with" language by Federal courts, including cases that held persons liable for violating Section 4b who were not involved directly in making orders for futures contracts, who misrepresented the quality of a CTA, or whose fraudulent conduct occurred prior to the actual opening of a trading account.
OGC also deflected attempts in these appeals to draw analogies to cases interpreting similar language in securities laws. OGC contrasted the "in or in connection with" language in Section 4b(a) of the CEA with the "in connection with" language in Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. OGC stressed that the two regulatory statutes have had their own separate evolution and that the anti-fraud provisions in the securities laws and the CEA are based upon different considerations of policy.
Collateral Order Doctrine
Arnold v. CFTC, No. 97-5713 (11th Cir. Sept. 20, 1999), was an appeal from an interlocutory Commission order that affirmed the decision of an ALJ disqualifying an attorney and his firm from appearing in a Commission enforcement case pending against their clients. Following an evidentiary hearing, the ALJ found the attorney guilty of contemptuous conduct for knowingly making false written representations to induce the ALJ to accept his clients' answers to the administrative complaint after the filing deadline had passed. As authorized by Commission Regulation 10.11(b), the attorney and his firm were debarred from the administrative case, and both they and their clients sought judicial review. Based upon Supreme Court precedent, the Eleventh Circuit dismissed the appeal. The court held that it lacked jurisdiction under the collateral order exception to the final judgment rule, and that judicial review of the disqualification order by counsel or clients will be available only after final disposition of the administrative case.
Equal Access to Justice Act
During FY 1999, OGC was presented with two cases brought under the Equal Access to Justice Act (EAJA). In one of the cases, OGC successfully defended the Commission in the U.S. Court of Appeals for the Second Circuit. In another case, the Second Circuit awarded EAJA fees to the petitioner.
In CFTC v. Dunn, 169 F.3d 785 (2d Cir. 1999), the Second Circuit affirmed the district court's conclusion that the Commission's litigation position in an enforcement action was "substantially justified," 28 U.S.C.A. § 2412(d)(1)(A), thus precluding an award of attorney fees under EAJA. The EAJA applicants argued that, while the Commission had acted in accordance with Second Circuit precedent that upheld CFTC jurisdiction to bring its enforcement action, that position was not substantially justified because the U.S. Supreme Court later adopted a contrary view in Dunn v. CFTC, 519 U.S. 465 (1997). The Court of Appeals concluded, however, that because its precedent was the binding law of the circuit on the jurisdictional question presented during the filing and pendency of the CFTC's action, the CFTC was entitled to rely upon that authority, notwithstanding that the law changed. The EAJA applicants filed a petition for certiorari in the U.S. Supreme Court, which was denied on October 4, 1999.
In New York Currency Research Corp. v. CFTC, 180 F.3d 83 (2d Cir. 1999), a former off-exchange foreign currency trader, which had once been registered as a CTA and a CPO, petitioned for review of a Commission order finding that it had violated the CEA and a Commission rule by not producing documents requested by the Commission's Division of Enforcement. The U.S. Court of Appeals for the Second Circuit held that petitioner did not actually act as a CTA or CPO, and that such action would be a necessary prerequisite to the imposition of recordkeeping and production obligations under the CEA. Petitioners subsequently moved for EAJA fees and the Second Circuit issued an order awarding them to the petitioner.
Trade Practice Cases
The CEA requires that all commodity transactions be executed competitively by open outcry in the trading ring. The difficulty of detecting breaches of this requirement through direct evidence means that circumstantial evidence, particularly inferences drawn from trading patterns and trading data, frequently must be relied upon. See, e.g., In re Buckwalter, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,995 (CFTC Jan. 25, 1991); In re Bear Stearns, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,994 (CFTC Jan. 25, 1991); In re Gilchrist, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,993 (CFTC Jan. 25, 1991). Recent decisions from the U.S. Court of Appeals for the Second Circuit in two complex trade practice cases have provided important guidance to the Commission, particularly with respect to such evidentiary issues as the probative value of patterns of trading, audit trail irregularities, and proof of motive.
Beginning with its opinion and order in In re Rousso, et al., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,133 (CFTC June 25, 1997), aff'd without opinion sub nom. Rousso v. CFTC, No. 97-4232 (2d Cir. Mar. 11, 1998), the Commission analyzed the significance of a recurring pattern of trading marked by characteristics unlikely to occur in an open and competitive market, and the inference properly drawn from such a pattern that trades conforming to the pattern were achieved intentionally by noncompetitive means. The Commission considered the argument advanced by the respondents' expert that the audit trail irregularities associated with the challenged trades reflected random errors or flaws in the exchange's audit trail system. The Commission concluded, as had the Division's expert, that such audit trail irregularities take on additional evidentiary significance when viewed in the context of pattern evidence, and observed that the Division's audit trail evidence indicated that the irregularities often reflected the use of techniques to obscure prearrangement. The Second Circuit affirmed this decision.
The Commission addressed similar issues and reached similar conclusions in three other cases that have been appealed to the Second Circuit, In re Reddy, et al., In re Mayer, et al., 191 F.3d 109 (2d Cir. 1999) and In re Guttman. On September 3, 1999, the Second Circuit issued decisions denying the petitions for review of the Commission's orders in Reddy and Mayer. Characterizing evidence of unlawful trading upon which the Commission had based its decisions variously as "strong," "powerful," "highly probative," and "more than substantial," the Court found that in each case the Commission acted reasonably in concluding that evidence presented by the Division supported the Commission's findings that the trades at issue were executed noncompetitively in violation of the Act. The evidence included the existence of a recurring pattern of trades marked by characteristics unlikely to occur in an open and competitive market and audit trail irregularities associated with such trades. The Second Circuit has not yet issued its decision in Guttman.
Another such case, involving circumstantial evidence of prearranged trading by four large volume traders in the CBOT wheat pit, was briefed and argued before the Seventh Circuit at the end of FY 1998. Elliott, et al. v. CFTC, No. 98-1305 (7th Cir.). The Seventh Circuit has not yet issued a decision.
Hedge to Arrive Contract Litigation
In FY 1999, OGC was invited to file amicus curiae briefs in cases involving challenges to HTA contracts, pending in two U.S. Courts of Appeals.
In Lachmund v. ADM Investor Services, Inc., No. 98-3467 (7th Cir.) and Grain Land Coop v. Obermeyer, Nos. 98-3217, -3304 (8th Cir.), farmer/grain producers challenged unsuccessfully the HTA contracts into which they had entered. They claimed that the contracts that their grain elevator operators had been selling were illegal off-exchange futures contracts. On appeal of this issue, the Commission filed similar briefs in both courts of appeals, urging the courts to apply an analytical method similar to that reflected in two settled enforcement actions involving the same type of grain contracts. In particular, the Commission emphasized the importance of analyzing the entire transaction, not just the written contracts, and the purpose of the parties in entering into the contracts, i.e., whether the transactions were devices for delivery of the commodity or for a speculative purpose. Because of the pendency of related administrative cases before the Commission, the Commission took no position on the merits of either case before the courts of appeals. In an opinion issued on September 13, 1999, the Seventh Circuit adopted the Commission's proposal and methodology and found against Lachmund. The Grain Land case has not yet been decided.
Deference/Standard of Review
During FY 1999, several court decisions have further clarified the degree of deference to be accorded to Commission decisions. The CEA provides that the Commission's liability findings are to be affirmed if they are supported by the weight of the evidence. The U.S. Court of Appeals for the Second Circuit reaffirmed and refined this standard of review in Reddy, et al. v. CFTC, and Mayer, et al. v. CFTC, 191 F.3d 109 (2d Cir. 1999). In deciding these trade practice cases, the Court concluded that the Commission's liability findings cannot be set aside if the Commission acted reasonably "in concluding that the evidence . . . supported its findings," even if alternative conclusions might plausibly be claimed to have been equally reasonable or persuasive. "There was evidence to support each of [the Commission's] factual findings," the Court wrote, "and we are, therefore, bound by them . . ."
Bergamo v. CFTC, No. 98-4254 (2d Cir. Sept. 10, 1999), involved a challenge to the Commission's dismissal of an unperfected appeal from an ALJ's initial decision. The sole issue raised by the petitioner involved the Commission's interpretation of its Part 10 Rules of Practice. The Commission argued that under Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945), its interpretation of its own regulations is entitled to substantial deference unless it is plainly erroneous or inconsistent with the regulation. The court agreed and, finding that the Commission's interpretation of its Rules of Practice was reasonable, dismissed Bergamo's petition for review.
A similar issue of deference was one of the subjects of an action brought by the CBOT, the KCBOT and the MGE seeking judicial review of the Commission's approval of the Cantor Financial Futures Exchange (CFFE) as a contract market. Board of Trade of the City of Chicago, et al. v. CFTC, ---F. Supp. 2d.---, 1999 WL 781669 (N.D. Ill. 1999). The plaintiffs challenged the Commission's interpretation of "open and competitive trading" in Commission Regulation 1.38. Because the Commission's interpretation was neither plainly erroneous nor inconsistent with the language of the regulation, the district court agreed that the Commission's interpretation was entitled to deference. The plaintiffs next challenged the Commission's interpretation of the CEA itself, specifically criticizing the Commission's determination that the CFFE terminal operators were not "floor brokers" under 7 U.S.C. § 1a(8). Again, the court held that "[t]o the extent that the Commission may have interpreted the statute on account of the novel nature of the [CFFE] trading system, its reasoned analysis is entitled to due deference [under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)]."
Cases continued to be brought during FY 1999 in which plaintiffs contended that the Commission was barred by principles of collateral estoppel from taking legal positions different from those adopted in private lawsuits to which the Commission was not a party. Beginning with Grain Land Coop v. CFTC, 1998 WL 988313 (D. Minn. Jan. 7, 1998), the Commission has consistently taken the position that the doctrine of collateral estoppel does not apply where the prior litigation involved different parties and different facts. In that case, the U.S. District Court for the District of Minnesota, citing U.S. v. Mendoza, 464 U.S. 154 (1984), ruled that the interests of the Commission and those of a private litigant necessarily diverge, even when dealing with the same set of facts.
During FY 1999, the Commission defended against a similar challenge in Great Plains Coop. v. CFTC, No. 98CV609 (D. Nebraska). Great Plains, a grain elevator, sought injunctive relief based on its contention that it would be irreparably harmed if forced to defend itself in an investigation on an issue it had already litigated. The district court rejected the petitioner's claim that the relationship between the CFTC and private producers is so congruous that the Commission should be bound by the courts' earlier decisions. The court held that the primarily economic interest advanced by a private litigant is fundamentally different from the CFTC's interest in protecting public investors in the commodities marketplace. Stating that "[t]he CFTC was not a party to the private litigation and its interests in enforcing the CEA were not represented in these private lawsuits," the court on January 4, 1999, denied the motion for preliminary injunction.
The petition for review in Commonwealth Financial Group, Inc., et al. v. CFTC, Nos. 97-4506 and 4569 (11th Cir. June 22, 1999) had its origins in an NFA member responsibility action and a related disciplinary action, both of which were affirmed by the Commission. Before the Court of Appeals, the petitioners argued that NFA's actions were barred by preclusion principles based on a district court's findings of nonliability in the Commission's previous injunctive action against Commonwealth in the U.S. District Court for the Southern District of Florida. The U. S. Court of Appeals for the Eleventh Circuit found that the burden of establishing the applicability of collateral estoppel was on the petitioners, and that they had failed to make even a minimal showing of their entitlement to the benefit of collateral estoppel. The Eleventh Circuit therefore dismissed their petitions for review.
In Symon v. Lind-Waldock & Co., 173 F.3d 846 (2d Cir. 1999), the Second Circuit upheld the Commission's order affirming an ALJ's dismissal of this reparations complaint against a futures commission merchant (FCM) and two of its associated persons (APs). The complainant Symon alleged that her brokers mishandled her trading account by disregarding her instructions when placing orders on her behalf, providing poor trading advice, and persuading or coercing her to make trades against her better judgment. The dismissal resulted from Symon's refusal to attend an adjudicatory hearing after the ALJ denied her request for discovery from her FCM for floor order tickets pertaining to a number of disputed trades and her failure of proof. In addition, the ALJ found that many of Symon's claims were barred by the statute of limitations. On appeal, the Second Circuit rejected Symon's argument that the ALJ erroneously denied her discovery request. The court agreed with the ALJ that Symon's substantive claims were either barred by the statute of limitations or lacked supporting evidence. The Court concluded that the Commission did not err in adopting the ALJ's findings.
Judicial Appeal of Statutory Disqualification Proceeding
In an unpublished opinion, a panel of the U.S. Court of Appeals for the Second Circuit affirmed the Commission's decision in Michael J. Clark v. CFTC, 97-4228 (2d Cir. Jun. 4, 1999), a statutory disqualification action brought by the Division of Enforcement on the basis of Clark's exchange disciplinary history. The Court concluded that the record "amply support[ed]" the Commission's judgment that there was "other good cause" under CEA Section 8a(3)(M) to revoke Clark's registration.
Because the ALJ had ruled that he would not give collateral estoppel effect to the exchange proceedings, he held a hearing which required the Division of Enforcement to prove independently the conduct underlying the past exchange disciplinary actions against Clark. The ALJ excluded the testimony of one of Clark's witnesses during the hearing and refused Clark's request, made weeks after the hearing was concluded, to reopen the record to present the testimony of another witness. The Commission affirmed the ALJ's rulings.
Clark challenged these rulings on appeal to the Second Circuit. The panel concluded that the Commission correctly determined that the ALJ did not abuse his discretion in excluding the witness's testimony because Clark's counsel had represented that the witness would testify as to alleged procedural irregularities in the NYMEX proceeding. The panel agreed with the Commission that, because the ALJ had ruled that collateral estoppel did not apply, any procedural irregularities in the prior exchange proceedings were irrelevant to the Commission's statutory disqualification proceeding.
Judicial Appeal of Exchange Disciplinary Action
Michael J. Clark, a floor broker and member of the Commodity Exchange, Inc. (COMEX), sought review in the Second Circuit of a Commission order affirming a disciplinary decision of the COMEX. The Commission moved to dismiss for lack of subject matter jurisdiction, arguing that under Jaunich v. CFTC, 50 F.3d 518 (8th Cir. 1995), review of a Commission order affirming an exchange disciplinary action is appropriately sought in the district court. The Court of Appeals disagreed with the Eighth Circuit's holding in Jaunich, finding that Section 8c provides for judicial review of such orders but fails expressly to specify the court in which such review will take place. This ambiguity alone, the court held, favors the location of jurisdiction in the court of appeals: "In the absence of a firm indication by Congress of an intention to vest initial review of decisions of the Commission affirming disciplinary actions of [an exchange] in the district court, and in the face of an ambiguous statute, we are contained by [Florida Power & Light v. Lorion, 470 U.S. 729 (1985)] to accept jurisdiction in this Court." Michael J. Clark v. CFTC, 170 F3d 100, 114 (2d Cir. 1999). Accordingly, the Court denied the Commission's motion to dismiss.
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 brokers. One of the significant cases during FY 1999 was In re Griffin Trading Company, No. 98-41742 (Bankr. N.D. Ill). Griffin, a Chicago-based FCM, filed for liquidation under Subchapter IV of Chapter 7 on December 31, 1998. The Commission is a statutory party in Subchapter IV proceedings and participated extensively in this case. All accounts with positions on U.S. markets were transferred to another FCM prior to the bankruptcy filing under Commission rules and do not form part of the bankruptcy estate. Rather the case involves the conflict between customer priority claims by American and foreign customers who held positions on markets in Europe, through Griffin's London branch office, and claims by unsecured non-customer creditors. A large portion of Griffin's assets are in ancillary liquidation in England and that liquidation is also responsible for distribution of customer funds held in segregation under British law. These customer trust funds will be inadequate to satisfy all customer claims because the shortfall that caused the bankruptcy was due to a $10 million default in one of those customer accounts. The London branch office customers will look to the U.S. estate to make up the difference. The major non-customer creditor, a European bank which cleared Griffin trades on the EUREX, has challenged the validity of the customer priority provisions adopted by the Commission under the Bankruptcy Code in Part 190 of its rules. That issue is currently awaiting decision.
Another significant case was CFTC v. Oscar A. Klitin, Adv. Proc. No. 99-899-8350, Bankr. E.D.N.Y. (In re Oscar Klitin and Catherine Klitin, No. 99-80001, Bankr., E.D.N.Y.). On August 6, 1999, the Commission filed an adversary proceeding in the bankruptcy of a CPO to object to the discharge of the debt reflected in a disgorgement order that the Commission had earlier obtained against him in an enforcement action. In its adversary complaint before the Bankruptcy Court, the Commission alleges that the debt is for funds embezzled by Klitin from the commodity pool he had organized or alternatively for funds owed to the pool as a result of his defalcation while acting in a fiduciary capacity.
OGC drafts opinions and orders in matters appealed to the Commission. The Commission's jurisdiction in adjudicatory matters includes:
· administrative cases prosecuted by the Division of Enforcement against alleged violators of the CEA or related regulations;
· reparations cases brought by futures customers to recover money damages from industry registrants; and
· adjudicatory actions by industry self-regulatory organizations (SROs).
The Commission issued numerous adjudicatory opinions during FY 1999, several of which were appealed subsequently to the U.S. Courts of Appeals as described above. Examples of adjudicatory opinions issued during FY 1999 that have not been described above include opinions interpreting the phrase "board of trade" in the so-called Treasury Amendment; proof of rehabilitation in a statutory disqualification case; the required posting of bonds by foreign reparations claimants; issues relating to the scope of the liability of a guaranteed IB; review of SRO disciplinary actions; commodity pool fraud; review of NFA disciplinary actions; recordkeeping violations and civil monetary penalties.
The Commission held this year that a company selling off-exchange foreign currency contracts to the general public is a "board of trade" within the meaning of a provision of the CEA known as the "Treasury Amendment" and is, therefore, subject to the Commission's jurisdiction. The Commission found Global Link Miami Corporation, a defunct Florida firm, liable for selling futures outside a designated contract market, committing fraud in connection with the offer and sale of futures contracts, and bucketing customer orders. In re Global Link Miami Corporation, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,669 (CFTC June 21, 1999). Individuals associated with the firm were found liable on various charges. The decision reversed an ALJ's order dismissing the Division of Enforcement's complaint for lack of jurisdiction. The Commission held that "Global Link provided a public marketplace for bringing together buyers and sellers of standardized futures contracts, the availability of price information and an execution and settlement mechanism. As such, it clearly constituted a board of trade . . . ." Id. at 48,169.
Global Link is the first opinion and order in which the Commission has addressed the Treasury Amendment since the Supreme Court rendered its decision in CFTC v. Dunn, 519 U.S. 465 (1997). The Dunn decision construed a different phrase of the Treasury Amendment, the "in or involving" clause, and did not reach the term "board of trade." Dunn therefore did not resolve the controversy as to the scope of the Commission's authority to regulate foreign currency trading under the Treasury Amendment.
The Commission, relying on the legislative history and purpose of the Treasury Amendment, has acted on the premise that the Treasury Amendment serves the limited purpose of prohibiting the agency from regulating the interbank foreign currency market, and that it is free to pursue illegal futures trading outside that sphere. A number of courts have agreed with that position. See, e.g., CFTC v. Standard Forex, Inc., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,063 at 41,453 (E.D.N.Y. 1993). The Commission has resisted suggestions that all foreign currency trading is excluded from its jurisdiction unless it takes place on a formally organized futures exchange, such as the established contract markets in New York and Chicago. However, various courts, most decisively the U.S. Court of Appeals for the Ninth Circuit, have held that is the proper construction of the Treasury Amendment. CFTC v. Frankwell Bullion, 99 F.3d 299 (9th Cir. 1996).
In Global Link, the Commission acknowledged and addressed the incompatibility between the broad definition of "board of trade" and the Treasury Amendment, and provided a more nuanced articulation of what constitutes a board of trade. Global Link reflects a substantial departure by the Commission from the view of "board of trade" expressed by the ALJ in dismissing the complaint. He concluded that a board of trade is synonymous with an "organized exchange," which as "normally understood" includes memberships with exclusive trading rights and a role in corporate governance, a delivery mechanism, a clearing mechanism, and "trading by the customers among themselves." Global Link states, instead, that "[a] futures trading facility will not necessarily exhibit all, or indeed any, of [those] elements" and that the characteristics of the mature futures exchanges regulated by the agency "do not constitute a set of minimum, mandatory requirements for a board of trade." [Current Transfer Binder] ¶ 27,669 at 48,169.
Rehabilitation from Statutory Disqualification
During FY 1998, OGC represented the Commission in several appeals to the U.S. Court of Appeals for the Seventh Circuit in which the court affirmed the Commission's findings that the respondents failed to establish rehabilitation from statutory disqualification under Section 8a of the CEA, but questioned the Commission's emphasis on the value of expert opinion testimony in such cases. See La Crosse v. CFTC, 137 F.3d 925 (7th Cir. 1998), Cox v. CFTC, 138 F.3d 268 (7th Cir. 1998), Ryan v. CFTC, 145 F.3d 910 (7th Cir. 1998), and Vercillo v. CFTC, 147 F.3d 548 (7th Cir. 1998).
During FY 1999, in In re Zuccarelli, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,597 (CFTC Apr. 15, 1999), the Commission responded to the court's concerns by clarifying that lay testimony may be sufficient to establish rehabilitation in certain circumstances. The Commission emphasized that the focus of the analysis should always be on the basis for a witness's opinion, and that the bases for both expert and lay opinions should be considered carefully when determining the weight they should be accorded. The Commission remanded the case to the ALJ to give Zuccarelli an opportunity to provide greater detail concerning the bases for the lay opinions he had proffered.
Foreign Reparations Claimants
During FY 1999 the Commission issued several opinions clarifying the jurisdictional requirements of Section 14(c) of the CEA and Commission Rule 12.13(b)(4). Section 4(c) provides that to gain access to the reparations forum, a non-U.S. resident complainant must post a bond in double the amount of his or her claim unless the complainant demonstrates that he or she is a resident of a country which permits the filing of a complaint by a U.S. resident without the furnishing of a bond.
In Haekal v. Refco, Inc. and Ronald Von Neefe, CFTC Docket No. 93-R109 (Nov. 18, 1998), the Commission dismissed complainant's motion for reconsideration of its earlier order, Haekal v. Refco, Inc. and Ronald Von Neefe, CFTC Docket No. 93-R109 (Jul. 13, 1998), which had dismissed the complaint because complainant had not posted the bond in a timely fashion despite several extensions of time in which to do so. In an underlying order, the Commission had held that, to receive a bond waiver, the foreign country of which the complainant is a resident must provide a blanket, unrestricted waiver for U.S. resident complainants. The Commission determined that Haekal had not demonstrated that he was entitled to a bond waiver because the provision of German law that he cited, construed together with a treaty to which the United States was a party, placed restrictions on the ability of U.S. residents to bring complaints in Germany. Haekal v. Refco and Ronald Von Neefe, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,162 (CFTC Sept. 26, 1997). The Haekal matter is currently on appeal to the U.S. Court of Appeals for the Second Circuit and is awaiting decision.
In a similar vein, the Commission dismissed the appeal of another German reparations complainant because he failed to offer sufficient proof supporting his request that the Commission waive the bond requirement. Complainant chiefly argued that a particular treaty, together with the same provision of the German Code invoked in the Haekal case, provides the reciprocity necessary for a valid waiver of the bond requirement. The Commission found, however, that because the United States was not a party to the treaty that complainant cited, he had failed to offer sufficient proof that the Commission should waive the bond requirement. Hoff v. American Futures Group, Inc., CFTC Docket No. 96-R133 (Nov. 3, 1998).
In another opinion, C.I.M. Investments v. Hammer Trading, Inc., CFTC Docket No. 98-R034 (Feb. 12, 1999), the Commission vacated and remanded an ALJ's order dismissing a reparations case. The Commission found that the corporate complainant was not a resident of Nevis but of the United States under the "total activity" test governing determinations of corporate residence.
Liability of a Guaranteed Introducing Broker
The Commission addressed two challenges during FY 1999 by FCMs to the validity of its regulations relating to guaranteed introducing brokers (IBs) and to the 1983 rulemaking proceedings leading to their adoption. Violette v. First American Discount Corporation, CFTC Docket No. 97-R020 (CFTC Feb. 24, 1999) and Clemons v. McCabe, CFTC Docket No. 97-R053 (CFTC Jan. 29, 1999) involved appeals by FCMs from initial decisions finding them jointly liable for damages to customers incurred by their guaranteed IBs. The Commission found that the FCMs failed to establish that the challenged rules are contrary to Congressional intent or to the Commission's statutory authority to prescribe such minimum financial requirements for IBs as are necessary to meet their obligations under the CEA. The Commission also rejected the FCMs' challenge to the integrity of the Commission's rulemaking proceeding, finding that the modification to the proposed rules to permit voluntary guarantee agreements between FCMs and IBs was generally consistent with the tenor of the Commission's original proposals and did not warrant republication for comment. Finally, the Commission held that a customer indemnification agreement that seeks to vitiate the FCM's obligations as a guarantor is contrary to public policy, void and unenforceable. The Commission's decision in Violette is on appeal, and the Commission's brief was filed in early October 1999. First American Discount Corporation v. CFTC, No. 99-1098 (D.C. Cir.).
Review of SRO Disciplinary Actions
The consolidated appeals in Commonwealth Financial Group, Inc., et al. v. CFTC, Nos. 97-4506 and 98-4569 (11th Cir. 1998) arose from two final orders of the Commission entered on March 18, 1997 (CFTC Docket No. CRAA-95-3), and on March 18, 1998 (CFTC Docket No. CRAA-97-1 through 97-7). The first order affirmed a member responsibility action taken by the NFA against Commonwealth Financial Group (CFG) and its president, Charles Hoffecker. In that action, NFA imposed certain interim restrictions on CFG's advertising and customer sales solicitations pending the resolution of the related disciplinary action. The Commission's second order summarily affirmed a final disciplinary action by NFA against CFG, Hoffecker and certain brokers associated with CFG. In that action, NFA found that CFG and its APs, at Hoffecker's direction, had defrauded and deceived customers in violation of NFA compliance rules. NFA fined Hoffecker $250,000 and barred him from association with any member for five years. The APs were fined and suspended from registration.
On appeal to the Eleventh Circuit, CFG and Hoffecker limited their challenge to the Commission's final orders to claims of preclusion and procedural defects. AP Everton John Buchanan incorporated by reference certain of CFG and Hoffecker's procedural claims and asserted that NFA failed to prove that he had violated its compliance rules. On June 22, 1999, the U.S. Court of Appeals for the Eleventh Circuit affirmed the Commission's orders, finding that because CFG and Hoffecker had failed to make even a minimal showing of their entitlement to the benefit of res judicata or collateral estoppel, the Commission properly denied relief.
NFA Disciplinary Proceedings
In American Futures Group, Inc., George J. Perk, Thomas G. Reeves, and Evan Tucker III v. National Futures Association, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,630 (CFTC May 13, 1999), the Commission affirmed a decision of the NFA expelling from NFA membership American Futures Group, Inc. (AFG), a registered FCM, commodity trading advisor, and CPO, and two of AFG's APs and suspending a third AP from NFA membership for two years. The NFA Hearing Panel found that the respondents violated a number of NFA requirements by failing to maintain adequate books and financial records, engaging in deceptive and misleading sales practices, training APs to use high-pressure and deceptive sales practices, failing to supervise diligently, and violating the terms of a previous settlement agreement.
Before the NFA Appeals Committee, the appellants alleged that there were procedural irregularities during the hearing and that NFA staff committed discovery and ethical violations. They also argued that the Panel's findings were not supported by the weight of the evidence and that the sanctions imposed were excessive. The Appeals Committee rejected all of these arguments and affirmed the Panel's decision. The appellants raised many of the same arguments on appeal to the Commission. The Commission concluded that the NFA's decision was substantially correct and was supported by the weight of the evidence and that the appellants' arguments were without merit. The Commission's decision has been appealed to the Second Circuit.
Commodity Pool Fraud
In re Slusser, CFTC Docket No. 94-14 (CFTC July 19, 1999) was among the significant appeals decided by the Commission during FY 1999. This case had its origins in a complaint filed in May 1994 by the Division of Enforcement focusing on the disappearance of approximately $12 million that had been invested in commodity pools under the respondents' control. The ALJ found that respondents had engaged intentionally in a scheme to defraud the pool participants of millions of dollars in violation of the antifraud provisions of the CEA and imposed on the respondents trading prohibitions, registration revocations, and a $10 million civil monetary penalty. The respondents focused their appeal on alleged flaws in the ALJ's liability analysis, contending that they were not subject to the regulatory requirements imposed by the Act on CPOs, that the investors' funds were not commodity pools, and that the ALJ erred in finding that they had violated the antifraud provisions of the CEA. The Commission concluded that the funds were commodity pools and that respondent VFS acted as a CPO. Turning to the ALJ's liability findings, the Commission determined that the evidence supported the conclusion that the respondents violated the antifraud provisions of the Act by circumventing the compensation provisions of the fund prospectus, by failing to use the participants' funds in the manner required by the prospectus, and by failing to inform fund participants that they were not adhering to the terms of the prospectus. The Commission affirmed in all respects the initial decision and the ALJ's choice of sanctions. The case is presently on appeal. Slusser, et al. v. CFTC, No. 99-2947 (7th Cir.)
In In re Sean G. Kelly, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,514 (Nov. 19, 1998), an ALJ granted the Division of Enforcement's request for summary judgment on its complaint charging Kelly with failure to produce books and records upon request, revoked Kelly's registration as a CTA, and ordered him to pay a civil monetary penalty of $25,000. On appeal, the Commission found summary disposition appropriate because Kelly did not dispute the underlying facts, and because registrants are strictly liable for recordkeeping violations. In reliance on Federal case law, the Commission rejected Kelly's claim that he was denied his Constitutional right to due process when he testified without an attorney present because Kelly had waived that right. The Commission found that Kelly's claim that he and the Division had an enforceable oral contract to settle the complaint that provided for less severe sanctions was a settlement negotiation and that Kelly had not made a written settlement offer as required by Commission rules. Finding that the registration revocation and $25,000 civil monetary penalty imposed by the ALJ were too harsh, the Commission imposed a cease and desist order, suspended Kelly's registration for six months, and ordered him to pay a $10,000 civil monetary penalty.
Civil Monetary Penalties
The Commission's choice of sanctions was the subject of several appellate challenges during FY 1998 and FY 1999. The appropriateness of sanctions, particularly civil monetary penalties, continues to be a significant issue before the Commission.
In In re First Commercial Financial Group, Inc., Mark Rehn, and John A. Hermanson, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,648 (May 20, 1999), the Commission adopted, without discussion, the ALJ's liability findings regarding respondents' violations of various net capital and reporting requirements. The Commission found that the capital and reporting requirements were designed to avert harm and represent critical check points in assuring the safety and soundness of the market. The Commission concluded that respondents' misconduct posed a grave danger to customers and the market and was tantamount to a fraud on the investing public. In order properly to reflect the gravity of the misconduct, the Commission raised the civil monetary penalties imposed by the ALJ ($200,000 each for FCFG and Rehn and $50,000 for Hermanson) to $400,000 each for FCFG and Rehn and $200,000 for Hermanson.
In In re Slusser, CFTC Docket No. 94-14 (CFTC July 19, 1999), the respondents claimed that the ALJ erred in imposing civil penalties without considering the level of sanctions imposed for prior, purportedly similar, violations of the CEA. The Commission observed that it consistently has imposed substantial civil penalties in cases involving customer fraud and held that, even if the civil penalties assessed in previous decisions were less stringent, the choice of a sanction within the Commission's authority is not invalid because it is more severe than the sanctions imposed in other cases. Accordingly, the Commission held that under principles of administrative law, the argument that the penalty imposed on these respondents appears more substantial than those imposed in other cases is insufficient as a matter of law and Commission policy to warrant modification.
Significant Regulatory Activities
As the Commission's legal advisor, OGC drafts or reviews the following:
· 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 by-laws or rules.
In FY 1999, OGC reviewed more than 115 matters related to enforcement actions, investigations of illegal activity, and complaints in administrative or judicial actions; more than 73 applications to trade futures or option contracts; and approximately 140 exchange rule amendments.
OGC worked closely with the Division of Trading and Markets (T&M), and the Division of Economic Analysis in drafting a number of significant rulemakings and regulatory initiatives including:
· the placement of foreign terminals in the United States,
· over-the-counter derivatives,
· non-competitive transactions,
· end-of-day allocation of trades,
· notional funds,
· agricultural trade options,
· approval of London Clearing House proposal for clearing swaps transactions,
· amendments to foreign futures and option rules,
· streamlining Commission rule review and designation procedures,
· revised public interest requirements for contract market designation,
· two part disclosure documents,
· revision of speculation position limit rules,
· conflicts of interest,
· electronic submission of various reports to the Commission, and
· electronic trading.
In addition, OGC provided legal assistance to T&M in the continued processing of contract market dual trading exemptive petitions. OGC monitored the SEC proceeding respecting the CBOT's application to trade the Dow Jones Utility and Transportation Stock Indices.
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 T&M in implementing and revising rules governing the offer and sale of foreign futures and option contracts in the United States. During FY 1999, OGC issued and processed 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 arrangements with foreign financial market regulators and with the Divisions of Trading and Markets and Enforcement as well as the Office of International Affairs in their activities involving the International Organisation 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 analyze requests for exemptions from various requirements of the CEA and Commission regulations for certain exchange-traded futures and option contracts, including the London Clearing House proposal to clear swap transactions.
OGC helps to prepare and comments on proposed legislation that would affect the Commission. OGC reviews all Commission Congressional testimony. During FY 1999, OGC provided assistance with respect to the Bankruptcy Reform Act of 1999 (S. 625), the Financial Services Act of 1999 (S. 900) and the Hedge Fund Disclosure Act (H.R. 2924).
During FY 1999, OGC advised the Commission on issues raised under the Freedom of Information Act (FOIA), the Privacy Act, and the Government in the Sunshine Act. Having developed and implemented procedures in FY 1998 to assure timely review and response to requests for information under the FOIA and to administrative appeals under the FOIA and Privacy Act, OGC issued timely responses to 15 FOIA and Privacy Act appeals during FY 1999.
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 and provides annual ethics training for CFTC employees as required by OGE regulations.
OGC also advises the Commission on labor and employment law matters. In conjunction with the Office of Human Resources, OGC handles Equal Employment Opportunity cases arising under Title VII of the Civil Rights Act of 1964 and Merit Systems Protection Board cases arising under the Civil Service Reform Act of 1978.
OGC continued to advise the Commissioners who chair the Commission's advisory committees on procedural and substantive matters. The Global Markets Advisory Committee provides advice to the Commission on international market issues that affect the integrity and competitiveness of U.S. markets and firms engaged in global business. 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 litigation and opinions cases for FY 1998 and FY 1999 are as follows:
|Litigation Docket||FY 1998||FY 1999|
|Appellate cases involving the CFTC's enforcement program||
|Appellate cases involving the CFTC's reparations program||
|Appellate cases involving the CFTC's review of registered futures association and exchange review cases||
|District Court cases||
|Bankruptcy cases monitored||
|Amicus cases monitored||
|Total cases beginning of fiscal year||
|Cases pending end of fiscal year:|
|SRO disciplinary actions||