UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the matter of:||)||CFTC DOCKETS NO. 99-6|
Farmers Cooperative Company,
|)||ORDER MAKING FINDINGS|
|Richard Houge,||)||AND IMPOSING REMEDIAL|
|John A. McPherson,||)||SANCTIONS|
Larry D. Peterson,
On January 12, 1999, the Commodity Futures Trading Commission ("Commission") filed a Complaint and Notice of Hearing ("Complaint") against Farmers Cooperative Company ("Farmers Co-op"), Richard Houge, John A. McPherson and Larry D. Peterson (collectively, "Respondents"). Counts One and Five of the Complaint charge that Farmers Co-op, aided and abetted by Houge and Peterson, violated Sections 4(a) and 4c(b) of the Commodity Exchange Act, as amended (the "Act"), 7 U.S.C. §§ 6(a) and 6c(b) (1994), and Commission Regulation 32.2 promulgated under the Act, 17 C.F.R. § 32.2 (1998). Counts Two, Three and Four of the Complaint charge that Farmers Co-op, aided and abetted by Houge, Peterson and McPherson, violated Sections 4c(b) and 4d(1) of the Act, 7 U.S.C. §§ 6c(b) and 6d(1) and Commission Regulations 1.33(a), 1.55, 32.3 and 33.3(b), 17 C.F.R. §§ 1.33(a), 1.55, 32.3 and 33.3(b).
In order to dispose of the allegations and issues raised in the Complaint, Respondents have submitted Offers of Settlement ("Offers") which the Commission has determined to accept. Without admitting or denying any of the allegations of the Complaint or the findings herein, except that Respondent Farmers Co-op admits the allegations and findings of violations of Sections 4c(b) and 4d(1) of the Act and Commission Regulations 1.33(a), 1.55, 32.3 and 33.3(b), Respondents acknowledge service of this Order Making Finding and Imposing Remedial Sanctions ("Order"). Respondents consent to the use of the findings contained in this Order in this proceeding and in any other proceeding brought by the Commission or to which the
Commission is a party.1
The Commission finds that:
From March 1993 through at least June 1996, Farmers Co-op, aided and abetted by Houge and Peterson, two co-op employees, offered Hedge to Arrive ("HTA") contracts that constituted illegal futures contracts, in violation of Section 4(a) of the Act. From November 1994 to at least June 1996, Farmers Co-op, aided and abetted by Houge and Peterson, offered contracts that included option features that under certain circumstances could result in additional grain delivery obligations, in violation of Section 4c(b) of the Act and Regulation 32.2.2
In addition, from November 1994 through at least February 1996, Farmers Co-op, aided and abetted by Houge, Peterson and McPherson, another co-op employee, operated as an unregistered futures commission merchant ("FCM"), in violation of Sections 4c(b) and 4d(1) of the Act and Regulations 32.3 and 33.3(b), by enabling producers to trade exchange-traded futures and options contracts through a Farmers Co-op commodity trading account. Subsequently, Farmers Co-op voluntarily disclosed this activity to the Commission. In operating as an unregistered FCM during this two year period, Farmers Co-op, aided and abetted by the individual respondents, failed to issue monthly statements to the producers, in violation of Commission Regulation 1.33(a), and failed to issue risk disclosure statements to the producers, in violation of Commission Regulation 1.55.
Farmers Cooperative Company is a cooperative grain company with its main office at 105 Garfield Avenue, P.O. Box 35, Farnhamville, Iowa 50538. Farmers Co-op is in the business of purchasing and storing corn and soybeans, selling the corn and soybeans to other elevators and end users such as grain processors, selling fertilizer and other agricultural products, and operating feed mills. Farmers Co-op has approximately thirty-four branch facilities, including twenty-three elevators, located in northern Iowa. Farmers Co-op has never been registered with the Commission in any capacity.
Richard Houge resides in Fort Dodge, Iowa. Between March 1993 and June 1996, Houge was a Farmers Co-op employee. Houge has never been registered with the Commission in any capacity.
John A. McPherson resides in Churdan, Iowa. Between November 1994 and February 1996, McPherson was a Farmers Co-op employee. McPherson has never been registered with the Commission in any capacity.
Larry D. Peterson currently resides in Hutchinson, Minnesota. Between February 1995 and June 1996, Peterson resided in Lytton, Iowa, and was an employee of Farmers Co-op. He received a temporary associated person ("AP") registration in November 1995 and his permanent AP registration in January 1996. From January 1996 to December 1999, Peterson was registered as an AP of FCC Futures, Inc. ("FCCFI"), an introducing broker ("IB") registered with the Commission.
1. Farmers Co-op's HTA Contracts
From March 1993 through at least June 1996, Farmers Co-op offered its member producers HTA grain contracts as part of its grain marketing program.3 It did so in order to compete with other grain elevators that were offering similar instruments, and in response to producer demand for such instruments. The HTAs allowed producers to establish a price for grain to be delivered at some time in the future.4
Producers entered into Farmers Co-op's HTAs by making a verbal request to Houge or Peterson in order to establish a futures reference price for the HTA, as well as a quantity of grain, and a contract month for delivery that was tied to the futures reference price. The quantity of grain and contract months matched the quantities and contract months of futures contracts traded on the Chicago Board of Trade ("CBOT") or the Mid-America Commodity Exchange ("MACE").
Farmers Co-op hedged the HTAs it held with producers. Once a producer chose a futures reference price, contract month and a quantity for an HTA, Houge or Peterson placed an order to sell an exchange-traded futures contract corresponding to the parameters requested by the producer.
On their face, Farmers Co-op's HTA contracts required delivery of the underlying commodity and stated that they would be canceled "only upon sufficient proof of inability to deliver." In marketing the HTAs and through course of dealing, however, Farmers Co-op allowed producers to satisfy their delivery obligations by "buying back" the HTAs. This allowed producers to capture gains or absorb losses at any time without regard to the delivery date on the contracts. As such, the contracts tended to serve the purpose of assuming or shifting risk without delivery either to or from Farmers Co-op of the underlying commodity. Indeed, in some instances, Farmers Co-op allowed producers to enter into HTAs under circumstances where the producers had insufficient capacity to perform, and Farmers Co-op had no reasonable expectation of delivery. Of the approximately 300 producers who entered into HTAs with Farmers Co-op, approximately 40% bought back at least one contract.
When producers wished to buy back their HTAs, Houge or Peterson bought exchange-traded futures contracts to offset the exchange-traded futures contracts made at the time the HTA contracts were initiated. Under the HTAs, the profits or losses generated by the offsetting exchange-traded futures contracts were credited or debited to the producers. Houge and Peterson prepared and sent producers invoices that detailed the profits and losses generated from buying back the HTA contracts.
In marketing the HTAs and through course of dealing, Farmers Co-op also allowed producers, at their own discretion and without proof of an inability to deliver, to defer delivery of the underlying commodity by "rolling" their HTA contracts to some future date, at a new futures reference price, either to accommodate shortfalls in their crop yield or to sell their grain on the "spot" (cash) market for a better price. Producers rolled their HTAs until it became practical to either deliver the underlying commodity or else extinguish their delivery obligations by "buying back" the contracts. Of the approximately 300 producers who entered into HTAs with Farmers Co-op, approximately 70% rolled at least one contract.
When a producer wanted to roll an HTA, Houge and Peterson offset the exchange-traded short futures position which established the original futures reference price and then entered into another short exchange-traded futures position in a later contract month in order to establish a new futures reference price for the rolled HTA. Profits and losses generated by the offset of the exchange-traded futures positions were credited or debited to producers and listed on the producers' invoices that Houge and Peterson prepared and sent to the producers.
Although Farmers Co-op actually received (or made) deliveries on some of the HTA contracts, in most situations in which the HTAs were entered into, no delivery to or from Farmers Co-op took place. Rather, contracts were settled through payments of monetary gains or losses; there was no expectation of delivery to or from Farmers Co-op, and the contracts were used to shift risk.
2. Option Contracts Creating Additional Grain Obligations
From November 1994 to at least June 1996, Farmers Co-op offered producers option contracts in corn and soybeans that functioned as short call option contracts. These option contracts included short option features that, under certain circumstances, could result in additional grain delivery obligations for the producer. As part of these contracts, Farmers Co-op, through Houge and Peterson, credited producers with premiums for the right to purchase corn or soybeans from the producers by the dates and at the prices listed on the option contracts. Houge and Peterson then sold exchange-traded corn or soybean option contracts with months, strike prices and premiums that corresponded to the option contracts Farmers Co-op held with the producers. This enabled Farmers Co-op to hedge the option contracts it held with producers with exchange-traded options.
When the exercise prices of the exchange-traded option contracts were reached, those contracts were exercised against Farmers Co-op. Farmers Co-op, through Houge and Peterson, then exercised the corresponding short call option feature contracts it had with the producers and converted the corn or soybean short call option contracts to HTA contracts. The HTAs that resulted from the exercised corn and soybean short call options required the producers to deliver the grain by the dates stated on the short call option contracts at the option strike price. In the absence of exercise, however, no additional grain delivery obligation was created for the producers. Once the call option contracts became HTAs, producers could buy back the contracts or roll them instead of making delivery. Houge and Peterson also allowed producers to buy back their short call option contracts before the contracts were exercised, thereby extinguishing the producers' delivery obligations under the call option contracts.
3. Market Events in 1994 to 1996
In October 1994, the price of grain began an unprecedented steady rise. The market fundamentals and its anticipated prices did not follow historic movements, and a large price inversion developed in late 1995 and early 1996 that made the current value of the grain higher than its expected value at harvest. That is, by early 1996, the prices in nearby (old crop) futures prices for grain rose to levels well above those for the deferred (new crop) months. These price conditions impacted both the HTA and the short call options contracts that Farmers Co-op offered. Although Farmers Co-op did not anticipate the magnitude or duration of the market inversion, once the market became inverted, Farmers Co-op explained to the producers the effect the market inversion might have on grain prices and the HTAs.5
Producers with HTAs who had planned to roll their delivery obligations forward found that it cost them more to do so than it would have based on historic price relationships. The price difference, or "spread," between the months to which delivery is rolled and the month from which delivery was rolled became negative, and producers who rolled incurred the resulting losses.
As grain prices rose in 1995, Farmers Co-op's exchange-traded short call options, which the elevator had entered into for each short call option contract it held with producers, were exercised against the elevator. This caused Farmers Co-op to carry additional short futures positions in rising markets, and exposed Farmers Co-op to larger margin requirements than in previous years. Farmers Co-op, in turn, exercised its call option contracts against the producers, converting the contracts to HTA contracts which required the delivery of additional grain. Many producers did not have the additional grain to deliver under the exercised call options and, therefore, rolled their delivery obligations forward to later delivery months or crop years. However, each roll in an inverted market reduced the producer's contract price by the dollar amount of the spread between the two contract months.
4. Operating as an FCM
Farmers Co-op disclosed to the Commission that for two years it had permitted producers to speculate in commodities by allowing producers to buy and sell exchange-traded futures and option contracts through one of Farmers Co-op's trading accounts.6 Farmers Co-op placed orders for the producers in its designated account to buy or sell exchange-traded futures and options contracts in soybean meal, soybean oil, live hogs, live cattle and wheat, among other commodities, on the CBOT, MACE and the Chicago Mercantile Exchange ("CME").7 Houge, Peterson and McPherson each consulted with the producers to assist them in placing orders for exchange-traded futures and options trading. Farmers Co-op initially paid the margin for the producers' trades, rather than collecting the margin from the producers. However, producers were later debited for losses and payment of any costs that resulted from the futures or options trades.
After the trades were placed, Houge, Peterson or McPherson prepared a statement for Farmers Co-op's records entitled "Trade Confirmation Contract," which confirmed that the "following trades" were made at an exchange "for the account" of the producer. Houge, Peterson or McPherson then entered the transactions in Farmers Co-op's books to tie the exchange-traded future or option to a particular producer. The profits and losses for these trades were credited or debited to producers' accounts through invoices sent to the producers and later satisfied through monetary credits and debits.
Although Farmers Co-op allowed producers to trade exchange-traded futures and options, the co-op did not issue risk disclosure statements or monthly statements, each of which is mandated by the Act's regulatory requirements. Thus, the producers were not expressly informed of the risks involved in trading futures and options, and were not informed of losses that they were suffering as a result of trading futures and options.
D. VIOLATIONS OF THE ACT AND COMMISSION REGULATIONS
Farmers Co-op Engaged In the Offer and Sale
of Illegal Futures
Contracts in Violation of Section 4(a) of the Act
Section 4(a) of the Act makes it unlawful for any person to offer to enter into, enter into, execute, confirm the execution of, or conduct any business for the purpose of soliciting, accepting orders for, or otherwise dealing in, futures contracts not traded on a designated contract market. There is no definitive list of factors that will identify when a contract is a futures contract and when it is not. The transaction must be viewed as a whole with a critical eye toward its underlying purpose, CFTC v. Co Petro Marketing Group, Inc., 680 F.2d 573, 581 (9th Cir. 1982), without regard to whatever self-serving labels the instrument might bear, CFTC v. American Metal Exchange Corp., 693 F. Supp. 168, 192 (D.N.J. 1988). See also CFTC v. National Coal Exchange, Inc., [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,424 at 26,055 (W.D. Tenn. 1982) ("[s]ubstance rather than mere form must be accorded full legal significance" in evaluating whether a contract is a futures contract). In general, futures contracts are contracts for the purchase or sale of a commodity for delivery in the future at a price or pricing formula that is agreed upon when the contract is initiated. In addition, futures contracts are undertaken principally to assume or shift price risk without transferring the underlying commodity. While futures contracts generally provide for delivery, delivery can be avoided by mechanisms such as offset, cancellation and cash settlement.
The HTA contracts Farmers Co-op offered from March 1993 to June 1996 had all of the above-described characteristics of futures contracts and were thus illegal futures contracts not offered on a designated contract market, in violation of Section 4(a) of the Act. The HTAs were contracts for the purchase or sale of a commodity for delivery in the future at a price or pricing formula that was agreed upon when the contract was initiated and undertaken, in part, to assume or shift price risk without delivery either to or from Farmers Co-op of the underlying commodity. Most significantly, Farmers Co-op provided producers with an effective means of liquidating the contract for monetary gains or losses. Farmers Co-op's HTA contracts provided producers with an effective means of discharge that was, in practice, used to liquidate the contracts for monetary gains or losses with no required delivery to or receipt of grain by Farmers Co-op. Co Petro, 680 F.2d at 579-81; American Metals Exchange, 693 F. Supp. at 192. Farmers Co-op's HTA contracts provided producers with an effective means of discharge that was, in practice, used to liquidate the contracts for monetary gains or losses with no required delivery to or receipt of grain by Farmers Co-op. See CFTC v. Noble Metals International, Inc., 67 F.3d 766, 772 (9th Cir. 1995); In re Stovall, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,941 at 23,777-79 (CFTC Dec. 6, 1979). Thus, Farmers Co-op's HTA contract customers, "like customers who trade on organized exchanges, could deal in commodity futures without the forced burden of delivery." Co Petro, 680 F.2d at 580.
Farmers Co-op's HTAs did not qualify for exclusion from the requirements of Section 4(a) as a "sale of any cash commodity for deferred shipment or delivery" pursuant to the exclusion in Section 1(a)(11) of the Act for "cash forward contracts." "The exemption . . . is a narrow one. It originated in the 1921 Act . . . to meet a particular need: it allowed a farmer to sell part of the next season's harvests at a set price to a grain elevator or miller. . . . The exemption clearly encompassed only those contracts which promised the actual delivery of grain at a specified time in the future." NRT Metals, Inc. v. Manhattan Metals (Non-Ferrous) Ltd., 576 F. Supp. 1046, 1050 (S.D.N.Y. 1983) (citations omitted). As the Commission stated in its Statutory Interpretation Concerning Forward Transactions, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,925 at 37,367 (CFTC Sept. 25, 1990), "[t]he underlying postulate of the exclusion is that the Act's regulatory scheme for futures trading simply should not apply to private commercial merchandising transactions which create enforceable obligations to deliver but in which delivery is deferred for reasons of commercial convenience or necessity."
Farmers Co-op's HTA contracts did not meet these standards for exclusion. Delivery to Farmers Co-op was neither deferred nor avoided in order to accommodate commercial convenience or necessity. The ability to routinely avoid delivery to Farmers Co-op and instead capture the price movements in the futures markets by buying back the HTAs and being credited or debited for profits or losses, set the contract apart from forward contracts under which producers are obligated to deliver certain quantities of grain to the elevator at certain times. See Co Petro, 680 F.2d at 580; American Metal Exchange, 693 F. Supp. at 192.
Farmers Co-op Violated Section 4c(b) of the
Act and Regulation
32.2 by Engaging in Illegal Agricultural Options Transactions
Section 4c(b) of the Act and Regulation 32.2, prohibit the short call option feature contracts offered by Farmers Co-op in which a new delivery obligation could have been created. A commodity option "confers upon the holder the right to buy . . . or to sell . . . either a specified amount of a commodity or a futures contract for that amount of a commodity within a certain period of time at a given price." CFTC v. U.S. Metals Depository Co., 468 F.Supp. 1149, 1154-55 (S.D.N.Y. 1979); CFTC v. Crown Colony Commodity Options, Ltd., 434 F.Supp. 911, 913-14 (S.D.N.Y. 1977). Section 4c(b) of the Act provides that "no person shall offer to enter into, enter into or confirm the execution of, any transaction involving any commodity regulated under this Act which is of the character of, or is commonly known to the trade as, an `option,' . . . contrary to any rule, regulation, or order of the Commission prohibiting any such transaction . . . ." Except when such transaction is undertaken on a designated contract market pursuant to Part 33 of the Commission's Regulations, 17 C.F.R. Part 33 (1998), "[n]o person may offer to enter into, confirm the execution of, or maintain a position in, any transaction in interstate commerce involving wheat, . . . corn . . . [or] soybeans . . . if the transaction is or is held out to be of the character of, or is commonly known to the trade as, an option . . . put, [or] call . . . ." Regulation 32.2. Farmers Co-op's contracts short call option contracts violated these proscriptions.
The Commission's guidance on forward contracts has never permitted contractual arrangements that involved producers selling options. Farmers Co-op's marketing program offered the opportunity for producers to engage in short call option feature contracts in which the calls created potential additional delivery obligations have all of the characteristics of commodity options. British American Commodity Options Corp. v. Bagley, 552 F.2d 482 (2d Cir. 1977), cert. denied, 434 U.S. 938 (1978). This type of option feature contract offered by Farmers Co-op violated Section 4c(b) of the Act and Regulation 32.2.
The Commission's Office of General Counsel ("OGC") and Division of Economic Analysis ("DEA") have recognized that certain types of forward contracts having option characteristics are not considered prohibited option transactions. "Characteristics Distinguishing Cash and Forward Contracts and `Trade' Options," [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,718 at 31,028 (OGC Sept. 30, 1985) and DEA Interpretative Letter 96-23, "Request for Guidance Regarding Producer Option Contract" [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,646 (March 14, 1996). However, the fact that Farmers Co-op's contracts could and did create additional delivery obligations distinguishes these contracts from the examples of permissible forward contracts recognized in these interpretative letters.
Farmers Co-op Operated as an Unregistered
Futures Commission Merchant,
In Violation of Sections 4c(b) and 4d(1) of the Act and Regulations 32.3 and
33.3(b), and Violated Commission Regulations 1.33(a) and 1.55
Section 4d(1) of the Act makes it illegal to operate as an FCM without being registered with the Commission. An FCM is any entity which solicits or accepts orders for futures or option contracts traded on a contract market and which accepts money or extends credit to margin, guarantee or secure such contracts. Section 1a(12) of the Act; Commission Regulation 1.3(p). Commission Regulations 32.3 and 33.3(b), in relevant part, make it unlawful for any entity to solicit or accept orders from an option customer for any commodity option transaction unless such entity is registered as a FCM .
Farmers Co-op acted as an FCM by soliciting and accepting producers' orders for exchange-traded futures and options. Producers placed these orders through Houge, Peterson or McPherson and received confirmation statements which indicated that a futures or options contract had been made for the producers, and showed whether the futures or options contract had been bought or sold, and the quantity, contract month and price of the transactions. One of the three co-op employees then issued invoices to producers for the realized profits or losses from these exchange futures and options trades. The profits and losses were later satisfied through monetary credits or debits to the producers.
Farmers Co-op also acted as an FCM by extending credit to producers to margin the purchase or sale of exchange-traded futures or options contracts. Rather than immediately collecting the margin from the producers, Farmers Co-op was responsible for the margins in the trading accounts, which held the producers' trades. However, producers who entered into the futures or options trades ultimately bore responsibility for any losses that resulted from such trades and payment of any costs associated with the trades. Covering the margin calls for producers' futures trading until the producer reconciled his account effectively extended credit to the producer for the purpose of guaranteeing, margining or securing a futures trade.
Commission Regulation 1.33(a) mandates that FCMs or persons required to be registered as FCMs provide customers who trade futures and options with monthly statements of the customers' trading activity. Monthly statements are a vital part of the regulatory environment the Commission has established because they serve to alert customers to losses that may be accruing from trading futures and options so that customers are able to make fully informed trading decisions and terminate their futures or options trading before suffering further monetary losses. Cf. In re Slusser, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,701 at 48,312 (CFTC July 19, 1999) (failure to disclose information required to be disclosed by Commission regulations is per se material information to which customers are entitled). Similarly, Commission Regulation 1.55 mandates that FCMs or persons required to be registered as FCMs provide customers who trade futures and options with specific, extensive, risk disclosures. The disclosures mandated by Commission Regulations inform customers as to the risks involved in trading futures and options, including the risk of sustaining substantial monetary deficits, as some producers had sustained at Farmers Co-op. Id. From November 1994 to at least February 1996, Farmers Co-op failed to issue monthly statements to producers, in violation of Commission Regulation 1.33(a), and failed to issue risk disclosure statements to producers, in violation of Commission Regulation 1.55.
Houge, Peterson and McPherson Willfully
Abetted Farmers Co-op in Violating the Act
To be liable for aiding and abetting a violation of the Act, a person must knowingly associate himself with an unlawful venture, participate in it as something he wishes to bring about and seek by his actions to make it succeed. In re Richardson, [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,145 at 24,646 (CFTC Jan. 27, 1981). The unlawful nature of a business and a respondent's knowledge and participation in the unlawful venture may establish a respondent's liability for aiding and abetting the business venture. Id. at 24,645. Ignorance of the law is not a defense for the aider and abettor, especially when the persons charged with aiding and abetting are industry professionals who operate in a highly regulated field. In re Lincolnwood Commodities, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,986 at 28,255 (CFTC Jan. 31, 1984).
Houge and Peterson aided and abetted Farmers Co-op in offering producers HTA contracts that functioned as futures contracts, in violation of Section 4(a) of the Act. They took producers' orders for and wrote the HTA contracts, and bought back and rolled the producers' HTA contracts, thereby knowingly extinguishing the producers' HTA delivery obligations, and prepared invoices for the producers' monetary profits and losses resulting from the HTA contracts. In addition, by causing Farmers Co-op to exercise its short call option feature contracts against the producers, issue new HTA contracts for delivery of additional grain as a result of the exercised short call option feature contracts, and buy back short call option contracts from producers before the options were exercised, as well as other actions as described throughout this Order, Houge and Peterson aided and abetted Farmers Co-op in offering producers agricultural call option contracts, in violation of Section 4c(b) of the Act and Commission Regulation 32.2.
Houge, Peterson and McPherson aided and abetted Farmers Co-op in operating as an unregistered FCM, in violation of Sections 4c(b) and 4d(1) of the Act and Commission Regulations 32.3 and 33.3 (b) by, among other actions, taking producers' orders to buy and sell exchange-traded futures and options, placing those orders in the designated Farmers Co-op trading account and recording the transactions in Farmers Co-op's books to identify the exchange-traded contracts as belonging to the producers rather than being positions of the co-op. Houge, McPherson and Peterson failed to issue monthly statements to producers who were allowed to trade the exchange-traded futures and options, thereby aiding and abetting Farmers Co-op in violating Commission Regulation 1.33(a) and failed to issue risk disclosure statements to producers, thereby aiding and abetting Farmers Co-op in violating Commission Regulation 1.55.
OFFER OF SETTLEMENT
Respondents have submitted Offers of Settlement in which Farmers Co-op admits the allegations of the Complaint and the findings herein relating to Counts Two, Three and Four of the Complaint; Farmers Co-op neither admits nor denies the allegations of the Complaint or the findings herein relating to Counts One and Five of the Complaint; and Houge, McPherson and Peterson neither admit nor deny the allegations of the Complaint or the findings herein. Subject to the foregoing, Respondents: acknowledge service of this Order and admit the jurisdiction of the Commission with respect to the matters set forth herein; waive: (1) a hearing; (2) all post-hearing procedures; (3) judicial review by any court; (4) any objection to the staff's participation in the Commission's consideration of the Offers; and (5) all claims which they may possess under the Equal Access to Justice Act, 5 U.S.C. § 504 (1994) and 28 U.S.C. § 2412 (1994), as amended by Pub. L. No. 104-121, §§ 231-32, 110 Stat. 862-63, and Part 148 of the Commission's Regulations, 17 C.F.R. §§ 148.1, et seq., relating to or arising from this action; and (6) any claim of Double Jeopardy based upon the institution of this proceeding or the entry in this proceeding of any order imposing a civil monetary penalty or any other relief. Farmers Co-op stipulates that the record basis on which this Order is entered consists of the Complaint, the Amended Answer of Farmers Co-op, this Order and the findings to which it has consented in its Offer, which is incorporated in this Order. Respondents Houge, McPherson and Peterson stipulate that the record basis on which this Order is entered consists solely of the Complaint, this Order and the findings to which they have consented in their Offers, which are incorporated in this Order. Respondents consent to the Commission's issuance of this Order, which makes findings, as set forth above and orders Respondents to cease and desist from violating the provisions of the Act and the Commission Regulations they are found to have violated; orders that Respondents shall be jointly and severally liable for payment of a civil monetary penalty of $100,000; and orders Respondents to comply with their respective undertakings as set forth in the Offers and this Order.
FINDINGS OF VIOLATIONS
Solely on the basis of the consents evidenced by the Offers, and with respect to Farmers Co-op, its Amended Answer, and prior to any adjudication on the merits by the Commission, the Commission finds that Farmers Co-op, Houge and Peterson violated Sections 4(a), 4c(b) and 4d(1) of the Act, 7 U.S.C. §§ 6(a), 6c(b) and 6d(1) (1994), and Commission Regulations 1.33(a), 1.55, 32.2, 32.3, and 33.3(b) promulgated under the Act, 17 C.F.R. §§ 1.33(a), 1.55, 32.2, 32.3 and 33.3(b) (1998), and McPherson violated Sections 4c(b) and 4d(1) of the Act and Commission Regulations 1.33(a), 1.55, 32.3 and 33.3(b).
Accordingly, IT IS HEREBY ORDERED THAT:
1. Farmers Co-op, Houge and Peterson shall cease and desist from violating Sections 4(a), 4c(b) and 4d(1) of the Act, 7 U.S.C. §§ 6(a), 6c(b) and 6d(1) (1994), and Commission Regulations 1.33(a), 1.55, 32.2, 32.3, and 33.3(b), 17 C.F.R. §§ 1.33(a), 1.55, 32.2, 32.3, and 33.3(b) (1998), and McPherson shall cease and desist from violating Sections 4c(b) and 4d(1) of the Act, 7 U.S.C. §§ 6c(b) and 6d(1), and Commission Regulations 1.33(a), 1.55, 32.3 and 33.3(b), 17 C.F.R. §§ 1.33(a), 1.55, 32.3 and 33.3(b);
2. Respondents shall be jointly and severally liable for payment of a civil monetary penalty in the amount of One Hundred Thousand Dollars ($100,000) within five (5) days of the date of the Order and make such payment by electronic funds transfer to the account of the Commission at the United States Treasury or by certified check or bank cashier's check made payable to the Commodity Futures Trading Commission, and addressed to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581 under cover of a letter that identifies Respondents, the name and docket number of the proceeding. A copy of the cover letter and of the form of payment shall be simultaneously transmitted to Phyllis J. Cela, Acting Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581. Pursuant to Section 6(e)(2) of the Act, 7 U.S.C. § 9a(2) (1994), if payment of the full amount of this penalty is not made within fifteen (15) days of the due date, Respondents shall be automatically prohibited from trading on all contract markets until Respondents show to the satisfaction of the Commission that payment of the full amount of the penalty with interest thereon to the date of payment has been made;
3. Farmers Co-op shall comply with its undertaking to maintain its newly-established procedures whereby its General Manager and the Head of its Grain Division have the responsibility to review all new proposed types of HTA contracts and any type of contract involving option features it plans to offer to producers to ensure the legality of such contracts under the Act and Commission Regulations;
4. Houge shall comply with his undertaking not to apply for registration or seek exemption from registration with the Commission in any capacity under the Act, and not to engage in any activity for which registration or exemption from registration with the Commission is required under the Act or act as a principal, employee, officer or agent of any person registered, exempted from registration or required to be registered under the Act;
5. McPherson shall comply with his undertaking not to apply for registration or seek exemption from registration with the Commission in any capacity under the Act, and not to engage in any activity for which registration or exemption from registration with the Commission is required under the Act or act as a principal, employee, officer or agent of any person registered, exempted from registration or required to be registered under the Act;
6. Peterson shall comply with his undertaking not to seek registration as an AP, as defined in Commission Regulation 1.3(aa), 17 C.F.R. § 1.3(aa) (1998), for a period of six months, beginning on the date of this Order. During the six-month period, Peterson shall not engage in any activity requiring AP registration or act as a principal, director, agent or officer of any person registered or required to be registered with the Commission.
7. Should Peterson seek AP registration after the six-month period, he shall undertake to have his registration conditioned in the following manner:
a. Peterson may not act as an AP pursuant to Section 4k of the Act, and as defined under Regulation 1.3(aa), 17 C.F.R. § 1.3(aa) (1998), unless his activities are subject to a Supplemental Sponsor Certification Statement ("SSCS"), executed and submitted to the Commission by a designated principal of the Commission registrant ("Sponsor") and approved by the Commission. Immediately upon the Sponsor's ceasing to serve as Peterson's sponsor, Peterson shall stop acting as an AP until his activities are subject to a SSCS, executed and submitted to the Commission by a qualified sponsor and approved by the Commission;
b. Peterson must be supervised by a designated principal of a Sponsor who shall be a Commission registrant ("Supervisor"), who is physically present in the office on a daily basis;
c. Peterson may not exercise discretionary trading authority over customer accounts;
d. Peterson must conduct customer business only when physically present in Sponsor's office;
e. The Supervisor shall review on at least a weekly basis, and monitor generally, all transaction slips, including office orders and floor orders, for all customer futures and options contracts orders received by Peterson. Sponsor shall maintain a written record of these weekly evaluations, immediately confer with Peterson if Sponsor or Supervisor has any questions or concerns, and shall make these records available to the Commission, the NFA or any futures exchange;
f. Sponsor shall maintain a separate file of all correspondence and memoranda of meetings and telephone calls concerning problems, complaints, disputes or claims arising from or related to his handling of any customer futures or options account, and shall make the separate file available to the Commission, the NFA or any futures exchange;
g. The Supervisor shall meet at least monthly with Peterson to discuss Peterson's registered activities and any questions, problems, complaints, disputes or claims of which Sponsor or Supervisor is aware arising from or related to Peterson's handling of any customer futures or options account or employer's proprietary futures or options account. The Sponsor shall maintain a written record of these conferences with Peterson, and shall make the separate file available to the Commission, the NFA or any futures exchange;
h. Peterson shall not directly or indirectly act in any supervisory capacity over any person required to be registered with the Commission;
i. Peterson shall not serve on any disciplinary committee, arbitration panel, oversight panel or governing board of any self-regulatory organization subject to regulation by the Commission;
j. Peterson shall not directly or indirectly act as a principal, partner, officer, director or branch office manager of any entity registered or required to be registered with the Commission;
k. Peterson's registration shall be automatically suspended if he is charged with a disciplinary offense as defined in Commission Regulation 1.63(a)(6), except that, as to offenses defined in Regulation 1.63(a)(6)(i)(C), suspension shall occur if fines aggregating $5,000 or more are imposed during the period of these conditions rather than during a calendar year;
l. If Peterson's registration is automatically suspended pursuant to the preceding subparagraph, the period of suspension shall terminate six months after the date of the suspension, unless the Commission files within that period a Notice of Intent to Revoke or Restrict Registration, pursuant to Commission Regulation 3.60(a); and
m. If Peterson should seek to and become registered as an AP upon the expiration of his undertaking not to apply for registration with the Commission as an AP, set forth in paragraph 6 above, his registration as an AP shall be conditioned as set forth in paragraphs a through l above for a period of two years from the date of registration.
8. Respondents agree that neither they nor any of their agents or employees under their authority or control shall take any action or make any public statement denying, directly or indirectly, any allegation in the Complaint or findings or conclusions in the Order, or creating or tending to create, the impression that the Complaint or the Order is without a factual basis; provided, however, that nothing in this provision shall affect Respondents': (i) testimonial obligations, including the testimonial obligations of Farmers Co-op's employees and agents; or (ii) rights, including the rights of Farmers Co-op's employees and agents, to take legal positions in other proceedings to which the Commission is not a party. In addition, Respondents understand and agree that the Commission's acceptances of their Offers are conditioned upon their compliance with this agreement. Respondents will undertake all steps necessary to assure that all of their agents and employees.
Unless otherwise specified, the provisions of this Order shall be effective on this date.
|By the Commission|
|Dated: March , 2000|
|Jean A. Webb|
|Secretary of the Commission|
|Commodity Futures Trading Commission|
1 Respondents do not consent to the use of the Offers or this Order, or the findings consented to in the Offers, as the sole basis for any other proceeding brought by the Commission other than in a proceeding to enforce the terms of this Order, nor do they consent to the use of the Offers or this Order, or the findings in the Order consented to in the Offers, by any other person or entity in this or any other proceeding. The findings made in the Order are not binding on any other person or entity in any other proceeding.
2 The Commission does not express any opinion on the question of what obligations, if any, may exist and be enforceable as between the parties to any particular contract. The Commission views those issues as possibly affected by factors outside of the issues it addresses in this Order. The Commission takes no position on the relative equities between the parties to any particular contract.
3 In 1993, the co-op hired Houge for the purpose of marketing and operating the co-op's HTA program. In February 1995, Houge hired Peterson to assist him in marketing the HTAs.
4 HTAs are contracts which require delivery of grain on or before a specified date in the future and which usually base the price of the producer's grain on (1) the price of grain as reflected for the corresponding exchange-traded futures contract (the futures reference price); and (2) basis, which is the difference between the futures reference price and the local cash price offered by Farmers Co-op. The futures reference price component of the contract is set at the time the contract is made. The final contract price is usually set at the time the grain is delivered.
5 There are no allegations in the complaint that Farmers Co-op engaged in any fraudulent activity in connection with its HTA and options program, which Farmers Co-op ended in 1996.
6 On August 29, 1994, the Division of Trading and Markets issued a no-action letter to Farmers Commodity Corporation ("FCC"), a registered FCM, and FCCFI, a wholly-owned subsidiary and guaranteed IB of FCC. FCC and FCCFI sought to exempt certain agricultural elevator cooperatives from the registration requirements of the Act. The no-action letter allowed FCC to establish an FCCFI branch office at Farmers Co-op so that producers could open their own accounts at and trade exchange-traded futures and options contracts to hedge their cash grain. Each of the FCCFI branch offices was to be staffed by at least one registered AP, although the AP could be an elevator employee - in this case, Peterson.
7 Farmers Co-op used one of the four commodity trading accounts it maintained at FCC to place the exchange-traded futures and options trades it made on behalf of the producers.