UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC Docket No. 00-23|
|IRA M. LAVENDER,||)||ORDER INSTITUTING PROCEEDINGS|
|)||PURSUANT TO SECTIONS 6(c)|
|)||AND 6(d) OF THE COMMODITY|
|)||EXCHANGE ACT, MAKING FINDINGS|
|)||AND IMPOSING REMEDIAL SANCTIONS|
The Commodity Futures Trading Commission (the "Commission") has reason to believe that Ira Monroe Lavender ("Lavender") has violated Sections 4b(a)( i) and (iii), 4m(1) and 4o(1) of the Commodity Exchange Act, as amended (the "Act"), 7 U.S.C §§ 6b(a)(i) and (iii), 6m(1) and 6o(1) (1994). Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted to determine whether Lavender engaged in violations set forth in this Order and to determine whether any order should be issued imposing remedial sanctions.
In anticipation of the institution of this administrative proceeding, Lavender has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Without admitting or denying the findings in this Order, and prior to any adjudication on the merits, Lavender acknowledges service of this Order. Lavender consents to the use of the findings 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 the following:
From February 1999 to September 1999, Lavender directed the trading in ten accounts pursuant to power of attorney and generally held himself out to the public as a commodity trading advisor ("CTA") without being registered as a CTA. Lavender also unsuccessfully solicited other prospective clients. Lavender agreed with at least three of his clients that he would receive a percentage of any trading profits in the accounts. In the course of soliciting these accounts, Lavender guaranteed profits and made misrepresentations concerning the likelihood of generating profits from trading commodity futures.
Ira Monroe Lavender currently resides at 4011 Crown Point Drive, V-6, in San Diego, California. He has never been registered with the Commission in any capacity.
After taking a course in commodity futures trading in early 1998, Lavender opened both a personal and a joint (with his son) commodity futures trading account in September 1998. In or about February 1999, Lavender began holding evening "study groups" at his home to teach his sister and their friends how to trade commodity futures. The goal of Lavender and the group was to enable members of the group eventually to trade their own commodity futures accounts.
During the course of these study groups and at other times, Lavender made misrepresentations to the members of the study group concerning the likelihood that profits could be made from trading commodity futures contracts. In February 1999, Lavender's sister opened a commodity futures account and gave Lavender power of attorney. During March 1999 five additional accounts were opened by other members of the study group and their friends, all of whom gave Lavender power of attorney. Lavender told one of these clients that he could "make ...[her] rich"; and they orally agreed that Lavender would receive 10% of her profits. Pursuant to a second oral agreement, Lavender was to receive 50% of the profits. In May and July, two additional accounts, giving Lavender power of attorney, were opened by friends of Lavender to whom Lavender had made similar misrepresentations concerning the likelihood of profiting from trading commodity futures.
In March 1999, with Lavender's knowledge, one of Lavender's friends recommended him to a person with whom Lavender had no previous relationship. This person contacted Lavender to discuss opening a commodity futures trading account to be managed by Lavender. During the course of soliciting this prospective client, Lavender guaranteed that the client would not lose any of his principal and that he would double his money within 90 days. In March 1999, this client opened a $100,000 futures trading account, giving power of attorney to Lavender. Lavender secured this investment with a promissory note stating that "by May 30,1999 there will be in your account all of the initial investment ($100,000) plus an unforseeable [sic] profit which we will divide 50/50." Subsequently, this client's account suffered losses of $113,000, and Lavender never received any compensation under the agreement.
All of the other accounts under Lavender's management, including his own and his joint account with his son, sustained trading losses. Lavender told his clients that he would continue to trade their accounts in order to restore their original account balances, at which time he wanted them to trade their own accounts. Lavender attempted but failed to recoup the losses sustained in the accounts he was managing. Although the accounts he was managing had sustained losses, Lavender solicited others to open futures trading accounts to be managed by Lavender.2
D. LEGAL DISCUSSION
1. Lavender Violated Section 4b(a)(i)and (iii) of the Act
Section 4b(a)(i) and (iii) of the Act prohibits any person, in or in connection with any order to make or the making of a futures contract, for or on behalf of any other person, from cheating or defrauding, or attempting to cheat or defraud, such other person, or willfully to deceive or attempt to deceive such other person. Misrepresentations and omissions of material facts made with scienter regarding futures transactions constitute fraud under Section 4b(a) of the Act. In the Matter of R&W Technical Services, Inc., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27,582 at 47,740-47,741 (CFTC Mar. 16, 1999), aff'd in relevant part, R&W Technical Svcs., Inc. v. CFTC, 205 F.3d 165 (5th Cir. 2000). See, e.g., Saxe v. E.F. Hutton, 789 F.2d 105, 110 (2d Cir. 1986); Kelley v. Carr, 442 F. Supp. 346, 351-54 (W.D. Mich. 1977), aff'd in part, rev'd in part, 691 F.2d 800 (6th Cir. 1980); CFTC v. J.S. Love Associates Options, Ltd., 422 F. Supp. 652, 655 (S.D.N.Y. 1976).
A statement is material if it is substantially likely that a reasonable investor would consider the matter important in making an investment decision. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); Sudol v. Shearson Loeb Rhoades, Inc., [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,748, at 31,119 (CFTC Sept. 30, 1985). In general, all manner of omissions and misrepresentations of material fact regarding futures transactions violate the antifraud provisions of the Act, including omissions and representations concerning the likelihood of profit and other matters that a reasonable investor would consider material to his investment decisions. See, e.g., First Nat. Monetary Corp. v. Weinberger, 819 F.2d 1334 (6th Cir. 1987); CFTC v. US Metals Depository Co., 468 F. Supp. 1149 (S.D.N.Y. 1979); CFTC v. Crown Colony Commodity Options Ltd., 434 F. Supp. 911 (S.D.N.Y. 1977).
Guarantees of profits as a result of futures trading are material and inherently fraudulent. Munnell v. Paine Webber Jackson & Curtis, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,313 at 32,863 (CFTC Oct. 8, 1986) (promises of large and certain profits amount to a guarantee of profitability and are inherently fraudulent); cf. Levine v. Refco, Inc., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,488 at 36,115 (CFTC July 11, 1989) ("bold predictions of significant profit coupled with claims that risks are subject to specific limitations amounts to the type of guarantee of profits prohibited under Section 4b").
Liability under Section 4b(a) of the Act requires proof of scienter, i.e., proof that the respondent committed the alleged wrongful acts "intentionally or with reckless disregard for [his] duties under the Act." Hammond v. Smith Barney, Harris Upham & Co., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,617 at 36,659 n.21 (CFTC March 1, 1990); CFTC v. Savage, 611 F.2d 270, 283 (9th Cir. 1979) (finding of scienter supported by proof of recklessness). Lavender's reckless guarantees of profit and other misrepresentations concerning the likelihood of making a profit constitute fraud in violation of section 4b(a) of the Act. Accordingly, Lavender violated Section 4b(a)(i) and (iii) of the Act.
2. Lavender Violated Section 4m(1) of the Act
Section 1(a)(5) of the Act defines a CTA as a person who "for compensation or profit, engages in ...advising others, either directly or through publications, writings, or electronic media as to the value of or the advisability of trading" in futures contracts. Since Lavender directed commodity futures trading accounts pursuant to powers of attorney and was to receive a percentage of profits for the management of some of these accounts, he acted as a CTA.
Pursuant to Section 4m(1) of the Act, in the absence of registration, a CTA is prohibited from using the instrumentalities of interstate commerce to provide trading advice unless the advice is provided to fewer than 15 persons during the preceding 12-month period and the unregistered CTA does not hold himself out generally to the public as a CTA. Although Lavender managed fewer than 15 accounts, he held himself out to the public as a CTA. He solicited prospective clients from the general public in the course of his work as an electrician and was aware that his friends were soliciting client accounts for him to manage. Unless a CTA restricts his clients to family, friends, and existing business associates, he is viewed as holding himself out to the public as a CTA. CFTC Interpretative Letter No. 97-26 [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27, 026 (March 26, 1997). Therefore, Lavender acted as a CTA, without being registered as such, in violation of Section 4m(1) of the Act.
3. Lavender Violated Section 4o(1) of the Act
Section 4o(1) of the Act provides that it is unlawful for a CTA by means of the use of the mails or any instrumentalities of interstate commerce, directly or indirectly, to either "(A) employ any device, scheme, or artifice to defraud any client or participant or prospective client or participant; or (B) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant."
The same conduct by Lavender that violated Section 4b(a) of the Act also violated Section 4o(1) of the Act because he engaged in that conduct in his capacity as a CTA. Skorupskas, 605 F. Supp. at 932-33 (the same conduct that violates Section 4b can violate Section 4o(1)); In re Slusser, [1998-1999 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27, 701 at 48, 315 (CFTC July 19, 1999), aff'd in part, remanded in part, 210 F. 3d 783 (7th Cir. 2000) (`[w]here the record establishes that the respondents engaged fraudulent conduct in violation of Section 4b the Division has ... surpassed its burden of proof with respect to section 4o").Scienter is not necessary to prove a violation of 4o(1)(B) of the Act. In re Kolter [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶26, 262 at 42, 198 (CFTC Nov. 16, 1994) citing Messer v. E.F. Hutton & Co., 847 F. 2d 673, 678-9 (11th Cir. 1988).
Accordingly, Lavender's reckless guarantees of profits and his other misrepresentations of the likelihood of profitable commodity futures trading that operated as a fraud or deceit on his clients and prospective clients in violation of Section 4b(a) also violate Section 4o(1) of the Act.
LAVENDER'S OFFER OF SETTLEMENT
Lavender has submitted an Offer of Settlement, a copy of which is attached hereto, in which, without admitting or denying the findings of fact herein, he:
A. Admits the jurisdiction of the Commission with respect to all matters set forth in the Order;
B. Acknowledges service of the Order;
1. the service and filing of a complaint and notice of hearing;
2. a hearing;
3. all post-hearing procedures;
4. judicial review by any court;
5. any objection to the staff's participation in the Commission's consideration of his Offer;
6. all claims which he 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 the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104-121, §§ 231-232, 110 Stat. 862-863, and Part 148 of the Regulations, 17 C.F.R. §§ 148.1, et seq. (1999), relating to, or arising from, this action, and he shall not assert any right under the Equal Access to Justice Act to seek costs, fees, or other expenses relating to, or arising from, this proceeding; and
7. 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;
D. Stipulates that the record basis on which this Order is entered shall consist solely of this Order and its findings to which he has consented in the Offer, which are incorporated in this Order; and
E. Consents, solely on the basis of the Offer, to the entry of the Order in the form attached hereto, which makes findings of fact and findings of violations, and:
1. directs Lavender to cease and desist from violating Sections 4m(1) and 4o(1) of the Act;
2. permanently prohibits Lavender from trading on or subject to the rules of any contract market; and
3. directs Lavender to comply with his undertakings, as set forth below.
FINDINGS OF VIOLATIONS
Based on the foregoing, the Commission finds that Lavender violated Sections 4b(a)(i)and (iii), 4m(1) and 4o(1) of the Act.
Accordingly, IT IS HEREBY ORDERED THAT:
A. Lavender shall cease and desist from violating Sections 4b(a)(i) and (iii), 4m(1) and 4o(1) of the Act;
B. Lavender shall be prohibited permanently from trading on or subject to the rules of any contract market; and all contract markets shall deny permanently Lavender privileges thereon; and
C. Lavender shall comply with the following undertakings:
1. never to apply for registration with the Commission in any capacity or to seek exemption from registration;
2. never to engage in any activity that requires registration with the Commission, including, but not limited to, directing any current or prospective client's commodity interest account; soliciting, accepting or receiving any funds, revenue, or other property from any person; or soliciting prospective customers, related to the purchase or sale of any commodity futures or options on commodity futures contracts; and
3. never to act as a principal, agent, or officer of any person registered, exempted from registration or required to be registered with the Commission; and
4. not to take any action or make any public statement denying, directly or indirectly, any finding in the Order, or creating or tending to create, the impression that the Order is without factual basis; provided, however, that nothing in this provision affects Lavender's (1) testimonial obligations; or (2) right to take contrary factual or legal positions in other proceedings to which the Commission is not a party.
|By the Commission.|
|Dated: June 30, 2000||______________________|
|Jean A. Webb|
|Secretary to the Commission|
Commodity Futures Trading Commission
1 Lavender does not consent to the use of this Order as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of this Order and does not consent to the use of the Offer or this Order, or the findings consented to in the Offer, by any other person or entity in this or in any other proceeding. The findings made in this Order are not binding on any other person or entity in any other proceeding.
2 One of these persons contacted the Arizona Department of Securities. On April 28, 2000, the Arizona Corporation Commission entered an Order of Relief and Consent to Same that included findings that, in connection with the offer and sale of securities in the form of investment contracts, Lavender had "misrepresented the risks of trading" and had misrepresented that "certain stops would be in place to provide investors with a safety net, when in fact, this was not true." Lavender consented to the Order, by which he was ordered to (1)permanently cease and desist from the conduct alleged, including managing or trading commodity futures accounts for the benefit of investors; (2) pay restitution in the amount of $175,000 plus interest of 10% per annum from the date of initial investment; and (3) pay a penalty of $10,000.