United States District Court,

D. New Jersey.

March 1, 2000.

Commodity Futures Trading Commission (CFTC) brought a civil enforcement action against a broker for violations of the Commodities Exchange Act (CEA) and enforcement regulations. The District Court, Orlofsky, J., held that: (1) conversations between broker and investor was within the sweep of the evidentiary rule generally excluding evidence of offers to compromise; (2) conversations were admissible on rebuttal to impeach broker's testimony during cross-examination; (3) prior bad acts evidence that broker depleted a trading account funded by a third party by making unauthorized withdrawals for his personal expenses was admissible; (4) to establish a claim for futures and options fraud under the CEA in an enforcement action, the CFTC need not prove customer reliance on material misrepresentations, though reliance is essential to restitution relief; (5) broker violated CEA anti-fraud provisions; (6) broker and his company violated the CEA by failing to register as a futures commission merchant (FCM); and (7) permanent injunctive relief and restitution award were warranted.

Ordered accordingly.

OPINION

ORLOFSKY, District Judge.

This case requires this Court to enter the realm of commodity futures and options on futures trading as regulated by the provisions of the Commodities Exchange Act, 7 U.S.C. §§ 1 et seq. (1999)("CEA"). Plaintiff, Commodity Futures Trading Commission ("CFTC"), brought this civil enforcement action against Defendant Murray I. Rosenberg ("Rosenberg") for his alleged violations of the CEA, and the regulations which have been promulgated to enforce it, 17 C.F.R. §§ 1.1 et seq. (1999). Simply stated, the CFTC alleges that Rosenberg offered to introduce James Stollenwerck ("Stollenwerck") to a registered trading firm so that Stollenwerck could open a trading account, but instead, used Stollenwerck's money to open an account in Rosenberg's own name and then pilfered the money for payment of his personal expenses. See Joint Final Pre-trial Order ("JFPO") at 3-7. The CFTC alleges that Rosenberg and his corporation, Pro Broker Service, Inc. ("Pro Broker"): (1) committed futures and options fraud, in violation of 7 U.S.C. §§ 6b(a)(i)-(iii), 6c(b) and 17 C.F.R. § 33.10 (1999); (2) unlawfully converted Stollenwerck's money in violation of 7 U.S.C. § 13(a)(1); (3) acted as a futures commission merchant ("FCM") or introducing broker ("IB") without registering as such and commingled funds in violation of 7 U.S.C. §§ 6d(1)- (2) and 17 C.F.R. § 33.3(b); and (4) failed to execute commodity option orders in violation of 17 C.F.R. § 33.9(c) and failed to issue written monthly account and confirmation statements, in violation of 17 C.F.R. § 1.33(a)-(b). See id. at 7-9.

Based upon my findings of fact and conclusions of law as set forth below, [FN1] I find that Rosenberg and Pro Broker have violated the Commodities Exchange Act and the regulations promulgated thereunder. Accordingly, I shall permanently enjoin Rosenberg and Pro Broker from further violations of the CEA as well as from trading commodity futures or options on futures on behalf of any other person or entity, including, but not limited to, any association, partnership, corporation, or trust. Furthermore, I shall order ancillary relief in the form of restitution.

I. BACKGROUND AND PRELIMINARY EVIDENTIARY ISSUES

A. The Nature of Commodity Futures and Options on Futures

This case is brought pursuant to the Commodities Exchange Act ("CEA"), 7 U.S.C. §§ 1 et seq., a comprehensive statutory scheme governing the trading of commodity futures and options on futures. *430 See id. For the sake of clarity, this Court shall set forth a brief description of commodity trading.

Commodity futures trading involves contracts of sale for a specific quantity of a commodity [FN2] at a set price to be delivered at some future date. See 7 U.S.C. § 2(i) (1999); see also Commodity Futures Trading Comm'n v. Co Petro Mktg. Group, Inc., 680 F.2d 573, 579-80 (9th Cir.1982); Cargill, Inc. v. Hardin, 452 F.2d 1154, 1156 (8th Cir.1971). Options trading involves contracts under which the holder has the right to purchase a commodity futures contract at a specified price. See Harold S. Bloomenthal, 3 Securities and Federal Corporate Law § 2.92 (1999).

In Commodity Futures Trading Comm'n v. Standard Forex, Inc., No. CV- 93-0088, 1996 WL 435440 (E.D.N.Y. July 25, 1996), the Court described futures contracts in the following way:

Id. at *1 (internal citations omitted). The CEA was enacted to regulate the futures and options on futures market, and governs this enforcement action.

B. Evidentiary Issues

Before the trial, Rosenberg filed a rash of motions in limine, seeking, among other things, to exclude from evidence tape recorded conversations between Rosenberg and Stollenwerck as well as the testimony of both Raymond Kent Driskill ("K.Driskill") and Carl Raymond Driskill ("C.Driskill"). See JFPO at 53-60; Notice of "Cross Motion in limine To Exclude Witness and Tape Recordings" at 1 (filed July 1, 1998); Notice of "Cross Motion in limine To Exclude Witnesses" at 1 (filed July 1, 1998). [FN3] On May 25, 1999, I filed an unpublished Opinion in which I excluded the tape recorded conversations ("Tapes") as inadmissible settlement discussions, pursuant to Federal Rule of Evidence 408, and also the testimony of the Driskills on the ground that the in limine motion was premature. See CFTC v. Rosenberg, et al., No. 97-2927 at 16, 18 (D.N.J. filed May 25, 1999)("Rosenberg I ").

This Court then conducted a three-day bench trial in this matter, from May 25, 1999 until May 27, 1999. In the course of *431 the trial, the CFTC moved for reargument of my decision to exclude the Tapes and Rosenberg renewed his objection to the admission of the Driskills' testimony. Considering Rosenberg's status as a pro se defendant and the nature of a non-jury trial, I provisionally admitted into evidence, subject to further review based upon the post-trial submissions of the parties: (1) the Tapes (Pl.'s Ex. 2) and the transcript of the Tapes (Pl.'s Ex. 3); [FN4] and (2) the trial testimony of C. Driskill and the de bene esse deposition of K. Driskill (Pl.'s Ex. 366). [FN5] Following the conclusion of the trial, on June 21, 1999, the parties submitted post-trial memoranda on the admissibility of both the Tapes and the Driskills' testimony. See Pl.'s Post-Trial Submission for Reconsideration of Exclusion of Audiotapes (filed June 21, 1999); Pl.'s Post-Trial Submission Regarding Testimony of the Driskills (filed June 21, 1999); Def.'s Letter Br. in lieu of More Formal Post Trial Submission ("Def.'s Br.")(filed June 21, 1999). I shall now address the admissibility of the Tapes and the corresponding transcript, the court testimony of C. Driskill and the de bene esse deposition testimony of K. Driskill (Pl.'s Ex. 366).

1. The Tapes and Corresponding Transcript

In its original opposition to Rosenberg's pre-trial motion in limine to exclude the Tapes, the CFTC argued, among other things, that the conversations Rosenberg had with Stollenwerck's lawyer, Gary Sinclair, Esq. ("Sinclair"), and the tape recorded conversations between Rosenberg and Stollenwerck did not implicate Federal Rule of Evidence 408 [FN6] because of the absence of a disputed claim. See Pl.'s Opp. to Def.'s Mot. to Quash at 4. In the alternative, the CFTC contended that the de bene esse deposition of Sinclair and the Tapes were admissible because they would be offered for reasons other than to prove liability or damages, a well-established exception to Rule 408. See id. at 5. Specifically, the CFTC argued that:

See id. at 6; see also Rosenberg I, at *14.

In my May 25, 1999 opinion, I assumed that the conversations between Rosenberg and Stollenwerck were settlement discussions and rejected the argument that the Tapes were admissible under the exception to Rule 408. See Rosenberg I, at *14-16. The following excerpt is illustrative:

Rosenberg I, at *14-16.

[1] In its post-trial submission for "reconsideration" of the Tapes, [FN7] the CFTC advances four major contentions. First, the CFTC characterizes the conversations as efforts by Stollenwerck to close his account with Rosenberg's corporation, Pro Broker, and contends that as such, the discussions do not fall under the rubric of Rule 408. See Pl.'s Post-Trial Submission for Reconsideration of Exclusion of Audiotapes ("Pl.'s Tapes Br.") at 3. Second, and in the alternative, the CFTC re-asserts the applicability of the Rule 408 exception permitting admissibility for a purpose other than establishing liability or damages. See id. at 2. Next, the CFTC asserts that because Rosenberg was "not acting in good faith," the exclusion of the Tapes would be inconsistent with the underlying policy of Rule 408 to encourage good faith settlement discussions. See id. at 8. Finally, the CFTC urges this Court to use "surgical precision," ostensibly like the Third Circuit's decision in Affiliated Mfrs. v. Aluminum Co. of Am., 56 F.3d 521, 526 (3d Cir.1995), and exclude only certain portions of the Tapes. See id. at *4. In opposition to the admission of the Tapes, Rosenberg relies on this Court's earlier application of Rule 408 and rejection of the Rule's exception in my unpublished opinion, Rosenberg I. See Def.'s Br. at 1.

[2][3] A critical factor a court must consider in deciding whether or not a motion for reargument [FN8] should be granted is *433 whether the court "overlooked" factual matters or controlling decisions of law that might reasonably have resulted in a different conclusion had they been considered. See Local Civ. R. 7.1(g); Damiano v. Sony Music Entertainment, Inc., 975 F.Supp. 623, 633-34 (D.N.J.1996)(Simandle, J.). To be sure, a motion for reargument "is an extremely limited procedural vehicle," Resorts Int'l, Inc. v. Greate Bay Hotel & Casino, Inc., 830 F.Supp. 826, 831 (D.N.J.1992)(Gerry, C.J.), and relief under the rule is granted "very sparingly." Maldonado v. Lucca, 636 F.Supp. 621, 630 (D.N.J.1986)(Barry, J.). For the reasons set forth below, I find that in arriving at my decision in Rosenberg I, I overlooked no factual matter or decision of law that might reasonably have resulted in a different conclusion had it been considered. Accordingly, I shall exclude the Tapes (Pl.'s Ex. 2) and the corresponding transcript (Pl.'s Ex. 3) in their entireties.

In its memorandum in support of the admission of the Tapes, the CFTC seems to concede the existence of a "disputed claim" [FN9] and instead, argues that the conversations, allegedly mere efforts to close the account and obtain the money, do not involve attempts to settle or compromise a claim under Rule 408. See Pl.'s Tapes Br. at 3. In support of its interpretation of the Tapes, the CFTC cites Winchester Packaging, Inc. v. Mobil Chemical Co., 14 F.3d 316 (7th Cir.1994), and Kraemer v. Franklin and Marshall College, 909 F.Supp. 267 (E.D.Pa.1995) for the proposition that a mere demand for payment, even in conjunction with the threat of legal action, is not an offer of settlement. See Winchester, 14 F.3d at 319; Kraemer, 909 F.Supp. at 268.

While it is true that the Tapes reflect both Stollenwerck's attempt to close the account and his demand for the return of some amount of money, the CFTC's interpretation is remarkably incomplete. For instance, in the first conversation, Stollenwerck threatens Rosenberg with legal action [FN10] and clearly demands what he believes to be the remaining account balance, $116,498, so that negotiations could move forward. [FN11] I find that this precursor to *434 settlement is a term or condition of the settlement negotiations, thereby bringing the conversation within the sweep of Rule 408. To find such a conversation admissible would run afoul of the policy considerations behind Rule 408 protecting frank disclosure for the purpose of compromise and settlement of disputes. See Advisory Committee's Note, Fed.R.Evid. 408; United States v. Clatworthy, No. 91-CIV-6211, 1992 WL 6179 at *3 n. 6 (S.D.N.Y. Jan.8, 1992); see generally Affiliated Mfrs., Inc. v. Aluminum Co. of Am., 56 F.3d 521, 526 (3d Cir.1995)("[t]he policy behind Rule 408 is to encourage freedom of discussion with regard to compromise"); Fiberglass Insulators, Inc. v. Dupuy, 856 F.2d 652, 654 (4th Cir.1988)("[t]he public policy of favoring and encouraging settlement makes necessary the inadmissibility of settlement negotiations in order to foster frank discussions"); United States v. Contra Costa County Water Dist., 678 F.2d 90, 92 (9th Cir.1982)("[b]y preventing settlement negotiations from being admitted as evidence, full and open disclosure is encouraged, thereby furthering the policy toward settlement"); Lo Bosco v. Kure Eng'g Ltd., 891 F.Supp. 1035, 1037-38 (D.N.J.1995)(Wolin, J.)(stating that one of the primary rationales supporting Rule 408 is the "obvious public policy interest in encouraging settlement of private disputes"). While it is unclear whether the CFTC's argument is intended to reach the second and third conversations on the Tapes, which contain Rosenberg's offer to pay Stollenwerck $100,000 per year for three years in settlement of the claim and the break down of that offer and the negotiations as a whole, the application of Rule 408 is clear. I therefore find no merit in the CFTC's argument that the substance of the Tapes removes them from the scope of Rule 408.

I need not dwell on the CFTC's policy justifications or argument that the Tapes are admissible pursuant to the exception of Rule 408 since these contentions were previously addressed in Rosenberg I and the CFTC has failed to raise any factual matters or present controlling decisions of law that this Court overlooked. See Local Civ. R. 7.1(g); Damiano v. Sony Music Entertainment, Inc., 975 F.Supp. 623, 633-34 (D.N.J.1996)(Simandle, J.).

[4] Finally, I find it impossible to parse the taped conversations for content that is, as the CFTC contends, "not made in the context of settlement negotiations." Pl.'s Tapes Br. at 4. The CFTC urges this Court to use "surgical precision" and exclude only "that portion of the audiotapes which concerns Mr. Rosenberg's offers to repay Mr. Stollenwerck over time." Id. (citing Affiliated Mfrs., Inc. v. Aluminum Co. of Am., 56 F.3d 521, 523 (3d Cir.1995)). Taken to its inevitable conclusion, this argument would result in the admission into evidence of numerous damaging statements and admissions by Rosenberg concerning his involvement in Stollenwerck's trading account.

Not only am I unable to find support in Affiliated Mfrs. for such a narrow interpretation of the Rule, but the Rule's text expressly precludes such an application. Rule 408 specifically provides that "[e]vidence of conduct or statements made in compromise negotiations is ... not admissible." See Fed.R.Evid. 408; see also Kritikos v. Palmer Johnson, Inc., 821 F.2d 418, 421-23 (7th Cir.1987)(letters advising plaintiff of possible compromise plan prior to institution of legal action were inadmissible under Rule 408 rationale). Accordingly, the Tapes and the accompanying transcript are inadmissible in their entireties.

Numerous courts have held that the exception to Rule 408, allowing the admission of settlement negotiation evidence when offered for a purpose other than to establish liability or damages, permits the use of such evidence for purposes of rebuttal or impeachment. See Freidus v. First Nat'l Bank, 928 F.2d 793 (8th Cir.1991); County of Hennepin v. AFG Indus., Inc., 726 F.2d 149, 153 (8th Cir.1984); John McShain, Inc. v. Cessna Aircraft Co., 563 F.2d 632, 635 (3d Cir.1977); Wisconsin Pub. Serv. Corp. v. Ecodyne Corp., 702 F.Supp. 217, 218 (E.D.Wis.1988); cf. Reichenbach v. Smith, 528 F.2d 1072, 1075 (5th Cir.1976)(because of broad discretion to conduct trial, court found no harmful error when trial judge prohibited cross-examination on settlement but stated the decision was not "an approval for the future of the trial court's approach ... [t]he existence of a settlement agreement goes directly to the issue of credibility and usually the better approach is that codified in Rule 408"). In this case, the Tapes and transcript were properly used to rebut Rosenberg's testimony and to impeach his credibility during cross-examination. See Trial Tr. at 429, 451-52; 453-54. Yet, Rosenberg asserts that the Tapes were unlawfully made and therefore inadmissible for purposes of impeachment.

[6] As I noted in Rosenberg I, the Tapes are inadmissible if made "for the purpose of committing any criminal or tortious act in violation of the Constitution or laws or the United States or of any State." See Rosenberg I, at *16 (quoting 18 U.S.C. § 2511(2)(d)). [FN12] Rosenberg has alleged that the conversations were taped "for blackmail" purposes, see Certif. of Murray I. Rosenberg at ¶ 11 (filed July 1, 1998), while the CFTC claims that "Mr. Stollenwerck ... audiotaped his telephone conversations with Mr. Rosenberg in an attempt to protect himself and prevent further distortions of Mr. Rosenberg's story." Pl.'s Opp. at 11. Rosenberg, as the party attempting to suppress a recording, has the burden of proving that the Tapes were made for an impermissible purpose. See United States v. Cassiere, 4 F.3d 1006, 1021 (1st Cir.1993)(preponderance of the evidence standard); Traficant v. Commissioner of I.R.S., 884 F.2d 258, 266 (6th Cir.1989); United States v. Phillips, 540 F.2d 319, 326 (8th Cir.1976); United States v. Nietupski, 731 F.Supp. 881, 882-83 (C.D.Ill.1990)(citing Traficant, 884 F.2d at 266).

Rosenberg has not submitted a shred of comprehensible evidence that Stollenwerck made the Tapes for a criminal or tortious purpose. While this Court is sympathetic to the obstacles faced by pro se litigants and the often confused submissions which result, I am unable to find any coherent support for Rosenberg's argument that he*436 was "blackmailed." [FN13] There is no evidence that Stollenwerck used the Tapes for an unlawful purpose or even threatened to use them to blackmail Rosenberg.

That being said, even if this Court were to read into Rosenberg's statements that he sufficiently raised the issue of blackmail, a finding in Rosenberg's favor is wholly precluded by Rosenberg's incredibility as a witness. At trial, Rosenberg was evasive, uncooperative, and bordered on incorrigible. Conversely, Stollenwerck was highly credible, lending support to this Court's determination that Stollenwerck made the Tapes to prevent future distortions by Rosenberg. [FN14] Accordingly, I find that Rosenberg has failed to meet his burden of proving by a preponderance of the evidence that the Tapes were made for an illegal or improper purpose. In sum, I find the Tapes and transcript are admissible for impeachment purposes only.

2. The Testimony of Carl Raymond and Raymond Kent Driskill

[7][8] Also during the course of trial, Rosenberg renewed his objection to the admission of the de bene esse deposition of Raymond Kent Driskill ("K.Driskill") and the trial testimony of Carl Raymond Driskill ("C.Driskill"). See Trial Tr. at 269-274. Again, because of Rosenberg's pro se status and the fact that the case was not tried before a jury, I provisionally admitted the testimony and deposition to allow Rosenberg a second bite at the proverbial apple. See Trial Tr. at 272. In his post-trial submission, Rosenberg contends that the trial testimony and de bene esse deposition of the Driskills' are inadmissible under Federal Rule of Evidence 404(b), presumably because they are offered to prove propensity, and under Federal Rule of Evidence 401, because they are irrelevant. See Def.'s Br. at 2-3. In support of the admission of the evidence, the CFTC argues that the testimony and deposition of the Driskills are offered to prove Rosenberg's intent and method of operation, and to show that there is a "substantial likelihood that Mr. Rosenberg will commit similar offenses unless restrained and enjoined." [FN15] Pl.'s Post-Trial*437 Submission Regarding Testimony of the Driskills ("Pl.'s Driskill Br.") at 3. The evidence at issue includes testimony concerning the Driskills' involvement with Rosenberg from 1992-94 in a trading relationship similar to the one between Stollenwerck and Rosenberg. Specifically, the Driskills testified that Rosenberg depleted a trading account, funded by C. Driskill, by making unauthorized withdrawals for his personal expenses. See Section II, Findings of Fact, infra. For the reasons set forth below, I find both the trial testimony of C. Driskill and K. Driskill's de bene esse deposition admissible.

[9] In United States v. DeLaurentis, 83 F.Supp.2d 455 (D.N.J. 2000), this Court had the opportunity to explore Federal Rule of Evidence 404(b) which provides in relevant part that:

Fed.R.Evid. 404(b). Applicable in both the civil and criminal contexts, Rule 404(b) is a rule of inclusion, "designed to promote the admission of evidence," but acts to prohibit "evidence offered solely to prove a defendant's character or to demonstrate that a defendant has a propensity to commit a crime." DeLaurentis, 83 F.Supp.2d at 466 (citing United States v. Sriyuth, 98 F.3d 739, 745 (3d Cir.1996); United States v. Sampson, 980 F.2d 883, 886-87 (3d Cir.1992); United States v. Scarfo, 850 F.2d 1015, 1019 (3d Cir.1988)). In other words, evidence of prior bad acts "must be probative of a material issue other than character to be admissible." Id. (citing United States v. Butch, 48 F.Supp.2d 453, 457 (D.N.J.1999)(Orlofsky, J.) (citation omitted)).

To protect against the admission of evidence offered to prove the defendant's propensity to commit the act in question, the CFTC must " 'clearly articulate how [the prior bad act] evidence fits into a chain of logical inferences, no link of which can be the inference that because the defendant committed ... offenses before, he therefore is more likely to have committed this one.' " Id. (quoting United States v. Morley, 199 F.3d 129, 137 (3d Cir.1999) (citation omitted)). "Once the Government has met this burden, 'the [D]istrict [C]ourt must put a chain of inferences into the record, none of which is the inference that the defendant has a propensity to commit [the act in question]." Id. (quoting Morley, 199 F.3d at 137) (citation omitted).

In United States v. Mastrangelo, 172 F.3d 288 (3d Cir.1999), the Third Circuit repeated the well-established four-pronged test governing the admissibility of evidence under Rule 404(b):

Id. at 294-95 (citing Huddleston v. United States, 485 U.S. 681, 691- 92, 108 S.Ct. 1496, 99 L.E.2d 771 (1988)).

[10][11][12] Regarding the first prong of the test, I conclude that "intent" is a proper evidentiary purpose for the admission of the Driskill evidence. [FN16] Not only is intent *438 an exception enumerated in Rule 404(b), but it is well-established that similar prior acts may be admitted to show a pattern of operation suggestive of intent where it is in fact an issue at trial. See Jannotta v. Subway Sandwich Shops, Inc., 125 F.3d 503, 517 (7th Cir.1997)(stating that trial court properly admitted testimony of other defrauded individuals as proof of intent in common law fraud action); Morganroth & Morganroth v. DeLorean, 123 F.3d 374, 379 (6th Cir.1997)(finding that district court properly admitted evidence that defendant consistently failed to pay other lawyers to prove intent on fraud claim); Wegerer v. First Commodity Corp. of Boston, 744 F.2d 719, 724 (10th Cir.1984)(stating that trial court properly admitted prior consent decree in commodities fraud action for purpose of showing intent and knowledge). Since intent is at issue in determining whether Rosenberg acted with the requisite scienter in his alleged violation of the CEA anti-fraud provisions, [FN17] I find that the CFTC has articulated a proper purpose for the admission of the Driskills' testimony.

I also find that the proffered testimony is relevant to the purpose for which it is offered. " 'Relevant evidence' means evidence having any tendency to make the existence of a fact that is of consequence to a determination of the action more probable or less probable than it would be without the evidence." Fed.R.Evid. 401. In this case, credible evidence of an analogous trading scheme that occurred close in time to the alleged violation, see Pl.'s Ex. 411, makes it more probable that Rosenberg intended to defraud Stollenwerck.

[13][14] Moreover, I find that the Driskill evidence is more probative than prejudicial. According to Federal Rule of Evidence 403, "[e]vidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence." Id.; see also DeLaurentis, 83 F.Supp.2d at 468. In weighing the evidence, the District Court must assess " 'the genuine need for the challenged evidence and balance that necessity against the risk that the information will influence the jury to convict on improper grounds." DeLaurentis, at 468 (quoting Sriyuth, 98 F.3d at 747-48 (citation omitted)). Moreover, "the need for the evidence is to be considered 'in view of the contested issues and other evidence available to the [plaintiff], and the strength of the evidence in proving the issue.' " Id. (quoting Sriyuth, 98 F.3d at 748 (citation omitted)).

Simply stated, the Driskill evidence is essential to establish that Rosenberg intended to defraud Stollenwerck in violation of the CEA. Moreover, considering the substantial similarity of the Driskill and Stollenwerck transactions, the Driskill evidence is highly probative. Since the danger of unfair prejudice is largely, if not completely, non-existent in a non-jury bench trial, I find that the significant probative *439 value of the evidence weighs in favor of admission. Accordingly, because the testimony of C. Driskill and the de bene esse deposition of K. Driskill are offered for a proper evidentiary purpose, are relevant, and are more probative than prejudicial, I shall admit the testimony into evidence. [FN18] Finally, pursuant to the fourth prong of the Mastrangelo test, I find that a limiting instruction is not necessary considering the non-jury nature of the trial.

In sum, when making my findings of fact and conclusions of law, I shall consider the Driskill evidence only with respect to whether Rosenberg possessed the requisite fraudulent intent to violate the CEA. I shall now make my findings of fact and conclusions of law in accordance with Federal Rule of Civil Procedure 52(a).

II. FINDINGS OF FACT

A. The Parties and Jurisdiction

1. Plaintiff Commodity Futures Trading Commission ("CFTC") is an independent agency of the United States Government responsible for administering and enforcing the provisions of the Commodity Exchange Act, 7 U.S.C. §§ 1 et seq. (1999)("CEA"), and promulgating and enforcing the CEA's supporting regulations, 17 C.F.R. §§ 1 et seq. (1999).

2. Defendant Murray I. Rosenberg ("Rosenberg"), d/b/a Pro Broker Service, Inc., a/k/a Pro-Broker Services, Inc., is an individual who resides at RR1 Box 165U, Mullica Hill, New Jersey 08062. See Pl.'s Ex. 373, Tabs N and O (Pl.'s First Request for Admissions and Answers) at ¶ B1. The only capacity in which Rosenberg has been registered with the CFTC is as a floor broker, from April 9, 1985 until January 21, 1995. See Trial Tr. at 279; Pl.'s Ex. 373, Tabs N and O at ¶¶ B151-52.

3. Defendant Pro Broker Service, Inc., a/k/a Pro-Broker Services, Inc., ("Pro Broker") is a New Jersey corporation incorporated by Rosenberg on or about November 4, 1993. See Pl.'s Ex. 373, Tabs N and O, ¶ B139; Trial Tr. at 407. At all times relevant to this litigation, Rosenberg had exclusive control of Pro Broker and held himself out as having such control: he was its only employee and director, he had the authority to sign contracts on Pro Broker's behalf, he opened a bank account for Pro Broker, of which he was the sole signatory, and only Rosenberg could withdraw funds from Pro Broker's bank account. See Trial Tr. at 407-08; see also Pl.'s Ex. 366 (K. Driskill Dep.) at 24-26. Pro Broker has never been registered with the CFTC in any capacity. See Trial Tr. at 279; Pl.'s Ex. 363, Tabs N and O at ¶ B13.

4. This Court has jurisdiction pursuant to 7 U.S.C. § 13a-1 [FN19] and 28 U.S.C. §§ 1331, [FN20] 1348. [FN21]

5. James W. Stollenwerck ("Stollenwerck") is an individual residing in Westerly, Rhode Island, who has traded commodity futures and options on futures on behalf of himself and his wife since 1992. See Trial Tr. at 13. In April, 1992, Stollenwerck traded commodity futures and options on commodity futures through his broker, Robin Rosenberg, [FN22] at First American Discount Corporation ("First American"), a registered futures commission merchant ("FCM"). See id. at 16. Stollenwerck paid commissions to First American in the amount of sixty dollars per round turn. See id. at 17.

6. In or about the fall of 1992, as Stollenwerck was becoming more interested in options trading, Stollenwerck's broker, Robin Rosenberg, referred him to Murray Rosenberg for assistance in options trading and strategy. See Trial Tr. at 19. Although the initial meeting between Stollenwerck and Rosenberg occurred during a three-way telephone conversation involving Robin Rosenberg, soon Stollenwerck was regularly speaking with Rosenberg individually and receiving free strategical options advice and information. See id. at 19- 22. For the next six months, Rosenberg dispensed to Stollenwerck free options advice "as infrequently as twice a week or ... as frequently as twice a day," with each conversation lasting between five and twenty minutes. See id. Although Stollenwerck maintained his trading account at First American throughout this time, he contemplated leaving First American because of his displeasure with the commission structure. See Trial Tr. at 23-24. When he conveyed his discontent, First American offered him a lower commission rate. See id. at 24.

7. In early 1993, Rosenberg contacted Stollenwerck and offered to execute Stollenwerck's commodity futures and options on futures trades for a commission rate of ten dollars per round turn, a fraction of Stollenwerck's cost at First American. See Trial Tr. at 25, 419. Specifically, Rosenberg told Stollenwerck that Rosenberg's corporation, Pro Broker, would execute the trades through Gerald, Inc., a registered FCM. For its services, Pro Broker would retain two of the ten dollar commission rate, while Gerald, Inc. would see the remaining eight dollars as profit. See id. at 26. Moreover, Rosenberg told Stollenwerck that he would open Stollenwerck's personal account at Gerald, Inc. in Stollenwerck's name. See id. at 27-28. The two men agreed that Stollenwerck was the only person allowed to withdraw funds from the account. See id. at 28.

8. Subsequently, Stollenwerck completed a Pro Broker account application form and submitted the form to Rosenberg. See Trial Tr. at 28. The application did not authorize Rosenberg to withdraw funds from Stollenwerck's future account at Gerald, Inc. nor did it indicate that the account would be opened in a name other than Stollenwerck's. See id.

9. Contrary to his agreement with Stollenwerck, on May 10, 1993, Rosenberg opened Gerald Inc. Account Number 827-82715 ("Gerald Account") in his own name. See Pl.'s Ex. 11, Trial Tr. at 291 (relying on Pl.'s Exs. 135, 136, 313). Rosenberg had sole authority both to withdraw funds from and to execute trades through the Gerald Account. See Pl.'s Ex. 373, Tabs N and O at ¶¶ B26- 27; Trial Tr. at 440.

10. Rosenberg then gave Stollenwerck instructions to wire funds to Gerald, Inc.'s bank account at Chase Manhattan Bank, Account Number 9101457464, for the benefit of Pro Broker. See Trial Tr. at 39, 44-45. On August 2, 1993, February 4, 1994, and March 15, 1995, Stollenwerck wired a total of $265,000 to the Chase Manhattan *441 Bank to fund what he believed was his trading account at Gerald, Inc. See Trial Tr. 39, 43, 45, 49; Pl.'s Exs. 135, 313. [FN23] Instead, the wired monies were deposited into Rosenberg's Gerald Account. See Pl.'s Ex. 11; see also Trial Tr. at 46-48.

11. After Stollenwerck wired the money to the Gerald Account, he began to call in commodity futures and options on futures trades telephonically to Rosenberg. See Trial Tr. at 55. Following each trade request, Rosenberg would return Stollenwerck's call, repeat Stollenwerck's order, and report the order's fill information. See id. However, Stollenwerck's trades were never confirmed in writing and both Rosenberg and Pro Broker failed to provide monthly account statements, because, as Rosenberg told Stollenwerck, the operation was small and he did not have "back office capability." Id. at 29-30, 348-49. Consequently, Stollenwerck kept a written, and later computerized, ledger or tally of his trades with Rosenberg. See id. at 55, 68-70; Pl.'s Ex. 5. Stollenwerck also regularly verbally verified the amount of his account with Rosenberg. See Trial Tr. at 55-56. In fact, based in part upon Rosenberg's assertions, on March 15, 1995, Stollenwerck made the largest deposit, $165,000, because he believed the Gerald Account was "doing great." See Trial Tr. at 130-31.

12. In early 1994 and early 1995, Stollenwerck received from Rosenberg and Pro Broker 1099 tax statements of profits and losses for the account Stollenwerck believed he had at Gerald, Inc. See Trial Tr. at 51; Pl.'s Ex. 137. The information provided in the 1099 statements conformed to Stollenwerck's understanding of the account. For example, the 1099 tax form was prepared by Pro Broker for Gerald Account number 827-82715, it was addressed to Stollenwerck and contained his Social Security number as the tax identification number. See Pl.'s Exs. 137, 138; Trial Tr. at 53. In addition, the 1099 tax form for the year 1993 reflected a loss of $12,177.60, which Stollenwerck believed, based upon the trade notes in his personal ledger and Rosenberg's representations, was an accurate reflection of the account's balance. See Pl.'s Exs. 137; Trial Tr. at 33, 53. Similarly, the 1099 tax form for 1994 reflected a loss of $2,540.00, again an amount which comported with Stollenwerck's understanding of his account balance. See Pl.'s Ex. 138; Trial Tr. 33. Pursuant to law, Stollenwerck filed the 1099s provided by Rosenberg and Pro Broker with the Internal Revenue Service. See Trial Tr. at 51.

13. Based upon his personal computerized record keeping, Stollenwerck believed that, during the 1995 tax year, he had gains of $389,041.05. See Pl.'s Ex. 5; Trial Tr. 68-72, 447-450. Yet, in early 1996, Rosenberg told Stollenwerck that the trading account had not made a profit and that "there was no money in it." Trial Tr. at 57, 67-68.

C. The History of Stollenwerck's Trading Account

14. Unbeknownst to Stollenwerck, Rosenberg had failed to execute many of Stollenwerck's trade orders. See Trial Tr. at 59, 297; Pl.'s Exs. 6, 11. Specifically, the Gerald, Inc. records show that from June 1994 through February 1995, not one trade originated from the Gerald Account, see Pl.'s Exs. 6, 11; Trial Tr. 58-59, yet, from early 1993 until sometime in 1996, Rosenberg had confirmed Stollenwerck's steady stream of trade orders, see Trial Tr. 55, 57-59; Pl.'s Ex. 5. Moreover, the Gerald Account balance remained at a stagnant ninety-nine dollars throughout this entire period, yet Rosenberg reported to Stollenwerck that it was much higher. *442 See generally, Trial Tr. at 55-56 (Stollenwerck testifying that Rosenberg's balance reports were not perfect, but were "within a thousand dollars" of Stollenwerck's ledger balance "which [was] accurate enough").

15. Not only did Rosenberg disregard Stollenwerck's trade requests and respond with fictitious "fill" reports, but Rosenberg also made trades in the account without Stollenwerck's permission. See Trial Tr. 63, 410-17; see also Pl.'s Ex. 373, Tabs N and O, ¶ B119. These unauthorized trades, while clearly discernible in the monthly commodity statements sent to Rosenberg by Gerald, Inc., were not included in the 1099s prepared by Rosenberg and sent to Stollenwerck. See Pl.'s Exs. 11, 137, 138. Thus, the Gerald Account experienced approximately $27,000 and $24,500 more losses in 1993 and 1994, respectively, than was reported to Stollenwerck. See Trial Tr. at 298; Pl.'s Exs. 60 (reporting total 1994 loss as $27,561.47), 61 (reporting total 1993 loss as $39,426.37), 137, 138.

16. As set forth above, Stollenwerck deposited a total of $265,000 into the Gerald Account. See Findings of Fact, ¶ 10. While Rosenberg himself deposited about $26,000 into the account, see Pl.'s Ex. 373, Tabs N and O, ¶¶ B29, B32; Pl.'s Ex. 11, he withdrew or caused to be withdrawn $229,429 from the Gerald Account. See Trial Tr. at 294; Pl.'s Exs. 6, 11, 13-59, 139-58, 160-61, 376-88, 399-406. [FN24] Of the total $229,429 withdrawn from the account, approximately $140,149 was made payable to Rosenberg while $86,650 was withdrawn and made payable to Pro Broker or for Pro Broker in care of Rosenberg. [FN25] See Trial Tr. at 294; Pl.'s Ex. 6, 13-16, 19-32, 48-59, 139-57, 160-61, 376-88, 399-406. Rosenberg did not notify Stollenwerck of the withdrawals from the Gerald Account, see Trial Tr. at 420, which he testified he made for his personal use, including living expenses, or more generally, for "[s]ex, drugs, and rock and roll. I mean for what? For me, everything, Murray I. Rosenberg." Trial Tr. at 441; see also id. at 335-36, 436-41, 444. Rosenberg also withdrew money on Pro Broker's behalf for payment of his personal expenses. See Trial Tr. at 444. The only person to withdraw money from the Gerald Account, Rosenberg used it like his personal bank account. See Trial Tr. at 420, 440, 504.

17. Rosenberg's conduct was in direct contravention of his agreement with Stollenwerck. While Rosenberg was to receive a commission on each of Stollenwerck's trade orders, neither he nor Pro Broker had authorization, written or otherwise, to withdraw other funds from the Gerald Account. [FN26] See Trial Tr. at 49,*443 65,429-431, 495-98 (no written partnership agreement and no books kept of account). Stollenwerck and Rosenberg never agreed that the funds could be used to pay Rosenberg's personal expenses; rather, the funds were to be used for the sole purpose of supporting Stollenwerck's personal commodities trading through his supposed account at Gerald, Inc. See Trial Tr. at 49, 104, 116-17. At the time of trial, neither Rosenberg nor Pro Broker had returned any of Stollenwerck's funds deposited into the Gerald Account. See Trial Tr. at 102, 459; Pl.'s Ex. 373, Tabs N and O, ¶ B138.

18. Following his involvement with Stollenwerck, Rosenberg continued to trade and to advise others in commodity options and futures strategy. See Def.'s Ex. 1 (Peter Griffin Dep.) at 66-67.

D. The Driskills

19. In 1992, Carl Raymond Driskill ("C.Driskill") traded bond futures and options through his broker, Robin Rosenberg at First American Discount Corporation ("First American"). See Trial Tr. at 205-06. Knowing that C. Driskill was interested in trading options, the broker, Robin Rosenberg, telephonically introduced C. Driskill to Murray Rosenberg, whom the broker called an options "specialist." See id. at 206-08. This conference call occurred after the First American broker assured C. Driskill that he would not be charged additional fees for the referral to Murray Rosenberg. See id. at 207.

20. Soon thereafter, C. Driskill and Rosenberg engaged in "extended conversations about various options and various strategies" involving C. Driskill's account at First American. See Trial Tr. at 208. In these conversations, which occurred daily for a period of six to eight months, Rosenberg discussed his previous work experience with the Chicago Board of Trade and sent C. Driskill various brochures from the conferences at which he lectured. See id. at 211-12. C. Driskill testified that he "came to believe in [Rosenberg]." Id. at 211.

21. After the funds in his First American account were depleted, C. Driskill continued to discuss trading strategies with Rosenberg. See Trial Tr. at 210. At some point in the course of these discussions, Rosenberg suggested that the two form a partnership and sent C. Driskill draft articles of partnership. See Trial Tr. at 214-16; Pl.'s Exs. 319, 334. After C. Driskill rejected the idea of a general partnership, the two agreed upon the corporate form, and on January 11, 1994, Rosenberg caused the incorporation of the "Telephony Hedgefund, Ltd." ("Telephony"). See Trial Tr. at 217, 221-24; Pl.'s Exs. 320, 333. C. Driskill, his son, Raymond Kent Driskill ("K.Driskill"), and Rosenberg were the *444 sole shareholders and officers of Telephony. See Pl.'s Ex. 366 (K. Driskill Dep.) at 42 (stating that Rosenberg was the President of Telephony, C. Driskill was the Secretary/Treasurer, and K. Driskill was the Vice-President).

22. The purpose of founding Telephony was to trade stock options for the benefit of Telephony's three shareholders. See Trial Tr. at 225; Pl.'s Ex. 366 at 42. The Driskills and Rosenberg hoped that Telephony could one day serve as a mutual fund or index on the Philadelphia Stock Exchange. See Trial Tr. at 224-25; Pl.'s Ex. 366 at 42-43. The shareholders agreed Telephony's funds were to be used only for trading and were to be held in the primary corporate account, or as C. Driskill called it, the "A Account." See Trial Tr. at 226, 249; Pl.'s Ex. 366 at 44. If the shareholders wished to have personal trading accounts, the individual funds were to be held separately, in "B" and "C Accounts." See Trial Tr. at 226; Pl.'s Ex. 366 at 69. Because of his prior experience, Rosenberg was charged with trading Telephony's funds, see Pl.'s Ex. at 44, while C. Driskill personally funded the trading account. See Trial Tr. at 237; Pl.'s Ex. 366 at 43.

23. Per Rosenberg's instructions, C. Driskill wired $15,000 of the Telephony funds, which he originally had deposited, to Rosenberg's corporation, Pro Broker. See Trial Tr. at 227-48, 307; Pl.'s Exs. 317, 318, 324. The Driskills believed that this money would be used to set up Telephony's trading account for the purpose of trading stocks and options. See Trial Tr. at 248; Pl.'s Ex. 366 at 43-44.

24. K. Driskill also sent Rosenberg money for Rosenberg to place trades for K. Driskill separate and apart from Telephony. See Pl.'s Ex. 366 at 53. Rosenberg told K. Driskill that his $1200, sent by K. Driskill to Pro Broker pursuant to Rosenberg's request, would be held in a "B Account," or segregated from Telephony's funds. See id. at 54, 67-68. After he sent the personal check to Rosenberg's home address, K. Driskill began to place trade orders through Rosenberg who would confirm the options trades through return telephone calls. See id. at 69-72. K. Driskill kept a written record or "calendar" of the trades he believed Rosenberg had executed on his behalf. See id. at 77-78.

25. Despite their repeated requests for information, neither C. Driskill nor K. Driskill ever received account statements from Rosenberg. See Trial Tr. at 252-53; Pl.'s Ex. 366 at 72-74. Rosenberg has admitted that there were never separate A and B accounts, see Trial Tr. at 467, and that he and Pro Broker used portions of the Driskills' money for his personal expenses and business expenses other than trading options. See id. at 467-69 (testifying that he used the monies for "groceries, electricity and so forth"); see also Pl.'s Ex. 373, Tabs U and V ("Plaintiff's Third Request for Admissions to Pro-Broker Service, Inc. [sic]" and Answer) at ¶ 20.

26. In fact, Rosenberg diverted the vast majority of the Driskills' investment funds in a series of transfers. Of the $16,200 originally sent to Pro Broker by both Driskills, Rosenberg only transferred $10,000 to trading accounts which, unsurprisingly, were held in Rosenberg's own name. See Pl.'s Exs. 216, 311, 351, 411; Trial Tr. at 309. Of this $10,000, Rosenberg diverted at least $9,754.91 to his personal use. See Pl.'s Exs. 214, 312, 341, 343, 349, 351, 354, 411; Trial Tr. at 310. Of the $6,200 remaining in the Pro Broker account, Rosenberg caused four separate checks to be written to Rosenberg and his wife, Margaret McBride Rosenberg, totaling $3800. See Pl.'s Ex. 216, 219, 247, 250, 251, 411; Trial Tr. at 308-09. In sum, Rosenberg diverted $13,554.91, or about eighty-four percent of the funds wired by the Driskills.

27. Neither Rosenberg nor Pro Broker had authorization from the Driskills to use the Telephony or the K. Driskill personal funds for expenses, personal, business, or otherwise. See Trial Tr. 248-250; Pl.'s *445 Ex. 366 at 44, 67-68 (K. Driskill testifying that Telephony funds were not to be used for anything other than trading and his personal $1200 was to be used for trading); Pl.'s Ex. 373, Tabs U and V at ¶¶ 36-37.

28. Both Driskills demanded that Rosenberg return their money. See Trial Tr. 254; Pl.'s Ex. 366 at 76. Rosenberg returned $6800 to C. Driskill and refused to return the balance. See Trial Tr. 253-56, 258. Similarly, Rosenberg returned only a portion of what K. Driskill believed to be his account balance. See Pl.'s Ex. 366 at 76-77.

III. CONCLUSIONS OF LAW

A. Violations of the Commodities Exchange Act and Supporting Regulations

1. Rosenberg Committed Futures and Options Fraud in Violation of 7 U.S.C. §§ 6b(a),6c(b) and 17 U.S.C. § 33.10

1. This case is governed by two separate anti-fraud provisions of the CEA, namely section 4b(a), governing futures contracts, and section 4c(b), in conjunction with 17 C.F.R. § 33.10, governing options contracts. Because Stollenwerck and Rosenberg dealt in both commodity futures and options on futures, both provisions will be analyzed together. For the reasons set forth below, I find that Rosenberg has violated both provisions.

[15] 2. Section 4b(a) of the CEA makes it unlawful for any person to deceive or defraud another person "in or in connection with any order to make, or the making of, any contract of sale of any commodity ... for future delivery...." [FN27] 7 U.S.C. § 6b(a)(i)-(iii)(1999); see also Saxe v. E.F. Hutton & Co., Inc., 789 F.2d 105, 109 (2d Cir.1986). The ban on options fraud involves a two-step process: section 4c(b) [FN28] of the CEA prohibits option transactions "contrary to any rule, regulation, or order of the Commission" while the regulations promulgated thereunder make it unlawful for any person to deceive or defraud another "in or in connection with an offer to enter into, the entry into, the confirmation of the execution of, or the*446 maintenance of, any commodity option transaction." 17 C.F.R. § 33.10 (1999). [FN29]

3. Judicial and agency interpretations of these statutes are inconsistent and far from clear. In Commodity Futures Trading Comm'n v. American Metals Exch. Corp., 693 F.Supp. 168 (D.N.J.1988)("American Metals I "), Judge Ackerman held that to establish a fraud claim in an enforcement action under the CEA, the CFTC must demonstrate: (1) a material misrepresentation of presently existing or past fact; (2) knowledge of the falsity by the person making the misrepresentation; (3) intent that the misrepresentation be relied upon; and (4) reliance on the misrepresentation. See id. at 194. Subsequently, in Commodity Futures Trading Comm'n v. American Metals Exch. Corp., 775 F.Supp. 767, 774 (D.N.J.1991)(Ackerman, J.), aff'd in part, vacated in part on other grounds, 991 F.2d 71 (3d Cir.1993)("American Metals II "), Judge Ackerman followed his earlier opinion and held that reliance was an essential element of fraud in an enforcement action under the CEA. See id. at 774-775. In so holding, Judge Ackerman noted the absence of any agency case law on the issue of reliance and found the fraud provision of the Securities Exchange Act of 1934, Rule 10b-5, which does not require a finding of reliance, distinguishable. See American Metals II, 775 F.Supp. at 774.

4. Agency law has evolved since the American Metals line of cases, clearly holding that customer reliance on material misrepresentations need not be proven in an enforcement action alleging fraud. See Matter of Staryk, No. 95-5 (C.F.T.C. Dec. 18, 1997); In re JCC, Inc., et al., No. 89-4, 1994 WL 183817, at *6 n. 17 (C.F.T.C. May 12, 1994), aff'd, JCC, Inc. v. Commodity Futures Trading Comm'n, 63 F.3d 1557 (11th Cir.1995); In re GNP Commodities, Inc., et al., No. 89-1, 1992 WL 201158, at *16 (C.F.T.C. August 11, 1992), aff'd in part and modified sub nom., Monieson v. Commodity Futures Trading Comm'n, 996 F.2d 852 (7th Cir.1993). In making this policy determination, the CFTC, in direct opposition to Judge Ackerman, analogized the CEA fraud provisions to Rule 10b-5 and reasoned that, like proceedings brought by the Securities Exchange Commission, CFTC proceedings are brought to protect the public interest and not to redress private wrongs. See In re GNP Commodities, Inc., 1992 WL 201158, at *16. The CFTC also distinguished the injunctive nature of the American Metals proceeding, noting in dicta that "proof of reliance may have relevance" in ancillary equitable relief secured for the benefit of defrauded customers. See id. Recently, two district courts held that reliance is not an essential element of commodities fraud. See Commodity Futures Trading Comm'n v. AVCO Fin. Corp., 28 F.Supp.2d 104, 115 (S.D.N.Y.1998)("to establish the fraud element of a § 6b(a)(i) charge, it must be established that Defendants made a material misrepresentation with scienter"); Commodity Futures Trading Comm'n v. Commonwealth Fin. Group, Inc., 874 F.Supp. 1345, 1355 (S.D.Fla.1994)("in an enforcement proceeding under section 4b(A) of the Act, reliance by customers is irrelevant").

5. In light of the CFTC decisions regarding the issue of reliance in enforcement actions, I find it appropriate to defer to the agency's clear policy determination and its permissible construction of the *447 statutory scheme it is entrusted to administer. See Chevron, USA Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 834-844, 104 S.Ct. 2778, 2781- 82, 81 L.Ed.2d 694 (1984). Accordingly, I find that to establish a claim for futures and options fraud under section 4b(a) and 4c(b) of the CEA in an enforcement action, the CFTC must demonstrate that the defendant made a material misrepresentation of presently existing or past fact with scienter. See AVCO Financial Corp., 28 F.Supp.2d at 115.

6. Enforcement cases brought by the agency are clearly distinguishable from actions brought by private actors against alleged violators of the CEA. In such cases, reliance is relevant to the causation element of the plaintiff's fraud claim to recover damages. See e.g., 7 U.S.C. § 9 (1999)(providing that the CFTC can "require restitution to customers of damages proximately caused by violations of such persons"); Indosuez Carr Futures, Inc. v. Commodity Futures Trading Comm'n, 27 F.3d 1260, 1264 (7th Cir.1994)(stating that "to recover, an investor must show that it is more likely than not that her losses were proximately caused by the misrepresentations ... in other words, that she relied on the misrepresentations"); In re Staryk, 1997 WL 778236, at *13 ("reliance is a statutory requirement of restitution"); In re JCC, et al., 1994 WL 183817, at *6 n. 17 ("the customer must prove, in order to prevail, that he relied on the misrepresentations he is alleging").

[16] 7. Because the CFTC is seeking restitution, ostensibly to compensate Stollenwerck, this case is an amalgam of an enforcement action and one brought by a private litigant for damages. Yet, the issues are easily separated into the elements necessary to establish commodity futures and options fraud and those essential to recover the desired relief. More than a mere technical distinction, I find that customer reliance on the defendant's misrepresentation is not a necessary element of the CFTC's case in an enforcement action, but is essential to restitution relief sought to compensate the injured party. Accordingly, I shall address the issue of reliance for purposes of the CFTC's requested relief. I shall now turn to the elements of the CFTC's fraud claims.

[17][18] 8. First, Rosenberg made numerous material misrepresentations. "[A] statement is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision." Saxe v. E.F. Hutton & Co., Inc., 789 F.2d 105, 109 (2d Cir.1986); see also Street v. J.C. Bradford & Co., 886 F.2d 1472, 1485 (6th Cir.1989)(Milburn, J., concurring); Commodity Futures Trading Comm'n v. Commonwealth Fin. Group, Inc., 874 F.Supp. 1345, 1354 (S.D.Fla.1994). Rosenberg's misrepresentations can be grouped into three general categories, including: (1) the promise to open a trading account at Gerald, Inc. in Stollenwerck's name and the subsequent solicitation of funds; (2) the reporting of erroneous account balances; and (3) the unlawful trading activity.

9. As this Court noted in its findings of fact, Rosenberg misrepresented that he would set up a trading account for Stollenwerck at Gerald, Inc. See Findings of Fact at ¶ 7. Rosenberg only opened a trading account in his own name, maintaining exclusive control over all aspects of the account. See id. at ¶ 9. Second, Rosenberg regularly overstated the account's balance to Stollenwerck. Specifically, Rosenberg reported the existence of trading profits when no profits had been earned and failed to report both the losses on trades Stollenwerck had not authorized Rosenberg to make and his numerous withdrawals of Stollenwerck's money from the Gerald Account. See id. at ¶¶ 14-16. Moreover, Rosenberg prepared and sent false 1099 tax forms for the 1993 and 1994 tax years. See id. at ¶¶ 12, 15. Finally, Rosenberg not only confirmed trade orders submitted by Stollenwerck that Rosenberg had failed to execute but he also engaged in unauthorized trading. See id. at ¶¶ 14- 16.

[19] 11. This Court also concludes that Rosenberg made the misrepresentations with the requisite degree of scienter. The term "scienter" refers to a mental state embracing an intent to deceive, manipulate, or defraud. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); see also AVCO Fin. Corp., 28 F.Supp.2d at 116. In this District, one of my colleagues has held that to make out a fraud claim under the CEA, "plaintiffs need not show that defendants acted with an evil motive or an intent to injure," see American Metals I, 693 F.Supp. at 194, rather, "recklessness is sufficient to satisfy the scienter requirement...." American Metals II, 775 F.Supp. at 775. In this case, the more lenient recklessness standard is unnecessary since there is overwhelming evidence that Rosenberg's misrepresentations were made intentionally and with knowledge of their falsity. As was determined by this Court in the findings of fact, Rosenberg instructed Stollenwerck to wire funds to Gerald Account No. 827-82715 for the benefit of Pro Broker when he knew that the account was in fact in Rosenberg's name alone. See Findings of Fact at ¶¶ 9-10. Moreover, the evidence shows that Rosenberg confirmed Stollenwerck's trades when he knew he had not executed them, and that the 1099 tax forms Rosenberg sent to Stollenwerck did not accurately reflect the monthly confirmation statements he had been receiving from Gerald, Inc. See id. at ¶¶ 14-16. Finally, as set forth above, the CFTC offered evidence of Rosenberg's similar "trading" conduct with the Driskills as evidence that Rosenberg intended to defraud Stollenwerck. See id. at ¶¶ 19-28. Accordingly, the CFTC has established that Rosenberg acted with scienter.

12. I also find that Rosenberg's misrepresentations were made "in connection with" commodity futures and options trading within the meaning of the CEA. While it is undisputed that Rosenberg traded in commodity futures and options on futures with Stollenwerck's money, it is also true that all of the misrepresentations involved the trading relationship between Rosenberg and Stollenwerck. For those reasons, I find that the misrepresentations meet the statutory "in connection with" requirement.

[20] 13. Finally, and for purposes of supporting their request for restitution, the CFTC has sufficiently proven that Stollenwerck relied on Rosenberg's misrepresentations. For instance, as reflected in my findings of fact, Stollenwerck wired the monies to fund what he believed was his account at Gerald, Inc. because Rosenberg had explicitly told him that he *449 would set up an account for Stollenwerck in Stollenwerck's name. See Findings of Fact at ¶¶ 7, 10. Furthermore, Stollenwerck continued to deposit monies because, based in part upon his conversations with Rosenberg, he thought that his account at Gerald was "doing great." See id. at ¶ 11. Moreover, in reliance on their veracity, Stollenwerck submitted to the Internal Revenue Service the 1099 tax forms he received from Rosenberg and Pro Broker. See id. at ¶ 12. In sum, there is ample evidence to support a finding of reliance in this case.

14. For the reasons set forth above, I find that Rosenberg has committed futures and options fraud in violation of sections 4b(a) and 4c(b) of the CEA, 7 U.S.C. §§ 6b(a), 6c(b)(1999), and the regulations promulgated thereunder.

2. Rosenberg Did Not Convert Stollenwerck's Money With Criminal Intent in Violation of 7 U.S.C. § 13(a)(1 )

[21] 15. Section 9(a)(1) of the CEA makes it a felony to convert, with criminal intent, a customer's money having a value in excess of $100 which was received to secure trades for that customer. See 7 U.S.C. § 13(a)(1)(1999); [FN30] see also Commodity Futures Trading Comm'n v. Prism Fin. Corp., No. 96-D-389, 1996 WL 523349, at *1 (D.Co. April 5, 1996); Commodity Futures Trading Comm'n v. Dominick, No. 94-661-CIV-ORL-18, 1996 WL 406833, at *5 (M.D.Fla. Mar.30, 1996). The crime of conversion is punishable by a fine of not more than $1,000,000 (or $500,000 in the case of an individual), imprisonment for not more than five years, or both, together with the costs of prosecution. See 7 U.S.C. § 13(a) (1999). In this case, I intimate no view regarding whether Rosenberg committed criminal conversion in violation of 7 U.S.C. § 13(a)(1) since he was not afforded the traditional Due Process rights guaranteed to defendants in a criminal prosecution. For example, Rosenberg was not provided an attorney or a jury of his peers. Consequently, it would be inappropriate for this Court to make any finding concerning whether or not Rosenberg acted, beyond a reasonable doubt, with criminal intent.

3. Rosenberg Failed to Register as a Futures Commission Merchant and Unlawfully Commingled Funds in Violation of 7 U.S.C. §§ 6d(1)-(2)

[22] 16. At trial, the CFTC introduced evidence that Rosenberg and Pro Broker violated section 4d of the CEA by failing to register as either a futures commission merchant ("FCM") or "introducing broker" and by unlawfully commingling customer funds with his own. For the reasons set forth below, I find that Rosenberg and Pro Broker were in fact an unregistered FCM and commingled Stollenwerck's funds with their own in the Gerald Account.

17. Section 4d of the CEA and its supporting regulations make it unlawful for any person to solicit or accept orders as an FCM or introducing broker without registering *450 as such. See 7 U.S.C. § 6d(1)(1999); [FN31] 17 C.F.R. § 33.3(b)(1999). [FN32] Thus, to find that Rosenberg violated the registration provisions of the CEA, this Court must first determine whether Rosenberg meets the statutory definitions of either "futures commission merchant" or "introducing broker."

18. The CEA defines the relevant terms as follows:

7 U.S.C. §§ 1a(12), 1a(14)(1999); see also 17 C.F.R. §§ 1.3(p), 1.3(mm)(1999)(defining futures commission merchant and introducing broker). Undoubtedly, the distinction between an FCM and an introducing broker is that an FCM accepts money, securities, or property to secure trades while an introducing broker does not. For the reasons set forth below, I find that Rosenberg and Pro Broker acted as an FCM, and not an introducing broker.

19. In this case, Rosenberg instructed Stollenwerck to wire funds to an account at the registered FCM Gerald, Inc., which, unbeknownst to Stollenwerck, bore Rosenberg's name. See Findings of Fact at ¶¶ 8-10. The simple fact that Stollenwerck did not directly deposit his money with Pro Broker but instead wired the funds to Rosenberg's Gerald Account for the benefit of Pro Broker does not place Rosenberg or Pro Broker outside the scope of the statutory definition of an FCM. A finding to the contrary would circumvent the plain language of the CEA since Rosenberg clearly "accept[ed]" Stollenwerck's funds. Moreover, the evidence shows that Rosenberg, through Pro Broker, solicited, accepted, and placed Stollenwerck's commodity futures and options trade orders, created and delivered to Stollenwerck 1099 tax forms from the trading profits and losses in the Gerald account, and never registered with the CFTC. See id. at ¶¶ 2-3, 7, 11-12. Accordingly, I find that Rosenberg and Pro Broker meet the definition of a FCM under the provisions of the CEA and further find that Rosenberg's failure to register himself or Pro Broker as such violated 7 U.S.C. § 6d(1). See Skorupskas, 605 F.Supp. at 933 (finding defendant violated 7 U.S.C. § 6d where, among other things, commodity investors contributed funds to defendant's corporation); Commodity Futures Trading Comm'n v. Standard Forex, No. CV-93-88, 1998 WL 236923, at *7 (E.D.N.Y. Mar. 31, 1998)(defendant violated section 4d when solicited orders by newspaper advertisement and telephone call, placed commodity futures orders, and never registered); In re Zurich, No. 82-27, 1986 WL 65997, at *3-4 (C.F.T.C. Sept. 12, 1986)(violation of 7 U.S.C. § 6d where respondents, among other things, provided customers with account statements on respondent letterhead).

[23] 20. Subject to exceptions inapplicable to this case, section 4d of the CEA also prohibits an FCM from commingling customer funds. Specifically, 7 U.S.C. § 6d(2) requires the FCM to "treat and deal" with all property received by a customer "as belonging to such customer." Id. The provision further requires that "[s]uch money ... shall be separately accounted for and shall not be commingled with the funds of such commission merchant or be used to margin or guarantee the trades or contracts .... of any customer or person other than the one for whom the same are held...." Id.; see also In re Zurich, 1996 WL 65997, at *4 (FCM improperly allocated trading profits and losses between customer funds in violation of § 6d(2)). Based upon the findings of fact as set forth above, it is clear *452 that Rosenberg deposited funds, albeit a small amount, into the Gerald Account, commingling them with Stollenwerck's monies. See Findings of Fact at ¶ 16. Accordingly, I find that Rosenberg and Pro Broker violated section 4d(2) of the CEA.

4. Rosenberg Failed to Provide Statements in Violation of 17 C.F.R. § 1.33(a)-(b) and Failed to Promptly Execute Trades in violation of 17 C.F.R. § 33.9

[24][25][26] 21. Finally, Rosenberg and Pro Broker violated various CEA regulations. First, in violation of 17 C.F.R. § 1.33(a), Rosenberg and Pro Broker failed to furnish written monthly statements to Stollenwerck reflecting the trading activity, balances, and profits and losses of the Gerald Account. See Findings of Fact at ¶ 11; see also 17 C.F.R. § 1.33 (1999); [FN33] In re Farmers Coop. Co., No. 99-6, 1999 WL 10041, at *7 (C.F.T.C. Jan. 12, 1999). Moreover, Rosenberg and Pro Broker failed to provide daily written confirmation of each futures and options transaction in violation of 17 C.F.R. § 1.33(b)(1999). [FN34] See Findings of Fact at *453 ¶ 11. Finally, as set forth in the findings of fact, Rosenberg failed to execute all Stollenwerck's trades promptly, a violation of 17 C.F.R. § 33.9(c). [FN35] See id. at ¶ 14.

B. The Liability of Pro Broker

[27] 22. Because Rosenberg was at all times relevant to this litigation acting on behalf of himself and Pro Broker, the corporation is liable under 7 U.S.C. § 4 (1999). That provision provides:

Id.; see also Guttman v. Commodity Futures Trading Comm'n, 197 F.3d 33, 39 (2d Cir.1999)(stating that liability may be imposed under 7 U.S.C. § 4 if the CFTC shows that: (1) defendant acted as agent of principal when violation of CEA occurred; and (2) agent's actions were within scope of employment); Commodity Futures Trading Comm'n v. Sidoti, 178 F.3d 1132, 1135-36 (11th Cir.1999).

23. As set forth in the findings of fact, Rosenberg was, for all intents and purposes, Pro Broker. See Findings of Fact at ¶¶ 2-3. He incorporated Pro Broker, which by default, like Rosenberg, was in the business of trading commodity futures and options on futures. See id. Rosenberg also was Pro Broker's sole director and employee, opened its bank account, was the sole signatory on that account, and had the sole authority to withdraw funds from Pro Broker's bank account. See id. at ¶ 3. Moreover, Rosenberg instructed Stollenwerck to wire his funds for the benefit of Pro Broker and made numerous withdrawals on behalf of the corporation. See id. at ¶¶ 10, 16. For these reasons, I find that in his trading associations with Stollenwerck, Rosenberg was acting as an agent of Pro Broker and within the scope of his employment. Accordingly, pursuant to 7 U.S.C. § 4, I find Pro Broker liable for the acts of Rosenberg.

C. Relief Requested

24. The CFTC seeks a permanent injunction enjoining Rosenberg and Pro Broker from committing further violations of the CEA charged in this case. Moreover, the CFTC also seeks ancillary relief in the form of a permanent trading prohibition, disgorgement, restitution, and civil monetary penalties. Invoking this Court's "broad discretion to fashion appropriate relief" in a case under the CEA, see American Metals I, 693 F.Supp. at 195, I shall permanently enjoin Rosenberg and Pro Broker from committing further violations of the CEA as well as from trading commodity futures and options on futures on behalf of any other person or entity, including, but not limited to, any association, partnership, corporation, or trust. Furthermore, I shall grant the CFTC's demand for restitution in the amount of $265,000.

[28][29] 25. Pursuant to section 6c of the CEA, the CFTC is authorized to institute an action for injunctive relief in federal district court whenever it appears that any person "has engaged, is engaging, or is about to engage in any act or practice constituting a violation of [the CEA] or any rule, regulation, or order thereunder." 7 U.S.C. § 13a-1 (1993); [FN36] see also Commodity Futures Trading Comm'n v. Hunt, 591 F.2d 1211, 1219 (7th Cir.1979). The District Courts also have jurisdiction to enter a permanent injunction "upon a proper showing." 7 U.S.C. § 13a- 1(b)(1999). The legal standard for determining whether an injunction should issue is whether, once a violation has been established, there is a reasonable likelihood of future violations. See American Metals II, 775 F.Supp. at 787 (citing Commodity Futures Trading Comm'n v. American Bd. of Trade, Inc., 803 F.2d 1242, 1251 (2d Cir.1986); Hunt, 591 F.2d at 1220). "While past misconduct does not lead necessarily to the conclusion that there is a likelihood of future misconduct, it is 'highly suggestive of the likelihood of future violations.' " Hunt, 591 F.2d at 1220 (quoting SEC v. Management Dynamics, Inc., 515 F.2d 801, 807 (2d Cir.1975)); see also AVCO Fin. Corp., 28 F.Supp.2d at 120; American Metals II, 775 F.Supp. at 787; Skorupskas, 605 F.Supp. at 942-43. Furthermore, various courts have also looked to the nature of the past misconduct, whether the defendant's business interests place him in a position where future violations are possible, the persistence of the violating conduct, and whether the defendant has maintained that his conduct was blameless to determine whether an injunction is appropriate. See Hunt, 591 F.2d at 1220 (collecting cases); see also Skorupskas, 605 F.Supp. at 942-43.

26. This Court concludes that permanent injunctive relief is warranted since it is highly probable that Rosenberg and Pro Broker will engage in future violations of the CEA. In this case, Rosenberg engaged in egregiously fraudulent conduct in violation of the CEA and misappropriated well over $200,000 of Stollenwerck's money, using it for his own personal expenses. Throughout the trial, Rosenberg failed to acknowledge the wrongfulness of his conduct, contending that he siphoned the funds pursuant to some type of an agreement with Stollenwerck. According to the testimony of his witness, Peter Griffin, Rosenberg has continued to "advise" others in commodity futures and options trading and this Court has received no evidence indicating that Rosenberg or Pro Broker will cease dispensing this trading advice. Finally, it is clear from the testimony of the Driskills that prior to this action, Rosenberg and Pro Broker engaged in similar fraudulent conduct where Rosenberg lured the Driskills into sending him funds and then converted the monies for his personal use. Considering the totality of these circumstances, it appears highly likely that Rosenberg and Pro Broker will engage in future violations of the CEA if not permanently enjoined. For that reason, pursuant to 7 U.S.C. § 13a-1, I shall enjoin Rosenberg and Pro Broker from future violations of Sections 4b(a), 4c(b), 4d, 9(a)(1) of the CEA as well as 17 C.F.R. §§ 1.33(a)-(b), 33.3(b), 33.9 and 33.10 (1999). I also find it proper to permanently enjoin Rosenberg and Pro Broker from trading on behalf of any other person or entity, including, but not limited *455 to, any association, partnership, corporation, or trust.

2. Ancillary Equitable Relief: Restitution

[30] 27. In terms of further relief, the CFTC also seeks restitution, disgorgement, and a civil monetary penalty. For the reasons set forth below, I shall only order restitution of $265,000.

[31] 28. While restitution "is meant to make the damaged persons whole and compensate them for a defendant's wrongful acts," the disgorgement remedy "is intended to deprive the violator of his ill-gotten gains and to further the deterrence objectives of the CEA." AVCO Fin. Corp., 28 F.Supp.2d at 121. Because there has been no evidence presented regarding any profits made by Rosenberg with Stollenwerck's monies, I find that disgorgement would be an improper remedy. However, considering that Stollenwerck deposited a total of $265,000 in the Gerald Account, this Court concludes that Rosenberg and Pro Broker are jointly and severally liable for restitution in that amount.

29. While this Court has jurisdiction to impose on Rosenberg and Pro Broker a civil monetary penalty of not more than the higher of $100,000 or triple the monetary gain to them for each violation of the CEA, see 7 U.S.C. § 13a- 1(d)(1)(1999), this Court is cognizant of its duty to "be realistic and not set a figure which is impossible for a defendant to comply with due to lack of monetary resources." AVCO Fin. Corp., 28 F.Supp.2d at 121. Because the testimony in this case suggested that Rosenberg does not have the financial means to pay any amount set by the Court, I shall not impose a civil monetary penalty in this case.

IV. CONCLUSION

Based upon the findings of fact and conclusions of law set forth above, I find that Rosenberg has violated sections 6b(a), 6c(b), 4d, and 9(a) of the Commodities Exchange Act and many of its supporting regulations. Accordingly, I shall enter a judgment against Rosenberg and Pro Broker in accordance with these Findings of Fact and Conclusions of Law. The Court shall enter an appropriate order.

ORDER

This matter having come before the Court on the motion of Plaintiff, Commodity Futures Trading Commission ("CFTC"), for reargument of my decision in Commodity Futures Trading Comm'n v. Rosenberg, No. 97-2927 (D.N.J. filed May 25, 1999), to exclude from evidence the taped conversations between Mr. James Stollenwerck and the defendant, Murray I. Rosenberg ("Rosenberg"), pursuant to Federal Rule of Evidence 408; and,

This matter having come before the Court on the motion of Rosenberg, to exclude the de bene esse deposition testimony of Raymond Kent Driskill and the trial testimony of Carl Raymond Driskill, pursuant to Federal Rule of Evidence 404(b)l; and,

This matter having come before the Court on the Complaint of the CFTC, for Rosenberg's violations of the Commodities Exchange Act; and,

Robert J. Cleary, Esq., United States Attorney, Paul A. Blaine, Esq., Assistant United States Attorney, Matthew Elkan, Esq. and Karen Kenmotsu, Esq. of the Commodity Futures Trading Commission, appearing on behalf of Plaintiff, CFTC; and

Murray Ira Rosenberg, appearing pro se, and Gary W. Stuhltrager, Esq. appearing on behalf of Defendant, Pro-Broker Service, Inc.; and,

The Court having considered the submissions of the parties, as well as the evidence presented at trial; and,

The Court having made its findings of fact and conclusions of law as set forth in *456 the OPINION filed concurrently with this ORDER;

IT IS, on this 1st day of March, 2000, hereby ORDERED that:

West Headnotes

157k213(1)

Commodity futures investor's threat to broker of legal action and his demand for what he believed to be a remaining account balance so that negotiations could move forward was a term or condition of settlement negotiations, thereby bringing their conversation within the sweep of the evidentiary rule generally excluding evidence of offers to compromise. Fed.Rules Evid.Rule 408, 28 U.S.C.A.

170Ak928

Critical factor a court must consider in deciding whether a motion for reargument should be granted is whether the court overlooked factual matters or controlling decisions of law that might reasonably have resulted in a different conclusion had they been considered. U.S.Dist.Ct.Rules D.N.J., Rule 7.1(g).

170Ak928

Motion for reargument is an extremely limited procedural vehicle, and such relief is granted very sparingly. U.S.Dist.Ct.Rules D.N.J., Rule 7.1(g).

157k213(1)

Evidentiary rule generally excluding evidence of offers to compromise precluded parsing of taped settlement conversations for content that was allegedly not made in the context of the settlement negotiations. Fed.Rules Evid.Rule 408, 28 U.S.C.A.

410k390

General.

Tapes and transcript of conversations between commodity futures investor and broker, while falling under the evidentiary rule generally excluding evidence of offers to compromise, were admissible on rebuttal to impeach the broker's testimony during cross-examination, despite claim that investor had taped the conversations for "blackmail" purposes; there was no evidence that the investor used the tapes for an unlawful purpose or even threatened to use them to blackmail the broker. Fed.Rules Evid.Rule 408, 28 U.S.C.A.

157k154

Party attempting to suppress recordings had the burden of proving that the recordings were made for an impermissible purpose.

157k135(1)

Prior bad acts evidence that broker depleted a trading account funded by a third party by making unauthorized withdrawals for his personal expenses was admissible to show intent in Commodity Futures Trading Commission's (CFTC) action against the broker for violations of the Commodities Exchange Act (CEA) arising from a similar relationship with a commodity futures investor; intent was at issue in determining whether broker acted with the requisite scienter in his alleged violation of CEA anti-fraud provisions. Commodity Exchange Act, § 1 et seq., as amended, 7 U.S.C.A. § 1 et seq.; Fed.Rules Evid.Rule 404(b), 28 U.S.C.A.

157k135(1)

Evidentiary rule addressing evidence of other crimes, wrongs, or acts was inapplicable to the question of whether injunctive relief was warranted in Commodity Futures Trading Commission's (CFTC) action against a broker for violations of the Commodities Exchange Act (CEA). Commodity Exchange Act, § 1 et seq., as amended, 7 U.S.C.A. § 1 et seq.; Fed.Rules Evid.Rule 404(b), 28 U.S.C.A.

157k129(5)

Evidentiary rule addressing evidence of other crimes, wrongs, or acts is a rule of inclusion, designed to promote the admission of evidence, but acts to prohibit evidence offered solely to prove a defendant's character or to demonstrate that a defendant has a propensity to commit a crime; evidence of prior bad acts must be probative of a material issue other than character to be admissible. Fed.Rules Evid.Rule 404(b), 28 U.S.C.A.

83Hk17

To establish a claim for futures and options fraud in an enforcement action, the Commodity Futures Trading Commission (CFTC) must demonstrate that the defendant made a material representation of presently existing or past fact with scienter; term "scienter" refers to a mental state embracing an intent to deceive, manipulate, or defraud. Commodity Exchange Act, §§ 4b(a), 4c(b), as amended, 7 U.S.C.A. §§ 6b(a), 6c(b).

157k135(1)

Prior bad acts evidence of broker's alleged pattern of conduct with third party traders, where he formed a corporation, was sufficiently distinct from his alleged dealings with a commodity futures investor that it was not admissible as evidence of the broker's modus operandi in Commodity Futures Trading Commission's (CFTC) action against the broker for violations of the Commodities Exchange Act (CEA). Commodity Exchange Act, § 1 et seq., as amended, 7 U.S.C.A. § 1 et seq.; Fed.Rules Evid.Rule 404(b), 28 U.S.C.A.

157k138

"Modus operandi," usually a method of proving identity, is a type of signature quality or striking similarity between two events. Fed.Rules Evid.Rule 404(b), 28 U.S.C.A.

157k135(1)

157k146

Evidence that broker depleted a trading account funded by a third party by making unauthorized withdrawals for his personal expenses was more probative than prejudicial in a non-jury bench trial, and was thus admissible in Commodity Futures Trading Commission's (CFTC) action against the broker for violations of the Commodities Exchange Act (CEA) arising from a similar relationship with a commodity futures investor; the evidence was essential to establish that broker intended to defraud investor in violation of the CEA, and was highly probative. Commodity Exchange Act, § 1 et seq., as amended, 7 U.S.C.A. § 1 et seq.; Fed.Rules Evid.Rule 403, 28 U.S.C.A.

157k146

In weighing probative value against prejudicial effect of evidence, court must assess the genuine need for the challenged evidence and balance that necessity against the risk that the information will influence the jury to convict on improper grounds; moreover, the need for the evidence is to be considered in view of the contested issues and other evidence available to the plaintiff, and the strength of the evidence in proving the issue. Fed.Rules Evid.Rule 403, 28 U.S.C.A.

83Hk17

To establish a claim for futures and options fraud under the Commodities Exchange Act (CEA) in an enforcement action, the Commodity Futures Trading Commission (CFTC) must demonstrate that the defendant made a material misrepresentation of presently existing or past fact with scienter, but need not prove customer reliance on material misrepresentations. Commodity Exchange Act, §§ 4b(a), 4c(b), as amended, 7 U.S.C.A. §§ 6b(a), 6c(b); 17 C.F.R. § 33.10.

83Hk17

Customer reliance on defendant's misrepresentation, while not a necessary element of the Commodity Futures Trading Commission's (CFTC) case in an enforcement action, is essential to restitution relief sought to compensate a party injured by the defendant's futures and options fraud. Commodity Exchange Act, §§ 4b(a), 4c(b), as amended, 7 U.S.C.A. §§ 6b(a), 6c(b); 17 C.F.R. § 33.10.

83Hk30

Broker's misrepresentations to investor, including promising to open a trading account in investor's name, reporting erroneous account balances, and confirming trades he had not executed, violated the Commodities Exchange Act's (CEA) anti-fraud provisions; reasonable investor would have considered the information important, such that the misrepresentations were "material," there was overwhelming evidence that the misrepresentations were made intentionally and with knowledge of their falsity, and the misrepresentations were made "in connection with" commodity futures and options trading within the meaning of the CEA. Commodity Exchange Act, §§ 4b(a), 4c(b), as amended, 7 U.S.C.A. §§ 6b(a), 6c(b); 17 C.F.R. § 33.10.

83Hk17

Statement is "material," for purposes of proving futures and options fraud under the Commodities Exchange Act (CEA), if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. Commodity Exchange Act, §§ 4b(a), 4c(b), as amended, 7 U.S.C.A. §§ 6b(a), 6c(b); 17 C.F.R. § 33.10.

83Hk17

Term "scienter," for purposes of a fraud claim under the Commodities Exchange Act (CEA), refers to a mental state embracing an intent to deceive, manipulate, or defraud. Commodity Exchange Act, §§ 4b(a), 4c(b), as amended, 7 U.S.C.A. §§ 6b(a), 6c(b); 17 C.F.R. § 33.10.

83Hk30

As required for restitution under the Commodities Exchange Act (CEA), the Commodity Futures Trading Commission (CFTC) proved that investor relied on broker's misrepresentations, including promising to open a trading account in investor's name, reporting erroneous account balances, and confirming trades he had not executed; investor wired monies to a fund that he believed was his account because broker had explicitly told him that he would set up an account for investor in investor's name, and he continued to deposit monies because, based in part upon his conversations with broker, he thought that his account was "doing great." Commodity Exchange Act, §§ 4b(a), 4c(b), as amended, 7 U.S.C.A. §§ 6b(a), 6c(b); 17 C.F.R. § 33.10.

83Hk78

92k296(1)

Broker, in civil enforcement action brought by Commodity Futures Trading Commission (CFTC), was not afforded the traditional Due Process rights guaranteed to defendants in a criminal prosecution, such as an attorney and a jury of his peers, and thus, it would have been inappropriate for court to make any finding as to whether broker converted investor's money with criminal intent, in violation of the Commodities Exchange Act (CEA). U.S.C.A. Const.Amend. 14; Commodity Exchange Act, § 9(a)(1), as amended, 7 U.S.C.A. § 13(a)(1).

83Hk8

Broker and his company acted as a futures commission merchant (FCM), and thus violated the Commodities Exchange Act (CEA) by failing to register as an FCM; broker instructed investor to wire funds to an account which, unbeknownst to investor, bore broker's name, and the simple fact that the investor did not directly deposit his money with the broker's company, but instead wired the funds to broker's account for the benefit of the company, did not place broker or his company outside the scope of the statutory definition of an FCM. Commodity Exchange Act, §§ 1a(12, 14), 4d(1), as amended, 7 U.S.C.A. §§ 1a(12, 14), 6d(1); 17 C.F.R. §§ 1.3(p), 33.3(b).

83Hk8

Broker and his company violated the Commodities Exchange Act (CEA) section prohibiting a futures commission merchant (FCM) from commingling customer funds when the broker deposited funds, albeit a small amount, into an account, commingling them with investor's monies. Commodity Exchange Act, § 4d(2), as amended, 7 U.S.C.A. § 6d(2).

83Hk18

Failure of broker and his company to furnish written monthly statements to investor reflecting the trading activity, balances, and profits and losses of a trading account, violated a Commodities Exchange Act (CEA) regulation. Commodity Exchange Act, § 1 et seq., as amended, 7 U.S.C.A. § 1 et seq.; 17 C.F.R. § 1.33(a).

83Hk18

Failure of broker and his company to provide daily written confirmation of each futures and options transaction violated Commodities Exchange Act (CEA) regulation. Commodity Exchange Act, § 1 et seq., as amended, 7 U.S.C.A. § 1 et seq.; 17 C.F.R. § 1.33(b).

83Hk15

Failure of broker and his company to execute all of investor's trades promptly violated a Commodities Exchange Act (CEA) regulation. Commodity Exchange Act, § 1 et seq., as amended, 7 U.S.C.A. § 1 et seq.; 17 C.F.R. § 33.9(c).

83Hk27

Broker, at all times relevant to civil enforcement action brought by Commodity Futures Trading Commission (CFTC), was acting on behalf of himself and his corporation, and thus, the corporation was liable under the Commodities Exchange Act (CEA) section providing that the act of a person acting for any corporation within the scope of his employment of office shall be deemed the act of the corporation; broker was corporation's sole director and employee, opened its bank account, was the sole signatory on that account, and he instructed an investor to wire funds for the benefit of the corporation and made numerous withdrawals on behalf of the corporation. Commodity Exchange Act, § 2(a)(1)(A)(iii), as amended, 7 U.S.C.A. § 4.

83Hk91

Broker and his corporation, having violated fraud provisions of the Commodities Exchange Act (CEA), would be permanently enjoined from committing further violations of the CEA, as well as from trading commodity futures and options on futures on behalf of any other person or entity, including any association, partnership, corporation, or trust; it was highly probable that they would engage in future violations of the CEA. Commodity Exchange Act, §§ 6c, 6c(b), as amended, 7 U.S.C.A. §§ 13a-1, 13a-1(b).

83Hk91

Legal standard for determining whether an injunction should issue is whether, once a violation of the Commodities Exchange Act (CEA) has been established, there is a reasonable likelihood of future violations; while past misconduct does not lead necessarily to the conclusion that there is a likelihood of future misconduct, it is highly suggestive of the likelihood of future violations. Commodity Exchange Act, § 1 et seq., as amended, 7 U.S.C.A. § 1 et seq.

83Hk79

Broker and his corporation, having violated fraud provisions of the Commodities Exchange Act (CEA), would be required to pay restitution of $265,000, but a disgorgement remedy was not warranted absent evidence of any profits made by broker with investor's monies. Commodity Exchange Act, §§ 6c, 6c(b), as amended, 7 U.S.C.A. §§ 13a-1, 13a-1(b).

83Hk79

While restitution is meant to make the damaged persons whole and compensate them for a defendant's wrongful acts, the disgorgement remedy is intended to deprive the violator of his ill-gotten gains and to further the deterrence objectives of the Commodities Exchange Act (CEA). Commodity Exchange Act, § 1 et seq., as amended, 7 U.S.C.A. § 1 et seq.

Murray Ira Rosenberg, Mullica Hill, NJ, pro se.

Gary W. Stuhltrager, Deptford, NJ, for Defendant, Pro-Broker Service, Inc.

END OF DOCUMENT

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