UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION

TRISTAN DUBOIS

v.
CFTC Docket No. 95-R152
ALARON TRADING CORP.
and PATRICK YANG
OPINION and ORDER

Respondent Alaron Trading Corp. ("Alaron") appeals from a Judgment Officer's award of $15,672 plus interest and costs to complainant Tristan DuBois ("DuBois"). The Judgment Officer ruled that Alaron was responsible for DuBois's damages because the record showed that the damages were proximately caused by violations of Sections 4(a) and 4b(a)(i) of the Commodity Exchange Act ("Act") committed by an introducing broker ("IB") that Alaron had guaranteed pursuant to Commission Rule 1.10(j).1

Alaron's challenges to the Judgement Officer's decision are narrowly focused on Sections 2(a)(1)(A)(i) and (ii) of the Act and the inferences that the Judgment Officer drew from the facts and circumstances material to the nature of the transactions underlying DuBois's complaint. The Judgment Officer inferred that the transactions involved the purchase and sale of futures contracts for purposes of Section 2(a)(1)(A)(i), and that the purchases and sales were conducted on a board of trade for purposes of Section 2(a)(1)(A)(ii). Alaron emphasizes that the transactions involved foreign currency and contends that the Judgment Officer's interpretation of the phrase "board of trade" is inconsistent with the Supreme Court's interpretation of Section 2(a)(1)(a)(ii) in Dunn v. CFTC, 519 U.S. 465 (1997) ("Dunn"). According to Alaron, since the Judgment Officer erred in concluding that the transactions at issue were futures contracts subject to the Commission's jurisdiction, and the scope of its guarantee agreement with Infoex is limited to conduct that violates the Act, the Judgment Officer's award must be vacated.

Complainant opposes Alaron's appeal. He contends that the Judgment Officer's analysis is consistent with Dunn and emphasizes that Alaron's guarantee agreement with Infoex covered all of the IB's obligations under the Act.

Because our independent review of the record establishes that the transactions underlying DuBois's complaint were purchases and sales of futures contracts conducted on a board of trade and that Alaron's guaranteed IB violated the Act in the course of those transactions, we affirm the Judgment Officer's award.

BACKGROUND


I.

On September 18, 1995, DuBois filed a pro se complaint seeking $15,672 from Infoex, Yang and Alaron.2 DuBois asserted that Infoex and Yang fraudulently induced him to make purchases and sales of foreign currency contracts through both affirmative misrepresentations and failures to disclose material facts regarding the risk and profit potential of the transactions.3 As for the nature of the transactions, DuBois acknowledged that Infoex had portrayed and promoted the underlying contracts as "spot"4 foreign currency contracts5, but alleged that his purchases and sales actually involved off-exchange foreign currency futures contracts prohibited by Section 4(a) of the Act.

The complaint indicated that in February 1995, DuBois opened an account with a Hong Kong-based firm recommended by Infoex -- SHK Forex. DuBois's initial deposit of $12,000 was lost in early March on an unsuccessful Deutschemark transaction.6 According to DuBois, he deposited an additional $9,858 in April after Infoex promised to lower its commission rate. During April and May 1995, DuBois authorized four unprofitable trades in Japanese yen contracts. DuBois closed his account in July 1995, shortly after he suffered another loss on a Japanese yen trade.

Respondents filed separate answers denying DuBois's allegations and seeking dismissal of the complaint. Infoex asserted that the Commission lacked jurisdiction because the transactions DuBois traded were not futures.7 Alaron's answer also claimed that the transactions underlying DuBois's complaint fell outside the Commission's subject matter jurisdiction. In this regard, it alleged that DuBois had made spot cash trades in the interbank foreign currency market. Alaron's answer also emphasized that the wrongdoing raised in the complaint was outside the scope of its guarantee agreement with Infoex8 because the Act did not apply to spot cash trades in the interbank foreign currency market. Id. at 4. Yang's answer incorporated Infoex's answer by reference.9

II.

Following the completion of the discovery process, the Judgment Officer conducted a telephonic hearing. Yang and DuBois appeared pro se and Alaron appeared through counsel. DuBois's testimony was generally consistent with his complaint. Yang denied telling DuBois that he would identify "sure trades" for him. (Tr. at 87.)

Yang explained that when Infoex sought an affiliation with Alaron in 1994, its primary business was dealing in spot foreign currency and precious metals. (Tr. at 78.) Yang indicated that a representative of Alaron had visited Infoex's offices in October 1994. According to Yang, he told the representative that Infoex was soliciting members of the general public for foreign spot currency trading." (Tr. at 79.) Yang also claimed that foreign currency trading was actually taking place when Alaron's representative visited Infoex's office. (Tr. at 100.) Alaron did not present any testimony from the representative who visited Infoex's offices.10

III.

The Judgment Officer issued his Initial Decision ("I.D.") in May 1997. DuBois v. Alaron Trading Corp., [1996-1998 Transfer Binder] (CCH) 27,061 (May 28, 1997). As to the nature of the transactions underlying DuBois's complaint, the Judgment Officer made findings about the material facts and circumstances, drew inferences based on these findings, and then assessed the inferences against the requirements of Sections 2(a)(1)(A)(i) and (ii) of the Act.11

The Judgment Officer found that the purchase and sale transactions that DuBois entered into had the following characteristics:

the underlying contracts were standardized;
the underlying contracts required the purchaser to pay initial and maintenance margin;
the underlying contracts did not require performance by a specific time;
the underlying contracts permitted the purchaser to avoid his performance obligation through offset;
the transactions were settled by the exchange of cash payments; and
participants in the transactions were not limited to those with the capacity to take delivery of the underlying currency.

I.D. at 45,054. In light of these findings, the Judgment Officer inferred that the contracts at issue were intended as a means to speculate on changes in the value of the underlying currency without actually taking delivery of the currency. Id. He disregarded the "spot" label that the parties had used in describing the transactions because the record showed that they lacked an essential characteristic of spot foreign currency trades - delivery within two business days. I.D. at 45,057. Consequently he concluded that the transactions underlying DuBois's complaint involved the purchase and sale of futures contracts for purposes of Sections 2(a)(1)(A)(i). Id.

The Judgment Officer also made findings about the SHK Forex facility for conducting DuBois's purchases and sales of foreign currency futures contracts. He found that SHK Forex was the subsidiary of another Hong Kong-based company and had been licensed as a "leveraged foreign exchange trader" since 1994. I.D. at 45,053.12 He also found that SHK Forex established the prices for trading its futures contracts, I.D. at 45,054, and that Infoex's advertising and promotional material indicated that small and medium sized investors could gain access to the global currency market through SHK Forex's trading facility. I.D. at 45,052. Finally, he found that SHK Forex had never obtained designation as a contract market pursuant to Section 6 of the Act. I.D. at 45,053.

In light of these findings, the Judgment Officer inferred that SHK Forex's trading facility was open to the general public rather than limited to the sophisticated network of bank and institutional traders that participate in the interbank market for foreign currencies. Based on his review of relevant pronouncements by the Commission and the federal courts regarding the intended scope of the exclusion in the Treasury Amendment, the Judgment Officer concluded that SHK Forex fell within the meaning of Section 2(a)(1)(A)(ii)'s reference to "board of trade." I.D. at 45,056.13

As to the merits of DuBois's claims, the Judgment Officer made a variety of findings regarding Infoex's and Yang's deceptive conduct. He detailed numerous material misrepresentations by Yang and other Infoex agents concerning the likelihood of profits and the risk of loss from trading leveraged forex contracts. I.D. at 45,057-58. Moreover, the Judgment Officer found that DuBois "credibly testified that he relied to his detriment on [the] deceptions, misrepresentations and omissions, especially Yang's promise that he would select 'sure' trades." I.D. at 45,058.

In light of his analysis of the record, the Judgment Officer concluded that respondents Infoex and Yang violated Section 4b(a)(i) of the Act by fraudulently inducing DuBois to trade futures contracts through SHK Forex and violated Section 4(a) of the Act by soliciting DuBois to enter orders for the purchase and sale of futures contracts that were not conducted on or subject to the rules of a Commission-designated contract market. I.D. at 45,058. He concluded that these violations proximately caused DuBois's $15,672 in damages and that Alaron was jointly and severally liable for these damages under its guarantee agreement with Infoex. Id.

IV.

Alaron filed a timely appeal and submitted its appeal brief in August 1997. DuBois filed his answering brief in September 1997.

DISCUSSION


I.

As noted above, Alaron's challenges to the Judgement Officer's decision are narrowly focused on Sections 2(a)(1)(A)(i) and (ii) of the Act. Its primary emphasis is on language from the Supreme Court's Dunn opinion indicating that (1) the scope of the exclusion in the Treasury Amendment should be determined based on the plain meaning of the language that Congress used, and (2) the Treasury Amendment was intended to take all transactions relating to foreign currency outside the Act's ambit if they were not conducted on a board of trade.14

Alaron's reliance on Dunn is fundamentally misplaced. In Dunn, the Supreme Court recognized that "[t]he narrow issue that we must decide is whether the . . . phrase [in the Treasury Amendment] 'transactions in foreign currency' includes transactions in options to buy or sell foreign currency." 519 U.S. at 469. (emphasis added). The Court held that foreign currency options were included within the Treasury Amendment as "transactions in foreign currency." Id. As the Judgment Officer noted, this is the only issue that the Court definitively addressed in Dunn.

Alaron's argument rests more on the language included in Dunn than in the Court's actual holding. It insists that Dunn "reveals a full interpretation of the Treasury Amendment" and reflects that "the Treasury Amendment is to be construed as plainly and broadly as possible." Alaron brief at 6. It emphasizes that the Court found that the history of the Treasury Amendment revealed Congress's intent to "take all transactions relating to foreign currency not conducted on a board of trade outside of the CEA's ambit" and argues that nothing in the Treasury Amendment's language indicates that the Commission retains jurisdiction over any transaction made on trading facilities open to the general public. Id. at 7.

The Commission discussed the plain meaning of the language of the Treasury Amendment in its recent decision in In re Global Link Miami Corp., [1998-1999 Transfer Binder] Comm. Fut. L. Rep. (CCH) 27,669 (CFTC June 21, 1999) ("Global Link"). In this regard, the Commission noted that the Act defines the term "board of trade" broadly enough to cover "all facilities open to the public for futures trading." Id. at 48,165.15 It acknowledged that the legislative history of the Treasury Amendment suggested that the Treasury Department wanted to limit the Commission's jurisdiction over trading in foreign currencies to transactions that took place on organized exchanges, but noted that Congress had included a reference to "board of trade" rather than "organized exchange" in the actual language of the Treasury Amendment. Id. at 48,167. The Commission inferred that Congress understood and intended its reference to board of trade to be interpreted in the context of the Act's existing definition. Id. at 48,165.16

The Commission, however, did not limit its analysis to the broad interpretation of the term board of trade justified by a plain meaning analysis. Like the Supreme Court in Dunn, the Commission relied on the Congressional intent evidenced by the legislative history of the Treasury Amendment. It concluded that the history "[made] it clear . . . that the purpose of, and sole policy rationale offered for, the Treasury Amendment was to insulate the network of bank and institutional trading in foreign currencies . . . from regulation under the [Act]." Id. at 48,167.17

The Commission used the facts established in Global Link to illustrate characteristics of a trading facility falling within the Treasury Amendment's reference to "board of trade." It noted that, in essence, Global Link provided a "centralized and public trading facility for buying and selling standardized foreign currency futures contracts." Global Link at 48,167. As to the specific characteristics of the Global Link facility, the Commission found that:

A. the facility held itself out as a place to price, trade and settle currency futures contracts;
B. the facility offered contracts for standardized units that were margined and marked to market daily;
C. the facility only required relatively small amounts of money to open and maintain an account; and
D. the facility did not otherwise impose substantial limits on the class of eligible traders.

Id. at 48,168.

In light of these factors, the Commission concluded that because Global Link "provided a public marketplace for bringing together buyers and sellers of standardized futures contracts, the availability of price information and an execution and settlement mechanism," it constituted a board of trade and was subject to the Commission's jurisdiction. Id. at 48,169.

Nothing in Dunn is incompatible with the Commission's interpretation in Global Link. Even Dunn's broadest implications, that the Treasury Amendment was intended to apply to instruments that were unregulated by the Commission at the time the Amendment was adopted, does not suggest that a facility that provides "a public marketplace for bringing together buyers and sellers of standardized futures contracts, the availability of price information, and an execution and settlement mechanism" is not a board of trade. Id.

II.

The Judgment Officer's conclusions in this case are fully consistent with the Commission's analysis in Global Link. The record establishes that SHK Forex's contracts were for standardized units (incidentally, of the same size as parallel contracts traded on a designated contract market); did not require performance by a specific time (indeed, the SHK Customer Agreement made clear that delivery of the underlying foreign currency was an anomaly that only occurred if specifically requested by the customer)18; required payment of initial and maintenance margin; permitted the purchaser to avoid his performance obligation through offset; and were settled by the exchange of cash payments. Participants were not limited to those with the capacity to take delivery of the underlying currency. Given these circumstances, the Judgment Officer properly concluded both that the contracts at issue were intended as a means to speculate on changes in the value of the underlying currency without actually taking delivery of the currency, and that they amounted to futures contracts under Sections 2(a)(1)(A)(i).

The record also shows that SHK Forex provided a centralized and public trading facility for buying and selling standardized foreign currency futures contracts. SHK Forex established the prices for trading in its futures contracts and Infoex's advertising and promotional material indicated that small and medium-sized investors could gain access to the global currency market through SHK Forex's trading facility. Nothing in the record suggests that DuBois was the type of sophisticated institutional trader eligible to trade on the interbank market. In these circumstances, the record supports the Judgment Officer's conclusion that SHK Forex was a board of trade for purposes of the Treasury Amendment.

Alaron's guarantee agreement with Infoex, by its terms, extends to violations of the Act. Because the record shows that Infoex violated both Section 4(a)19 and 4b(a)(i) of the Act, and that the violations proximately caused DuBois's damages, the Judgment Officer properly held Alaron responsible for his award.

CONCLUSION


Based on the foregoing analysis, we affirm the result of the Judgment Officer's decision.

IT IS SO ORDERED.20

By the Commission (Chairman RAINER and Commissioners HOLUM, SPEARS, NEWSOME and ERICKSON).

Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission

Dated: October 26, 2000


1 During the time at issue, Alaron was registered as a futures commission merchant ("FCM"). The IB that Alaron guaranteed was Infoex International, Inc. ("Infoex"). Respondent Patrick Yang was registered as an associated person ("AP") sponsored by Infoex.

Alaron is the only respondent with unresolved issues in this proceeding. Yang filed a notice of appeal that the Commission dismissed when he failed to file an appeal brief. DuBois included Infoex among the named respondents in his complaint, but the Judgment Officer dismissed Infoex from the proceeding when it became the subject of a bankruptcy proceeding.

2 The complaint alleged that DuBois invested $21,858 through Infoex and recovered $7,086 when he closed his account.

3 DuBois alleged that Infoex's marketing brochures and training classes stressed the potential profits of trading but failed to disclose that most of the firm's customers had lost significant amounts of money within a short time. DuBois also claimed that Infoex emphasized that spot market participants received "better fills," enjoyed "better liquidity" and "24 hour access" and were relieved of the "constraints of Futures (sic) delivery dates." Complaint at 2. According to DuBois, Yang assured him that if he opened an account, Yang would direct him to a "sure trade" a couple of times a month so that DuBois could amass equity while he acquired experience through "paper trading." Complaint at 5.

4 The "spot" market, generally speaking, is the market of immediate delivery of the product and immediate payment. The CFTC Glossary: A Layman's Guide to the Language of the Futures Industry (1997).

5 Infoex promotional literature attached to the complaint described the company as a "financial service company, specializing in trading foreign currencies and precious metals on the interbank spot market." The material characterized Infoex's role as that of an "intermediary between investors and the dealers [that] provides clients with comprehensive information on global markets, professional analysis, and strategies."

6 DuBois held his Deutschemark position for eight business days.

7 The firm also maintained that the risks of trading were fully disclosed to DuBois, who had made all his own trading decisions. Infoex Answer at 1-2.

8 Alaron's guarantee agreement with Infoex provided that:

The [FCM] guarantees performance by the [IB] of, and shall be jointly and severally liable for, all obligations of the [IB] under the Commodity Exchange Act . . . with respect to the solicitation of and transactions involving all commodity customer, option customer, foreign futures customer and foreign options customer accounts of the [IB] entered into on or after the effective date of this agreement.

9 Yang also emphasized that he took all his actions with respect to DuBois in his capacity as president of Infoex. Yang Answer at 1.

10 In discovery responses, Alaron claimed that it did not have notice that Infoex was soliciting members of the general public for foreign spot currency trading.

11 The Judgment Officer used the popular designation "Treasury Amendment" in referring to Section 2(a)(1)(A)(ii) of the Act. As pertinent to this case, the Treasury Amendment provides that:

Nothing in this chapter shall be deemed to govern or in any way be applicable to transactions in foreign currency, . . . unless such transactions involve the sale thereof for future delivery conducted on a board of trade.

12 The judge noted that the license was obtained from the Hong Kong Securities and Futures Commission pursuant to a Leveraged Foreign Exchange Trading Ordinance which authorized some regulatory supervision of a previously unregulated segment of the Hong Kong forex market. Id.

13 The Judgment Officer acknowledged the Supreme Court's decision in Dunn, but emphasized that the dispute resolved by the Court only involved whether options and futures should be treated in a similar manner for purposes of the Treasury Amendment. Id.

14 Given this focus, we find that Alaron waived any other objection to the Judgment Officer's decision, including his findings regarding Infoex's fraud and the facts and circumstances material to determining the nature of the transactions underlying DuBois's complaint. See Commission Rule 12.401(f).

15 Section 1a(1) of the Act defines board of trade as "any exchange or association, whether incorporated or unincorporated, of persons who are engaged in the business of buying or selling any commodity or receiving the same for sale or consignment." The Commission noted that the board of trade definition had been part of predecessor statutes and was recodified without change in 1974, when the Treasury Amendment was added to the Act. Id.

16 This aspect of the Commission's analysis is contrary to the United States Court of Appeals for the Ninth Circuit's interpretation of the Treasury Amendment in CFTC v. Frankwell Bullion Limited, 99 F.3d 299 (9th Cir. 1996). Consequently, we must determine whether the Ninth Circuit's interpretation is controlling in this case. The answer to this inquiry depends on the circuit where this decision may be appealed which, in turn, depends on where the hearing in this case was "held" for purposes of Section 14(e) of the Act.

The record shows that the Judgment Officer conducted a telephone hearing from Washington, D.C. on February 13, 1997. Complainant and respondent Yang participated from California and respondent Alaron participated from Illinois. In a telephone hearing, the underlying activity is spoken communication that one would not normally describe as "held" in a particular location. The spoken communication can originate from several different locations, but it is primarily directed to the presiding officer who is located in Washington, D.C. Consequently, we view such hearings as being "held" in Washington, D.C. Such an interpretation is consistent with Commission Rule 12.209(a) which requires Judgment Officers to conduct in person hearings in Washington, D.C. Moreover, this interpretation permits the parties to identify the venue of an appeal at the time of the hearing and prepare their presentations accordingly. Finally, any analysis that resulted in multiple appellate venues based on the location of hearing participants would not only cause confusion about the controlling precedent but readily permit parties to manufacture appellate venue by making their telephonic presentation from a location in the preferred circuit.

17 In this regard, the Commission noted that the Joint Explanatory Statement of the Conference Committee described the intent of the Treasury Amendment as providing that "interbank trading of foreign currencies and specified financial instruments is not subject to Commission regulation." Id.

18 SHK Forex's Customer Agreement describes the company as a "licensed leveraged foreign exchange trader registered under the Leveraged Foreign Exchange Trading Ordinance." SHK Forex Customer Agreement at (1). In general, its function was to act "as principal in any foreign exchange transactions made by the customer with SKH Forex." Id. at 4.1.

SHK Forex characterizes the contracts in its Customer Agreement as "leveraged foreign exchange" contracts or "FX" contracts. SHK Customer Agreement at 1.2 (Definitions). The contracts were marketed to the public in standardized units. Illustratively, the value of a Deutsche Mark ("DM") contract unit was set at 125,000 DM--the same value as a DM futures contract on the Chicago Mercantile Exchange. See "Infoex International, Inc. Spot Currencies Trading Manual" at 12. SHK Forex set the prices of the foreign currency contracts that DuBois traded, purportedly on the basis of "interbank market prices." Infoex "Spot Currencies Trading Manual" at 4. SHK Forex required a customer to pay initial margin on his position and, in the event of adverse market moves, "additional" or maintenance margin. If a customer failed to pay additional margin on demand, his position was subject to liquidation. SHK Customer Agreement at 2 (Margin Requirements) and 5 (Closing Out).

The SHK Forex Customer Agreement defines the "value date" as "the date on which the FX agreed to be purchased or sold pursuant to a FX Contract is to be delivered or deferred." Id. at 1.2 (Definitions). In practice, the Agreement provides that "unless specifically requested by the Customer . . . the Customer shall not take delivery of FX on the Value Date pursuant to any FX contract and the Customer shall be deemed to have agreed with SHK Forex to extend the term of the FX contract beyond the Value Date" until the customer requests delivery or the customer or SHK Forex closes out the position. Id. at 3.12. If the customer opted to take delivery, he was required to notify SHK Forex "at least two Business Days before the day of delivery of the FX concerned." Id. at 3.15.

19 In the circumstances presented, we need not determine whether purchases and sales through SHK Forex were made on or subject to the rules of a board of trade located outside the United States for purposes of Section 4(a). No party has raised this issue and, even if the issue were resolved against complainant (by finding that SHK Forex was a foreign board of trade), Alaron would remain liable due to Infoex's violation of Section 4b(a)(i).

20 Under Sections 6(c) and 14(e) of the Commodity Exchange Act (7 U.S.C. 9 and 18(e) (1994), a party may appeal a reparation order of the Commission to the United States Court of Appeals for only the circuit in which a hearing was held; if no hearing is held, the appeal may be filed in any circuit in which the appellee is located. The statute also states that such an appeal must be filed within 15 days after notice of the order, and that any appeal is not effective unless, within 30 days of the date of the Commission order, the appealing party files with the clerk of the court a bond equal to double the amount of the reparation award.

A party who receives a reparation award may sue to enforce the award if payment is not made within 15 days of the date the order is served by the Proceedings Clerk. Pursuant to Section 14(d) of the Act (7 U.S.C. 18(d) (1994)), such an action must be filed in United States District Court. See also 17 C.F.R. 12.407 (2000).

Pursuant to Section 14(f) of the Act (7 U.S.C. 18(f) (1994)), a party against whom a reparation award has been made must provide to the Commission, within 15 days of the expiration of the period for compliance with the award, satisfactory evidence that (1) an appeal had been taken to the United States Court of Appeals pursuant to Sections 6(c) and 14(e) of the Act or (2) payment had been made of the full amount of the award (or any agreed settlement thereof). If the Commission does not receive satisfactory evidence within the appropriate period, such party shall be suspended automatically. Such prohibition and suspension shall remain in effect until such party provides the Commission with satisfactory evidence that payment has been made of the full amount of the award plus interest thereon to the date of payment.