UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION

HUSSEIN M. HAEKAL
v.
DOCKET NO. 93-109
REFCO, INC. and RONALD VON NEEFE OPINION AND ORDER

Complainant Hussein M. Haekal ("Haekal") appeals from an Initial Decision (I.D.) that summarily dismissed his complaint against Ronald von Neefe ("von Neefe") and Refco Inc. ("Refco").1 The Administrative Law Judge ("ALJ") took this action because he found nothing in the parties' documentary submissions that suggested Haekal traded or intended to trade either futures contracts or commodity options. On this basis, the ALJ ruled that the instruments underlying Haekal's complaint were not within the Commission's jurisdiction.

Haekal argues that the ALJ's conclusion is based on a misinterpretation of the documentary record. Respondents urge us to affirm the ALJ's dismissal because the documentary evidence in the record establishes that the transactions at issue involve either the purchase of foreign currency on the spot or cash market, purchase of foreign currency forward contracts, or placement of a foreign currency deposit.

For the reasons explained below, we vacate the ALJ's order of dismissal and remand for a hearing on the facts material to Haekal's claims.

BACKGROUND

Haekal, a resident of Germany, filed a pro se complaint in 1993 seeking an award of 8,112,153 Japanese yen against Refco and von Neefe.2 The theories of recovery that Haekal raised included unauthorized trading, churning, and failure to disclose material facts.

According to the complaint, in July 1991, Haekal entered into an agreement with Refco F/X Associates, Inc. ("Refco F/X"), a company represented by von Neefe.3 Complaint at 1. The agreement at issue was attached to the complaint.4 The complaint indicated that Haekal submitted 65,779,064 Japanese yen to Refco F/X in September 1991.5

Account statements attached to the complaint indicated that a number of purchase and sale transactions in Deutschemarks were made in Haekal's Refco F/X account during September 1991. One column of the account statement included a description of the transactions made for Haekal's account. Each transaction was labeled "physical settlement," but four transactions were also labeled "(Rollover)." The account statements indicated that Haekal suffered a small loss in U.S. dollars as a result of transactions in September 1991.

The account statements also indicated that a number of purchase and sale transactions in Deutschemarks were made in Haekal's Refco F/X account during October 1991. Once again, each transaction was labeled "physical settlement," but four were also labeled "(Rollover)." The account statements indicated that Haekal suffered a loss of over $54,000 as a result of transactions in October 1991.

According to the complaint, on October 10, 1991, Haekal learned that between October 3 and 10 Refco F/X executed transactions for his account without his prior consent. Haekal attached a copy of an October 10, 1991 telex protesting the alleged unauthorized trades. The complaint claimed that Refco F/X failed to respond either to Haekal's October 10, 1991 telex or to similar telexes that he sent on November 12, December 6, and 11, 1991. The complaint stated that Refco F/X returned 57,666,911 yen to Haekal on December 27, 1991.

Among other things, Refco's answer claimed that the transactions underlying Haekal's complaint were not futures or commodity options contracts that were subject to the Commission's jurisdiction. Refco emphasized that Haekal's transactions were with another company -- Refco F/X -- and that, as a consequence, it lacked sufficient knowledge to respond to Haekal's substantive allegations. Nevertheless, it claimed sufficient knowledge about the underlying transactions to insist that they were spot transactions in foreign currency. In a separate answer, von Neefe also claimed that the transactions underlying Haekal's complaint were not subject to the Commission's jurisdiction. He also generally denied Haekal's allegations of wrongdoing.

The Office of Proceedings forwarded the case to the ALJ for adjudication in June 1993. On June 23, 1993, the Hearing Clerk issued an order notifying the parties that an ALJ had been assigned and requiring them to serve discovery requests within 40 days and complete the discovery process within 60 days.

In July 1993, Refco requested that the ALJ dismiss the complaint against it because Haekal had failed to properly allege either a basis for Commission jurisdiction or a basis for holding it responsible for the alleged wrongdoing of Refco F/X or von Neefe. In August 1993, the ALJ denied Refco's motion due to the undeveloped state of the record. In addition to directing the parties to initiate discovery by October 2, 1993 and to file prehearing memoranda by November 13, 1993, the ALJ required both complainant and respondents to answer certain questions.6

The record shows that both complainants and respondents sought discovery and that Haekal received some responses.7 On September 16, 1993, Refco filed a motion to compel Haekal to respond to its discovery requests. In the alternative, Refco sought summary disposition on the ground that Haekal's failure to respond to its requests for admissions established that Haekal never entered any orders to trade commodity futures and that no commodity futures were traded on his behalf. On September 29, 1993, complainant filed his response to Refco's discovery requests.8 In addition, Haekal filed his own motion for summary disposition.

The ALJ issued his I.D. in October 1993. Haekal v. Refco, Inc., CFTC Docket No. 93-R109 (October 8, 1993). The I.D. did not mention either Refco's or Haekal's motions for summary disposition and did not consider any of the discovery issues Refco had raised in its motion to compel. The I.D. did refer to the questions that the ALJ had posed in his August 1993 order and stated that:

On reviewing the information furnished by the parties, I find nothing in the way of documentary evidence, including the account statements, that would suggest the complainant at any time traded or intended to trade futures contracts or commodity options.

I.D. at 2. On this basis, the ALJ found that the instruments underlying the complaint were not within the Commission's jurisdiction and dismissed the complaint without prejudice.

Complainant filed a timely appeal and an informal brief in November 1993. Refco filed a responsive brief in December 1993. The Commission dismissed Haekal's complaint on a jurisdictional theory that was not addressed by the I.D. in July 1998. In April 1999, the United States Court of Appeals for the Second Circuit remanded this case back to us after clarifying our authority to extend the period for submitting the double bond required by Section 14(c) of the Act. 9

DISCUSSION


I.

Commission Rule 12.311 authorizes a presiding officer to resolve a reparations complaint without an oral hearing when "the documentary proof and other tangible forms of proof submitted by the parties are sufficient to permit resolution of some or all of the factual issues in a proceeding without the need for oral testimony." Our precedent recognizes that this simplified procedure is only appropriate when the documentary evidence is "'so convincing or persuasive' that credibility can be readily determined without an oral hearing." Faro v. Interlink Trading, Inc., [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,537 at 43,372 (CFTC Nov. 16, 1995.) A presiding officer abuses his discretion by invoking Rule 12.311's procedures outside these narrow circumstances. Jenne v. Painewebber, Inc., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,329 at 35,425 (CFTC Aug. 31, 1988). A presiding officer cannot properly evaluate either the range of issues the parties may raise or the quality of the documentary submissions they may make until after discovery is completed. Faro at 43,373.

Application of these principles in the circumstances before us requires a vacation of the ALJ's I.D. While the ALJ did not cite to Rule 12.311 in his decision, it is the only reparation rule that even remotely authorizes the judge's summary resolution of the issues raised in Haekal's complaint. Both Refco and Haekal did move for summary disposition under Commission Rule 12.310, but the ALJ did not purport to resolve these motions and, in any case, neither motion established that there was "no genuine issue of material fact to be determined."

At the time the ALJ issued his decision, the discovery period remained open and the parties' dispute about the timeliness of complainant's responses to Refco's discovery requests remain unresolved. Consequently, the judge's order "unduly interfered with [the parties'] right to discovery pursuant to Subpart B of the [reparation] rules." Jenne at 35,424. Full access to the discovery process is especially important to pro se parties when documents material to their claim are under the exclusive control of an opposing party.10

Given this fundamental flaw in the procedures underlying the ALJ's decision, a remand for further proceedings is necessary. While the long passage of time since the complaint was filed is regrettable in many respects, there have been important legal developments that should help the parties to focus their presentations in a manner that will help expedite the final resolution of this matter. For example, it is now clear that whether a transaction is a "contract of sale of a commodity for future delivery," a "spot transaction," or a "cash forward" depends upon the particular facts and circumstances of each case. Motzek v. Monex International Ltd., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. 26,095 at 41,625-41,626 (CFTC June 1, 1994). There is "no bright-line definition or list of characteristics" that determines what constitutes a futures contract; instead, "the transaction must be viewed as a whole with a critical eye toward its underlying purpose." Id.,quoting CFTC v. Co Petro Marketing Group, Inc., 680 F.2d 573, 581 (9th Cir.1982). The fact that this holistic approach is somewhat imprecise and often raises difficult issues of interpretation does not justify elevating form over substance. Id. Consequently, the labels that parties apply to their transactions are not necessarily controlling. Because such labels are often illusory, a decisionmaker must evaluate those labels in the context of the parties' actual conduct.11

Here, for example, Refco has emphasized that Haekal's account statements indicate that the transactions at issue involved "physical settlement." Without being specific, Refco is apparently suggesting that this reference supports an inference that the transactions were spot transactions that were settled by the physical delivery of Deutschemarks. Nothing in the record, however, indicates that physical delivery actually took place. Indeed, the statements' references to "rollover" suggest that under some circumstances any obligation that Haekal might have had to take physical delivery could be avoided. In addition, there is no basis to infer that Haekal had either a personal or business need that would be served by taking delivery of Deutschemarks. Indeed, the fact that the account statements denominated Haekal's profit and loss in U.S. dollars suggests that the overall focus was speculative gains and losses rather than the specific currency supposedly being purchased or sold.

Recent cases also make it clear, however, that Haekal must prove more than that the transactions at issue were futures contracts. As noted in the Commission's recent decision in In re Global Link Miami Corporation, [1998-1999 Transfer Binder] Comm. Fut. L. Rep. (CCH) 27,669 at 48,164 (CFTC June 21, 1999), Section 2(a)(1)(a)(ii) of the Act includes language that is generally referred to as the "Treasury Amendment." The Treasury Amendment provides an exclusion from the Act for futures and option transactions involving foreign currencies and certain other designated instruments unless the transactions are conducted on a "board of trade." In Global Link, the Commission ruled that for purposes of the Treasury Amendment, the term "board of trade" included facilities that "provide order execution for the public" rather than limiting themselves to "the network of bank and institutional trading in foreign currencies" commonly known as the "interbank" market. Consequently, unless Haekal can establish that Refco F/X's trading facility was open to the public, he cannot successfully claim that his transactions fall within the scope of the Commission's jurisdiction.12

Resolving these issues reliably and fairly requires that all parties have an opportunity to develop the record prior to a hearing on the merits. Due to the passage of time since the parties initiated discovery, we direct the ALJ to reopen the discovery process for at least 60 days after the date the proceedings on remand commence. He shall permit all parties a fair opportunity to pursue the discovery permitted by Subpart B of the Commission's reparations rules.

II.

Complainant must file the bond required by Section 14(c) of the Act as a condition to any further proceedings on his complaint. We grant Haekal 75 days from the date this decision is served to submit a bond in the amount of $130,878.00 to the Director of the Commission's Office of Proceedings. Any inquiries regarding the bond requirement shall be made in writing, filed with the Director of the Commission's Office of Proceedings, and served on counsel for respondents. We delegate to the General Counsel, or his designee, authority to dismiss Haekal's complaint in the event that he fails to file the required bond within the 75-day period or, in the alternative, to issue an order specifying the date that the proceedings on remand shall commence.

CONCLUSION

The ALJ's I.D. is vacated and this case is remanded for further proceedings consistent with this decision.13

IT IS SO ORDERED.

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

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

Dated: September 29, 2000


1 We previously resolved this case on a jurisdictional issue that was not raised in the parties' appellate submissions. Haekal v. Refco Inc., 1998 WL 390811 (CFTC July 13, 1998) reconsideration denied [1998-1999 Transfer Binder] Comm. Fut. L. Rep. (CCH) 27,468 (CFTC Nov. 18, 1998) (collectively "Haekal I"). On appeal, the United States Court of Appeals for the Second Circuit ruled that we could exercise preliminary jurisdiction over Haekal's complaint if he filed the bond required under Section 14(c) of the Commodity Exchange Act ("Act") and directed us to provide Haekal with another opportunity to submit an appropriate bond. Haekal v. Refco, Inc., 198 F.3d 37 (2nd Cir. 1999). We resolve issues related to the court's remand in Part II of our discussion, infra.

2 During the time at issue, Refco was registered as a futures commission merchant ("FCM") and von Neefe was registered as an associated person ("AP") sponsored by Refco.

3 Refco F/X was not registered with the Commission.

4 The title on the agreement was "Margin Based Interbank Forex/Precious Metals Trading Agreement" ("Agreement"). Among other things, the agreement stated that "Refco will deal spot interbank foreign exchange and precious metals as principal with customer." Agreement at 1. Although Haekal signed the agreement, he claimed that his signature was contingent on certain amendments that von Neefe agreed to orally.

5 In this regard, Haekal claims that he submitted the funds with the understanding that they would be deposited with Citibank in Tokyo and earn interest of 7.3 percent for three months, but that Refco F/X kept the money and only paid him interest of 6.6 percent for one month. As discussed below, this aspect of Haekal's claim does not seem to implicate a violation of either the Act or Commission regulations.

6 The ALJ directed respondents to answer four questions bearing on von Neefe's relationship with Refco and the benefits that Refco derived from Haekal's transactions with Refco F/X, and directed complainant to answer three questions bearing on his discussions with von Neefe relating to futures or commodity options.

7 Refco refused to provide documents regarding its relationship with Refco F/X on the grounds that the documents were irrelevant and that production would be burdensome. It did acknowledge that Refco F/X was a "sister" company with "common ownership."

8 In this regard, Haekal argued that the ALJ's August 1993 order had extended his deadline for responding to October 20, 1993.

9 Section 14(c) provides that:

In case a complaint is made by a nonresident of the United States, the complainant shall be required, before any formal action is taken on his complaint, to furnish a bond in double the amount of the claim conditioned upon the payment of costs, including a reasonable attorney's fee for the respondent if the respondent shall prevail, and any reparation award that may be issued by the Commission against the complainant on any counterclaim by respondent: Provided, That the Commission shall have authority to waive the furnishing of a bond by a complainant who is a resident of a country which permits the filing of a complaint by a resident of the United States without the furnishing of a bond.

The Second Circuit concluded that, in appropriate circumstances, the Commission is required to toll the deadline for filing the required bond to permit a complainant to have a full two years to make an appropriate submission.

10 In this regard, given its refusal to produce documents about its relationship with Refco F/X and von Neefe's apparent status as an agent for both, Refco is hardly in a position to complain about the limited record on issues material to its responsibility for the wrongdoing alleged in the complaint.

11 The Commission and the courts have consistently looked beyond the appearance of legitimacy created by written materials to the underlying economic reality of the transaction itself as reflected in the actual day-to-day operation of those engaged in the business of marketing such transactions. Motzek, 26,095 at 41,624 n.4.

12 Haekal's claim that he was not paid the promised amount of interest on his Japanese Yen deposit appears to raise a breach of contract claim that is not cognizable in reparations unless he can show that respondents made the promise without a good faith intent to perform. See Wills v. First Financial Corp. of America [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) 22,605 at 30,596-97 (CFTC May 31, 1985.)

13 We note that one of the documents submitted to the record is in German. Any party that submits a document to the record in a foreign language must provide a reliable translation or the document will not be considered.