UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION

Complainant Theodore Tak-Lung Lee ("Lee") appeals from a Judgment Officer's dismissal of his challenge to the process respondent Lind-Waldock & Co. ("Lind-Waldock") followed when it decided to close his account.  Lee raises objections to the Judgment Officer's factual and legal analysis and submits additional documentary evidence in support of his complaint.  As explained more fully below, we conclude that complainant has not established an appropriate basis for reopening the record to consider additional evidence.  On the merits, we find that the judgment Officer erred in one aspect of his factual analysis, but affirm his dismissal of the complaint.

BACKGROUND

I.

In September 1998, Lee opened an account with Lind-Waldock, a registered futures commission merchant ("FCM").¹ Lee deposited $5,000 to margin his trading and transferred $1,400 and a seven-contract Treasury bond spread position from E.D. & F. Man International, his previous FCM.² Four days after opening the account, Lee traveled to Japan from his home in Bellevue, Washington.

Several days later, respondent decided to close Lee's account.³ A Lind-Waldock employee made numerous attempts to contact Lee at the telephone number he had provided when he opened the account. The Lind-Waldock employee was unable to reach Lee because he was out of town. For reasons that are not explained on the record, Lind-Waldock did not mail a written notice to complainant.

In addition to taking steps to notify complainant of its decision, Lind-Waldock notified its employees that Lee's account was on a "liquidation-only" status. In effect, this instructed the employees to refuse any order Lee might give that would add a position to his account.

Lee returned home from Japan on October 15, 1998. Early that day, he contacted respondent's trading desk and requested market quotes. The Lind-Waldock employee he spoke to did not inform him that his account was on a liquidation-only status. The next morning, Lee contacted respondent's trading desk and directed that one of his long December Treasury bond contracts be sold at the market. Again, Lind-Waldock's employee failed to notify him that respondent had placed his account on a liquidation-only status.

After the market rallied later that day, Lee contacted respondent's trading desk and attempted to enter an order to purchase one December Treasury bond contract. Lind-Waldock's employee informed Lee that he could not accept the order. After Lee inquired, he was informed that Lind-Waldock had placed his account on a liquidation-only status. Lee then directed Lind-Waldock to sell two of the remaining six spread positions. As a result of this trade, complainant lost $2,918.

Several weeks later, Lee transferred his remaining positions - four spread positions and one short March Treasury bond contract - to an account he had established with another FCM. He later liquidated the transferred positions for a profit of $1,728.

II.

Lee filed a pro se reparations complaint on October 26, 1998. In essence, he alleged that Lind-Waldock had violated the Act by (1) placing his account on liquidation-only status⁴ and (2) failing to provide prompt notice of the limitations it unilaterally imposed on his trading.⁵ He sought damages of $4,734, explaining that he not only lost almost $3,000 when he liquidated a portion of his spread position on October 16, but was also deprived on an opportunity to liquidate them at a profit of $1,728.⁶

Lind-Waldock's answer referred to information it had learned from CDC about Lee's litigation history as the basis for its decision to close his account. It also insisted that it had acted diligently in attempting to notify Lee of its decision. It denied that placing complainant's account on a liquidation-only status had compelled him to liquidate any of his positions at a loss.

The case was assigned to a Judgment Officer in January 1999. At that time, the Proceedings Clerk issued a procedural order establishing deadlines for completing discovery and submitting verified statements. The order indicated that discovery requests should be made within 35 days and that verified statements should be filed 60 days after the end of the discovery period.⁷

In early March, Lind-Waldock served Lee with its discovery requests. Shortly thereafter, Lee sought an extension of the deadline for filing his discovery responses. On March 10, 1999, the Judgment Officer granted Lee an extension until May 1, 1999. The judge's order also specified that verified statements should be submitted on or before July 1, 1999.

In early April, Lee submitted a letter identifying two non-substantive errors in the discovery requests he had received from Lind-Waldock. Lee did not seek any type of ruling in his letter. Neither party submitted a verified statement by the July 1 deadline.

On July 15, 1999, the Judgment Officer dismissed the complaint for a failure of proof. Without explaining the legal standard underlying his analysis, the Judgment Officer generally concluded that Lind-Waldock had acted reasonably under the circumstances. He found that Lee failed to notify respondent that he was leaving town and that respondent placed his account on a liquidation-only status as a result of learning that he had a litigious history with other firms and had disavowed a debit balance with one of the firms. He also found that Lind-Waldock acted diligently by making numerous attempts to telephone Lee to notify him that his account had been placed on a liquidation-only status. Initial Decision at 3.⁸ He found that the trading restrictions Lind-Waldock imposed were reasonable and permissible pursuant to the language of the Customer Agreement granting Lind-Waldock broad authority to liquidate positions when its customers were unavailable. Initial Decision at 3.⁹

On July 20, 1999, the Office of Proceedings received a letter from Lee protesting the Judgment Officer's decision. Lee claimed that the judge should not have issued his decision until Lind-Waldock had replied to his letter pointing out errors in its discovery requests. In addition, he argued that (1) he does not have a litigious history with brokers; (2) he informed one of respondent's employees of his travel plans prior to his departure; (3) Lind-Waldock should have left a message on his home answering machine informing him of its decision placing his account on a liquidation-only status; and (4) Lind-Waldock had information about where he could be reached in Japan. The Office of Proceedings responded to the letter by advising him to file a notice of appeal. Lee submitted a notice of appeal on July 29 and filed his appeal brief on August 25. Lind-Waldock did not file a responsive brief.¹⁰

On appeal, complainant did not reiterate many of the points raised in his July 20 letter. He did, however, submit additional documents that indicated he provided Lind-Waldock with written notice of his travel plans at the time he opened his account. In addition, he submitted documents supporting his claim that Lind-Waldock would have been able to contact him earlier if it had been more diligent in searching its relevant records.¹¹ He reiterated his claim that respondent's failure to provide prompt notice of applicable trading restrictions deprived him of the opportunity to liquidate his open positions at a substantial profit.

DISCUSSION

I.

On appeal, complainant has submitted new documentary evidence relating to (1) whether he provided Lind-Waldock with prior notice of his trip to Japan and (2) whether Lind-Waldock's records included information disclosing a location where he could have been contacted. In addition, he alleged for the first time that he had a telephone answering machine at his Washington home and that respondent failed to leave any messages about its decision to place his account on a liquidation-only status.

Commission Rule 12.405 permits reopening of the evidentiary record on appeal under limited circumstances. A party seeking to reopen the record must show that (1) the additional evidence is material, and (2) there were reasonable grounds for failing to adduce such evidence before the presiding officer.

In this instance, the evidence Lee seeks to submit is material, but there is no persuasive explanation for his failure to submit this evidence by the July 1, 1999 deadline established by the Judgment Officer. In one of his post-hearing submissions, Lee claimed that he was waiting for Lind-Waldock to respond to his letter noting problems in its discovery requests. The errors at issue were minor, however, and were not an obstacle to Lee's timely submission of documentary evidence in his possession. In these circumstances, we decline to reopen the record to consider Lee's new documentary evidence.

II.

Turning to the merits, we note that Lee's challenge to the process respondent followed in closing his account raises issues of first impression. We conclude that Lind-Waldock's conduct is properly evaluated under Sections 4b and 4d of the Act.

Lee's complaint essentially alleged that there was no factual basis for Lind-Waldock's decision to close his account. Nothing in the Act, however, limits an FCM's right to select its customers. As a result, we conclude that Lee's complaint about Lind-Waldock's rationale for declining to do business with him does not state a claim under the Act or Commission regulations.¹²

Once an FCM opens an account for a customer, however, the Act imposes duties that relate to the control the FCM exercises over its customers' money and property as well as its superior access to material information. For example, Section 4d of the Act requires FCMs to treat and deal with a customer's money and property as belonging to the customer. In practice, this duty requires an FCM to follow customers' instructions regarding their money and property. See Slone v. Dean Witter Reynolds, Inc., [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,283 at 42,433 (CFTC Dec. 16, 1994).

In this case, Lee's account included cash and open positions at the time that Lind-Waldock placed Lee's account on a liquidation-only status. When Lind-Waldock instructed its employees to refuse Lee's instruction to use his cash to margin additional positions, it altered its relationship with Lee in a fundamental manner. This change amounted to a material fact that Lind-Waldock had a duty to disclose under Section 4b of the Act. Sudol v. Shearson Loeb Rhoades, Inc., [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,748 at 31,119 (CFTC Sept. 30, 1985).

Moreover, by instructing its employees to refuse to comply with a customer's instruction, Lind Waldock imposed limitations on Lee's control of his funds that are facially incompatible with its duty under Section 4d of the Act. The Commission has recognized, however, that the duties Section 4d imposes may be subject to appropriate conditions. For example, when a customer fails to pay a margin call, an FCM's duty to protect the financial position of its other customers and its right to protect its own financial position supersedes any duties it owes to the defaulting customer. In these circumstances, the Commission permits FCMs to make good faith judgments about the steps necessary to protect its financial interests. These steps may include liquidation of the defaulting customer's open positions. Baker v. Edward D. Jones & Co., [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,167 at 24,772 (CFTC Jan. 27, 1981).

We believe that an FCM's duty under Section 4d is also conditioned when it exercises its right to close the account of a current customer. Nevertheless, the FCM must provide its customer with a fair opportunity to protect its financial interests. To fulfill this duty, an FCM must generally: (1) provide the customer with prompt notice of its decision to close his account or limit his trading, (2) provide a prompt response to the customer's instruction to return excess funds and transfer open positions, and (3) take reasonable steps to protect the customer's interests until the transfer process is completed. ¹³

The limited record before us does not show that Lind-Waldock failed either to respond promptly to Lee's transfer instruction or to take the steps necessary to protect Lee's interests until the transfer process was completed. Moreover, we find that Lind-Waldock's decision to place Lee's account on a liquidation-only status was a reasonable initial step in the process of closing his account.

The record, however, shows that Lind-Waldock failed to take the practical steps necessary to ensure that Lee received prompt notice of the material change in the status of his account. Although the Judgment Officer found that a Lind-Waldock employee made numerous attempts to reach Lee by phone, respondent failed to mail Lee a written notice. Moreover, respondent also failed to ensure that the employees at its trading desk notified Lee of the change in the status of his account when they spoke to him on October 15 and 16. This stands in sharp contrast to Lind-Waldock's effective communication to these same employees of its instruction limiting Lee's trading to liquidation orders.

Respondent eventually did provide appropriate disclosure. Its delay, however, deprived Lee of meaningful disclosure at the time he liquidated one of his long Treasury bond positions. In these circumstances, we find that Lind-Waldock's delay in disclosing the material change in the status of complainant's account was reckless and breached its duty under Section 4b to disclose material facts to its customer. This flaw in Lind-Waldock's process also amounted to a breach of its duty under Section 4d of the Act.

It is well established that in cases involving the failure to disclose a material fact, there is a rebuttable presumption that the customer relied on the missing information in making trading decisions. Maloley v. R.J. O'Brien & Assoc., Inc., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,293 at 35,382 (CFTC July 22, 1988). Lee, however, did not enter the liquidation order that led to the losses he claims during the period that he remained ignorant about the status of his account. Indeed, it is undisputed that Lind-Waldock provided effective disclosure on October 16 and that this disclosure took place prior to Lee's entry of the order liquidating two of his spread positions. As a result, the presumption of reliance is insufficient to support Lee's damage claim.

In these circumstances, we focus on whether the record shows that Lind-Waldock's delay in providing appropriate disclosure was a substantial factor in Lee's decision to enter a liquidation order. Modlin v. Cane, CFTC Docket No. 97-R083, slip op. at 17 (CFTC Mar. 15, 2000) (proof of proximate cause includes evidence that the wrongful conduct was a substantial factor in bringing about complainant's loss). The record is essentially silent on this point. As discussed above, Lee did not avail himself of the opportunity to affirmatively set forth his case in a verified statement and has not offered any reasonable explanation for his failure to do so. Lee's complaint refers to the possibility of a margin call on October 16, but there is no evidence that a margin call was either threatened or issued on that day. Moreover, Lee has not established that he would have been unable to meet any margin call that was issued. In these circumstances, we conclude that Lee failed to submit sufficient evidence to establish that respondent's wrongdoing was the proximate cause of his claimed damages. On this basis, we affirm the Judgment Officer's dismissal of the complaint.

IT IS SO ORDERED.¹⁴

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

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

Dated:  June 29, 2000

1 In early 1998, Lee apparently closed an account that he had previously maintained with respondent.

2 Lee's spread position was long the December contract and short the March contract.

3 Respondent's change in position apparently reflected new information gathered from a data base maintained by Compliance Data Central, Inc. ("CDC"), a firm that collected information about litigation, debits and arbitrations involving futures and securities firms. As noted below, however, complainant claims that respondent's counsel told him that Lind-Waldock would not do business with him due to problems that he had with the trading desk during the time he previously maintained an account with respondent.

4 Lee alleged that Lind-Waldock gave him two reasons for its decision: (1) his failure to pay a $5,000 debit balance incurred at Ira Epstein and Co. and (2) problems he had with the trading desk during the time he previously maintained an account with respondent. He alleged that both these claims were untrue.

5 Lee alleged that respondent should have contacted him at a Tokyo telephone number that he previously used when trading through Lind-Waldock.

6 Lee did not specifically address the relationship between respondent's conduct and his decision to liquidate his two spread positions. He did generally claim that no one "with common sense" would trade an account placed on a liquidation only status. He also explained that when the market moved against him on October 16, he "had to spread [his] positions evenly to avoid margin calls at the end of the day, if any."

7 As a general rule, a claim for $30,000 or less is resolved through a summary decisional procedure "wherein an oral hearing need not be held and proof in support of each party's case may be supplied" in verified documents. Commission Rule 12.2. Commission Rule 12.208(a) indicates that appropriate verified documents include verified statements of fact and affidavits of non-party witnesses with personal knowledge of the facts which they aver to be true.

8 The Judgment Officer did not specifically discuss either Lind-Waldock's failure to provide written notice of its decision or failure to provide oral notice the first two times Lee contacted its trading desk after his return from Japan.

9 Paragraph 5 of Lind-Waldock's customer agreement provides that in the event the FCM is unable to contact its customer due to customer unavailability, Lind-Waldock shall have the right to liquidate some or all of the customer's position without notice.

10 Commission Rule 12.10 requires that parties include an affidavit or certificate of service as proof that a document was served on an opposing party. Lee did not include such an affidavit or certificate with his appellate submission. In these circumstances, we find that Lind-Waldock did not have a fair opportunity to file a response. Nevertheless, because we affirm the result of the Judgment Officer's decision, we find that respondent was not harmed by complainant's failure to comply with Rule 12.10.

11 These documents indicated that during 1996 complainant received Lind-Waldock account statements at an address in Japan.

12 In these circumstances, we need not resolve conflicts in the evidence regarding the basis for Lind-Waldock's decision to close Lee's account.

13 As discussed above, the Judgment Officer referred to the provision in the customer agreement that gave respondent the absolute right to liquidate complainant's account due to his unavailability. Because respondent did not place Lee's account on a liquidation-only status due to his unavailability, this aspect of Lind-Waldock's customer agreement is inapposite to our decision. Moreover, in resolving disputes under the Act, the Commission has traditionally focused on the obligations Sections 4d and 4b of the Act impose on FCMs rather than the waivers implicit in some provisions of standardized agreements between FCMs and their customers. See Slone v. Dean Witter Reynolds, Inc., ¶ 26,283 at 42,433 (an allegation of unauthorized liquidation of a customer's account is sufficient to state a cause of action under Sections 4b(a) and 4d of the Act.)

14 Under Section 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 was 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.