UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of
||CFTC Docket No.
|SHAHROKH NIKKHAH||OPINION AND ORDER|
We recently directed respondent Shahrokh
Nikkhah to show why a $200,000 civil money penalty would not be appropriate
in light of his net worth.1 Nikkhah's
response argues that no civil money penalty would be appropriate because
his current net worth is negative. Nikkhah supports the latter claim with
his own affidavit and several documents relating to his assets and
liabilities. The Division of Enforcement's ("Division") reply to Nikkhah's
response argues that a $200,000 civil money penalty would be appropriate
because the affidavit and documents submitted by Nikkhah are not
sufficiently reliable to establish that his net worth is negative.
As discussed below, we conclude that the current record does not permit us to make a reliable determination of respondent's net worth. Consequently, we cannot consider whether a $200,000 civil money penalty is appropriate in light of Nikkhah's net worth. Because we also conclude that in the circumstances of this case we may not impose a civil money penalty if the Division cannot produce sufficient evidence to permit a reliable assessment of respondent's net worth, we remand this matter to permit the Division to develop the record on the issues material to this determination.
The record establishes that most of respondent's wrongful conduct took place prior to October 28, 1992.2 Consequently, former Sections 6(b) and (d) of the Commodity Exchange Act ("Act") control our imposition of a civil money penalty on Nikkhah.3 Compare Slusser v. CFTC, 210 F.3d 783, 786 (7th Cir. 2000) ("Slusser") (former Sections 6(b) and (d) deemed applicable when all of respondent's wrongful conduct occurred prior to October 29, 1992).
Under former Section 6(b), we are authorized to impose a civil money penalty of $100,000 for each violation of the Act established on the record. Under our precedent, however, we do not determine the appropriate amount of a civil money penalty simply by multiplying the number of proven violations by the $100,000 statutory maximum. Our determination turns "more on an examination of the overall nature of the wrongful conduct respondent has committed than a simple enumeration of the violations established on the record." In re Incomco, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,198 at 38,535-36 n.16 (CFTC Dec. 30, 1991). See also, In re Interstate Securities Corp., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,295 at 38,955 (CFTC June 1, 1992).
Former Section 6(d) set forth factors that we are required to consider when we determine the amount of a civil money penalty that is appropriate for a particular respondent. We must consider the gravity of every respondent's violations. If respondent's primary business involves the use of the markets regulated by the Commission, we must also consider whether the amount of that respondent's civil money penalty is appropriate in light of (1) the size of respondent's business, and (2) the ability of respondent to continue in business. Otherwise, we must consider whether the amount of a respondent's civil money penalty is appropriate to his net worth.
Under Commission precedent, the factors generally material to determining gravity under former Section 6(d) are closely aligned with facts and circumstances material to the determination of respondent's liability for the violations alleged in the Division's Complaint.4 Consequently, it has proved practical to conduct discovery related to those factors at the outset of a proceeding and to develop the record on those factors at an oral hearing more generally devoted to liability issues.
Determining the appropriate process for developing the record on the remaining mandatory factors in former Section 6(d) involves more complex considerations. First, in many cases the remaining mandatory factors that are material to the calculation of a civil money penalty cannot be known until after both liability and non-monetary sanctions have been determined. This ambiguity is a result of the language of former Section 6(d) that focuses on whether a respondent's primary business involves the use of markets regulated by the Commission. Even if the answer to this inquiry is "yes" at the time a proceeding is commenced, it may be "no" after the ALJ resolves issues material to liability and non-monetary sanctions. 5
The second and more telling problem
affecting the process for developing the record on the remaining mandatory
factors in former Section 6(d) involves the nature of the information
material to these factors. If respondent's primary business involves use of
the markets regulated by the Commission, the inquiry focuses on the
financial details of his business. Otherwise, the inquiry focuses on
respondent's net worth. Under Commission precedent, this inquiry extends to
any evidence material to respondent's current assets and liabilities.
In both situations, the relevant inquiries focus on information that many people are generally loath to share even with their closest associates. Because few respondents are anxious to see this type of information disclosed on the public record of an enforcement proceeding, relevant information is almost never volunteered and is usually only surrendered after at least some resistance.6 As a consequence, without appropriate safeguards, the process for developing the record on the mandatory factors in former Section 6(d) that do not relate to gravity can easily degenerate into an unproductive, time-consuming struggle that not only delays the final resolution of enforcement proceedings but also wastes both the parties' and the Commission's resources.
The Commission has responded to this dilemma in two ways. First, it developed a process for building a record on former Section 6(d)'s mandatory factors unrelated to gravity that balanced respondents' interest in protecting their financial information against the Division's interest in developing the record in a manner consistent with the requirements of Section 6(d).7 The process was initially described in In re Rothlin, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,851 at 27,574 (CFTC Dec. 21, 1981) ("Rothlin") and was reaffirmed several years later in In re Murlas Commodities, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,440 at 35,929 (CFTC Apr. 24, 1989) ("Murlas").
Under this process, the Division was
relieved of the initial burden of developing the record on the mandatory
factors in former Section 6(d) that do not relate to gravity. Consequently,
the Division did not have to seek discovery related to these factors at the
outset of the proceeding and respondents could avoid an immediate choice
between protecting the privacy of their financial information and incurring
discovery sanctions for refusing to produce relevant information. Indeed,
if the Division failed to establish liability, respondents never had to
face this choice.
The process outlined in Commission precedent anticipated that parties would develop the factual record on issues material to liability, non-monetary sanctions, and former Section 6(d)'s gravity factor at an oral hearing. The ALJ would then issue a decision resolving issues material to liability, non-monetary sanctions and gravity that provided the parties with notice of the civil money penalty that he deemed appropriate in light of the record on gravity.8 Consequently, at the end of this stage of a proceeding, respondents would have notice of the cost of maintaining the privacy of their financial information. If they were willing to incur this cost, they could waive the protections implicit in the Section 6(d) factors that do not relate to gravity.
If respondents chose not to waive, they
were required to produce evidence on the material factors that was
"adequate on its face." Rothlin at 27,573. The Division was to be
given an opportunity to challenge respondent's showing through
cross-examination and an affirmative presentation. Id. at 27, 573,
27,574 n.12. The presiding officer would then make a final determination
based on the record as a whole.
Implementation of the process described in Rothlin ultimately drew concern from some reviewing courts. While Rothlin described respondent's burden on former Section 6(d)'s mandatory factors unrelated to gravity in terms of the burden of production, the outcome in some Commission decisions suggested that, as a practical matter, respondent also had the burden of proof on the relevant factors. See, e.g., In re Muller, 1982 WL 30323 (CFTC Aug. 2, 1982); In re Premex, Inc, [1982 -1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,992 (CFTC Feb. 1, 1984); In re Bentley, [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,620 at 30,652 (CFTC May 22, 1985.)
In 1986, the United States Court of Appeals for the Ninth Circuit vacated the civil money penalty that the Commission had imposed in Premex, holding that the Commission could not require respondent to undertake the burden of producing evidence on any of former Section 6(d)'s mandatory factors. Premex, Inc. v. CFTC, 785 F.2d 1403, 1409 n.17 (9th Cir. 1986).9 Three years later, a panel of the United States Court of Appeals for the Seventh Circuit issued a decision holding that the Division had the burden of establishing a respondent's net worth "with precision." Gimbel v. CFTC, Nos. 88-1849, 2029 (7th Cir. Apr. 10, 1989) slip op. at 8, cited in Murlas, ¶ 24,440 at 35,930 n. 5. The Commission sought reconsideration, however, because the panel's decision appeared to conflict with controlling Seventh Circuit precedent.10 The panel subsequently withdrew its decision and issued a new one reaching the same result - vacation of the Commission's civil money penalty -- on a different ground.11
The Commission's decision in Murlas
was partly in response to these courts' concerns. Murlas reaffirmed
Rothlin's requirement that presiding ALJs provide respondents with
specific notice that net worth or size of business and ability to remain in
business were likely to be material issues in the proceeding. In addition,
it indicated that respondents remained free to waive the inquiries required
by Section 6(d) in order to protect the privacy of their financial
information. The decision also endorsed Rothlin's holding that
respondents had "the initial burden of proffering information about their
financial condition." Murlas, ¶ 24,440 at 35,930. It
emphasized, however, that the presiding ALJ should not attach preconditions
to respondents' invocation of their rights under former Section 6(d) and
that it was the Division's role:
T]o raise objections to the respondent[s'] showing and, if necessary, to seek discovery and an oral hearing to further develop the record.
Id. at 35,930-31 n.8. Murlas
also noted that:
[A]bsent a waiver of the protections of [former] Section 6(d) by respondents or agreement by the parties regarding respondents' financial condition, respondents must be accorded the protection of the oral hearing process and the Division must be given an opportunity to develop the factual record [on former Section 6(d)'s mandatory factors unrelated to gravity]. A presiding officer abuses his discretion if he unduly interferes with respondents' right to a hearing or the Division's opportunity to develop the record.
Id. at 35,931. Finally, the Commission indicated that respondents' conduct could raise an inference of waiver of the protections of former Section 6(d):
[I]f a respondent participated in a proceeding on liability issues but frustrated the Division's opportunity to develop the factual record on its financial condition by failing to comply with discovery requests or refusing to appear as a witness, its conduct would amount to a waiver of the protections of [former] Section 6(d).
Id. at 35,931 n. 11.12
Unfortunately, in the decade since the Murlas decision was issued, neither presiding ALJs nor the Commission itself have been consistent in applying the guidance from Murlas. Usually the procedural shortcuts reflected an understandable reluctance to delay a final decision in order to conduct the supplementary proceedings that are often necessary to the reliable determination of former Section 6(d)'s mandatory factors.13 While the Commission's departures from the process described in Murlas only occurred in a limited number of cases, they created at least an appearance that the Commission expected respondents to carry the burden of proof on former Section 6(d)'s mandatory factors unrelated to gravity.14
In its recent decision in Slusser, a panel of the Seventh Circuit ruled that former Section 6(d) of the Act requires the Division to bear both the burden of production and the burden of proof on all mandatory factors. Because the panel's decision was partly based on a misunderstanding of current Commission precedent, it helped highlight the risks of permitting ambiguities to creep into relevant Commission caselaw.15 Consequently, we take this opportunity to clarify the process for developing the record on former Section 6(d)'s mandatory factors unrelated to gravity.
We interpret former Section 6(d) to impose on the Division both the burden of production and the burden of proof on all mandatory factors.16 In order to protect respondents' interest in the privacy of their financial information and avoid discovery disputes at the outset of a proceeding, however, we hold that the Division's burden to develop the record on former Section 6(d)'s mandatory factors unrelated to gravity does not come into play until after either the presiding ALJ or the Commission assesses a tentative civil money penalty in light of the gravity of respondents' violations established on the record.17 At that time, respondents may elect to file a written stipulation to both the findings required by former Section 6(d) and to the conclusion that the tentative civil money penalty is appropriate.18 The presiding ALJ would then assess the civil money penalty based on respondent's stipulation.
Absent such a written stipulation, a presiding ALJ shall give the Division a fair opportunity to develop the record on the applicable factors under former Section 6(d). In this regard, the Division shall be given reasonable time to seek discovery pursuant to Commission Rule 10.42(e) and 10.44(b) through (f),19 to subpoena witnesses to appear at a supplemental oral hearing on the material issues of fact, and, when necessary, to retain experts to review and analyze the information obtained through discovery and to testify at the supplemental hearing. The ALJ shall draw appropriate adverse inferences against respondents who fail to comply with their discovery obligations or to either appear or testify at the supplemental hearing after receiving a request from the Division. Cf. In re Citadel Trading Co. of Chicago, Ltd., [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,082 at 32,189 (CFTC May 12, 1986) (In appropriate circumstances, a presiding officer may draw an adverse inference from respondent's refusal to testify.)
Following the supplemental hearing, the presiding ALJ shall provide a reasonable period for the parties to submit proposed findings of fact and conclusions of law on material issues. Within sixty days of the deadline for making such submissions, the ALJ shall issue a supplemental Initial Decision making findings of fact on each disputed issue of fact material to a determination of the applicable factors. The supplemental Initial Decision shall also include the presiding ALJ's determination of the appropriate civil penalty in light of each of former Section 6(d)'s applicable mandatory factors.20
We recognize that the time necessary to
complete this process will delay the final resolution of affected
enforcement matters. Consequently, we urge the affected parties to consider
the use of stipulations under Commission Rule 10.43 to narrow the scope of
issues at the supplemental hearing. Parties may also find that Rule
10.108's settlement procedure can be an effective tool for developing a
workable consensus on an appropriate civil money penalty. In order to
hasten the final resolution of affected matters, we will consider joint
motions by the parties to waive applicable rules and accept appeals from a
presiding ALJ's resolution of liability issues and non-monetary sanctions
while the ALJ and parties continue with supplemental proceedings on issues
related to the appropriate level of a civil money penalty.21
The application of this clarified policy in the circumstances of this case requires a remand so that the Division may develop the record on issues relating to Nikkhah's net worth. As the Division notes, there are substantial reasons to question the reliability of Nikkhah's claims to a negative net worth. For example, given our affirmance of the ALJ's negative assessment of the credibility of Nikkhah's testimony in this proceeding, Nikkhah's conclusory affidavit addressing the reliability of proffered information related to his current assets and liabilities is of little value. The documents that Nikkhah submitted in support of his affidavit are not sufficiently self-authenticating to merit substantial weight without a process to explore the reliability of the information they disclose.
Clearly, however, Nikkhah has not waived
his right to have his net worth considered in assessing the appropriate
amount of a civil penalty under former Section 6(d). Consequently, we
cannot endorse the Division's request that we assess a $200,000 civil money
penalty because it is appropriate to the gravity of Nikkhah's
For the reasons stated above, this case is remanded to the ALJ for supplemental proceedings consistent with the guidance in this decision
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 26, 2000
1 In re Nikkhah, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 28,129 (CFTC May 12, 2000) ("Nikkhah I"). Our decision in Nikkhah I resolved liability issues raised by the parties' cross appeals and determined that a cease and desist order and 10-year trading prohibition were appropriate sanctions for the violations established on the record.
2 This is the effective date of the Futures Trading Practices Act of 1992, P.L. 102-546, 106 Stat. 3590 ("FTPA"). The FTPA altered both former Section 6(b)'s formula for determining the maximum civil money penalty that we can impose on a particular respondent and former Section 6(d)'s list of factors we must consider in determining the amount of a civil money penalty appropriate for that respondent.
3 In Nikkhah I we indicated that in assessing civil money penalties, we consider evidence of either respondent's net worth or the size of respondent's business and ability to continue in business "when some or all of the conduct at issue took place prior to October 29, 1992." This statement requires clarification in two respects. First, we should have referred to October 28, 1992 rather than October 29, 1992. More importantly, we should have made it clear that the Division does not have any burden of proof on these factors if a respondent's conduct occurred after October 28, 1992. Given the circumstances at issue in this case, we need not determine to what degree we will consider evidence relating to respondents' net worth or the size of respondents' business and ability to continue in business when most of the conduct at issue in a proceeding occurred after October 28, 1992.
4 As we noted in Nikkhah I, the factors we look to in assessing gravity generally include: (1) the underlying conduct's relationship to the core provisions of the Act; (2) whether the violations were knowing or unintentional; (3) whether respondent cooperated with the authorities when the violations were discovered or otherwise sought to ameliorate the harm flowing from the violations; and (4). factors relevant to a meaningful estimate of the negative consequences flowing from the violative conduct, such as (a) whether the violative conduct was isolated or continuous, (b) the length of time the violative conduct continued, (c) the number of customers affected, (d) the financial benefit to respondent, and (e) the financial harm to customers.
5 For example, at the time a proceeding is commenced a respondent may be registered as a floor broker and enter trades on a futures exchange for both customers and his own account. Clearly, at the time the proceeding is commenced such a respondent's primary business involves use of the markets regulated by the Commission. If, however, the presiding ALJ concludes that the record shows that respondent violated Section 4b of the Act by cheating his customers, and then concludes that a registration revocation and trading prohibition are appropriate non-monetary sanctions, there is no longer any basis for believing that respondent's primary business involves use of the markets regulated by the Commission. In such circumstances, it would be absurd to focus the determination of the amount of respondent's civil money penalty on either the size of his soon to be defunct business or his ability to continue operating his soon to be defunct business.
To avoid this absurdity, Commission precedent recognizes that when continuation of a respondent's former business is incompatible with the non-monetary sanctions imposed, the focus of the civil money penalty analysis under former Section 6(d) should be on gravity and net worth. See, e.g., In re Lincolnwood Commodities, Inc, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,986 at 28,260 (CFTC Jan. 31, 1984) . But see Slusser, 210 F.3d at 787 (suggesting that the Commission must consider the size of a corporation's business and ability to continue in business in calculating a civil money penalty when the record established that the business in question required registration, the Commission had revoked the registration, and the court had affirmed that sanction).
6 This is especially true for respondents who have been or may be subject to court or reparations actions due to customer losses caused by their fraudulent conduct. Such respondents have substantial incentives to hide assets, inflate liabilities, and to forestall or delay any inquiry into their financial circumstances.
7 The Commission's second response was to request that Congress eliminate all the mandatory factors from Section 6(d) other than gravity. Current Section 6(c) of the Act reflects Congress' agreement with this approach.
8 In Rothlin, the Commission recognized that the linchpin of an appropriate process was notice of two factors: (1) the probability of a civil money penalty, and (2) the procedures by which a respondent might avail himself of the protections of former Section 6(d). Rothlin at 27,573.
9 The court emphasized that as the proponent of the order assessing the civil monetary penalty, the Division "was required to produce evidence that the penalty was reasonable," and that the Commission's view that the statutory criteria applied only if respondent raised the issue of his net worth was "contrary to the language of the statute." Id at 1409.
10 See Sellersburg Stone Co. v. Federal Mine Safety and Health Review Commission, 736 F.2d 1147 (7th Cir. 1984).
11 Gimbel v. CFTC, 872 F.2d 196 (7th Cir. June 13, 1989). The court vacated the civil money penalty because the Division failed to develop a satisfactory record on the collectibility of the penalty. The court ruled that this defect warranted vacation of the civil penalty because it interpreted the Commission's decision in In re Nelson Ghun & Assoc., [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,584 (CFTC May 2, 1985) ("Nelson Ghun") as holding that "imposition of monetary sanctions is contingent upon the development of a satisfactory record on the collectibility of the proposed penalty." Id. at 201.
12 The Commission's Murlas decision also addressed the issue of collectibility. It noted that under Nelson Ghun the Division was obliged to produce "whatever evidence it may have concerning collectibility." Id. at 35,931. It emphasized, however, that there were important distinctions between the policies served by an inquiry into former Section 6(d)'s mandatory factors unrelated to gravity and the inquiry into the collectibility of a civil money penalty. It noted that the policies underlying the latter inquiry "do not involve the direct interests of respondents," and that "respondents have no standing to raise issues relating to collectibility." Id. at 35,931-32.
13 In re Gordon, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,667 at 40,182 (CFTC Mar. 16, 1993) (vacating an ALJ's imposition of a $1,000 civil money penalty and remanding for an oral hearing to develop the record on net worth); In re Grossfeld, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,726 at 40,366-67 (CFTC May. 20, 1993) (vacating an ALJ's imposition of civil money penalties of $110,000 and $33,000 and remanding for an oral hearing to develop the record on net worth); In re First National Trading Corp., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,142 at 41,789 (CFTC July 20, 1994)( vacating an ALJ's imposition of civil money penalty of $200,000 and remanding for an oral hearing to develop the record on net worth); In re Miller, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,440 at 42,913 (CFTC June 16, 1995) (vacating an ALJ's imposition of civil money penalty of $200,000 and remanding for an oral hearing to develop the record on net worth); In re Rousso, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,166 at 45, 564-65 (CFTC Oct. 8, 1997)(imposing civil money penalty of $100,000 based solely on gravity because respondent's submission on net worth was not sufficient to facilitate a net worth analysis); In re Elliot, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,243 at 46,008 (CFTC Feb. 3, 1998)(imposing civil money penalties of $50,000 on each respondent without any evidence on former Section 6(d)'s mandatory factors unrelated to gravity).
14 For example, the Commission's opinion in Rousso cited to the Commission's 1982 decision in Muller and suggested that respondent was required to refute a "presumption" that a civil penalty based on gravity was appropriate. Rousso, ¶ 27,166 at 45,565.
15 The panel's decision cited Gimbel's conclusion that the Division had the burden of developing a satisfactory record on the collectibility of a proposed civil money penalty and noted that the Commission had not explained why the Division should have a lesser burden in the context of net worth. As noted above, the Commission imposed the burden of developing a record on collectibility on the Division in Nelson Ghun. In that decision, the Commission recognized that collectibility was not one of the mandatory factors in former Section 6(d). Nelson Ghun, ¶ 22,584 at 30,525. The Commission indicated that a record on collectibility related to the Act's policy concerning the reference of uncollected civil money penalties to the Department of Justice, as well as the policies underlying the Debt Collection Act of 1982 and the 1984 revisions to the Federal Claims Collections Standards. Id. As noted above, the Commission's Murlas decision recognized that there were important distinctions between the policies served by an inquiry into former Section 6(d)'s mandatory factors and an inquiry into the collectibility of a civil money penalty. As a consequence, the Commission held that the collectibility inquiry did not involve "the direct interests of respondents," and that "respondents have no standing to raise issues relating to collectibility." Id. at 35,931-32.
16 As a consequence, our Rothlin decision and decisions based on Rothlin no longer have precedential weight.
17 Of course, as noted by the Slusser panel, such a civil penalty may not exceed the statutory maximum determined under the formula set out in former Section 6(b).
18 As noted above, except in unusual circumstances, respondents' net worth will be the appropriate factor under former Section 6(d) whenever the presiding ALJ or the Commission has determined that a registration revocation or a substantial trading prohibition is an appropriate sanction for respondents' wrongdoing.
19 For these purposes, we waive the requirements of Commission Rule 10.44(a) (1) through (3) and (b)(3).
20 In this regard, the presiding ALJ may not bypass making required findings because they are unnecessary in light of the overall level of civil money penalty he concludes is appropriate.
21 We delegate authority to the General Counsel, or his designee, to determine such motions in cases subject to former Section 6(d). We also delegate the authority to remand any matter subject to former Section 6(d) to a presiding ALJ with instructions to conduct supplemental proceedings on issues related to civil money penalties consistent with this decision.
22 Because the record shows that Nikkhah committed far more violations than the two necessary to justify the imposition of a $200,000 civil money penalty, we need not determine the maximum civil money penalty that former Section 6(b) would authorize in the circumstances of this case.