UNITED STATES OF
COMMODITY FUTURES TRADING COMMISSION
|JOE S. and ELIZABETH A.
|CFTC Docket No. 98-R161|
|FUTURES TRADING GROUP,
and DAVID GREGG WEISSER
|OPINION AND ORDER|
Respondents Futures Trading Group, Inc. ("FTG") and David Gregg Weisser ("Weisser") appeal from a Judgment Officer's decision awarding $12,697.20 plus interest and costs to complainants Joe S. and Elizabeth A. Nobrega.1 The Judgment Officer found that key portions of Nobrega's testimony were not credible and that complainants' allegation of fraudulent inducement was not supported by the record. Nevertheless, based on inferences drawn from the testimony offered by respondents' own witnesses, the Judgment Officer found that respondents failed to take adequate steps to correct Nobrega's misunderstanding about the risk inherent in holding a large position in wheat call options. He concluded that respondents' conduct was sufficiently reckless to amount to a violation of Commission Rule 33.102 and warrant an award of the damages complainants suffered prior to the date respondents provided Nobrega with information sufficient to correct his misunderstanding.
On appeal, respondents challenge the findings underlying the judge's analysis of scienter, proximate cause and mitigation as contrary to the record. They also argue that the Judgment Officer misapplied Commission precedent when he concluded that respondents breached their duty to complainants in the circumstances presented. In response, complainants argue that the judge should have awarded them their full out-of-pocket loss-$25,466.19.
As explained below, we vacate the award and
dismiss the complaint due to a failure of proof.
Complainants Joe S. and Elizabeth A. Nobrega are married and reside in Rochester, New York. Nobrega injured his back in 1992 while employed as a machine operator for DuPont Industries.3 Since then, Nobrega has been unable to work but received about $29,000 in disability payments annually. In the years following his injury, Nobrega has been treated for clinical depression and anxiety.
During the period at issue, Elizabeth Nobrega earned approximately $35,000 a year from her work at Eastman Kodak. Each of the complainants also maintained a 401k account. While the record is unclear as to the exact value, the combined value of these accounts was over $100,000 during the period complainants traded with FTG. Nobrega also had access to a bank account he shared with his father as a hedge against hard times.
The Nobregas had two daughters that they
supported. One daughter was wheelchair-bound and depended on her parents
for day-to-day care, including transportation. In April 1997, the Nobregas
purchased a new van for approximately $23,000. They financed about $15,000
of the cost through a bank. The Nobregas were interested in having a
wheelchair lift installed to simplify the task of transporting their
daughter. The cost of such a lift was approximately $6,000.
Respondent FTG is an independent introducing broker ("IB"). During the time at issue, Les Sobel was FTG's director of compliance. Respondent Weisser was a registered associated person sponsored by FTG.
Nobrega's initial interest in options trading was sparked by a flyer advertising a book authored by Ken Roberts-The World's Most Powerful Money Manual. Nobrega paid $195 to purchase the book in May 1996. In September 1996, Nobrega opened a futures account with his wife at ADM Investors Services, Inc. ("ADMIS"), a registered futures commission merchant ("FCM"). The account was introduced by Main Street Trading Company ("Main Street"), a registered IB. The ADMIS account opening form for this account indicates that the Nobregas' net worth was $300,000 and that they had $10,000 in available risk capital. Nobrega deposited $1,000 in September to begin trading. Nevertheless, he did not commence trading in the account until late December 1996.
The Nobregas maintained their ADMIS account for about one year. They mainly traded call option positions in cocoa, corn, frozen orange juice, silver, Swiss francs and wheat. They also traded put option positions on the euro dollar. The trading realized substantial profits in February and March. By the end of March, the value of Nobrega's account had risen to approximately $2,400. Because these profits were quickly reinvested in less successful positions, however, by the end of April the market value of complainants' account was only $1,350. Between May and October, no new positions were established in the account and all open option positions were permitted to expire. As a result, the Nobregas only received $100.30 when they closed their ADMIS account in October 1997.
Nobrega's first contact with FTG was in February 1997. On two occasions, Nobrega spoke with Peter Rowland about his interest in opening an account. As a result of these conversations, Rowland sent Nobrega account opening documents. Nobrega did not open an account at this time.
Early in April 1997, respondent Weisser contacted Nobrega on FTG's behalf. After two conversations, Nobrega agreed to open an account with Vision L.P. ("Vision") through FTG. Among the account-opening documents that FTG provided Nobrega were the Commission-required risk disclosure statement relating to futures and options, a notification regarding the required compliance interview, and a special risk disclosure statement for customers with incomes or net worths below $50,000. The Nobregas signed an acknowledgement that they had received and understood the pertinent disclosure in each of these documents.4
Nobrega also completed Vision's account-opening forms. Nobrega indicated that he was permanently disabled but noted that he had permanent disability income. He disclosed a combined income of $50,000, a net worth excluding primary residence of $70,000, and a liquid net worth of $60,000.
Nobrega began trading the Vision account on Friday, April 18, 1997. Prior to entering his initial two orders, Nobrega participated in a taped compliance interview with an FTG compliance employee. In response to questions, Nobrega indicated that: (1) the information that he had provided about his finances was "very conservative;" (2) he intended to open a joint account with his wife;5 (3) he had previously traded commodity options through "Barons;"6 (4) he had done "very well" trading his Barons account, had reinvested $3,000 and was "still waiting on $10,000;" (5) he had not borrowed money to open the Vision account; (6) he understood that he could lose his entire investment but not a penny more; (7) a total loss of his investment would not change his lifestyle; and (8) he had not received any profit guarantees or sales pressure to induce him to open an account. After speaking with respondent Weisser, Nobrega directed FTG to purchase 2 natural gas call options at a price of 80 or better and 3 wheat call options at a price of 16 or better.
During the compliance review, FTG's compliance interviewer informed Nobrega that FTG had determined that $9,000 would be the "approximate investment limit set on his account as a guideline." The interviewer also explained that the limit only applied to money that Nobrega submitted to Vision (as opposed to profits that might be earned and reinvested) and that Nobrega could "go through compliance" if he wanted to obtain an increase in the investment limit.
The natural gas options were purchased on Friday, April 18, 1997, around 11 a.m., for $1,990, but the wheat option order was not filled that day.7 On the following Monday, April 21, 1997, Nobrega advised Weisser that he wanted to substantially increase the funds in his Vision account in order to purchase wheat call options. After consulting with a supervisor, Weisser advised Nobrega that FTG would permit him to submit additional funds. Later that day, Nobrega used two wire transfers to submit a total of $24,500 to Vision. Nobrega used these funds to margin the purchase of 28 wheat call options at a price of 16 or better. One contract of the order was filled at a price of 15, and the remaining 27 were filled at a price of 15.5. By the end of the day, however, the price of the wheat calls that Nobrega purchased had receded. As a result, the market value of complainants' account was only $19,245, representing an accrued loss of almost $10,000.
During a telephone conversation with Weisser on Monday, Nobrega revealed that he wanted to buy a wheelchair for his disabled daughter and was counting on Weisser. Weisser responded that Nobrega should watch the market closely because there were "no guarantees." He also recorded Nobrega's comments on the account card that he used to keep track of their conversations. Weisser, however, did not consult with his supervisor about the significance of Nobrega's comment.
On April 22, 1997, the value of Nobrega's wheat position continued to deteriorate. By the following day, April 23, 1997, the price of the wheat calls had fallen about 6 points below the price that Nobrega had paid. When Weisser informed Nobrega of the decline, complainant reiterated that he and his daughter were counting on Weisser. Weisser responded that he did not have control over the markets and that there was "no guarantee of returns." Once again, Weisser recorded Nobrega's comments on the account card but did not consult his supervisor about how to deal with Nobrega's comment.
By the end of April, the market value of complainants' wheat position had declined to $7,700. On May 2, 1997, Weisser advised Nobrega that the price of the wheat call options was at 5 (compared with the purchase prices of 15 and 15.5). Nobrega stated that he did not understand why the wheat market kept going down and asked Weisser whether the losses could be reversed. Weisser advised Nobrega that he could cut his losses by liquidating or risk the remainder of the premium by staying in the market. Nobrega responded that he still believed in the market and wanted to recover his original investment.
On May 7, 1997, Nobrega again told Weisser that he was "counting on" him. Weisser responded that he did not "make the markets move" and that there was "[n]o guarantee." Nobrega then called Sobel, FTG's compliance director, to complain that Weisser had: (1) promised that he could double, triple, or quadruple his money; (2) failed to tell him that he could lose all his money; and (3) told him to say no during the compliance interview when he was asked whether Weisser had offered any guarantees. Nobrega threatened litigation unless his full investment was returned to him. During this conversation, Sobel told Nobrega that he would investigate his complaint and advised that he should consider cutting his losses by liquidating the wheat call position.
The following day, Sobel telephoned Nobrega
and informed him that FTG would not return his funds. Sobel specifically
advised Nobrega that he should either liquidate his wheat call position or
transfer the position to another FCM. The following day, Sobel provided
Nobrega with written notice that FTG would no longer handle his account.
The letter indicated that unless Nobrega transferred the wheat call
position to another FCM by May 14, 1997, FTG would order the position
liquidated. Sobel reiterated these options when he spoke to Nobrega on May
9, 1997. Nevertheless, Nobrega failed to either liquidate the position or
transfer it to another FCM. The position eventually expired. As a result,
Nobrega lost all but $3,377 of the funds he had deposited with
In June 1998, the Nobregas filed a reparations complaint seeking $26,100 in damages from FTG and Weisser. The Nobregas alleged that prior to opening their account, Weisser was aware that Nobrega needed money to buy medical equipment for his disabled daughter and told Nobrega that he would triple or quadruple his money in two to three weeks. In addition, they alleged that Weisser lulled Nobrega when he sought to liquidate his position by promising that he would make a lot of money. Due to a number of deficiencies in the complaint and Nobrega's failure to respond promptly to the Office of Proceedings' requests for clarifying information, the complaint was not forwarded to respondents until early August 1998.
Respondents filed their joint answer in September 1998. They specifically denied that: (1) prior to opening his account, Nobrega informed Weisser that he needed money to take care of his disabled daughter's medical needs; and (2) Weisser guaranteed or promised that Nobrega would triple or quadruple his money. In addition, they emphasized that Nobrega received both oral and written disclosure that he could lose all or part of the money he invested. Respondents also claimed that after his account was open, Nobrega independently decided to submit additional funds in order to purchase 28 wheat call options. They also alleged that the Nobregas had failed to mitigate damages.
After the case was assigned to a Judgment Officer for adjudication, respondents served discovery requests on the Nobregas. The Nobregas responded to these requests but did not seek discovery from respondents. In January 1999, the Judgment Officer issued an order notifying the parties that he would conduct an oral hearing to resolve credibility. In the same order, he directed respondents to submit any tapes of conversations with Nobrega that they had retained.
Several days later, respondents submitted a
verified statement that included transcripts of seven conversations between
Nobrega and FTG employees. None of these conversations included respondent
Weisser. Respondents also attached a copy of the notes that Weisser
recorded at the time of his conversations with Nobrega. In early February,
complainants filed a verified document commenting on some of the documents
respondents had included with their verified statement.
The Judgment Officer held a telephonic hearing in April 1999. The Judgment Officer conducted most of the questioning during the hearing but permitted respondents' counsel to question Weisser and Sobel and cross-examine the Nobregas. Complainants did not question any of the witnesses.
Elizabeth Nobrega's testimony established that she did not play a significant role in her husband's opening or trading of either the ADMIS or Vision account. Indeed, she testified that she trusted her husband's financial decisionmaking and authorized him to sign documents on her behalf without discussing them with her in advance. (Tr. 19, 241.)
Nobrega's testimony was generally consistent with the allegations he had raised when he complained to Sobel in May 1997. He explained that he opened the joint account at ADMIS after purchasing a book on futures trading by Ken Roberts. (Tr. at 106.) Nobrega claimed that he wanted to learn more because he "was concerned about [his] daughter, how [he] was going to provide for [his] daughter." (Tr. at 266.) Nevertheless, he claimed that he did not read either the Robert's book or the disclosure documents that ADMIS later supplied to him. (Tr. at 106, 109, 111.) Nobrega was unable to recall any details of the ADMIS account-opening process but claimed that he was not aware that he could lose the $1,000 he deposited to margin trading in the account. (Tr. at 111, 115, 118.) He also explained that he was less concerned about losing this money because he had received the $1,000 as a gift. (Tr. at 118.)
As for the trading in the ADMIS account, Nobrega claimed that he generally went along with the trades recommended by his account executive because he was "the expert" and Nobrega trusted his judgment. (Tr. at 120-121.) He acknowledged that he did independently establish a wheat option position in his ADMIS account on April 17, 1997. (Tr. at 286.) Nobrega claimed that he made this trade because respondent Weisser had him "pumped up on wheat." (Tr. at 286.)
According to Nobrega, he was dissatisfied with the ADMIS account because he "wasn't learning anything." (Tr. at 38.) He testified that he was excited about working with Weisser at FTG because Weisser was a lawyer and told Nobrega he would teach him how to do futures trading. (Tr. at 38, 54, 349.) Nobrega insisted that prior to opening the FTG account he advised Weisser that he (1) was permanently disabled; (2) suffered from depression; and (3) had a disabled daughter. (Tr. at 35, 59, 316-17.)
As to Weisser's initial solicitation, Nobrega testified that the account executive promised that he would turn a $5,000 investment into $15,000. (Tr. at 46-47.) According to Nobrega, he received a "personal guarantee" that Weisser knew what he was doing and the market "had one way to go and that was up." (Tr. at 90.) Nobrega insisted that if Weisser had mentioned that he could lose his money there was "no chance I could have went ahead and invested this type of money, because I am very conservative." (Tr. at 81.)
Nobrega testified that he did not read any of the risk disclosure documents that FTG supplied to him. (Tr. at 68-69, 71.) He claimed that Weisser told him it was "just a procedure" and that he simply signed the documents in the places Weisser instructed him to sign. (Tr. at 70.) As for the interview with FTG's compliance employee, Nobrega acknowledged that he was "kind of shocked" by some of the information he heard during the interview, but put his trust in Weisser's "words instead of listening to the interview and to myself." (Tr. at 92.) He claimed that Weisser specifically told him to answer no when the interviewer asked whether he had received any guarantees. (Tr. at 85.)
Nobrega testified that his deposit of additional funds was also due to Weisser's misrepresentations. In this regard, he claimed that Weisser told him that he would triple or quadruple his deposit. (Tr. at 48.) Nobrega also claimed that Weisser lulled him into maintaining his account after he told the account executive about a stockbroker's advice that he take his money out of the options market. According to Nobrega, the stockbroker told him that the trading he was doing was risky and that he could not triple or quadruple his money in a short period of time. (Tr. at 99.) Nobrega testified that he reviewed the conversation with Weisser and told him he wanted to get out of his positions. He claimed that Weisser deflected his instruction and suggested that the other broker (who had previously worked in the futures industry) "couldn't handle the pressure." (Tr. at 101.)
On cross-examination, Nobrega acknowledged
that he did not liquidate his wheat position when he became aware of its
decline in value and also allowed losing positions to expire in his ADMIS
account. He denied, however, that Weisser had discussed the option of
liquidating the wheat position on May 2, 1997. (Tr. at 325-26.)
Respondent Weisser's testimony was fundamentally inconsistent with Nobrega's. For example, he denied that: (1) Nobrega ever told him that he suffered from depression; (2) Nobrega told him about his disabled daughter prior to purchasing his large position in wheat call options; (3) he told Nobrega that he was going to make $10,000 to $15,000 on his $5,000 investment; and (4) he guaranteed Nobrega that he would make money. (Tr. at 174, 183, 201, 336, 352.)
Weisser acknowledged that he had discussed the grain markets with Nobrega on April 7 and 16, 1997. (Tr. at 344.) He testified that he was bullish on wheat during these discussion based on certain reports.8 He denied, however, that he was "real excited" about wheat or considered it a "great chance." (Tr. at 345.) Weisser insisted that he informed Nobrega that the market was "speculative" and "risky," and that he could "make money in this market, but . . . [could] also lose money in this market." (Tr. at 352. See also, Tr. at 181, 183.) He also testified that he advised Nobrega that past performance was not indicative of future results. (Tr. at 181.)
Weisser testified that he was somewhat surprised when Nobrega informed him that he wanted to deposit an additional $25,000 and purchase a large wheat call position. (Tr. at 362.) According to Weisser, he told Nobrega that he could not accept his order until he consulted with his supervisor. (Tr. at 363.) Weisser explained that he discussed the trade with both Sobel and Kerry Brewer and that "they approved the trade." He then informed Nobrega that FTG would not forward the order until his additional funds were actually received. (Tr. at 364.)
Weisser acknowledged that, after Nobrega's money was received and his order filled, he told the account executive that he was buying a lift for his disabled daughter. According to Weisser, he felt "very, very bad at that point" and asked Nobrega why he did not tell him about this prior to entering his order. Weisser testified that he did not recall Nobrega's specific response, but that it was to the effect that Nobrega "didn't feel it was that important." (Tr. at 174.) He claimed that he responded to Nobrega's revelation by advising that "there was no guarantee" and that they "need[ed] to watch the market extremely closely." (Tr. at 372.)
Weisser explained that two days later,
Nobrega again raised the subject of his daughter. (Tr. at 373.) He stated
that he had been "constantly" concerned since Nobrega raised this point two
days earlier and that he was "more concerned" after Nobrega raised the
point a second time. According to Weisser, he once more advised Nobrega
that they "need[ed] to watch his markets closely." He stated that he did
"not recall" whether he gave any thought to telling Sobel or Brewer about
Nobrega's revelation. (Tr. at 372.) Under questioning by the Judgment
Officer, Weisser acknowledged that he did not recall advising Nobrega to
liquidate his position at that time. (Tr. at 375.) He claimed that he did
advise Nobrega that there were "real losses [that Nobrega] had already
suffered." (Tr. at 376.) In addition, he stated that he recommended that
Nobrega consider liquidation on May 2, 1997. (Tr. at 379.)
Much of Sobel's testimony focused on his recorded conversations discussing Nobrega's complaints against Weisser. The Judgment Officer also questioned him about Nobrega's disclosure on his account-opening form that he was disabled. (Tr. at 124.) Sobel confirmed Weisser's testimony about the steps taken to approve Nobrega's second deposit to his FTG account. (Tr. at 154-64.) He explained that he approved the acceptance of Nobrega's deposit because:
[T]he understanding was . . . that we had somebody who was underestimating their income and net worth, had previous investment experience, and had a full awareness of what he was getting into.
(Tr. at 161.)
Sobel acknowledged that he would have preferred that Weisser inform him of Nobrega's comment about depending on Weisser because he wanted to purchase a wheel-chair lift for his disabled daughter. (Tr. at 167.) Sobel testified that he would have refused to approve Nobrega's second deposit if he had known this information at the time he evaluated the issue, at least until he had personally spoken with Nobrega. (Tr. at 168-170.) He also acknowledged that he would interpret a customer statement that he was counting on his account executive to earn profits for use to fulfill a medical need as an indication that the customer had "a need that should not be satisfied by the commodities market." (Tr. at 146.) He explained that "it's hindsight and certainly somebody needs the money or this trade to work out, they're doing this for the wrong reasons...." (Tr. at 147.)
The Judgment Officer issued his Initial Decision in July 1999. Nobrega v. Futures Trading Group, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,680 (July 1, 1999) ("I.D."). The Judgment Officer did not make an express determination regarding Nobrega's overall credibility. He did credit certain aspects of Nobrega's testimony, e.g., his claim that he did not read (1) the Ken Roberts book that he purchased, (2) the disclosure documents that he received from ADMIS, and (3) the disclosure documents that he received from FTG. Id. at 48,228. He also credited Nobrega's testimony that he did not recall any discussions of risk by Weisser. Id.9
The Judgment Officer was similarly ambiguous in assessing Weisser's credibility. He credited certain aspects of Weisser's testimony, particularly those that related to his reaction and response to Nobrega's revelation that he was counting on Weisser because he was purchasing a wheelchair lift for his disabled daughter. Id. at 48,230. He refused, however, to credit Weisser's denial that he had discussed doubling or tripling Nobrega's $5,000 deposit. Id. at 48,231.
The Judgment Officer made several findings
that linked Nobrega's conduct to both his disability and treatment for
depression. According to the judge, there was an abrupt change in Nobrega's
approach to options trading between the time he opened his ADMIS account
and the time he opened his FTG account. He found that Nobrega's initial
approach was slow and focused on learning. He reasoned that two car
accidents and the purchase of a new van spurred Nobrega to move from an
"interested to [a] compulsive" approach. Id. The
Judgment Officer observed that:
It is not hard to see how the increased financial obligations the Nobregas had undertaken would be of concern to Nobrega, who was trying to provide for his disabled daughter with major medical and educational needs, while on a relatively limited disability income himself. After purchasing the van, the Nobregas wished to install a wheelchair lift, and that additional expected expense appears to have triggered Nobrega, whose depression and anxiety had previously not drastically affected his financial decisions, to switch from interested to compulsive in his approach to the futures markets.
These findings served as the background for
the Judgment Officer's analysis of Weisser's reaction to Nobrega's April
21, 1997 revelation that he was counting on Weisser because he was
purchasing a wheelchair lift for his disabled daughter. The judge found
that Nobrega's repetition of this revelation two times within a short
period of time put Weisser on notice that Nobrega was "neither a casual
investor nor a fully aware customer." Id. at 48,232. In this regard,
the Judgment Officer found that Weisser's testimony about his concern and
bad feelings showed that Weisser believed that Nobrega was accurately
describing his expectations.
The Judgment Officer found that Weisser's response to this knowledge was in reckless disregard of his duty under Commission Rule 33.9.11 He emphasized that Weisser was aware that Nobrega was on a disability income, had a wife who was a technician, and had increased his account six-fold with no additional compliance review.12 He reasoned that Weisser's new knowledge required him to take the information to Sobel "for a broader inquiry" and concluded that Weisser breached his duty by "merely repeat[ing] his prior comments about how profits were not guaranteed." Id. at 48,232. On this basis, the Judgment Officer ruled that:
The evidence compels the conclusion that Weisser's decision not to bring the information to Sobel's attention, and the resulting inability of FTG to use that information to ensure its customer understood the risks, was indeed reckless at a minimum. This conclusion is no different for this case, where Nobrega's comments were made after trading began, than it would be for a case where the customer's comments had been made during an initial compliance review. Simply put, a broker has the duty to correct a customer's erroneous beliefs about trading risks or expected profits when, as here, the broker becomes aware of those beliefs. Where, as here, reminders of previous warnings do not correct the customer's delusions, the broker is responsible for taking additional action.
Id. at 48,233 (footnote omitted).13
Finally, the Judgment Officer turned to the
issue of proximate cause. In this regard, the Judgment Officer interpreted
Weisser's breach of duty as the failure to inform Sobel of the information
Nobrega revealed on April 21, 1997. The judge then noted Sobel's testimony
that he would have refused to approve Nobrega's second deposit if he had
known this information at the time he evaluated the issue, at least until
he had personally spoken with Nobrega. The judge reasoned that he could
only speculate about what would have happened if Sobel had spoken to
Nobrega at this time. He held, however, that it was respondents' burden to
present evidence on this issue because they had disregarded their "duty to
inquire." The judge explained that his burden-shifting approach was
consistent with caselaw recognizing a presumption of reliance in cases
involving a failure to disclose. Id. at 48,234 n.10.
In light of respondents' failure to meet their burden on this issue, the Judgment Officer determined that Nobrega would have closed the FTG account after being informed of the true risks of trading. On this basis, he found that the Nobregas were entitled to damages based on the difference in the value of their account on April 22, 1997 and May 8, 1997. The judge ruled that the Nobregas were not entitled to damages arising after May 8 because at that point Nobrega was "explicitly made aware of the incorrectness of anything he formerly believed." The Judgment Officer calculated the resulting damages as $12.697.20.
Respondents filed a timely appeal and submitted their appeal brief in September 1999. Respondents' brief challenges the Judgment Officer's factual analysis as contrary to the record. In particular, they argue that in assessing the evidence of scienter, the judge gave undue weight to Weisser's testimony that he felt bad for Nobrega. In addition, they contend that the Judgment Officer's analysis of proximate cause fails to give appropriate weight to the necessary role Nobrega would have had to play in determining whether to liquidate his losing position. In this regard, respondents emphasize that they could not liquidate Nobrega's position without his permission and that the record shows that Nobrega consistently chose to maintain his position despite repeated disclosure of the risk of loss. Respondents also argue that the Judgment Officer should have limited the Nobregas' damage award to the losses incurred prior to May 3, 1997, rather than May 8, 1997, because the record shows that Weisser recommended that Nobrega liquidate the wheat options position on May 2, 1997.14
Complainants' brief in response does not
address the arguments raised by respondents. It reiterates some of the
factual points that Nobrega previously made and urges us to increase the
award to complainants' full out-of-pocket loss.
Respondents' brief raises a variety of challenges to the factual assessments underlying the Judgment Officer's award of damages to the Nobregas. Under our precedent, we generally defer to a presiding officer's credibility determinations in the absence of clear error, but review factual assessments based on those credibility determinations de novo. Bishop v. First Investors Group of the Palm Beaches, Inc., [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,004 (CFTC March 26, 1997). As noted above, the credibility determinations underlying the Judgment Officer's factual assessments are somewhat unclear, especially as they relate to Nobrega. The Judgment Officer did treat much of Nobrega's testimony as unreliable. Nevertheless, without offering a specific explanation, the judge relied on portions of Nobrega's testimony in resolving some factual issues.
The Judgment Officer apparently believed that Nobrega had testified in good faith - had honestly communicated what he believed happened.15 Even though this is one element of a proper credibility determination, the Judgment Officer should have assessed the reliability of Nobrega's recollection prior to according his testimony significant weight in the fact-finding process. See Secrest v. Madda Trading Co., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,627 at 36,696-97 (CFTC Sept. 14, 1989) (reliability determination is based on an assessment of the testimony at issue in the context of the record viewed in its entirety).16
Even if we assume for purposes of discussion that Nobrega was testifying in good faith about what he recalled, with a few exceptions, the record does not support a conclusion that his recollections are reliable.17 Nobrega's testimony is marked by both a spotty memory and a number of inconsistent assertions. Also, many of Nobrega's statements are contradicted by Weisser's or Sobel's testimony, documentary evidence, or both.18 Given these defects, and the absence of other reliable evidence to corroborate Nobrega's recollection, the Judgment Officer erred by relying on Nobrega's testimony to resolve factual issues.
As the party with the burden of proof, a complainant who fails to offer reliable testimony generally faces an insurmountable barrier to recovery. This case is unusual, however, because most of the facts material to the Judgment Officer's analysis are based on testimony offered by respondents. Respondents strenuously object to the inferences that the judge drew from Weisser's and Sobel's testimony, and there is certainly room to question the Judgment Officer's conclusion that Weisser recklessly disregarded his duty to offer meaningful disclosure to Nobrega.19 Nevertheless, the record raises legitimate questions about Weisser's somewhat passive reaction to Nobrega's revelation that he was depending on profits earned from his wheat option position to purchase a wheelchair lift for his daughter.
In the circumstances of this case, however, it is unnecessary to resolve the factual and legal issues underlying the Judgment Officer's liability analysis. Even if we assume for purposes of discussion that Weisser breached his duty to disclose material facts to Nobrega, the record demonstrates that the breach did not play a substantial role in complainants' losses. Consequently, the Nobregas cannot meet the statute's requirement that they prove their damages were proximately caused by respondents' alleged wrongdoing.20
Because Weisser's alleged breach of duty
involved a failure to disclose, complainants have the benefit of a
rebuttable presumption that they would have relied on the information that
Weisser should have disclosed - that options trading is too inherently
risky to be a source of funds to pay for a medically-related need. See
Lee v. Lind-Waldock & Co., [Current Transfer Binder] Comm. Fut. L.
Rep. (CCH) ¶ 28,173 at 50,160 (CFTC June 29, 2000.) The record,
however, shows that Nobrega failed to liquidate his wheat position even
after Sobel clearly and unequivocally disclosed the risk of maintaining the
position.21 Indeed, the record
indicates that Nobrega was largely indifferent to information contrary to
his expectations for a substantial profit and took an all-or-nothing
approach to recovering the funds he invested in the wheat position.22 In these circumstances, the record rebuts
the presumption that Nobrega relied on the information that Weisser should
have disclosed. Consequently, complainants are unable to show the proximate
cause necessary to support an award of damages.
For the foregoing reasons, we vacate the I.D. and dismiss the complaint for a failure of proof.
IT IS SO ORDERED.23
By the Commission (Chairman RAINER and Commissioners HOLUM, SPEARS, NEWSOME and ERICKSON).
Jean A. Webb
Secretary to the Commission
Commodity Futures Trading Commission
Dated: September 29, 2000
1 Elizabeth Nobrega was not actively involved in any of the transactions in the joint account. In this decision, we refer to Joe S. Nobrega as "Nobrega" and to Mr. and Mrs. Nobrega as "the Nobregas" or "complainants."
2 The Judgment Officer's decision includes an apparent typographical error that resulted in a reference to Rule 33.9 rather than 33.10.
3 The facts we describe are either undisputed or based on reliable documentary evidence in the record.
4 The Nobregas also signed an acknowledgment that they received written notification of the fees and charges applicable to their account.
5 The Vision account form that Nobrega completed was somewhat ambiguous on this issue.
6 While it is unclear why Nobrega referred to "Barons," the record as a whole makes it clear that he intended the statement to be a reference to his ADMIS account traded through Main Street.
7 The wheat call order was not been filled because the market did not reach the limit that Nobrega established in his order.
8 FTG submitted these reports as an exhibit to Sobel's verified statement.
9 The Judgment Officer did not make any findings concerning Nobrega's testimony that (1) prior to opening the FTG account he advised Weisser that he (a) suffered from depression and (b) had a disabled daughter; (2) Weisser advised him to tell FTG's compliance interviewer that no guarantees had been offered; (3) Weisser told him he would triple or quadruple his second deposit; and (4) Weisser lulled him into maintaining his account after a stockbroker advised him to liquidate his positions.
The Judgment Officer compared Nobrega's conduct to that of a compulsive
gambler, reasoning that:
By the time of the second investment, Nobrega's fixation on Weisser's suggestions of profits had become overwhelming. When Weisser's recommendations in wheat proved successful for him in his [ADMIS] account, he decided that Weisser had proven he could deliver those types of returns. The result was Nobrega's compulsive repeated calling on Monday to try to get hold of Weisser, followed by his tapping into money he well knew was not to be used for speculative investments, money set aside by his father for emergency use only. Like a compulsive gambler, Nobrega had passed the point where even the strongest disclosure of risk would have affected him - thus, he disregarded the warnings given him within a week by the [stockbroker] regarding the risks of what he was doing.
Id. at 48,231.
11 As noted above, this reference to Rule 33.9 appears to be a typographical error.
12 Earlier in his decision, the Judgment Officer had interpreted the FTG compliance interviewer's reference to Nobrega "going through compliance" to increase his trading limit as a statement that Nobrega would have to go through "a new compliance interview." Id. at 48,229, 48,233.
13 In explaining his reasoning, the Judgment Officer referred to a Commission decision dealing with suitability. Id. at 48,232 (discussing Phacelli v. ContiCommodity Services, Inc., [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,250 (CFTC Sept. 5, 1986).) On appeal, respondents argue that this discussion indicates that the judge based his decision on a suitability theory.
14 In addition to these challenges to the Judgment Officer's factual assessments, respondents claim that the Judgment Officer committed legal error by applying a suitability standard and awarding damages despite the alleged breach of duty's lack of connection with an actual commodity transaction.
15 At least one comment in his decision suggests this
view. In discussing Nobrega's testimony about his trust in Weisser, the
presiding officer stated that:
Although I find Nobrega's claims not credible that he would have paid attention to risk had it been disclosed, I conversely believe that Nobrega credibly testified that he does not recall any discussion of risk by Weisser. This finding does not mean, however, that such matters were not mentioned.
I.D. at 48,228.
16 The Judgment Officer made several findings relating to Nobrega's alleged depression, perhaps in an effort to bolster Nobrega's credibility. For example, he found that due to his depression, Nobrega's mindset was like that of a compulsive gambler. I.D. at 48,231. The record regarding Nobrega's depression is extremely limited, and does not include any expert medical opinion explaining the effect the alleged depression had on Nobrega's ability to make reasoned decisions. Given the limited record, the Judgment Officer did not have a reliable basis for finding that there was any significant link between Nobrega's conduct and his alleged depressive illness.
17 Some of Nobrega's testimony is corroborated by the transcripts of his taped conversations with FTG employees. These portions of his testimony are either not disputed or not material to the issues we resolve in this decision.
18 While there are also reasons to question the reliability of Weisser's and Sobel's testimony, these are less troubling than the problems affecting Nobrega's testimony. For example, Weisser's testimony is generally consistent with the document that reflects his notes contemporary with the conversations at issue, and most of Sobel's conversations with Nobrega were taped.
19 The I.D. is somewhat confusing about the precise duty that the Judgment Officer believed Weisser had breached. Some of the language suggests that the Judgment Officer believed that Weisser breached a duty to inquire. I.D. at 48,232 (Nobrega's revelation should have led to a "broader inquiry"). Other language suggests that the Judgment Officer believed that respondent Weisser breached a duty by failing to communicate Nobrega's revelation to Sobel. I.D. at 48,233 ("Weisser's decision not to bring the information to Sobel's attention" was reckless at a minimum). Still other language indicates that the Judgment Officer determined that Weisser breached a duty to disclose. I.D. at 48,232 (The "issue to be decided is whether respondents, having learned of Nobrega's unreasonable belief, took appropriate action to cure it"). Because the duty to disclose is firmly rooted in Commission precedent, we have focused our analysis on this interpretation of the Judgment Officer's holding.
20 Conduct is the "proximate cause" of a loss if the conduct was a "substantial factor" in bringing about the loss and if the loss was a reasonably probable consequence of respondents' conduct. Steen v. Monex Intl'l Ltd., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,245 at 38,723 (CFTC Mar. 3, 1992). Misleading conduct is not the proximate cause of a loss if the complainant would have acted no differently had he not been misled. Jakobsen v. Merrill Lynch, Pierce, Fenner & Smith, Inc. [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,812 at 31,392 (CFTC Nov. 21, 1985);Modlin v. Cane, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 28,059 at 49,551 (CFTC Mar. 15, 2000).
21 Because Nobrega was already in the market at the time of the alleged breach of duty, respondents were legally prohibited from liquidating complainants' position without Nobrega's authority. At most, respondents could have initiated the steps necessary to close the Nobregas' account. See Lee, ¶ 28,173 at 50,159-60.
22 The Judgment Officer's own decision recognized the
limited effect that disclosure had on Nobrega:
Like a compulsive gambler, Nobrega had passed the point where even the strongest disclosure of risk would have affected him-thus, he disregarded the warnings given him within a week by the [stockbroker] regarding the risks of what he was doing.
I.D. at 48,231.
23 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 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 and that any appeal is not effective unless, within 30 days of the date of the Commission order, the appealing party files with the court a bond equal to double the amount of any reparation award.