UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
In the Matter of
||CFTC Docket No. 97-9|
ALFRED R. PIASIO and
DONALD W. WILSON
|OPINION AND ORDER|
The Division of Enforcement
("Division") appeals from an Initial Decision
("I.D") that dismissed allegations that Alfred Piasio
("piasio") and Donald W. Wilson ("Wilson")
violated Section 4c(a)(A) of the Commodity Exchange Act
("CEA" or "Act") by knowingly participating in
wash sales. In essence, the Administrative Law Judge ("ALJ")
concluded that all the participants believed the challenged
transactions involved risk that was minimized but not negated. The
Division challenges the factual assessments underlying the ALJ's
analysis as contrary to the record. Respondents urge the Commission to
defer to the ALJ's findings and affirm the I.D.
Our review of the record indicates that the ALJ's credibility determinations do not warrant deference. Our de novo evaluation of both the documentary evidence and reliable testimony establishes that the transactions at issue were designed to achieve wash results in a manner that negated risk. Because the record also shows that both respondents were aware of these characteristics when they participated in the challenged transactions, we conclude that they violated Section 4c(a)(A). Based on our assessment of the gravity of respondents' violations, we impose tentative sanctions that include civil money penalties as well as cease and desist orders and registration suspensions. Because some of the violations at issue took place prior to October 28, 1992 and there is no record concerning the mandatory factors in former Section 6(d) of the Act, we remand this matter for additional proceedings consistent with our recent decision in In re Nikkhah, CFTC Docket No. 95-13 (Sept. 26, 2000).
In June 1997, the Commission issued a two-count Complaint against Piasio and Wilson. Count I alleged that during September 1992 and January and February 1993, Piasio and Wilson knowingly participated in eight transactions that were wash sales under Section 4c(a)(A) of the Act. Count II alleged that during August 1992, Piasio and Wilson violated Section 4c(a)(A) by knowingly participating in three transactions that amounted to offers to enter into wash sales. Each respondent filed a separate answer denying any wrongdoing.1
During the period of discovery that followed, the parties made certain admissions. Following the completion of the discovery period, the ALJ held three days of hearings in New York City. The Division introduced 26 exhibits relating to the 11 challenged transactions.2 In addition, it called both respondents as witnesses and sponsored the testimony of two experts - Martha Kozlowski ("Kozlowski") and Maura Viehmeyer ("Viehmeyer").3 Finally, the Division sponsored the testimony of the two Mitsubishi employees who initiated the challenged transactions (Kazushig Takao ("Takao") and Takeshi Momosaki ("Momosaki")), two Merrill Lynch APs who worked with Piasio (Robert Ascher ("Ascher") and Robert Herbik ("Herbik")), two employees of Country Hedging (Wesley Oja ("Oja") and Soule), an MGE floor broker who participated in some of the challenged transactions (Kevin Sallstrom ("Sallstrom")), and two members of the MGE staff (Mark Bagan ("Bagan") and Layne Carlsen ("Carlsen")).
Piasio and Wilson testified in their defense. Pursuant to stipulation, Piasio also introduced into the record designated portions of the investigative testimony of Eugene Treml ("Treml"), an employee of Country Hedging.4 Each respondent also introduced one exhibit.
The parties also submitted two Joint
Exhibits, which consisted of various stipulations.
The record developed at the hearing indicates that many of the facts material to the challenged transactions were not subject to serious dispute. For the most part, the parties' disputes focused on Mitsubishi's intent in initiating the challenged transactions and Piasio's and Wilson's interpretation of the information available to them when they chose to participate in the challenged transactions.
The primary elements of the Division's showing at the hearing involved facts and circumstances material to the information that the participants shared with each other at the time the challenged transactions were executed. The Division showed that in the summer of 1992, Mitsubishi was short of its budgeted profit objectives.5 To remedy this shortfall, Mitsubishi sought to shift profits in its futures and cash trading program from the second half of its fiscal year (October - March) to the first half (April - September). Tr. 25, 35-36 (Takao); 111 (Momosaki). Mitsubishi gave Takao the responsibility for resolving this budgetary problem.6 He decided to employ spread trades in MGE's hard red spring wheat futures contract to achieve Mitsubishi's profit-shifting objective. Tr. 25-26, 35-36 (Takao).7
During the time at issue, wheat spread positions on the MGE were traded in the thousands of bushels and prices were quoted in terms of the per bushel price differential between the two contract months that made up the legs of the spread. DX 25 at 10 (Kozlowski); DX 26 at 6 (McHugh).8 The traders did not determine the absolute prices for the two legs of the spread until after the transaction was executed at an agreed-upon differential. DX 25 at 11 (Kozlowski). The traders had broad discretion in choosing the absolute prices for the legs of the spread on the MGE, because MGE Rule 2018.000 only required that one leg be priced within the range that the underlying contract was actually traded during the trading session. DX 17.9
Takao took advantage of this broad discretion to price spread trades in a manner that generated a large apparent profit in the nearby leg (then September) that was actually offset by a comparable loss in the more distant leg (then December). Tr. 36-37 (Takao). Because he was free to price the distant leg anywhere within the permissible trading range for the underlying contract, Takao could more readily assign prices to the nearby leg that corresponded to the highest and lowest price that the underlying contract month traded that day. Consequently, Takao could obtain the level of apparent profit that Mitsubishi required with the fewest number of spreads possible.10
During a conversation with Piasio on August 26, 1992, Takao placed simultaneous orders to purchase 500 September/December wheat spread positions and sell 500 September/December wheat spread positions. DX 1A/1B. Takao did not specify whether the purchase or sale should be executed first, but he did specify that the result of the purchase and sale should not be a loss that exceeded one cent per bushel. Tr. 36-37, 39-40, 47, 81, 85, 93 (Takao); 702-03 (Piasio); DX 1A/1B. According to Takao's testimony, he instructed Piasio to assign the day's low prices to the purchase of the September leg and the day's high price to the sale of the September leg. Tr. 38-39 (Takao).11
Following the successful execution of these transactions on August 26, 1992, Takao placed three additional sets of similarly paired orders with Piasio in August and September 1992. DX 2A/2B - 4A/4B.
Mitsubishi sought a similar remedy for a budgetary shortfall in January 1993. Because Takao then worked in Mitsubishi's Tokyo office, the responsibility for arranging the necessary transactions fell to Momosaki. Tr. 43-45 (Takao); Tr. 111-13 (Momosaki). After consulting with Takao,12 Momosaki had a telephone conversation with Piasio on January 21, 1993. Momosaki placed simultaneous orders to purchase 500 March/May wheat spread positions and sell 500 March/May wheat spread positions. DX 5A/5B. According to Momosaki's testimony, he specified that the result of the purchase and sale should not be a loss that exceeded one-quarter cent per bushel. Tr. 118-19.13 Momosaki also testified that he instructed Piasio to assign the day's low price to the purchase of the March leg and the day's high price to the sale of the March leg. Tr. 116.
Following the successful execution of the January 21, 1993 transactions, Momosaki placed six other paired orders for wheat spread trades with Piasio in January and February 1993. DX 6A/6B-11A/11B.
Piasio recorded each set of Mitsubishi's simultaneous orders to purchase and sell the same quantity of wheat spread positions with no more than a small specified loss14 and transmitted the orders to Country Hedging for execution.15 Piasio transmitted both Mitsubishi's purchase orders and sale orders to Country Hedging at the same time. Tr. 276-77, 294 (Soule); Tr. 231-32, 237, 699, 702-03 (Piasio).
Soule directly communicated with Piasio about Mitsubishi's initial set of paired orders.16 According to Soule's testimony, during the conversation related to this transaction, he specifically advised Piasio that it would take a one-quarter to one-half cent per bushel loss to execute the paired orders. Tr. 284, 295 (Soule). Soule prepared separate but consecutively-numbered Country Hedging floor orders reflecting Mitsubishi's instructions for the purchase and sale of the same quantity of wheat spread positions. Both the account number and the time stamp on the purchase order and the sale order were the same. Tr. 514-15 (Wilson); DX 1A-3/1B-3.
Country Hedging accepted all 11 Transactions for execution in a mostly similar manner. DX 1A/1B - 11A/11B.17 With one exception, the Country Hedging floor orders recording each set of Mitsubishi's purchase and sale orders included an instruction to assign the day's low price to the purchase of the nearby leg and the day's high price to the sale of the nearby leg. DX 1A-3/1B-3 through 10A-3/10B-3; but see 11A-3/11B-3 (containing pricing instructions for the deferred month).18
For each of the challenged transactions, Country Hedging gave the order ticket for both Mitsubishi's buy order and sell order to Wilson at the same time. Tr. 506-07 (Wilson); DX 29; Wilson Admission No. 47 (admitting that he received each of the paired orders "at approximately the same time"). Wilson testified that for Transactions 1 through 3, he did not receive any pricing instruction concerning the result of the purchase and sale, but that for Transactions 4 through 11, he was told that the loss should not exceed one-quarter of a cent per bushel. Tr. 535-40 (Wilson).
Wilson achieved the desired result in Transactions 4 through 11 by bidding and offering the paired orders at the same time19 and allocating the positions he purchased and sold among participating traders in matched groups.20 For Transactions 1 through 3, however, Wilson executed portions of the buy and sell order at different times and did not allocate the positions he purchased and sold among participating traders in matched groups. DX 1A/1B - 3A/3B; DX 26 at 17-18 (McHugh). Wilson explained that he changed his execution method between Transaction 3 and Transaction 4 because of the new pricing instruction. Tr. 537-40, 542 (Wilson); DX 29 (explaining to MGE that he was under instructions "to do the best I could to minimize the loss").
Mitsubishi began and ended each of the challenged transactions with the same net position in the relevant wheat spread. Nevertheless, it was able to employ each of the challenged transactions to create the desired apparent profit in the nearby month. Despite the purchase and sale of a large number of wheat spread positions in each challenged transaction, the actual financial result for Mitsubishi was uniformly a relatively small loss.21 In discussing the transactions with staff of the MGE, Soule and Oja characterized the type of loss that Mitsubishi suffered as "inconsequential" in the context of shifting profits. DX 31 at 1-2.
Takao and Momosaki offered somewhat confusing testimony about their intent at the time they communicated instructions regarding the challenged transactions to Piasio. Takao testified that he wanted to profit from the trades. Tr. 49-50, 81 (Takao). He further testified that he knew his strategy carried risk and was willing to accept up to a one cent per bushel loss. Id.22 Similarly, Momosaki testified that he "was trying to make money even if this spread trading [was] for budgetary consideration[s]," and agreed that it was his practice "to buy the spread if the market were going up, and sell the spread if the market were going down. Tr. 123-24, 131-32 (Momosaki). Momosaki also testified that he realized that the trades carried some risk. Tr. 123.
Takao and Momosaki also provided confusing testimony about how they expected the simultaneous orders to be executed on the trading floor. Takao testified that he expected one of the market orders in a paired set not to be executed immediately, and that he did not care which spread was executed first. Tr. 85-87, 93-94 (Takao). Momosaki testified that he sometimes placed the paired orders with Piasio in different phone conversations, and that he never asked to have the trades executed simultaneously on the floor. Tr. 123-24, 130 (Momosaki). Takao and Momosaki both testified that even when they placed simultaneous purchase and sale orders at the market, they gave Piasio discretion to decide when to unwind the initiating spread order. Tr. 85-86 (Takao); Tr. 123-24, 131 (Momosaki); see also DOE Admission No. 161 (DOE admitting that Mitsubishi did not state to Piasio that he was required to place orders simultaneously). Both also testified that they wanted one order to be executed first and the liquidating order to be executed later in the day as the unwinding spread order. Tr. 86 (Takao); Tr. 136-37 (Momosaki).
The Division showed that Piasio was on notice of a variety of factors suggesting that when Mitsubishi initiated the challenged transactions, it intended to achieve a wash result while negating its risk. It showed that Piasio was on notice that Mitsubishi placed matched orders to purchase and sell the same quantity of wheat spreads in the same telephone conversation. Tr. 234, 699-700 (Piasio); Tr. 47 (Takao). It also showed that he had notice that Mitsubishi's instructions required that the result of the execution of the matched purchase and sale orders not exceed a specified loss. Tr. 40 (Takao); Tr. 119 (Momosaki); Tr. 235-36, 702 (Piasio conceding that customer requested losses of no more than one cent per bushel, but denying that it requested losses as small as one-quarter cent per bushel). The Division also elicited testimony indicating that Piasio was on notice that Mitsubishi's purpose in initiating the transaction was to create apparent profits for accounting purposes.23 Finally, the Division showed that Piasio had an incentive to cooperate with Mitsubishi despite notice of factors suggesting that his client was initiating illegal transactions.24
Piasio's own testimony, however, indicated that he did not notice anything particularly unusual about the structure of the transactions and believed they were legitimate.25 Piasio denied that either Takao or Momosaki told him about Mitsubishi's profit-shifting purpose. Tr. 236 (Piasio) and denied that he received any instruction limiting the loss to one-quarter cent per bushel. Tr. 235-36, 702 (Piasio). While he conceded that Mitsubishi instructed that the "day's highs and lows" be placed on "the buy of the spread," he testified that he never asked why they wanted to assign the highs and the lows to the spread trade and claimed that the instructions he received lacked specifics. Tr. 235, 237, 700 (Piasio).26 Piasio also emphasized that his participation in the challenged transactions was limited to passing on his customer's instructions.27 Finally, Piasio insisted that he transmitted orders to Country Hedging that were not structured to negate risk and rightfully assumed that the FCM would execute these orders "properly" and according to CFTC regulations. Tr. 701-02 (Piasio).28
The Division showed that Wilson was on notice that the orders received from Merrill Lynch were for the purchase and sale of the same quantity of the same spread positions. DX 1A-3/1B-3 through 11A-3/11B-3. Wilson acknowledged to MGE staff that after the first three challenged transactions, he suspected that the trades were for the benefit of one customer. Tr. 538-40 (Wilson); see also DX 29 at 2 (Wilson's interview with MGE). The Division showed that Wilson was on notice that the customer's instructions in Transactions 4-11 indicated that the result of the purchase and sale should not be a loss that exceeded one-quarter cent per bushel. Tr. 535-38 (Wilson); DX 29, at 2.29
The Division also showed that Wilson's conduct in executing Transactions 4 through 11 indicated that he knew that the customer who entered the purchase and sale orders intended to negate risk. Wilson acknowledged that he "bid and offered the spread within seconds of each other" and that, therefore, he "[didn't] think there would be any risk." Tr. 548-49, 561-62 (Wilson). Wilson explained that he thought that if he did not execute the set of paired orders simultaneously, he would expose himself to "financial risk." DX 29 at 1 (stating to the MGE that he had to fill the orders simultaneously "in order to prevent himself from becoming exposed if only one of the two spreads is filled").
Wilson testified that the orders
underlying the challenged transactions were "unusual" and
raised "questions" about his ability to fill the orders in
compliance with the "[r]ules and [r]egulations of [the]
MGE." Tr. 515-16, 518 (Wilson). Wilson emphasized that he had
consulted with Country Hedging about the orders and relied on the FCM
to tell him whether the orders were "in compliance with the
rules." Tr. 520 (Wilson). At Wilson's recommendation, Soule
contacted Bagan, who was vice president of market regulation at MGE.
Soule acknowledged, however, that he only asked Bagan whether the
prices on "both legs of the spread have to be within the daily
range." Tr. 290-91 (Soule). Bagan informed Soule that MGE Rules
did not require the prices on both legs of a spread trade to be within
the daily range.30 Wilson did not explain
when Soule reported on his conversation with Bagan or how what Soule
reported that Bagan had said alleviated his concern about the
The ALJ issued his I.D. in July 1999. In re Piasio, [1998-1999 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,714 (July 21, 1999). The ALJ did not specifically evaluate the credibility of the testimony offered by any of the witnesses. Moreover, rather than make findings on most issues material to the parties' dispute, the ALJ incorporated by reference selected findings of fact proposed by the parties. The judge did find that Mitsubishi initiated the challenged transactions to create apparent profits for accounting purposes. I.D. at 48,382. The ALJ found that Mitsubishi intended that either a short or long position be established and then "unwound promptly." Id. He emphasized that Mitsubishi would be subject to risk during the period that its initial position remained open and found that both Wilson and Piasio were at all times "cogently aware" of this risk. Id. The ALJ noted that one of the Division's expert witnesses had conceded that there was risk during this period and that the Division had admitted that there was no guarantee that the result of the purchase and sale would be a loss that did not exceed one cent per bushel. Id.
In light of this factual analysis, the ALJ concluded that there was "no probative evidence" to establish that either Piasio or Wilson had knowingly participated in wash sales. He bolstered his conclusion by noting that "piasio and Wilson are honest and honorable individuals." I.D. at 48,383. He also indicated that he viewed the case as involving "[t]he entry and execution of day spread orders." The judge remarked that the use of such orders reduced but did not eliminate market risk. Id.32
Given his findings and conclusions, the
ALJ dismissed the Complaint for a failure of proof.
The Division filed a timely notice of appeal and appeal brief. It argued that the ALJ's conclusions were the result of a flawed consideration of the evidence and a misinterpretation of applicable Commission precedent. It urged the Commission to reverse the I.D. and impose a cease and desist order, registration suspension, and civil money penalty on each respondent. In this regard, the Division argued that Piasio's sanctions should be more severe because his violations were more grave than Wilson's.
Piasio and Wilson filed responsive briefs
that urged the Commission to affirm the I.D. They also argued that the
sanctions proposed by the Division were not warranted on the record
before the Commission.33
Section 4c(a) provides, in pertinent part, that
[i]t shall be unlawful for any person to offer to enter into, enter into, or confirm the execution of, any transaction involving any commodity . . .
(A) if such transaction is, is of the character of, or is commonly known to the trade as, a "wash sale," . . . or
(B) if such transaction is used to cause any price to be reported, registered, or recorded which is not a true and bona fide price.
7 U.S.C. § 6c(a).
In order to establish that a wash sale has occurred, the Division must initially demonstrate that the transaction at issue achieved a wash result. The factors that show a wash result are (1) the purchase and sale (2) of the same delivery month of the same futures contract (3) at the same (or a similar) price. In re Gilchrist, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,993 at 37,653 (CFTC Jan. 25, 1991).
The other factors material to proof of a
wash sale violation relate either to the customer's intent at the
time the challenged transactions are initiated or to the
participants' knowledge at the time they choose to participate. As
to the first issue, the Division must demonstrate that the customer
intended to negate risk or price competition. Price competition or
market risk is negated "when it is reduced to a level that has no
practical impact on the transaction at issue." In re
Gimbel, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH)
¶ 24,213 at 35,003 n.7 (CFTC Apr. 14, 1988), aff'd as to
liability, 872 F.2d 196 (7th Cir. 1989).34 As to the second issue, the Division must
show that at the time respondent chose to participate in the
transaction, he knew that the transaction was designed to achieve a
wash result in a manner that negated risk. In re Bear Stearns &
Co., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶
24,994 at 37,665 (CFTC Jan. 25, 1991).
Before we evaluate the record in terms of the applicable legal standard, we must determine what role the ALJ's factual determinations should play in that process. In both enforcement and reparations cases, the Commission evaluates factual issues de novo. In re Nikkhah, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 28,129 at 49,883 (CFTC May 12, 2000); In re Mayer, [1998-1999 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,259 at 46,129 (CFTC Feb. 3, 1998), aff'd, 191 F.3d 109 (2d Cir. 1999). As a practical matter, this means we weigh the ALJ's factual findings along with the other evidence in the record, but do not accord those findings special weight.35
As a general rule, however, we defer to a presiding officer's credibility determinations in the absence of clear error. Nikkhah, ¶ 28,129 at 49,886; Mayer, ¶ 27,259 at 46,136 n.63. We have held that a credibility determination does not warrant deference when it rests on derivative rather than testimonial inferences and is "strongly contradicted by other compelling evidence." In re Elliott, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,243 at 46,007 (CFTC Feb. 3, 1998), aff'd, Elliott v. CFTC, 202 F.3d 926 (7th Cir. 2000). Similarly, we have held that deference is not appropriate when the presiding officer fails to assess the reliability of a witness's testimony in the context of the record as a whole. Secrest v. Madda Trading Co., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,627 at 36,696-97 (CFTC Sept. 14, 1989). Finally, we have held that deference is not appropriate when the presiding officer limits himself to "general and conclusory" fact finding and the record suggests that he may have evaluated the record in light of an incorrect legal standard. In re First National Trading Corp., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,142 at 41,785-86 (CFTC July 20, 1994).
Apart from a general reference to Piasio's and Wilson's honor and honesty, the ALJ failed to make an express assessment of any witness's credibility. In the context of this case, the ALJ should have evaluated each witness's version of events in light of the facts and circumstances established by the documentary record relating to the transactions. DX 1A/1B - 11A/11B. None of the parties seriously challenged either the authenticity of the written records that memorialized the challenged transactions or the accuracy of the key information reflected in the records. Such a contemporaneous record reflecting the elements of the challenged transactions communicated among the participants is a vital tool for evaluating the reliability of witnesses' recollections. In the circumstances of this case, the ALJ's failure to address the many conflicts between the witnesses' testimony and this documentary evidence amounted to a clear error.
The ALJ also committed clear error by limiting himself to conclusory findings and using an erroneous interpretation of the applicable standard. As noted above, the ALJ specifically noted that Kozlowski had testified that a position is at risk until it is unwound and that the Division admitted that there was no guarantee that losses would not exceed one cent per bushel. I.D. at 48,382. He also emphasized that the entry and execution of day spread orders reduces but "does not eliminate market risk." Id. (emphasis added). These references indicate that the judge equated negating risk with eliminating risk. Commission precedent, however, clearly recognizes that risk is negated whenever it is "reduced to a level that has no practical impact on the transaction at issue." Gimbel, ¶ 24,213 at 35,003 n.7. Moreover, the Commission has held that the tool traders use to eliminate risk - prearrangement - is not a necessary element of proof for a wash sale violation. Collins I, ¶ 22,982 at 31,900.36
Given these flaws in the ALJ's credibility assessment, we give it minimal weight in our assessment of the record evidence.37 We have reviewed each witness's testimony de novo, focusing particularly on the consistency between the witness's version of events and the contemporaneous record reflecting the elements of the challenged transactions communicated among the participants. Where there is inconsistency between a witness's testimony and the contemporaneous record of the transactions, we have looked to whether the witness offered a plausible explanation for the discrepancy. Overall, we have focused on making reliable distinctions between appearances and reality and, as we have explained before in the context of trade practice cases, separating what could have happened from what the preponderance of the evidence shows most likely did happen. Bear Stearns, ¶ 24,994 at 37,665.
Our findings on disputed issues are
reflected in the discussion that follows. In general, we conclude that
only portions of the testimony offered by Takao, Momosaki, Piasio and
Wilson are credible. For the most part, the portions we credit are
either consistent with the contemporaneous record reflecting the
elements of the challenged transactions communicated among the
participants or contrary to the interests of the witness. When
conflicting testimony is equally reliable on its face, we have looked
to other signs of reliability, such as the overall plausibility of the
witness's version of disputed events.38
A review of the record demonstrates that the challenged transactions achieved a wash result. Each set of Mitsubishi's 11 sets of paired orders consisted of orders to buy and sell an identical amount of September/December or March/May hard red spring wheat spread positions. The orders were accompanied either by an instruction to limit the loss to no more than one cent per bushel or an instruction to limit the loss to no more than one-quarter cent per bushel.39 After Mitsubishi's orders were executed, it had the same net position in the relevant wheat spread contract. Mitsubishi's financial result was a virtual wash - in no instance did Mitsubishi's loss exceed one-half cent per bushel and in most instances its loss was one-quarter cent per bushel or less. Accordingly, the record amply demonstrates that the execution of Mitsubishi's orders achieved a wash result.
The record shows that Mitsubishi not only placed these matched orders with Piasio at the same time, it provided pricing instructions that linked the orders and required that any loss be strictly limited. These factors support a finding that Mitsubishi structured its orders to negate risk. Compare In re Collins, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,982 at 31,900 (CFTC Apr. 4, 1986) ("Collins I"), rev'd on other grounds sub nom. Stoller v. CFTC, 834 F.2d 262 (2d Cir. 1987) ("the virtual simultaneous placement of the orders to buy and sell, with an instruction calculated to enhance the likelihood that the buy and sell orders would be filled at the same or a similar price" is "persuasive evidence" that the customer did not intend a bona fide transaction).
Contradictory testimony by Takao and Momosaki is the only evidence that raises a significant question about the structure of the orders. As noted above, Takao and Momosaki did indicate that they intended that a spread position be established and then offset later in the day. This testimony, however, is difficult to square with either the simultaneous placement of the orders or the inclusion of pricing instructions that put the floor broker at substantial risk if he failed to bid and offer simultaneously. Moreover, the pricing instruction for eight of the challenged transactions - execute both the buy and sell order at the market - obligated the floor broker to take immediate action to fill both orders. Takao's and Momosaki's failure to offer a plausible explanation for these anomalies undermines the reliability of this aspect of their testimony.40
Respondents also emphasize Kozlowski's statement that "there was risk involved in the transactions until the trade was unwound." I.D. at 48,382. On its face, this is a type of truism that merits little weight. The important issue is whether the customer intended that either position be open long enough to be at risk. As to this issue, Kozlowski testified that she did not believe that the orders underlying the challenged transactions represented initiating and unwinding orders. Kozlowski did say that she believed that Wilson established and liquidated the spread positions involved in Transactions 1-3 in a manner that exposed Mitsubishi to market risk. Tr. 604, 611-12. Nothing in Kozlowski's declaration or testimony, however, suggests that she believed that the manner in which Mitsubishi structured the orders underlying the challenged trades did not reflect an intent to negate risk.41
Piasio argues that Mitsubishi's $20,260 in losses, $22,500 in commissions, and the fact that there was no "guarantee" between any of the participants that the losses would not exceed one cent per bushel all demonstrate that risk was not negated. Piasio Br. at 17, 25, 26. Each of these arguments reflects a variation on the ALJ's erroneous view that negated risk is the equivalent of no risk or the complete elimination of risk. Since In re Goldwurm, which involved a request for an execution at a loss of "not more than three points," it has been recognized that proof of a wash sale violation does not require evidence that the customer intended that there be no gain or loss. 7 A.D. 265, 270 (1948). Indeed, in Gimbel the Commission clearly held that risk is negated whenever it is "reduced to a level that has no practical impact on the transaction at issue." Gimbel, ¶ 24,213 at 35,003 n.7.
The record establishes that the type of loss that Mitsubishi sought and achieved had no practical impact on the challenged transactions. As noted above, despite the purchase and sale of a large number of wheat spread positions in each challenged transaction, the actual financial result for Mitsubishi was uniformly a relatively small loss. In discussing the transactions with staff of the MGE, Soule and Oja characterized the type of loss that Mitsubishi suffered as "inconsequential" in the context of shifting profits. DX 31 at 1-2.
Taken as a whole, the weight of the
evidence shows that Transactions 4-11 were wash sales within the
meaning of Section 4c of the Act.
Some additional analysis is necessary to determine whether Transactions 1-3 were also transactions prohibited by Section 4c. Each set of the 11 sets of paired orders were structured in the same way and passed from Piasio, to Country Hedging and on to Wilson. The record, however, shows that Wilson chose to execute the first three transactions in a manner that merely minimized Mitsubishi's risk.42
The Division concedes that that Transactions 1-3 were not wash sales but argues they were nonetheless prohibited "offer[s] to enter into" wash sales within the meaning of Section 4c(a)(A). Under this theory, knowing participation in a transaction designed to achieve a wash result in a manner that negated risk would violate the Act even when the intended result is not achieved.
Section 4c(a)(A) provides that "[i]t
shall be unlawful for any person to offer to enter into, enter
into, or confirm the execution of, any transaction involving any
commodity" if such transaction is a wash sale. (Emphasis added).
If a completed wash sale was a necessary element of proof in all
circumstances, the words "offer to enter into" would have no
practical effect. To avoid this inappropriate result, we hold that
knowing participation in a transaction structured to achieve a wash
result while negating risk amounts to a prohibited "offer to
enter into" a wash sale.
Piasio's participation in Transactions 1-11 did not violate the Act unless it was "knowing." To resolve this issue, we must address the credibility of portions of Piasio's testimony.
In his testimony, Piasio denied that he was aware that Mitsubishi initiated the challenged transactions to generate an apparent profit for accounting purposes. He also denied that Mitsubishi gave him pricing instructions that limited the loss on any challenged transaction to one-quarter cent per bushel. In addition, Piasio testified that Mitsubishi did not inform him of the delivery month its high/low pricing instruction applied to and that he let Country Hedging choose. Finally, Piasio affirmatively testified that he intended to place bona fide positions, not orders for wash sales. Tr. 704-05, 712.
We find that in each of these regards, Piasio's testimony is not credible. First, Piasio's claim that Mitsubishi did not inform him of the delivery month for its high/low pricing instructions and that he let Country Hedging choose is not consistent with reliable evidence in the record. Piasio testified that he recorded such instructions on his blotter, but not on the Merrill Lynch office orders. Tr. 241. Piasio's discarding of the blotter, however, leaves no basis to verify the accuracy of Piasio's recollection. Piasio does not explain why he had confusingly failed to convey the customer's instructions to Country Hedging. Moreover, Piasio did not explain how Country Hedging was able to unfailingly price the nearby leg of the spreads purchased and sold in a manner consistent with Mitsubishi's expectations in the absence of instructions from him. Other evidence impeaches Piasio's version of these events. Soule testified that he received these specific pricing instructions from Piasio. Tr. 275, 278, 297 (Soule). In addition, Oja testified that Piasio refused to accept a fill that had the incorrect prices assigned to the legs of the spread, which contradicts Piasio's contentions that he let Country Hedging choose how to price the fills. Tr. 389-90 (Oja).
Piasio's denial of knowledge about Mitsubishi's profit-shifting motive also is not consistent with reliable evidence on the record. Both Takao and Momosaki testified that they explained to Piasio that they needed "to induce a profit from the further position . . . to a nearby month." Tr. 37 (Takao); Tr. 116-17 (Momosaki). Furthermore, Momosaki testified that Piasio sometimes would call to initiate the spread trades when the price range on the day's trading for the nearby month was wide, which would allow Mitsubishi to show a profit in the nearby month of the traded spreads. Tr. 119-20 (Momosaki). Moreover, because Piasio was aware that each set of orders included instructions to price the selling and the buying of the nearby month at the day's highs and lows, respectively, Piasio was on notice of an instruction that resulted in the shifting of profits forward.
There also is evidence that Country Hedging knew about Mitsubishi's profit-shifting motive, which is circumstantial evidence that Piasio also knew. See DX 30 (Soule and Oja speculating to the MGE that--consistent with Mitsubishi's actual purpose--"the customer orders appear to be an attempt to take current gains and roll loss forward for bookkeeping purposes," correcting statement in DX 31). Furthermore, Soule testified that he asked Piasio about the purpose behind these trades and that Piasio explained that it was for "accounting reasons." Tr. 276.
Third, Piasio's denial that Mitsubishi gave him pricing instructions that limited the loss on any challenged transaction to one-quarter cent per bushel is not reliable, given the contrary testimony by Wilson and Momosaki that is consistent with documentary evidence of the trades. See note 39, supra.
Piasio's testimony that he acted with a good faith belief that Mitsubishi only intended to minimize risk is equally incredible. As the participant who took each set of paired orders from Mitsubishi, Piasio knew that each set of the paired orders were for the same customer; that the orders were placed simultaneously; and that the orders were to buy and sell the same amount of the same spread contract. As explained above, the record also shows that Piasio was aware that Mitsubishi initiated the transactions to generate an apparent profit for accounting purposes, that the loss on the purchases and sales in Transactions 1 through 3 could not exceed one cent per bushel, and that the loss on the purchases and sales in Transactions 4 through 11 could not exceed one-quarter cent per bushel. In this regard, Piasio was on notice of factors that went beyond those that the Commission has recognized raise a duty to inquire about the customer's intention prior to proceeding with the transaction.43
The record shows that Mitsubishi was one of Piasio's substantial customers. This gave him a financial incentive to seek clarification of any ambiguity in Mitsubishi's paired orders rather than risk an improper fill. Nevertheless, Piasio does not claim that he considered seeking clarification from Mitsubishi even after he became aware of the consistent result of Mitsubishi's orders. Tr. 712. Given the information that Mitsubishi communicated to him, Piasio had clear notice that the transactions were designed to achieve and did achieve a wash result. Moreover, even a broker with far less experience than Piasio would recognize that a floor broker seeking to follow Mitsubishi's instructions without exposing himself to substantial financial risk would almost certainly bid and offer the orders simultaneously. Rather than acknowledge the apparent significance of facts he was clearly aware of, Piasio either pleads ignorance or seeks to shift responsibility to other participants. Such conduct is incompatible with his claim to good faith ignorance of his customer's intent.44
In light of our review of the record, we
conclude that Piasio knowingly participated in eight transactions that
were wash sales within the meaning of Section 4c(a)(A) and three
transactions that were offers to enter into wash sales within the
meaning of Section 4c(a)(A).45
Whether Wilson knowingly participated in the wash sales in Transactions 4-11 requires a similar analysis. Wilson specifically testified to his view that "there was risk involved to people involved on the other side of any of my executions." Tr. 751. The weight of the evidence, however, indicates that Wilson knew that the orders underlying Transactions 4 through 11 were designed to achieve wash results in a manner that negated risk.
The structure of the orders and pricing instructions put Wilson on notice of what the customer expected - a wash result achieved in a manner that negated risk. Wilson's own conduct demonstrated that he understood this. Wilson conceded that he bid and offered the March/May spreads at the same time, and there is abundant evidence in the record confirming this fact. Tr. 755, 757 (Wilson); DX 29 at 1. In addition, the traders who bought opposite Wilson on Transactions 4-11 simultaneously sold the same quantity of spreads to him. DX 4A/4B - DX 11A/11B.
Wilson's own statements about these transactions are also indicative of his knowledge. Wilson admitted that, beginning with Transaction 4, he suspected that the trades were for the benefit of one customer. Tr. 536-40 (Wilson); DX 29 at 2 (Wilson's interview with MGE).46 He further admitted that he began to execute these orders simultaneously because, otherwise, he would expose himself to "financial risk." DX 29 at 1 (further explaining that he wanted "to prevent himself from becoming exposed if only one of the two spreads [was] filled"). Wilson even conceded that "he did not think that there would be any risk" in the transaction "[b]ecause of the fact that I bid and offered the spread within seconds of each other." Tr. 548-49, 561-62 (Wilson); see also Tr. 473, 479, 483 (Sallstrom) (opposite trader testifying that he accepted Wilson's bid and offer believing that there was no risk in the transaction). These statements indicate that Wilson knew he was executing trades in a manner that negated risk.47
The fact that Wilson made an inquiry to Country Hedging about the orders does not undermine this conclusion. Tr. 515-16, 518 (Wilson testifying that he had "questions" about the pricing instructions on the orders, including whether he could fill these "unusual" orders in compliance with the "[r]ules and regulations of [the] MGE"). The nature of the inquiry suggests that it was not directed at the simultaneous placement of the orders, the loss limit, or the number of customers involved. Moreover, the response to the inquiry did nothing to dispel the indications that the transactions at issue were designed to achieve a wash result in a manner that negated risk.48 Such an inquiry simply is not persuasive evidence that Wilson made a good faith effort to avoid participating in an improper transaction.
In light of our review of the record, we
conclude that Wilson knowingly participated in eight transactions that
were wash sales within the meaning of Section 4c(a)(A) of the Act.49
In imposing sanctions, we look "to further the Act's remedial policies and to deter others in the industry from committing similar violations." In re Volume Investors Corp., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,234 at 38,679 (CFTC Feb. 10, 1992). Deciding upon an appropriate mix of sanctions begins with a determination of the gravity of a respondent's violations, which involves several related inquiries. The first inquiry focuses on the underlying conduct's relationship to the core provisions of the Act. The second inquiry focuses on the facts and circumstances of the particular case. In this regard, we often look to whether the violations were knowing and whether respondent cooperated with the authorities when the violations were discovered or otherwise sought to ameliorate the harm flowing from the violations. In re Grossfeld, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,921 at 44,467-68 and nn.29 & 31 (CFTC Dec. 10, 1996), aff'd, 137 F.3d 1300 (11th Cir. 1998). We also consider factors relevant to a meaningful estimate of the negative consequences flowing from the violative conduct. These include whether the violative conduct was isolated or continuous, the length of time the violative conduct continued, the number of customers affected, the financial benefit to respondent and the financial harm to customers. Id. at 44,468 & n.30.
Violations of Section 4c(a)(A) are always serious because, by their nature, they undermine confidence in the market mechanism that underlies price discovery. Indeed, the Commission has emphasized that such violations are grave even when they do not involve direct harm to customers or an actual appreciable effect on the underlying market. In re Buckwalter, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,995 at 37,688 (CFTC Jan. 25, 1991).
As discussed above, the record establishes that both Piasio's and Wilson's violative conduct was intentional. On this record, we find no basis for concluding that one was significantly more culpable than the other.50 Piasio and Wilson both claim that they did not intend either to "damage the market" or to "illegally profit." Piasio Br. at 47 n.72; Wilson Br. at 18-19. Their credibility, however, is suspect, at best, and it is facially implausible to claim that potential financial gains and losses did not play a role in their conduct.51 Piasio's claim that Merrill Lynch's failure to supervise him played a substantial role in his violative conduct is speculative, at best. Moreover, in some respects it suggests that Piasio fails to recognize his own culpability for actively cooperating with his customer's wrongdoing.
There is no evidence that Piasio and Wilson have cooperated with authorities since the time the violations were discovered. Indeed, there is evidence that Piasio continued to submit orders to Country Hedging even after he was told that there were "compliance inquiries" regarding those transactions. Tr. 246-47 (Piasio). Similarly, Wilson continued to fill Mitsubishi's orders even after the MGE interviewed him as part of the investigation into Transaction No. 5. DX 29 (MGE interview with Wilson on 2/10/93). Moreover, as our discussion of their credibility demonstrates, both respondents have offered disingenuous testimony concerning their knowledge of Mitsubishi's intent in initiating the challenged transactions.52
The record regarding the negative consequences flowing from respondents' violations is limited. It does show that Piasio committed 11 violations over two one-month periods of time and that Wilson committed eight violations over a similar period. As noted above, the most important benefit to respondents was probably the maintenance of valuable trading relationships. There is no basis in the record, however, to reliably estimate the monetary value of those relationships. Similarly, there is no basis in the record to reliably estimate the monetary value of the harm respondents' conduct inflicted on MGE's reputation for market integrity.
In light of the current record, we tentatively conclude that the following sanctions are appropriate to protect the public interest and deter future violations.
A. Cease and Desist Order
The Division requests that the Commission impose cease and desist orders on Piasio and Wilson. A cease and desist order is appropriate where there is "a reasonable probability that a respondent will again engage in unlawful conduct." Elliott, ¶ 27,243 at 46,008. Factors that can demonstrate a likelihood of future violations are past knowingly unlawful conduct or the existence of a pattern of past unlawful conduct. See In re Nikkhah, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 28,129 at 49,893 (CFTC May 12, 2000). Our conclusion that Piasio and Wilson were knowing participants in wash sales warrants the imposition of cease and desist orders against them. Moreover, the fact that Piasio and Wilson repeated their wrongful conduct several times strengthens the inference that they are likely to engage in the similar wrongdoing in the future.
Most of the factors that Piasio and Wilson cite to rebut this inference are facially flawed. Both note that prior to this case they had no disciplinary problems. The circumstances that arose in this case are not unusual, however, and, despite their prior records, respondents clearly gave into the temptation to act expediently.53 Consequently, we cannot infer that their prior disciplinary history is a reliable guide to their future conduct.
Piasio essentially argues that it is unlikely that he will be in a position to repeat his violations because he is seriously ill, which limits his working activity to "mostly clerical work" at Brookville Investments, a commodity trading advisor, "for a maximum of five hours a month."54 Piasio Br. at 50-51. While these factors are relevant, Piasio's credibility is suspect and there are circumstances suggesting that he intends to retain his registration and continue to work in the futures industry.
On the current record, we conclude that a cease and desist order is an appropriate sanction for both Piasio and Wilson.55
B. Registration Sanctions
Respondents' violations amount to statutory disqualifications from registration under Section 8a(3)(A) of the Act.56 Consequently, Wilson and Piasio have the burden of demonstrating that their continued registration would pose no "substantial risk to the public." In re Zuccarelli, [1998-1999 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,597 at 47,830 (CFTC April 15, 1999); In re Clark, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,032 at 44,925 (CFTC April 22, 1997).
Respondents have not made a reliable showing of either circumstances that indicate the seriousness of their wrongdoing was mitigated or circumstances that indicate a changed direction in their activities since the time of their wrongdoing. Over 7.5 years have passed since the latest violation, however, and our precedent recognizes that "[a]s wrongful conduct `recedes further into the past' the scales may begin to tilt in favor of a claim of rehabilitation." In re Hirschberg, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,573 at 43,523 (CFTC Dec. 27, 1995). Moreover, our precedent recognizes that registration suspensions are sometimes sufficient to protect the public interest when the violations at issue involve unlawful trade practices that did not harm customers directly. See, e.g., Bear Stearns, ¶ 24,994 at 37,666; Gilchrist, ¶ 24,993 at 37,654. Cf. Elliot, ¶ 27,243 at 46,008.
Based on the current record, we conclude
that a six-month suspension of both Piasio's and Wilson's
registration is appropriate to protect the public interest.
C. Civil Monetary Penalty
Based on our review of the evidence
relating to the gravity of respondents' violations, we tentatively
conclude that a civil money penalty of $40,000 is appropriate for
Piasio, and that a civil money penalty of $25,000 is appropriate for
Wilson. Because some of the violations at issue occurred prior to
October 28, 1992 and there is no record concerning the mandatory
factors in former Section 6(d) of the Act, we remand this matter for
additional proceedings consistent with our recent decision in In re
Nikkhah, CFTC Docket No. 95-13 (Sept. 26, 2000).
For the foregoing reasons, we vacate the ALJ's decision and conclude that Piasio knowingly participated in eight transactions that were wash sales within the meaning of Section 4c(a)(A) of the Act and three transactions that were offers to enter into wash sales within the meaning of Section 4c(a)(A), and that Wilson knowingly participated in eight transactions that were wash sales within the meaning of Section 4c(a)(A). Based on the current record, we conclude that the sanctions described above are appropriate to the gravity of respondents' violations but remand for further development of the record in accordance with this decision.
IT IS SO ORDERED.
By the Commission (Chairman RAINER and Commissions HOLUM, SPEARS, NEWSOME and ERICKSON).
Jean A. Webb
Secretary to the Commission
Commodity Futures Trading Commission
Dated: September 29, 2000
1 During the time at issue, Piasio was an associated person ("AP") at Merrill Lynch and Wilson was an independent floor broker on the Minneapolis Grain Exchange ("MGE").
In a separate case, the Commission raised similar allegations against the customer that initiated the 11 challenged transactions (Mitsubishi Corporation ("Mitsubishi")), the two futures commission merchants ("FCM") that participated in the transactions (Merrill Lynch Futures Inc. ("Merrill Lynch") and Country Hedging, Inc. ("Country Hedging")) and a Country Hedging AP (Charles B. Soule ("Soule")) who passed the orders for the challenged transactions to Wilson. These respondents agreed to settle the allegations against them and the Commission imposed sanctions on that basis. See In re Mitsubishi, CFTC Docket No. 97-10, 1997 WL 345634 (CFTC June 24, 1997). Our findings regarding respondents Piasio and Wilson are based solely on the record developed in this proceeding, which does not include the Mitsubishi consent order, the findings made in that order, or the offers of settlement submitted by the respondents.
2 "DX____" refers to the Division's exhibits.
3 This opinion includes references to Viehmeyer under her former name, Maura McHugh ("McHugh").
4 We have found no indication that the ALJ ruled upon the Division's relevancy objection to Treml's investigative testimony. We therefore consider the Treml designations to be part of the evidentiary record in this matter.
5 During the time at issue, Mitsubishi was based in Japan and engaged in the business of purchasing and selling grains. Mitsubishi owned all the stock of an American-based company known as Mitsubishi International Corporation ("MIC"). Tr. 25-26 (Takao). Except where the context requires that a distinction be drawn between Mitsubishi and MIC, this memorandum refers solely to the parent company, Mitsubishi.
6 Takao served as the manager MIC's Foods Division, with responsibility for wheat and barley trading. Tr. 26-27 (Takao).
7 In the context of this case, a "spread trade" involves the purchase of one futures delivery month against the sale of another futures delivery month of the same commodity. The CFTC Glossary: A Layman's Guide to the Language of the Futures Industry (1997) at 38 ("CFTC Glossary").
8 For example, "buying" or "purchasing" the September/December wheat spread (i.e., buying September wheat and selling December wheat) at 3 1/2 means that the price of the December contract is 3 1/2 cents per bushel higher than the price of the September contract. DX 25 at 10-11 (Kozlowski). In this example, 3 1/2 is the "differential."
9 The price of the other leg must be within the range that the underlying contract could have been traded during the trading session. DX 17.
10 Because commissions and fees vary with the size of the position traded, trading fewer contracts lowered Takao's cost to generate the apparent profit.
11 Somewhat contradicting himself, Takao also testified that he gave Piasio high/low pricing instructions with respect to both the September and the December legs of the spread. Tr. 38.
12 Takao testified that he specifically advised Momosaki to consult with Piasio because he had executed Mitsubishi's successful transactions in August and September 1992. Id.
13 Momosaki testified that he only told Piasio about acceptable losses "some of the time." Tr. 118-19.
14 During his testimony, Piasio acknowledged that he received Mitsubishi's purchase order and sale order at the same time. Tr. 234. While some of the time stamps on Merrill Lynch's office orders appear to be less than accurate, see DX 25 at 17, the time stamps on eight of the 11 pairs of purchase and sale orders corroborate Piasio's testimony that the orders were received at the same time. Piasio also conceded that the customer was willing to lose up to one cent per bushel. Tr. 236, 702 (Piasio). Piasio did not agree, however, that the requested acceptable losses were ever as low as one-quarter cent per bushel. Tr. 236.
Piasio's method of recording client's instructions left room for certain discrepancies. He initially recorded the instructions that he received from Mitsubishi on his blotter rather than the order tickets that he had time stamped. Tr. 229-31 (Piasio). Piasio did not transfer the instructions to the order tickets until after he learned that the orders had been executed. Moreover, Piasio discarded the blotter after he transferred the instructions to the order tickets. Consequently, there is no way to verify whether Piasio transferred all the instructions (and related information) recorded on his blotter to the office order tickets that are in the record. The record indicates that at least in some circumstances he did not transfer all the information. For example, although Piasio conceded that he received instructions from the customer about acceptable losses (Tr. 236, 702), he did not transfer those instructions to the Merrill Lynch order tickets. See, e.g., DX 1A-2;1B-2.
15 Merrill Lynch was not a clearing member of the MGE. Consequently, it had to employ a clearing member such as Country Hedging to execute customer orders for MGE contracts. Merrill Lynch maintained an omnibus account with Country Hedging for these purposes. Tr. 237 (Piasio); 266, 292 (Soule); DX 13A-13D.
16 Soule was Country Hedging's manager for floor operations on the MGE.
17 Soule processed 10 of the 11 sets of Mitsubishi's paired orders. Tr. 274, 280-82, 286, 293; see also Tr. 388 (Soule testifying that Andrea Johnson's handwriting is on floor orders for Transaction 11).
18 Instructions on the floor orders for the purchase and sale in Transactions 1, 3, 4, 6, 7, 8 and 11 indicated that both were to be executed at the current market price. Instructions on the floor orders for Transaction 2 indicated that both were to be executed at specified price limits that would result in a loss no greater than three-quarters of a cent per bushel. Instructions on the floor orders for Transactions 5, 9, and 10 indicated that both were to be executed at specified price limits that would result in a loss no greater than one-quarter of a cent per bushel. DX 1A/1B-11A/11B; DX 25A; DX 26 at 12 (McHugh).
19 The execution time for the buy order and the sell order are the same for Transactions 4 through 11. DX 4A/4B - DX 11A/11B; DX 26 at 19-20; see also Tr. 755, 757 (Wilson); DX 29 at 1; Tr. 471-72 (Sallstrom, one of the traders opposite Wilson in various transactions, testifying that Wilson bid and offered the spreads simultaneously); and Tr. 302, 366-67 (Soule testifying that, based on his knowledge of the pits and the endorsements and time stamps on the order tickets and his own personal observation, these transactions were probably bought and sold at the same time).
20 DX 4A/4B - DX 11A/11B; DX 26, at 19-20. Consequently, the result for each participating trader was a guaranteed profit without the risk attendant on an unmatched position. Sallstrom testified that he accepted Wilson's bid and offer because he believed that there was no risk in the transaction. Tr. 471-73, 479, 483. Wilson explained to the MGE that allocation among participating traders in matched groups was necessary to achieve the desired result because "it was unlikely he could get local traders to execute spreads using the contract's daily high and low unless they could be on both orders and scalp a profit." DX 29. See also DX 31 at 2 (Soule explained to the MGE that other traders would not likely execute spreads using the contract's daily high and low unless they could make a profit or offset it immediately).
21 Wilson executed a portion of Transaction 1 at no loss; a portion of Transaction 2 at a loss of one-half cent per bushel; and a portion of Transaction 3 at no loss. He executed the other challenged transactions at a loss of one-quarter cent per bushel. In Transactions 1-4, Mitsubishi lost $6,512; in Transactions 5-11, Mitsubishi lost $13,750. DX 25 at Attachment 2; Tr. 613-14 (Kozlowski). A "conservative" calculation of the commissions earned by Piasio was at least $6,675. Tr. 228 (Piasio); DX 12A-12D; see also Division's Proposed Findings of Fact 173-80. Wilson earned $6,400 in commissions in connection with the challenged transactions. Joint Exh. 2.
22 Takao also testified that he did not want the initiating spread order to remain open overnight and he did not want to spread over two different "crop years," which, standing alone, are factors consistent with an intent to minimize risk. Tr. 45-46 (Takao).
23 Both Takao and Momosaki testified that they explained to Piasio that they needed "to induce a profit from the further position . . . to a nearby month." Tr. 37 (Takao); Tr. 116-17 (Momosaki). Furthermore, Momosaki testified that Piasio sometimes would call to initiate the spread trades when the price range on the day's trading for the nearby month was wide, which would allow Mitsubishi to show a profit in the nearby month of the traded spreads. Tr. 119-20. Moreover, there is evidence that Piasio was aware that each set of orders included instructions to price the selling and the buying of the nearby month at the day's highs and lows, respectively, an instruction that was consistent with an intent to shift profits forward. Tr. 38-39 (Takao); Tr. 116 (Momosaki).
There also is evidence that Country Hedging knew about Mitsubishi's motives. Both Soule and Oja speculated to the MGE that "the customer orders appear to be an attempt to take current gains and roll losses forward for bookkeeping purposes." DX 30 (correcting statement in DX 31). Because Country Hedging received their orders from Piasio, evidence that it knew about Mitsubishi's motive is circumstantial evidence that Piasio also knew. Furthermore, Soule testified that he asked Piasio about the purpose behind these trades and that Piasio explained that it was for "accounting reasons." Tr. 276. Piasio, however, points to evidence that he claims impeaches Soule and Oja on these points. Piasio points out that the Country Hedging employees merely "speculated" to the MGE about Mitsubishi's purpose and that the orders were from the same customer. DOE Exh. 30. In addition, Soule testified that he did not specifically recall any particular conversation with Piasio. Tr. 351-52, 295-96 (Soule).
24 Piasio acknowledged that Mitsubishi had been a client since 1969 and was one of his largest customers, providing between 15%-20% of his total business during the relevant time period. Tr. 226-27 (Piasio).
25 Piasio affirmatively stated that he believed Mitsubishi's trades took real positions in the market and that, when he placed these orders with Country Hedging, he intended to place bona fide trades. Tr. 702, 704-05, 712 (Piasio).
26 Piasio explained that he was not informed as to which months the high/low pricing instructions should be applied and that he let Country Hedging choose. Tr. 235-36, 241-42, 712-13 (Piasio). Piasio testified that he recorded such instructions on his blotter, but not on the office orders. Because, as noted above, Piasio discarded the blotter, there is no basis for determining whether Piasio's recollection is accurate.
27 He testified that he played no part in assisting Mitsubishi with its trading strategy and never suggested that the trades should be executed simultaneously. Tr. 700-01 (Piasio); see also Tr. 48-49 (Takao testifying that Piasio never advised him how to remove risk); Tr. 122-23 (Momosaki).
28 Kozlowski acknowledged that Piasio was not required to direct Country Hedging to execute the orders properly. Tr. 622-23 (Kozlowski).
29 Wilson emphasized that the paired orders that made up Transactions 4 through 11 were accompanied by instructions concerning acceptable losses, a characteristic he claims Transactions 1-3 lacked. Tr. 535-40.
30 There is no evidence that Bagan was informed that the underlying orders were to purchase and sell the same spread position at the same or a similar price and that there was an instruction that the result should not be a loss that did not exceed one-quarter cent per bushel.
31 It is unclear whether Wilson waited for a response from Soule before filling the orders.
32 The ALJ's decision included a curious discussion of the Commission's decision in In re Three Eight Corporation, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,749 (CFTC June 16, 1993) ("Three Eight"). The ALJ explained that Three Eight involved "the entry and execution of an order for identical quantities of long and short contracts of the same month, to be executed simultaneously at identical prices, without any market risk." I.D. at 48,383. The ALJ stated that the Commission in Three Eight found that the "use of paired orders for matching executions did not negate risk in the manner of a typical wash trade." Id.
33 Piasio also requested that we hold oral argument, which we deny.
34 By contrast, a transaction structured to "minimize" risk or price competition does not violate the prohibition on wash sales. In re Collins, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,401 at 33,078 (CFTC Nov. 26, 1986) ("Collins II"), rev'd on other grounds sub nom. Stoller v. CFTC, 834 F.2d 262 (2d Cir. 1987).
35 Commission Rule 10.104(b) authorizes us to "make any findings or conclusions which in [our] judgment are proper based on the record in the proceeding."
36 The ALJ also misinterpreted our decision in Three Eight. The characteristics of the transactions in Three Eight were, in many ways, similar to Mitsubishi's transactions. Three Eight, a foreign broker, maintained a customer omnibus account at Iowa Grain, a domestic FCM. Three Eight made "simultaneous . . . orders to buy and sell the same quantity of the same delivery month of the same futures contract." ¶ 25,749 at 40,440. Three Eight's orders were either two market orders or orders at "corresponding limits," both of which would "produce a wash result for the omnibus account at the time of execution." Id. In addition, Three Eight "made it clear that the paired orders should be treated as a single transaction, directing Iowa Grain not to fill either order unless both could be executed at the same time." Id. The floor brokers in Three Eight also were told to "obtain a wash result" or, if that were not possible, not to execute either the buy or the sell order. Id. The floor brokers were able to execute most of the orders as instructed, which resulted in virtually no trading gains or losses to the omnibus account.
Our opinion in Three Eight clearly stated that "there [was] little doubt that the intent of the [omnibus] account taken as a whole was to avoid a bona fide market position." Id. at 40,444. We held that the appropriate focus, however, was on the intent of the "ultimate customer" rather than on the intent of the omnibus account the customer traded through. Because the record did not include evidence of the ultimate customers' intent, we ruled that the Division had failed to prove that the transactions at issue were wash sales. Here, however, there is not only evidence that the transactions were structured to negate risk, there is also evidence that the ultimate customer participated in the structuring of the transactions in that manner. Nothing in Three Eight can be read to suggest that such proof is insufficient to establish a wash sale violation.
37 Due to the brevity of the judge's decision, we cannot determine whether Piasio's and Wilson's demeanor while testifying played any meaningful role in his assessment of their credibility.
38 As a general matter, we have given significant weight to the testimony of the Division's experts relating to the mechanics of spread trading on the MGE and the information reflected on the orders underlying the challenged transactions. In the circumstances of this case, we find it is unnecessary to give significant weight to the opinions the experts expressed or to the derivative factual inferences that they drew from the evidence.
39 Testimony about this pricing instruction conflicts in several respects. Takao testified that he instructed Piasio to place Transactions 1-4 at no more than a one cent loss per bushel. Tr. 36-37, 39-40, 47, 81, 85, 93 (Takao). Momosaki testified that he instructed Piasio to place Transactions 5-11 at no more than a one-quarter cent loss per bushel. Piasio conceded that he received instructions to execute the trades at a loss of no more than one cent per bushel, but denied that he had received instructions to execute losses at no more than one-quarter cent per bushel. Tr. 236, 702-03. Wilson testified that he received instructions to execute Transactions 4-11 at a loss of no more than one-quarter cent per bushel, but that he had not received any such instructions for Transactions 1-3. Tr. 537-40, 42. Soule, who passed orders along from Piasio to Wilson, testified that at no time did Piasio relay instructions about taking a one cent loss. Soule's testimony is not credible, because he is the only witness whose testimony indicated that there was no instruction provided about acceptable losses. Tr. 284. Based on this evidence, we make the following findings:
(i) First, there was an instruction about acceptable losses expressly conveyed to Piasio and Wilson for all challenged transactions. Wilson's testimony that there was no instruction for Transactions 1-3 is the only testimony to the contrary. Although the manner of his executing the trades is consistent with his testimony, he offers no plausible explanation for what would have been abrupt change in the manner in which Mitsubishi placed its orders.
(ii) Second, given our first finding, the instructions for Transactions 1-3 limited the loss to a penny per bushel. Piasio and Takao provided corroborating testimony in support of this finding and the actual results are consistent with their testimony.
(iii) Third, the instructions for Transactions 4-11 limited the loss to one-quarter cent per bushel. Piasio's testimony that the requested losses were a consistent one penny per bushel is not reliable. With respect to Transactions 5-11, Wilson and Momosaki provided corroborating testimony that the instruction was for a loss of one-quarter cent per bushel, and the manner in which Wilson executed the trades supports that testimony. With respect to Transaction 4, only Wilson testified that the instruction was for a loss of one-quarter cent per bushel. Wilson's testimony, however, is supported by the change in his technique for executing the orders between Transactions 3 and 4.
40 Respondents also point to testimony of Momosaki that he did not ask for simultaneous execution as evidence that Mitsubishi intended the non-simultaneous execution of orders. A request for simultaneous execution, however, was strongly implied by Mitsubishi's orders. Moreover, because wash sales are unlawful, participants have a significant incentive to create a false appearance of legitimacy. In this context, our task is to separate what Mitsubishi could have meant when it entered its orders from what most likely Mitsubishi did mean. Bear Stearns, ¶ 24,994 at 37,664.
Respondents point to other evidence that suggests Mitsubishi requested a market order and a limit order, and contend that that combination provides other evidence that Mitsubishi intended to have the trades executed at different times. Tr. 86 (Takao); Tr. 136-37 (Momosaki); Tr. 700, 702-03 (Piasio); Piasio Br. at 23-24 & n.32; Wilson Br. at 11. Momosaki's and Piasio's testimony is inconsistent with the Country Hedging floor orders, which indicate that Mitsubishi's orders were always either two market orders or two limit orders. Respondents do not attempt to explain the discrepancy, which we find fatal to this line of argument.
41 The Division did admit that there was no "guarantee" that losses would not exceed one cent per bushel. At best, this admission supports a finding that there was some risk that Mitsubishi would not obtain both the positions it wanted and the limited loss that it required. In the circumstances of this case, however, the record shows that the level of risk that Mitsubishi was willing to undertake was so low that it required the floor broker to negate risk by reducing it to a level with no practical impact on the challenged transactions.
42 Wilson did not bid and offer the underlying orders simultaneously. DX 26 at 17-18 (McHugh); DX 1A/1B - 3A/3B. In addition, the traders who bought opposite Wilson in these three transactions did not sell him a corresponding number of spread contracts. DX 26 at 17.
43 In Three Eight, the Commission indicated that the receipt of paired orders for matching executions for a single account "standing alone, suggests an intent to avoid a bona fide market position that demands clarification prior to execution [and the] failure to undertake such an inquiry in the face of such facts may support an inference of knowing participation in wash sales." Three Eight, ¶ 25,749 at 40,445-46 (emphasis added and footnote omitted).
44 Piasio's claim that he lacked knowing participation in wash sales because of his expectation that Country Hedging and the floor broker would execute the orders properly is unpersuasive. Piasio Br. at 38. The Division correctly counters that this defense was rejected over 50 years ago by a judicial officer of the Department of Agriculture. See Goldwurm, 7 A.D. at 277 ("[r]egardless of whether the [customer] or [the FCM] knew or should have known precisely how the floor broker would execute the trades, they had asked the floor broker to execute what amounted to "wash sales" . . . and they accepted and confirmed the transactions.") (footnote omitted). Piasio's argument neglects to acknowledge that all participants in an order for a futures contract have a responsibility for ensuring that that order is permissible. Three Eight, ¶ 25,750 at 40,445.
Piasio also argues that any fault for his conduct lies primarily with Merrill Lynch, which he alleges failed to adequately supervise him. Piasio Br. at 47 n.72, 51-53. Indeed, the record contains suggestions that Merrill Lynch could have better performed its supervisory responsibilities. Piasio, however, does not explain why that should have any effect on his knowledge. For example, Piasio does not claim that he brought Mitsubishi's orders to supervisors prior to accepting them. In any case, for the same reason that a floor broker can not simply rely on those upstream in the order flow to pass along only legitimate orders, an AP cannot simply rely on his supervisor to ferret out illegitimate orders.
45 Piasio's challenges to Three Eight's discussion of the duty to inquire in the face of ambiguity are unpersuasive. Piasio emphasizes that his conduct took place nearly a year prior to the Commission's opinion in Three Eight. Piasio Br. at 14 n.22. The Commission, however, expressed a similar view about a participant's duty to seek clarification more than five years earlier. See Citadel, ¶ 23,082 at 32,190-91 (holding that even if a floor broker lacked actual knowledge of wash sales, the unusual circumstances of the trading "would have put him on sufficient notice to require inquiry" and that "[f]ailure to make such an inquiry would amount to carelessly induced ignorance sufficient to establish liability"). We also find no merit to Piasio's and Wilson's arguments that the duties explained in Three Eight lack clarity due to a release from the Chicago Board of Trade ("CBOT"). See Wilson Ex. 101 (CBOT Release conveying to its members that, despite Three Eight, there was no CBOT Rule requiring floor brokers to inquire about the customer's intent upon receiving "simultaneous buy and sell orders for the same commodity contract and the same account at the same price."). Considering that the trades in this case were executed on the MGE and that the CBOT's response to Three Eight was not disseminated until after respondents' conduct, the CBOT release is irrelevant to the factual question of Piasio's knowing participation.
46 Because the pricing instruction that Wilson received tied the result of the two orders together, the structure of the orders also put Wilson on notice that the orders were probably for the same customer.
47 Wilson argues that he was not a knowing participant because he relied on Country Hedging to tell him whether these orders were "in compliance with the rules." Tr. 520 (Wilson). Wilson's argument, however, is no more a defense than Piasio's argument that he relied on Country Hedging and Wilson to execute the transactions properly. As the Commission said in Three Eight, "[t]he fact that one of the parties upstream may have breached his duty to the marketplace does not excuse a floor broker's ignoring his own duty not to knowingly participate in wash sales." ¶ 25,749 at 40,445. Rather, "a floor broker is responsible for evaluating the orders he receives for indications that his participation in the transaction is legally prohibited." Id.
48 As noted above, Soule contacted Bagan of MGE's compliance department and asked whether the prices on "both legs of the spread have to be the daily range." Tr. 290-91 (Soule). Bagan informed Soule that MGE Rules did not require the prices on both legs of a spread trade to be within the daily range and that, therefore, the instruction was permissible.
49 Wilson's other arguments concerning his scienter (Wilson Br. at 4, 14, 15-16) are similar to arguments made by Piasio, which have been sufficiently discussed above. For example, Wilson argues that (i) the duties imposed by Three Eight lack clarity, as demonstrated by the CBOT's official response to that case; and (ii) that even if Three Eight imposed a relevant duty on Wilson, it was issued after the conduct in this case.
50 Although both the Division and Piasio have arguments concerning which respondent acted with more grave intent, we find that both respondents acted with equal culpability. Division Br. at 30-31; Piasio Br. at 56. The Division contends that Piasio was in a better position to determine Mitsubishi's intent. This could be a valid consideration if the record showed that Mitsubishi's intent was not clearly expressed in the structure of the orders and accompanying instructions. On this record, however, the message conveyed by the orders was clear, even when viewed from Wilson's perspective. Of course, the record does show that Wilson committed three fewer 4c(a)(A) violations than Piasio.
51 The record does not suggest that either Piasio or Wilson earned substantial commissions on the challenged transactions. For both respondents, however, the potential cost of refusing to participate in the transactions was high. Piasio had a long-term relationship with Mitsubishi that might have been put in jeopardy. While the record does not include much evidence of Wilson's relationship with Country Hedging, the potential for losing business to more cooperative competitors would have been an obvious concern.
52 Piasio emphasizes that the Division's theory of liability regarding Transactions 1 through 3 involves "matters of first impression." Piasio Br. at 56. The record, however, indicates that Piasio was a knowing participant in all 11 of the challenged transactions. Transactions 1 through 3 involve a different theory of liability because Wilson chose to execute those transactions in a manner that minimized risk despite Mitsubishi's intent that he execute the transactions in a manner that negated risk. Given these circumstances, there is no reason to think that the absence of established precedent concerning "offers" to enter into wash sales had any effect on Piasio's conduct.
53 Wilson characterizes his conduct as the result of a series of factors that were stacked up against him, such as his "competing obligation to devote proper attention to his large deck," his "confusion" concerning the pricing instructions, and his "misplaced reliance" on the assurances of Soule, Oja and Sinclair that the orders were proper. Wilson Br. at 18. Given our assessment of Wilson's credibility, and the evidence that he was a knowing participant in Mitsubishi's wash sales, these characterizations merit no weight.
54 Piasio explains that he has been diagnosed with tumors in his lung, liver and rib; high blood pressure; sluggish thyroid; and mild depression. Piasio Br. at 50-51 nn. 73-75 (citing his own testimony, affidavit and the exhibits thereto).
55 As explained below, a remand is necessary to develop the record on the mandatory factors for imposing a civil money penalty under former Section 6(d) of the Act. During the remand proceeding, the ALJ shall give Piasio an opportunity to develop the record on his illness and his future plans to act in a registered capacity. In light of this evidence, the ALJ shall reassess the likelihood that Piasio will be in a position to repeat his wrongdoing.
56 That provision authorizes the Commission to "refuse to register or to register conditionally any person, if . . . such person has been found by the Commission . . . to have violated . . . any provision of this Act."