UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
: JAMES AHLSTEDT : : v. : CFTC DOCKET NO. 96-RO50 : CAPITOL COMMODITY SERVICES, : OPINION AND ORDER INC., ET AL. : _______________________________:
Complainant James Ahlstedt appeals from an initial decision by a Judgment Officer dismissing his complaint alleging wrongful liquidation and breach of fiduciary duty. The Judgment Officer did not decide the wrongful liquidation claim, dismissing the complaint because Ahlstedt failed to mitigate damages. On appeal, complainant argues that the Judgment Officer acted prematurely in issuing the decision without granting the parties an oral hearing to resolve conflicting facts. Complainant also contends that he did not mitigate his damages because it would have required that he re-enter the market without reasonable assurance that respondents, who allegedly liquidated his account in bad faith, would not repeat their misconduct.
As explained more fully below, we remand to the Judgment Officer for an oral hearing(1) to determine if there was a wrongful liquidation and, if there was, for the assessment of damages in accordance with our instructions.
Complainant James Ahlstedt, a management consultant,(2) opened a commodity futures account with Edmund Hysni, an associated person at Capitol Commodity Services, Inc. ("Capitol"), an introducing broker, in March 1994. The account statements were generated by Vision Limited Partnership ("Vision"), a futures commission merchant ("FCM") through which orders were executed.(3) Complainant had traded commodity futures for two years prior to opening an account at Capitol.
On April 10, 1995, Ahlstedt entered a position of six long palladium futures contracts. At the time, complainant had $7,000 in margin funds on deposit. An initial margin of $4,800 was required for the six contracts. During the next eight and a half months, the price of palladium futures fell, absorbing the excess deposit in the account and requiring Ahlstedt to make six additional margin deposits totaling $16,900. On the morning of December 28, 1995, Hysni contacted complainant to inform him of a $3,500 margin call on his contracts.(4) Ahlstedt did not pay the margin call during the day. When Ahlstedt called Hysni after the close of business, Ahlstedt was informed that his positions had been liquidated.
On February 1, 1996, complainant filed a pro se reparation complaint(5) against Capitol, Alan Cohen, Capitol's President, and Hysni,(6) alleging wrongful liquidation and breach of fiduciary duty. He claimed $25,000 in damages.(7) Capitol, Cohen, and Hysni filed a joint answer and Vision later adopted that answer as its own.(8)
The parties presented two versions of the liquidation. According to Ahlstedt, he had made numerous trades since the opening of his account. Ahlstedt asserted that, when five previous margin calls had been made on his account, he had paid the margin calls in a timely manner. Ahlstedt stated that, when Hysni called him on December 28 and informed him of a margin call, he promised to pay the margin and to phone Hysni later in the day to ascertain the amount of money owing. When Ahlstedt phoned, he learned that his positions had already been liquidated. Ahlstedt asserted that Hysni offered him a chance to re-enter the market if he would post the required $3,500 margin. Complainant refused.
Ahlstedt stated that on January 3, 1996, he phoned Dan Laczynski, Vision's margin manager, to inquire why his account had been liquidated on December 28. Based on this conversation, which Ahlstedt recorded,(9) he learned from Laczynski that his account had been subject to a margin call for six days prior to December 28. Laczynski told complainant he had to liquidate complainant's positions because the account was about to go into a debit balance. Laczynski claimed that he had made numerous calls but could not reach Hysni during market hours on December 28 and had no indication whether Ahlstedt would post additional money. Further, Laczynski expressed his understanding that Ahlstedt had been given notice of a margin call by Hysni prior to December 28. Ahlstedt responded that he was never informed by Hysni that his account had been under-margined for six days, and he would have made the margin call as he had done in the past. Ahlstedt explained to Laczynski that previously he had sent in margin checks on the same or the following business day that he was informed of a margin call. Ahlstedt told Laczynski of Hysni's suggestion that complainant "could come [back] in at any time." Laczynski confirmed that complainant could re-establish his positions if he would send in additional money.
Subsequently, Ahlstedt alleged, he made a telephonic complaint to respondent Alan Cohen, Capitol's president. According to complainant, Cohen informed him that Capitol would not reinstate his positions and that he could re-enter the market only if he were willing to "start over from scratch like any new customer." Respondents denied wrongful liquidation, contending that on December 28 Ahlstedt did not promise Hysni that he would make the margin call, but stated that he would call Hysni after the close to see if the market had moved favorably. Respondents alleged that Ahlstedt frequently ignored and repeatedly failed to make margin calls in the past and in doing so had exposed respondents to market risk. In support of their allegations they produced phone logs. Thus, respondents contended that the liquidation was justified. In addition, respondents averred that complainant had ratified the liquidation by failing to object affirmatively or in a timely manner. Respondents also alleged that Ahlstedt had failed to mitigate damages.
On December 19, 1996, the Judgment Officer issued an initial decision dismissing the complaint.(10) He held that:
[C]omplainant cannot legitimately attribute his being out of the market to respondents' actions. Even if the liquidations were improper--and there is strong evidence in favor of such a conclusion--complainant could have gone right back to the market and limited his losses. . . . That he was allegedly afraid of being liquidated again is no excuse, because posting sufficient margin could have prevented any such possibility from occurring.
(Initial Decision at 3.)
The Judgment Officer expressed doubt that respondents liquidated Ahlstedt's account because of his past history of ignoring margin calls. The Judgment Officer pointed out that in the January 3, 1996 phone conversation between Laczynski and Ahlstedt, Laczynski admitted that Vision did not have any trouble with his account. Id. The Judgment Officer did not find any evidence that Ahlstedt ignored or failed to meet prior margin calls in a timely manner; that a single margin call was ever communicated to complainant in writing; or that respondents had ever expressed dissatisfaction with Ahlstedt's method of sending checks to post the margin. The Judgment Officer also rejected respondents' argument that the Vision customer agreement enabled respondents to liquidate complainant's account regardless of whether prior notice was given to him.
Complainant filed a notice of appeal on January 7, 1997, attaching a two-page appeal brief.(11)
He reiterates on appeal that his decision to stay out of the market was due to respondents' misconduct. He contends that the Judgment Officer erred by failing to resolve the factual issues by an oral hearing. Respondents filed an answering brief. Respondents assert the same affirmative defenses submitted below and contend that a hearing was unnecessary. Respondents argue that, even if an oral hearing had been held, it would not have changed the outcome of the case since complainant's refusal to re-enter the market proximately caused his damages.
We have reviewed the record and have determined that the case should be remanded to the Judgment Officer because he erred in ruling that Ahlstedt's failure to mitigate defeated his claim. The Judgment Officer should conduct an oral hearing to develop further facts on the record regarding Ahlstedt's wrongful liquidation claim.(12) He should make credibility assessments and factual findings to decide whether the liquidations were improper. Cf. Nacht v. Merrill Lynch, et al., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,057 at 41,396 (CFTC Apr. 19, 1994).
We have held that when a customer, once notified, fails to meet a legitimate margin call, an FCM may liquidate a customer's account to protect its financial interests. Baker v. Edward D. Jones & Co., [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,167 at 24,772 (CFTC Jan. 27, 1981). On the other hand, we recognize the customer's right to damages in a margin call situation when the FCM misled its customer concerning its margin or liquidation policies. See generally Levi-Zeligman v. Merrill Lynch, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,236 at 42,030-42,031 (CFTC Sept. 15, 1994) and Baker, ¶ 21,167 at 24,771. In this case, Hysni, Capitol, and/or Vision may have led Ahlstedt to believe that he would be given more time to respond to the margin call. The course of conduct between the parties must be examined to determine whether wrongful liquidation occurred.
In alleging a wrongful or unauthorized liquidation, a customer may rely on the general rule that under the Act, an FCM has a duty to follow a customer's instructions regarding his money and property. Slone v. Dean Witter Reynolds, Inc., [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,283 at 42,433 (CFTC Dec. 16, 1994). The burden is on the respondents to establish that the liquidation was proper in light of the margin call and the course of conduct between the parties.
In the event the Judgment Officer determines that the liquidation was wrongful, damages are to be assessed against respondents. Schultz v. Commodity Futures Trading Com'n, 716
F.2d 136, 139 (2nd Cir. 1983) citing Galigher v. Jones, 129 U.S. 193, 199-202 (1889). Generally, the measure of damages in a wrongful liquidation case is calculated using either "(1) [the value of the futures position] at the time of conversion or (2) its highest intermediate value between notice of the conversion and a reasonable time thereafter during which [the futures position] could have been replaced had that been desired, whichever is higher." Id. at 141; accord Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966 (2d Cir. 1987); Stiller v. Shearson, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,974 (CFTC Jan. 4, 1984). There is no duty on the part of complainant to actually re-enter the market, and the Judgment Officer erred in so ruling. Id. at 140, citing Letson v. Dean Witter Reynolds, et al., 532 F. Supp. 500, 503 (N.D. Cal. 1982). Nevertheless, the possibility of complainant's re-entry into the market "establish[es] the outer limit of a reasonable period during which the highest intermediate value of the lost [futures position] could be ascertained." Id.
The "reasonable period" represents the time during which the trader--having learned that his or her position has been involuntarily liquidated--might reasonably be expected to enter the market at the broker's expense. Letson, 532 F. Supp. at 503. The determination of a reasonable time period varies from case to case and is based on the facts and circumstances of the particular case. Katara, 835 F.2d at 973; Stiller, ¶ 21,974 at 28,181. The time needed to re-enter the market depends on several factors to be developed in the record including the trader's experience, capabilities and resources, the conduct of the broker, and the nature of the market involved. Letson, 532 F. Supp. at 504. On remand, the parties may present evidence assisting the Judgment Officer in making this determination.
Accordingly, we remand this case to the Judgment Officer to hold an oral hearing and to decide the claim in accordance with our instructions.
IT IS SO ORDERED.
By the Commission (Chairperson BORN, and Commissioners DIAL, TULL, HOLUM,
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: August 12, 1997
1. See 17 CFR 12.209 (an oral hearing is either telephonic or in person).
2. Complainant's personal profile (i.e., age, income, education, etc.) was included in the Vision customer agreement (Respondent's Exhibit A, attached to Vision's Verified Statement of November 27, 1996).
3. Capitol has been registered with the Commission as an introducing broker since July 11, 1984. Vision has been registered with the Commission as a commodity pool operator ("CPO") since February 1, 1988, and as an FCM since May 16, 1990.
4. It is not established on the record whether Hysni communicated that the margin call had existed for several days.
5. Complainant elected the voluntary decisional procedure.
6. Complainant amended his complaint in March 1996 to include Vision.
7. Complainant later adjusted the damages claimed to $24,000, which represents his initial deposit of $7,000 and the additional $16,900 he paid in six subsequent margin deposits.
8. Respondents elected the summary decisional procedure.
9. Complainant taped the January 3, 1996 conversation and submitted a tape cassette containing this conversation as evidence. The version of the liquidation submitted by Ahlstedt is a summary of the taped conversation. Respondents contend on appeal that the taping of the conversation by complainant was "illicit" because it allegedly was done without Laczynski's knowledge. The Judgment Officer took notice of the taped conversation in the initial decision but did not address its legitimacy.
10. Under the summary procedure, proof is by documentary submission. Commission Rule 12.208(b), 17 C.F.R. § 12.208 (1997) provides that a Judgment Officer "may order an oral hearing . . . when appropriate and necessary for the resolution of factual issues, upon motion by either a party or the Judgment Officer." On December 11, 1996, complainant filed a written request for an oral hearing, disputing respondents' submissions as patently false. In addition, complainant asked for punitive damages in the amount of $10,000. Complainant's request for an oral hearing was not received by the Office of Proceedings until December 23, 1996.
11. Complainant subsequently requested that his two-page brief be considered as an "informal" appeal brief in accordance with Commission Rule 12.401(d), 17 C.F.R. § 12.401(d) (1997). We hereby grant his request and accept his submission as an appeal brief.
12. In assessing reparation claims, we exercise our own independent judgment and do not defer to the findings of fact made in the initial decision, although the credibility determinations of the fact finder are accorded deference. Accordingly, we review the evidence in the record de novo.