UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION
_______________________________
:
In the Matter of :CFTC Docket No. SD 93-2
:
MICHAEL J. CLARK :OPINION AND ORDER
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In February 1995, an Administrative Law Judge ("ALJ") issued an initial decision revoking Michael J. Clark's registration as a floor broker. The ALJ rejected a number of the allegations of violations of the Commodity Exchange Act ("Act or CEA") by Clark, but found that the Division of Enforcement ("Division") had proven that respondent was involved in two instances of fraudulent trading at the New York Mercantile Exchange ("NYMEX") and concluded that this wrongdoing established the type of "other good cause" that raised a presumption that respondent was unfit for continued registration under Section 8a(3)(M) of the Act, 7 U.S.C. 12a(3)(M) (1994). Because the ALJ found that Clark's proof of mitigating circumstances and rehabilitation since the time of his wrongdoing was insufficient to rebut the presumption of unfitness, the ALJ revoked Clark's registration.
Both parties appeal and raise challenges to both the initial decision and the ALJ's rulings during the course of this proceeding. Clark raises several procedural issues and contends that the ALJ's factual assessments are contrary to the weight of the evidence. The Division challenges different aspects of the judge's factual assessments and contends that the ALJ failed to follow Commission precedent authorizing the use of collateral estoppel in registration proceedings like this.
As explained more fully below, we depart from the ALJ's reasoning in several respects, but affirm his conclusion that the record supports revoking Clark's floor broker registration.
BACKGROUND
On February 8, 1993, the Division commenced this proceeding with the filing of a Notice of Intent to Suspend, Revoke or Restrict Clark's floor broker registration ("the Notice"). The Notice alleged that Clark was subject to statutory disqualifications under Sections 8a(3)(J) and 8a(3)(M) of the Act, 7 U.S.C. 12a(3)(J), 12a(3)(M) (1994).
The Notice's allegation that Clark was subject to a disqualification under Section 8a(3)(M) was based on sanctions imposed on Clark between 1989 and 1992 in nine separate exchange disciplinary actions. The Notice described the nine disciplinary actions as follows:
*On March 10, May 18, and August 26, 1987, NYMEX imposed a fine on Clark because he engaged in disruptive trading practices on the floor of the exchange. Together, the three fines totaled $1,250. Notice at 10.
*On February 9, 1989, NYMEX imposed a $500 fine on Clark because he engaged in disruptive trading practices on the floor of the exchange. Notice at 10.
*On March 9, 1989, NYMEX imposed a cease and desist order, three-month membership suspension, and $35,000 fine on Clark to settle a complaint alleging that respondent had violated NYMEX Rules 6.61 (prearranged trading), 8.53(C) (providing false information or testimony to the exchange), and 8.53(F) (engaging in conduct detrimental to the best interests of the exchange). In re Clark, NYMEX Docket No. 88-06. The wrongdoing underlying the complaint allegedly took place in March 1988. Notice at 6.
*On January 18, 1991, NYMEX suspended Clark's membership for three-and-one-half years and ordered him to pay a $75,000 fine should he ever reapply for membership in light of evidence that Clark had violated NYMEX Rules 6.31(C) (prohibiting trading by a floor clerk), 8.55(A)(9) and (12) (material misstatements to NYMEX Compliance staff during an investigation), 8.00(D) and 8.50(B)(failure to make books and records available), and 8.55(A)(17) (engaging in conduct substantially detrimental to the best interests of the exchange). In re Clark, NYMEX Docket No. 90.02. Most of the wrongdoing underlying the complaint took place over a nine-month period in 1987. Notice at 7.
*On July 17, 1991, COMEX imposed a $150 fine on Clark to settle a complaint alleging that respondent had violated COMEX Rule 4.80(g) (failure to submit trading cards to a clearing member in a timely manner). Notice at 9.
*On December 18, 1991, COMEX suspended Clark's membership for nine months pursuant to COMEX Rule 3.31(b)(iii) (authorizing a COMEX disciplinary action against any COMEX member sanctioned by another contract market). In re Clark, COMEX Docket No. 24/615/91. Notice at 8.
*On June 3, 1992, COMEX imposed a cease and desist order, three-month membership suspension, and $25,000 fine on Clark in light of evidence that he had violated COMEX Rules 4.21 (open outcry), 4.27 (prearranged trading), 4.34 (withholding customer orders), and 4.80 (recordkeeping and reporting of trading cards). In re Clark and Auciello, COMEX Docket Nos. 02/516/91 and 03/516/91. The misconduct underlying the complaint occurred in December 1989. Notice at 5.
As an additional ground for finding Clark subject to a disqualification under Section 8a(3)(M), the Notice alleged that Clark had violated Commission Rule 3.31, 17 C.F.R. 3.31 (1996), by failing to provide NFA with information regarding a NYMEX disciplinary action (NYMEX Docket No. 90.02) and a consolidated COMEX disciplinary action (COMEX Docket Nos. 02/516/91 and 03/516/91). Notice at 11.
The Notice's allegation that Clark was subject to a statutory disqualification under Section 8a(3)(J) was based on the three-and-one-half year suspension NYMEX had imposed in NYMEX Docket No. 90.02 and the nine-month suspension COMEX had imposed in COMEX Docket Nos. 02/516/91 and 03/516/91. Both of these suspensions were outstanding at the time the Notice was issued.
Clark filed his response to the Notice in October 1993. He admitted to the existence of the exchange disciplinary proceedings described in the Notice but claimed the Division had mischaracterized the nature and severity of some of the violations at issue in those proceedings. He also challenged the Division's reliance on his agreement to settle exchange disciplinary allegations as a basis to find him disqualified from registration. Finally, he argued that imposition of a registration revocation would be unduly severe since all the exchange proceedings described in the Notice involved misconduct that occurred no later than 1989.
In addition to raising these general issues, Clark specifically challenged the Division's reliance on NYMEX's decision in NYMEX Docket No. 90.02. According to Clark, NYMEX's decision was an unreliable foundation for Commission action because it was the product of ex parte contacts between NYMEX's compliance staff and the attorneys for NYMEX's appeals panel.
After reviewing Clark's Response to the Notice, the Division filed a motion for summary disposition on liability issues. The ALJ found that the undisputed facts established that Clark was statutorily disqualified under Section 8a(3)(J) because he was subject to an outstanding order suspending his NYMEX membership. The ALJ declined to grant summary disposition as to the Notice's allegation under Section 8a(3)(M), however, because, in his view, orders issued by contract markets in exchange disciplinary actions "do not as a matter of law rise to the level of a statutory presumption of unfitness necessary to support a motion of summary disposition." Order on Summary Disposition at 9-10 (Dec. 21, 1993).
In response, the Division sought partial reconsideration, emphasizing that Commission precedent recognized that collateral estoppel could be applied in the context of Commission registration proceedings. See In re Lama, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,294 at 35,287 (CFTC Aug. 2, 1988). On this basis, the Division argued that the ALJ should conclude that Clark was precluded from contesting the findings made after full adjudication before the exchange in NYMEX Docket No. 90.02 and COMEX Docket Nos. 02/516/91 and 03/516/91. It contended that the findings made in these proceedings established that Clark had committed violations of sufficient severity to constitute "other good cause" for revoking his registration under Section 8a(3)(M).
The ALJ denied reconsideration without specifically addressing the Division's arguments. Several months later, however, the ALJ addressed the subject of collateral estoppel at a prehearing conference. In this regard, he ruled that the Division would have to prove its allegation that Clark was subject to a statutory disqualification under Section 8a(3)(M) by "trial de novo of any relevant facts or evidence that it feels constitutes . . . other good cause. . . . There will be no collateral estoppel based upon facts or circumstances which were adjudicated at the [self-regulatory organization] level." (Pre- hearing Conference Tr. at 6.)
The ALJ conducted two days of hearings in July 1994. The Division presented the testimony of Alfred Marrazo, a senior compliance investigator at COMEX, and James Morrissey, director of the Trade Practice Unit of NYMEX's Compliance Department. The Division also introduced the decisions in the exchange proceedings described in the Notice and documents generated in those proceedings. Clark testified on his own behalf and attempted to present the testimony of Jay Marc Israel, an attorney formerly employed by NYMEX's Compliance Department. Based on counsel's description of Israel's intended testimony, the ALJ excluded it as irrelevant to the issue of Clark's fitness for registration. Clark also introduced documentary evidence in support of his defense.
Alfred Marrazo testified regarding the wrongdoing underlying COMEX's disciplinary actions against Clark.Marrazo explained that early in 1990, he conducted a review of daily brokerage statistics for December 27, 1989. This review indicated that ten silver trades between Clark and Dominic Auciello may have been executed noncompetitively. (Tr. at 55, 65.) Based on the suspicions aroused by these records, COMEX asked Clark and Auciello to submit their trading records for that day. Marrazo said exchange staff noted several irregularities in these trading records. For instance, trades executed between Clark and Auciello did not appear in the same chronological order on their personal trading cards; trades were recorded in different colored ink; and there were obliterations on Clark's trading cards. (Tr. at 58.)
In light of these irregularities, Marrazo inferred that Clark had engaged in noncompetitive trading with Auciello. Marrazo stated that Clark had failed to announce his bids and offers to the ring and traded away from the market. (Tr. at 66.) In addition, Marrazo testified that Clark and Auciello had "traded for themselves at a better price than the customer orders had received on both sides of the market." (Tr. at 64.)
The Division's second witness, James Morrissey, testified that on March 24, NYMEX officials monitoring the platinum pit observed that a price had been reported for a trade execution that appeared to be higher than the prevailing market price. (Tr. at 163.) When an official challenged the price and asked who had executed the trade, no trader in the pit claimed it, and the price was stricken. Later during the same trading session, a higher than prevailing price was reported again and challenged again. Clark claimed the trade, which involved 35 platinum contracts and was executed opposite Clark's cousin. As part of their investigation, pit officials promptly interviewed five traders who stood in Clark's vicinity in the platinum ring on the day at issue. (Tr. at 164.) According to Morrissey, because none of the five had observed the trade in question, the pit officials concluded that the trade had not been executed competitively. (Tr. at 162-64.)
Morrissey testified that on April 11, 1988, Clark was interviewed by Robert Anderson, a member of NYMEX's compliance staff. (Tr. at 164-65.) During that interview, Anderson asked Clark to submit his trading cards for March 24, 1988. Morrissey said that, when he joined the investigation, he reviewed the trading cards that Clark had submitted and found irregularities. According to Morrissey, the first two trading cards Clark had supposedly used on March 24, 1988, were facially dissimilar to the remaining cards Clark used on that day. Morrissey testified that the first two cards that Clark had submitted actually matched trading cards from a pad Clark had used in mid-April. In light of these irregularities, Morrissey concluded that Clark had rewritten his first two trading cards from March 24, 1988, in an attempt to hide his noncompetitive execution. (Tr. at 166-168.)
Morrissey described two interviews with Clark. During the first interview, which took place before Morrissey discovered the irregularities in Clark's trading cards, the two discussed a description of Clark's trading activity on the morning of March 24, 1988, which Clark had prepared at the request of the floor committee. Morrissey said Clark's written description:
failed to include a separate customer order that Mr. Clark executed on the morning of the 24th. Our review of his trades, and the execution for the customer, caused us to believe that he traded for his own account at better prices before he executed the . . . customer order that he had in his possession from the earlier point in time. . . . So our belief was that his violations of March 24th included, in addition to the prearranged trading, an event of trading ahead.
(Tr. at 171.) Morrissey said that at his second meeting with Clark, he confronted him with the evidence of the irregularities in his trading cards, whereupon Clark immediately offered to settle. Morrissey testified that this investigation led to NYMEX's imposition of sanctions on Clark in NYMEX Docket No. 88- 06. (Tr. at 173.)
Morrissey testified that sometime after his initial investigation of Clark's conduct, NYMEX's membership committee asked him to investigate a membership application submitted by Clark's brother, Robert. During nine months of 1987, Robert Clark worked at NYMEX as a clerk for Clark. During this period, trades were executed for an account maintained by the Clarkson Corporation. In his membership application, Robert Clark stated that he was both the owner and a director of the Clarkson Corporation. Since NYMEX rules prohibit clerks with access to customer orders from maintaining any ownership interest in a trading account, Morrissey was asked to investigate the trading for the Clarkson Corporation account.
As part of NYMEX's investigation, its compliance staff requested Clark to submit trading records relating to the Clarkson Corporation. According to Morrissey, Clark failed to produce the requested records and claimed that Elders Futures ("Elders"), his clearing member at the relevant time, had custody of the requested records. (Tr. at 177.) When Morrissey tried to locate the records, Elders informed him that they had searched their files and were unable to locate any of Clark's records. Morrissey testified that Elders told NYMEX it filed each broker's records on a monthly basis and that they had been able to find the records of other brokers for the same nine-month period. (Tr. at 177-178.) Elders concluded that Clark had never submitted his records. Clark said Elders had lost or misplaced them. (Tr. at 176-82.)
Morrissey further testified that NYMEX investigators ascertained that 15 round-turn trades, involving 31 separate transactions, were executed for the Clarkson Corporation account during the nine months that Robert Clark clerked at NYMEX. Each of the 15 round-turn trades resulted in a profit, with aggregate profits totalling about $11,000. The only order tickets relating to these trades that NYMEX located were for a round-turn trade that Clark had not executed.
Morrissey testified that, in light of Clark's failure to produce the relevant records, he inferred that Clark had executed the remaining 29 transactions for the Clarkson Corporation account. Morrissey also said that, based on the 100 percent success rate for the trades Clark executed for the account, he inferred that Clark had executed the trades noncompetitively and that Robert Clark played a role in that misconduct. (Tr. at 183- 87.) Morrissey agreed with the ALJ's suggestion that such noncompetitive trading would amount to a "fraud basically on the market involved." (Tr. at 187.)
Morrissey testified that this investigation led to NYMEX's sanctioning of Clark in NYMEX Docket No. 90.02. (Tr. at 188.) In regard to NYMEX's finding that Clark had made material misstatements, Morrissey pointed out Clark's assertions to investigators that his trading records had been submitted to Elders. Morrissey testified that "when Mr. Clark sent us off to Elders to find those records, he was obstructing the investigation deliberately, and that was a material misstatement." (Tr. at 187.)
Clark testified on his own behalf. In addressing COMEX's decision in Docket Nos. 02/516/91 and 03/516/91, Clark claimed that he has substantially reduced his trading with Auciello and other traders who have caused him problems in the past. He specifically denied any intentional wrongdoing, explaining that: "I felt in my heart I didn't break any rules there, but the panel's conclusions are that I did." (Tr. at 288.) He maintained that he "did not do anything wrong that day." (Tr. at 289.)
During Clark's testimony about his settlement of the charges in NYMEX Docket No. 88-06, he again denied any wrongdoing, explaining that there were "errors and problems that happened in that day that at the time I didn't realize they were problems, but inadvertently they became problems." (Tr. at 291-92.) He testified that, when NYMEX investigators showed him all of the relevant order tickets, he saw that he appeared to have traded ahead of a small customer order on the morning in question. He denied that he did so intentionally, however, asserting that he was unaware that he was holding the customer order when he executed the disputed platinum trade. (Tr. at 295.)
Clark offered a tentative explanation for the irregularities in his trading cards. He said he might have started to use one pad at the beginning of the disputed trading session and inadvertently changed to another in the course of the morning. He speculated that he "picked the wrong pad up and went back out to the pit. That's an explanation. I can't say it happened or it didn't happen, but if you want an explanation of what could have happened, that could have happened." (Tr. at 355.)
Clark testified extensively about the charges underlying NYMEX's decision in NYMEX Docket No. 90.02. He denied that he violated NYMEX rules prohibiting clerk trading or that he had obstructed NYMEX's investigation. (Tr. at 305.) In refuting the charge of clerk trading, Clark asserted that his brother was never a clerk and that his brother had no ownership interest in or trading authority with respect to the Clarkson Corporation account.
Regarding the Clarkson Corporation account, Clark testified that the account was completely owned and controlled by his father. (Tr. at 344.) He acknowledged that he acted as a floor broker for the Clarkson Corporation account, but said he had nothing to do with making trading decisions for it and was unaware that some of the trades he executed on the exchange floor were for the family account. (Tr. at 343).Clark speculated that this account--supposedly traded off the floor by his father who had no previous trading experience--had 15 consecutive profitable trades because of a "hot streak." (Tr. at 345.)
In denying charges that he obstructed the NYMEX investigation, Clark speculated that Elders may have misplaced the records for the Clarkson Corporation account or that someone at Elders may have stolen the records. (Tr. at 181-82.)
Clark admitted that he had failed to file an updated Form 8- R to notify NFA of the decisions in NYMEX Docket No. 90.02 and COMEX Docket Nos. 02/516/91 and 03/516/91. He said he had entrusted this task to an attorney who neglected to perform it, but acknowledged on cross-examination that it was his responsibility to insure that this form was properly filed. Clark also admitted violating COMEX Rule 4.80(g) (failure to timely submit trading cards to a primary clearing member), as alleged in the Notice at 9, an action he settled in 1991 by paying a $150 fine. He also admitted the four summary disciplinary actions NYMEX took against him in 1987 and 1989. Notice at 10.
After addressing liability issues, Clark offered testimony regarding mitigation and rehabilitation. He generally denied ever having done anything knowingly to violate an exchange rule and emphasized that he never injured a customer. He said that, as a young and busy trader, he made mistakes. While freely admitting to such general defects of conduct and judgment, Clark emphatically denied committing the specific misconduct that Morrissey and Marrazo described at the hearing.
Clark testified that he suffers from a variety of mental, emotional, and physical illnesses, some of which are related to the stress of commodities trading and some of which have affected him throughout his life, such as a speech impediment and dyslexia. Nevertheless, he claimed that with the passage of time and appropriate medical treatment, he is now completely rehabilitated. He further said that his marriage and the birth of his son have had a positive effect on his life. When the ALJ questioned him about what behavior he claimed to have been rehabilitated from, Clark did not have a sufficient response. (Tr. at 326-28.)
Following the completion of the hearings, the parties filed a variety of post-hearing submissions, including briefs and proposed findings of fact and conclusions of law. In addition, Clark filed a motion to reopen the hearing pursuant to Commission Rule 10.69, 17 C.F.R. 10.69 (1996), so he could offer the testimony of Robert Anderson, an investigator with the NYMEX compliance staff who had testified in NYMEX Docket No. 90.02. Clark alleged that Anderson's testimony would show that Morrissey had exercised improper influence over the testimony Anderson offered during the proceeding. As to the timeliness of his submission, Clark claimed that he had been unable to locate and contact Anderson until after the hearing was complete.
The Division opposed this motion contending that the new evidence was not material to the issues raised in the case and that Clark had failed to show reasonable grounds for the delay.
THE INITIAL DECISION
In February 1995, the ALJ issued his initial decision revoking Clark's registration. In re Clark, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,305 (ALJ Feb. 3, 1995). The judge concluded that reopening the hearing to adduce additional evidence was unwarranted in light of the standards set forth in Commission Rule 10.69.In this regard, the ALJ concluded that the evidence Clark sought to adduce was material, but found that Clark had failed to establish that there were reasonable grounds for his failure to present the evidence earlier. The ALJ noted that Clark's counsel was aware of the character of the new evidence prior to the hearing in this matter, but failed to bring it to the ALJ's attention at that time. In light of this delay, and Clark's related dilatory tactics in litigating the proceeding, the judge found that the circumstances did not justify reopening the hearing.
The ALJ's evaluation of the merits of the Division's allegations turned largely on his evaluation of witness credibility. He credited all aspects of Morrissey's testimony, characterizing it as "extremely persuasive." Id. at 42,502. In contrast, he found that Marrazo's testimony was "unhelpful" and "unreliable" because he was "minimally prepared" and the testimony reflected "little recollection" of the details of COMEX's investigation of Clark's behavior. Id. at 42,506. Finally, the ALJ found Clark's testimony completely unpersuasive, noting that his evidence of mitigation was "nothing more than a continued denial of engaging in the disqualifying conduct at issue" and that his testimony "mock[ed]" the notion of accepting responsibility for his conduct. Id. at 42,509 n.67.
Based on Morrissey's testimony, the ALJ concluded that the record established that Clark had engaged in fraudulent trading practices in both March 1988 and during a nine-month period in 1987. The ALJ found that on March 24, 1988, Clark engaged in a prearranged trade of 35 platinum futures contracts with his cousin on the NYMEX and, to mask his fraudulent activity, subsequently rewrote two of his trading cards. Id. at 42,505. The ALJ also found that Clark held an executable customer order at the time he executed the illegal trade. Id. at 42,504.
The ALJ also held that, during a nine-month period in 1987, Clark engaged in a series of noncompetitive trades in the NYMEX platinum pit to benefit the Clarkson Corporation account. The ALJ found that Clark had fraudulently obtained the successful trading results in the account and subsequently concealed or destroyed the relevant trading records in order to hide his misconduct. Id. at 42,504. He found that Clark's enrichment of the family-owned account "was at the expense of NYMEX's defrauded customers who were denied a competitive price as determined by open outcry." Id.
In light of these findings, the ALJ concluded that the Division had established "other good cause" for revoking Clark's registration under Section 8a(3)(M) of the Act. He ruled that Clark's wrongdoing was sufficiently grave to constitute "other good cause" because it reflected not only an "'act or pattern' which plainly demonstrate[d Clark's] 'inability to deal fairly with the public,'" but also disregard of the Act because Clark's fraudulent trading "violate[d] the antifraud provisions of Section 4b." Id. at 42,508.
As to the other wrongful conduct described in the Notice, the ALJ held that the Division had either failed to prove that the alleged conduct occurred or failed to establish that the proven conduct was sufficiently grave to constitute "other good cause." As noted above, he found that Marrazo's testimony was insufficiently reliable to support the allegations relating to Clark's conduct at COMEX. Id. at 42,506. He also concluded that the Division had failed to provide "any evidence" in support of several of the Notice's allegations. Id. at 42,506-07.
The ALJ ruled that three other elements of proven conduct were insufficiently grave to constitute "other good cause" on their own. Id. at 42,506 n.59. He held that a nine-month suspension that COMEX had imposed lacked independent significance because it was based on conduct adjudicated and sanctioned by NYMEX. See Notice at 8. He ruled that Clark's admitted failure to submit his trading cards in a timely manner was not a result of willful wrongdoing and did not amount to "other good cause." See Notice at 9. He also found that the Division had proven that Clark failed to provide NFA with timely information about two of the exchange proceedings at issue, but credited Clark's testimony that his error was a result of reliance on his attorney to submit the required forms. In the absence of proof that Clark acted willfully, the ALJ held that the reporting violation did not rise to the level of other good cause. See Notice at 11.
In commenting on the Division's failure to present evidence to support some of the Notice's allegations, the ALJ reiterated two points he had made in prehearing rulings. First, he emphasized that neither the specific provisions of Section 8a nor the language of Section 8a(3)(M) supported the Division's view that proof that the respondent was subject to a series of disciplinary actions by self-regulatory organizations constituted "other good cause" for revoking a registration. Second, he concluded that, as a matter of law, the Division was precluded from relying on decisions by self-regulatory organizations to collaterally estop a respondent from challenging factual issues relevant to disqualification. The ALJ ruled that collateral estoppel may only be invoked as to an issue determined by a court of competent jurisdiction and that "a self-regulatory COMEX panel . . . comprised of members, does not rise to this level." Id. at 42,507 n.60.
Having concluded that the Division had met its burden of establishing "other good cause" for revoking Clark's registration, the ALJ turned to an assessment of Clark's evidence of mitigation and rehabilitation. He characterized Clark's mitigation evidence as "nothing more than a continued denial of engaging in the disqualifying conduct at issue." Id. at 42,509. Noting that Clark "neither expressed remorse or accepted responsibility for his conduct," the ALJ stated that Clark "presented little evidence beyond the passage of time to support his claim of a 'changed direction'" and concluded that Clark was not rehabilitated. Id. at 42,509-10.
In light of these findings, the ALJ concluded that Clark was subject to a statutory disqualification from registration under Section 8a(3)(M) of the Act and had failed to rebut the presumption that his continued registration would pose a substantial risk to the public. In these circumstance, the ALJ ordered that Clark's registration as a floor broker be revoked. Id. at 42,511.
Both the Division and Clark filed timely appeals from the ALJ's initial decision.
DISCUSSION
On appeal, Clark raises a number of procedural challenges. He argues that the ALJ erred in declining to dismiss the Notice in light of alleged defects in its allegations. In addition, he challenges the ALJ's decision to exclude Jay Israel as a witness at the hearing. He also objects to the ALJ's denial of his motion to reopen the record, contending that the record shows he took reasonable steps to raise the newly discovered evidence as soon as practicable. As to the substance of the ALJ's decision, Clark challenges the judge's credibility determinations and factual assessments as unsupported by the record.
For its part, the Division also challenges aspects of the ALJ's credibility determinations and factual assessments. In addition, it contends that the ALJ adopted an unduly narrow approach to determining the type of conduct that may constitute "other good cause" for revoking registration under Section 8a(3)(M). Finally, the Division contends that the ALJ's prehearing ruling precluding it from relying on collateral estoppel is contrary to Commission and federal court precedent establishing the grounds for invoking collateral estoppel.
I.
Clark argues that the ALJ committed procedural errors. He contends that the ALJ should have reopened the hearing to consider testimony from NYMEX employee Robert Anderson, challenging the ALJ's conclusion that Clark did not raise the new evidence in a timely manner.
Commission Rule 10.69 permits a party to petition the ALJ to reopen the record in an enforcement proceeding prior to issuance of the initial decision upon a showing that "the evidence sought to be adduced is relevant and material" and "that there were reasonable grounds for failure to adduce such evidence at the time of the original hearing." The ALJ held that Clark had failed to satisfy the second prong of the test. Noting that Clark's lawyer admitted knowing of Anderson's information before the hearing began, he concluded that Clark had failed to show that he had reasonable grounds for failing to adduce the evidence at the original hearing.
We agree with the ALJ. Rule 10.69 imposes a necessary degree of discipline upon litigants, requiring them to investigate thoroughly and promptly and to deal forthrightly with the forum and other parties. As the ALJ properly noted, Clark engaged in extensive delaying tactics in litigating his case, raising numerous claims concerning the introduction of new evidence, new witnesses, and new theories in support of continued proceedings. In these circumstances, we find that the ALJ properly rejected Clark's continued attempts to protract this proceeding.
The ALJ's ruling that Jay Israel would not be allowed to testify regarding purported ex parte contacts between the NYMEX compliance staff, whose role was prosecutorial, and the attorneys who advised NYMEX's appeals panel was consistent with his prehearing order refusing to apply collateral estoppel. Once the ALJ made clear that he would not apply preclusion principles in trying this case, the judge's ruling made collateral attacks on the integrity of the NYMEX forum irrelevant. The ALJ acted properly in excluding evidence that was irrelevant in the context of his prehearing rulings.
Although Clark argues on appeal that Israel's testimony would not have been limited to the ex parte issue, a review of the record reveals that at the outset of the hearing, the ALJ closely questioned Clark's lawyers as to the subject matter of Israel's testimony. Both said Israel would address the integrity of the NYMEX proceeding. Neither suggested that Israel would or could speak to any other aspect of the case, even when the ALJ indicated that he would dismiss Israel as a witness. (Tr. at 14- 22.)
II.
Both parties challenge aspects of the ALJ's credibility determinations and factual assessments as unsupported by the record. Clark challenges the ALJ's endorsement of Morrissey's testimony and dismissal of his own explanation for his conduct. The Division challenges the ALJ's negative assessment of Marrazo's testimony and crediting of Clark's claim that his failure to disclose information to NFA was a product of his reliance on counsel.
The Commission generally defers to the credibility determinations of its presiding officers. See In re Squadrito, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,262 at 38,828 (CFTC Mar. 27, 1992). Neither Clark nor the Division has demonstrated the type of substantial defect in the judge's credibility determinations that would warrant our reaching a different result. In these circumstances, we adopt the ALJ's credibility assessments and utilize them in our independent assessment of the factual record before us.
III.
Based on our review of the record, we conclude that Morrissey's testimony establishes that Clark engaged in two instances of noncompetitive trading at NYMEX and that one of these instances resulted in specific harm to Clark's customer. In addition, it establishes that Clark twice took steps to obstruct NYMEX's investigation of his conduct.
As to Clark's noncompetitive execution of a 35-contract platinum trade in March 1988, Morrissey fully explained the chain of evidence he developed in conducting the investigation. Since none of the five traders in Clark's vicinity who were interviewed soon after the disputed trade could remember its execution, it may permissibly be inferred that the trade was prearranged between Clark and John Lymkin and not filled through open outcry. The inference of prearrangement is further supported by the fact that the trade was executed at a higher price than the prevailing price and that the trade was challenged by pit officials immediately after the price was posted.
An analysis of Clark's trades for the day in question demonstrates that Clark held an executable customer order while trading opposite Lymkin. Clark's failure to include the customer trade in his narrative of his activities that day evidenced his attempt to hide the fact that he had traded ahead of the customer.
Clark's testimony did not rebut Morrissey's testimony regarding this trade. While Clark denied that he intentionally traded ahead of the customer, he admitted that he appeared to have done so, and he offered only speculative explanations for how the trading pad anomalies noted by Morrissey could have occurred. In sum, the ALJ properly rejected Clark's vague explanations and credited Morrissey's account.
The ALJ also properly credited Morrissey's testimony about Clark's trading for the Clarkson Corporation account during a nine-month period of 1987. The ALJ determined that the Clarkson Corporation account's improbable record of success and the disappearance of its trading records both pointed to prearranged trading. Clark's alternative explanations for the missing records--disruption associated with Elders' reorganization, slipshod recordkeeping by Elders or misappropriation by others with access to Elders' files--are not persuasive, particularly since nine months' of records could not be located while records of other Elders' brokers for the same period were found. Clark's contentions with respect to the account's trading success are similarly unpersuasive.
To summarize, the record establishes significant wrongdoing by Clark--a pattern of noncompetitive trading, a pattern of obstructing NYMEX's disciplinary process, and customer fraud. This wrongdoing plainly establishes that Clark was dishonest and has been unable to comply with the requirements of the Act. It is sufficiently grave to constitute "other good cause" for revoking Clark's registration under Section 8a(3)(M). Indeed, as the ALJ noted, Congress has specifically recognized that the type of fraudulent conduct Clark engaged in constitutes a statutory disqualification under Section 8a(2)(E).
Clark's mitigation and rehabilitation evidence does not overcome the presumption of unfitness arising from his disqualification. He argues that the ALJ should have given more weight to his mitigating factors, namely his youth and his physical and mental disabilities. Youth can be a mitigating factor in appropriate circumstances. See, e.g., In re Walter, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,215 (CFTC Apr. 14, 1988). In the circumstances of this case, however, it does not merit significant weight. The record establishes a pattern of repeated willful misbehavior over a period of more than a year, not an isolated incident of youthful misjudgment.
Nor do Clark's medical and psychological problems mitigate his behavior. While he appears to have suffered from illnesses which culminated in a psychiatric hospitalization, there is insufficient proof to establish that such illnesses caused his illegal behavior.
Clark has failed to put forward persuasive evidence of rehabilitation. The principal defect in his evidence is his total inability to acknowledge or to accept any responsibility for his past misconduct. He admits only to unspecified "mistakes" and insists that he did nothing wrong in connection with the prearranged trading incidents that form the basis for his disqualification. With no evidence of an affirmative change in direction, the passage of time carries little weight.
Our review of the record establishes that Clark has committed significant wrongdoing that endangered the integrity of the market and defrauded customers. Such behavior amounts to "other good cause" for revoking his registration. Clark has produced little or no persuasive evidence that the seriousness of his wrongdoing was mitigated or that he has changed the direction of his conduct since the time of the wrongdoing. In these circumstances, Clark's registration must be revoked.
IV.
In its cross-appeal, the Division challenges the judge's narrow construction of the type of conduct that may constitute "other good cause" for revoking registration under Section 8a(3)(M) and his prehearing ruling precluding it from raising the issue of collateral estoppel.
The Division's Notice alleges that Clark is unfit for registration because he has been the subject of a series of disciplinary actions in which self-regulatory organizations sanctioned him for misconduct. In essence, the Division claims that these disciplinary actions, taken as a whole, amount to "other good cause" under Section 8a(3)(M) of the Act. The ALJ ruled that, as a matter of law, a series of self-regulatory organization disciplinary actions cannot establish "other good cause." The Division argues that the ALJ erred in so ruling. We agree and find that a statutory disqualification under Section 8a(3)(M) may arise on the basis of a pattern of exchange disciplinary actions alleging serious rule violations that result in significant sanctions.
In 1982 the Act's registration provisions were amended by the Futures Trading Act of 1982, Pub. L. 97-444, 96 Stat. 2294 (1983)(the "1982 Act"). The legislative history of the 1982 Act demonstrates that one of Congress's purposes in revising the Act's registration provisions was to streamline and simplify the registration procedures so that those who were fit could be registered expeditiously and those who were unfit could be removed from the industry promptly. See Walter, 24,215 at 35,010 and authority cited therein.
The 1982 Act also increased the categories of cases establishing a prima facie case of unfitness. Section 8a(3) sets forth 14 bases on which the Commission may take adverse registration action against a person after a hearing. Of these, 13 are specific conditions or circumstances, e.g., failure to meet minimum financial requirements or a felony conviction. Section 8a(3)(M), a catchall provision, allows adverse registration action for "other good cause."
"Other good cause" is not defined in the statute. The Commission's Interpretative Statement With Respect to Section 8a(3)(M) of the Act explains that this provision
authorize[s] the Commission to affect the registration of any person if, as a result of any act or pattern of conduct attributable to such person, although never the subject of formal action or proceeding before either a court or governmental agency, such person's potential disregard of or inability to comply with the requirements of the Act or the rules, regulations or order[s] thereunder, or such person's moral turpitude, or lack of honesty or financial responsibility is demonstrated to the Commission.
The statement concludes that:
Any inability to deal fairly with the public and consistent with just and equitable principles of trade may render an applicant or registrant unfit for registration, given the high ethical standards which must prevail in the industry.
17 C.F.R. Part 3 (1996), at App. A.
Apparently, the ALJ believed that a self-regulatory organization's imposition of sanctions on a member is not relevant to determining whether the member is unable to comply with the requirements of the Act or to deal with the public in a manner consistent with just and equitable principles of trade. Nothing in the Act compels such a view, however, especially where, as here, the record shows that a respondent has been involved in a pattern of exchange disciplinary actions over several years alleging serious rule violations and resulting in the imposition of significant sanctions on respondent. For purposes of the standard we articulate here, it is immaterial whether the sanctions were imposed in a fully adjudicated disciplinary action or an action that resulted in a settlement. In addition, we find that, at a minimum, charges of fraud, customer abuse or other illicit trading practices constitute allegations of serious violations of exchange rules.
Clark was sanctioned by NYMEX in March 1989 (Notice at 6) and January 1991 (Notice at 7) and by COMEX in June 1992 (Notice at 5). On each occasion, the sanctions imposed by these exchanges were significant and the charges involved serious rule violations. Such a pattern of exchange disciplinary actions supports an inference that respondent is unable to deal with the public in a just and equitable manner.
We have previously reviewed the evidence of mitigation and rehabilitation submitted by Clark. See pp. 33-34, supra. We find his showing equally unpersuasive in the context of this alternative theory for establishing "other good cause" for revoking Clark's registration. Accordingly, we find that the Division's proof of a pattern of disciplinary actions filed against respondent which alleged serious rule violations and resulted in the imposition of significant sanctions establishes "other good cause" for revoking his registration under Section 8a(3)(M) of the Act. In these circumstances, the Division has established an independent basis for a finding that there is "other good cause" for revoking Clark's registration.
V.
We turn to the final issue raised in the Division's appeal-- its contention that the ALJ erred by precluding it from asserting collateral estoppel to establish that Clark had committed misconduct that amounted to "other good cause." The ALJ acknowledged that it is well established that collateral estoppel may arise from decisions of administrative agencies of government, but ruled that decisions of a self-regulatory organization comprised of industry members were insufficient to support the application of collateral estoppel. Initial Decision at 42,507 n.60.
However, courts have not limited collateral estoppel to decisions by courts or other governmental forums. Indeed, arbitration decisions may be given preclusive effect in appropriate circumstances. See Greenblatt v. Drexel Burnham Lambert, Inc., 763 F.2d 1352, 1360 (11th Cir. 1985). Courts look to whether a proceeding "affords basic elements of adjudicatory procedure." Id.
Determinations made by futures exchanges in formal disciplinary actions pursuant to Subpart B of the Commission's Part 8 Rules provide sufficient adjudicatory procedure to warrant application of collateral estoppel. In a formal disciplinary action, an exchange must provide notice of its charges with sufficient detail to enable a respondent to frame an answer and to prepare a defense, permit a respondent to be represented by counsel or another representative, and provide a fair hearing on contested charges before members of a disciplinary committee at which the respondent is entitled to appear, to cross-examine adverse witnesses, and to present evidence. See Commission Rules 8.11, 8.12, 8.15, 8.17(a)(1), (6)-(8), 17 C.F.R. 8.11, 8.12, 8.15, 8.17(a)(1), (6-8) (1996).
Part 8 further requires an exchange to make a substantially verbatim record of the hearing, requires the disciplinary panel to prepare a written opinion capable of review, and requires an exchange to provide an internal appeal procedure. Id. at Sections 8.17(a)(10), 8.18, 8.19, 17 C.F.R. 8.17(a)(10), 8.18, 8.19 (1996). Finally, exchange disciplinary actions are subject to Commission review and subsequent review in the federal courts. See Section 8c(b) of the Act, 7 U.S.C. 12c(2) (1994), and Commission Rules 9.1, 9.20, 9.30 and 9.31, 17 C.F.R. 9.1, 9.20, 9.30, 9.31 (1996).
Accordingly, we hold that the formal disciplinary proceedings of a self-regulatory organization afford respondents adequate procedural safeguards, and assuming the other requirements of collateral estoppel are satisfied, the decisions reached in those proceedings support the application of collateral estoppel against respondents.
Courts generally apply a multi-factor test in assessing whether collateral estoppel may be properly invoked against a party to a prior proceeding: (1) as discussed above, whether the forum resolving the issue in the first case was a "judicial-like" decision-maker that was acting within its jurisdiction; (2) whether the issue was actually litigated; (3) whether the issue was actually and necessarily resolved; and (4) whether the issue that was resolved in the first case is in substance the same as the issue in the second case. The burden of proving these factors in a statutory disqualification case rests with the Division. After it has been demonstrated that these requirements are satisfied, the first case is subject to a second level of scrutiny before it will be given preclusive effect in the second case. At this second level of scrutiny, courts analyze a variety of fairness-related factors, including whether the party resisting estoppel had a full opportunity and an adequate incentive to contest the issue in the first case. In a statutory disqualification case, a respondent seeking to avoid the preclusive effect of an exchange decision would bear the burden of showing that preclusion would be unfair in his or her case.
Because the ALJ's prehearing ruling prevented the Division from relying on collateral estoppel, the record in this case is insufficient to rule on the factors relevant to the proper application of collateral estoppel. Thus, collateral estoppel could not be applied to any of the exchange decisions listed in the Notice absent a remand for further hearing on the above- listed factors.
Such a remand is not warranted in this case since we hold that the Division prevails under two independent theories: our affirmance of the ALJ's liability findings and our conclusion that "other good cause" under Section 8a(3)(M) exists based on the pattern of exchange disciplinary actions resulting in substantial sanctions for significant rule violations.
In conclusion, we reiterate that collateral estoppel is a litigation tool available for the Division's use in statutory disqualification cases. The propriety of its application in a given case will be determined in accordance with the factors discussed herein.
CONCLUSION
For the foregoing reasons, Clark's registration as a floor broker is revoked.
IT IS SO ORDERED.
For the Commission (Chairperson BORN and Commissioners DIAL, TULL, HOLUM, and SPEARS).
_____________________________
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: April 22, 1997
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