UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
In the Matter of
GRAIN LAND COOPERATIVE
_________________________________: CFTC Docket No. 97-1
In the Matter of :
ROGER J. WRIGHT d/b/a AGRICULT-
URAL MARKETING SERVICE d/b/a : CFTC Docket No. 97-2
MICHA I INVESTMENT CLUB,
BUCKEYE COUNTRYMARK, INC.,
PHILLIP L. LUXENBERGER, and
A.G. EDWARDS & SONS, INC.
In the Matter of
SOUTHERN THUMB CO-OP, INC. :
_________________________________: : CFTC Docket No. 97-3
OPINION AND ORDERS ON INTERLOCUTORY REVIEW
These applications for interlocutory review arise from three enforcement proceedings pending before the Commission's Administrative Law Judges ("ALJs").(1) The parties to these cases seek review of certain common issues involving alleged ex parte communications and separation of functions. The issues stem from respondents' claims that the staff of the Division of Enforcement ("Division") improperly discussed the merits of the cases with the Commission between the time it voted to authorize the complaints and the date on which the complaints were signed by the Commission's Secretary and filed with the Proceedings Clerk.(2) For the reasons discussed below, we find no merit to the respondents' arguments and conclude that the Division has not acted improperly.
On November 13, 1996, complaints in the Grain Land, Southern Thumb, and Buckeye cases were signed by the Secretary of the Commission, filed with the Office of Proceedings, and served on all named respondents.(3) At various times in December 1996 and January 1997, the respondents (except Roger Wright in Buckeye) filed motions alleging that the Division improperly communicated with the Commission and Commission decisional employees(4) about the merits of these cases. The respondents argued that these conversations violated separation of functions rules, prohibitions against ex parte communications, and procedural due process rights secured by the Fifth Amendment.
Buckeye Countrymark, Inc., a respondent in Docket No. 97-2, submitted a memorandum in support of its motion setting forth its version of relevant events. See generally Buckeye Memorandum (Dec. 20, 1996). The other respondents alleged substantially similar facts. According to Buckeye, on August 9, 1996, about six months after the Division began investigating HTAs, the Division contacted its lawyer and "stated unequivocally that the Commission already had authorized the filing of an administrative complaint alleging that Buckeye had violated [the Commodity Exchange Act and Commission Rules]," but would "delay the public filing of the complaint pending settlement negotiations between the parties." Memorandum at 3. Over the next six weeks the Division and Buckeye attempted without success to negotiate a settlement. Id. at 3-4. Buckeye stated that on Friday, September 27, 1996, it informed the Division that it believed the prohibition against ex parte contacts in Commission Rule 10.10, 17 C.F.R. § 10.10 (1997), went into effect on or before August 9, 1996, when Buckeye was told the Commission had authorized the complaint against it. Id. at 3. Buckeye therefore alleged that:
[u]pon information and belief, on numerous occasions after the Commission
authorized the complaint, but before the complaint was filed on the
public record, the Division . . . communicated with the Commission and
Commission decisional employees concerning the merits of the
Division's allegations and the substance of the parties'
respective positions on settlement; and . . . provided the Commission and
Commission decisional employees with written comments concerning the
merits of Buckeye's Appendix A submission . . . .
Id. at 7.
Buckeye also argued that on November 8, 1996, five days before the complaint against it was filed and served, the Commission held a nonpublic meeting during which the Division presented its views on the merits of its case against Buckeye. Buckeye argued that at that meeting the Commission ordered the complaint we previously had authorized to be filed and served. Id. at 8.
The Division opposed Buckeye's motion, denying that its employees acted improperly and arguing that the rules cited by respondent were inapplicable to the allegedly improper communications. According to the Division, the prohibitions in the Commission's ex parte rule did not apply to communications from Commission employees. Separately, the Division argued that no violation of the separation of functions rule occurred. The Division argued that that rule, Commission Rule 10.9, 17 C.F.R. § 10.9 (1997), did not apply until a proceeding was commenced and that, since "[t]his action was commenced by the filing of a complaint and notice of hearing on November 13, 1996," no violation occurred. According to the Division, "[t]his is the only important fact for the purposes of the instant motions." Division's Response at 2 (Feb. 7, 1997).(5)
Buckeye respondent A.G. Edwards & Sons, Inc. ("A.G. Edwards") filed pleadings substantially identical to those filed by Buckeye, and respondent Phillip Luxenburger, an A.G. Edwards employee, adopted the company's arguments. Similar arguments were advanced by the parties in Grain Land and Southern Thumb. The respondents in all three cases sought similar relief, asking the ALJs to issue orders to show cause why the cases should not be dismissed and why the Division should not be sanctioned for the alleged misconduct of its personnel.
The ALJs ruled differently on the show cause motions. Judge Levine granted the motions before him in Buckeye and announced that he would conduct a factual inquiry to assure that an on-the-record disclosure of the communications was accomplished.(6) Judge Levine held that, once the Commission voted "to authorize the complaints," an adjudicatory proceeding commenced under Rule 10.21, 17 C.F.R. § 10.21 (1997), and the ex parte communications prohibition of Administrative Procedure Act ("APA") Section 554(d), 5 U.S.C. § 554(d) (1994), applied. He characterized the actual filing and service of the complaints in November 1996 as a ministerial act without substantive significance. According to the ALJ, "[a]t the moment that the Commission . . . `voted to charge certain persons and entities for violations specified' in the Complaint, the Division was subject to Section 554(d)'s restrictions . . . ." Levine Order of April 2, 1997 at 15 (internal citation omitted).
In consequence of these findings, Judge Levine ruled that he was "duty bound" to conduct a factual inquiry concerning the Division's communications with the Commission. He concluded that such an inquiry was needed to ensure both the disclosure of all communications and the opportunity for respondents to rebut such communications. Accordingly, he ordered the Division to provide in camera all relevant written communications, a list of investigative and prosecutorial agency staff that communicated orally with the Commission, any Commissioner, or Commission decisional employee regarding Buckeye or factually related cases between August 15, 1996, and November 13, 1996, and a list of the recipients of all such oral communications. Judge Levine also asked the parties to set forth their views on the specific procedures to be followed during the inquiry.
Judge Painter, on the other hand, denied relief to Southern Thumb and Grain Land in two-page orders. He agreed with the Division that the ex parte communications prohibitions did not apply to the challenged communications because the Division is a person within the Commission, not outside of it. He also held that the separation of functions rules did not apply before a complaint is filed with the Proceedings Clerk because "the Commission does not serve in a decisionmaking capacity" before a complaint is filed and served. See Painter Corrected Order of February 11, 1997 at 2.(7)
The rulings on the show cause motions prompted a second round of motions. The Division in Buckeye and the respondents in Grain Land and Southern Thumb requested the ALJs to certify the contested issues for interlocutory review by us. See Commission Rule 10.101(a)(5), 17 C.F.R. § 10.101(a)(5) (1997). Judge Levine granted certification in Buckeye and stayed further proceedings pending such review, whereupon the Division filed an application for interlocutory review here.(8) Judge Painter denied certification in Grain Land and Southern Thumb and moved forward with those cases. Those respondents asked us to grant interlocutory review despite the absence of certification and also to stay proceedings before Judge Painter pending review.(9)
Since Judge Levine certified his ruling in Buckeye as appropriate for interlocutory review, the initial issue before us is whether the Division has made a sufficient showing of "extraordinary circumstances" to warrant immediate resolution of the issues raised. In re Abrams, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,577 at 36,494 (CFTC Oct. 13, 1989). We have held that this requirement is fulfilled when the ruling in question raises issues of first impression that would have a material impact on other enforcement proceedings and "there is substantial doubt that an appeal at the end of the proceeding would be effective in protecting the Division's ongoing interests." In re Bilello, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,032 at 41,311 (CFTC Mar. 25, 1994). Given the breadth of Judge Levine's ruling, the fundamental errors underlying it, and the resources that would be wasted on unnecessary proceedings to uncover the facts relating to the allegedly improper communications, we find that extraordinary circumstances exist and grant the Division's application for interlocutory review.(10)
Turning to the substantive issues, we assume, without deciding, that the communications in question took place at a time when a proceeding had been "commenced" within the meaning of Commission Rule 10.21.(11) In these circumstances, the question before us is whether the communications in question were prohibited by the APA, which governs federal agency adjudicatory proceedings generally, by Commission rules, or by principles of due process.
Ex parte communications relevant to the merits of a proceeding are specifically prohibited by both Section 557(d) of the APA, 5 U.S.C. § 557(d) (1994), and Commission Rule 10.10. The plain language of both these provisions, however, describes the relevant prohibition as applying to interested persons "outside" the Commission (Rule 10.10) or the agency (Section 557(d)).(12)
Given this unequivocal language, courts have consistently held that Section 557(d) of the APA does not apply to contacts within an agency. Burke v. Board of Governors of the Federal Reserve System, 940 F.2d 1360, 1368 (10th Cir. 1991), cert. denied, 504 U.S. 916 (1992)(ex parte communications prohibition does not apply to contacts within the agency); United Steelworkers of America v. Marshall, 647 F.2d 1189, 1213 (D.C. Cir. 1980), cert. denied, 453 U.S. 913 (1981)(APA ex parte communications rule cannot apply to contacts wholly among agency employees); Hercules, Inc. v. Environmental Protection Agency, 598 F.2d 91, 125 n.60 (D.C. Cir. 1978) (communications solely among agency employees excluded from APA ex parte communication prohibition). We interpret Commission Rule 10.10 in a similar manner and hold that the communications in question did not violate that rule.(13)
Turning to the separation of functions issue raised by Judge Levine's order, we begin by noting that both Section 554(d) of the APA and Commission Rule 10.9 prohibit Commission staff members who perform the function of an investigator or prosecutor in a proceeding (or a factually related proceeding) from performing the function of decision maker or advisor to the decision maker in the same proceeding.(14) Greenberg v. Board of Governors of the Federal Reserve System, 968 F.2d 164, 167 (2d Cir. 1992)(APA separation of functions rule violated only where a staff member actually participates in a case as both a prosecutor and an adjudicator); Environmental Defense Fund, Inc. v. Environmental Protection Agency, 510 F.2d 1292, 1305 (D.C. Cir. 1975)(no allegation of communication between agency prosecutorial staff and agency head regarding final decision of a case); In re Yeh, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,367 at 42,708 n.9 (Apr. 7, 1995)(the Commission and Division may discuss prosecutorial matters affecting a pending case, but not the Commission's adjudication of that case).
In arguing that the communications at issue were prohibited by Section 554(d), respondent Buckeye emphasized that the communications involved matters "relevant to the merits" of this proceeding, but failed to note the context in which the communications were made. When the context of the challenged communications is properly considered, there is no substantial likelihood that they amounted to participating or advising in an adjudicatory decision or review of such a decision, as proscribed by Section 554(d). Since the complaint had not been filed or served and since no proceedings in the case had occurred, no adjudicatory decision was at issue. In any event, under Commission procedures, an initial adjudicatory decision is issued by an ALJ, with the Commission's role limited to review of that decision. Therefore, the communications in question were neither intended to influence nor could be expected to influence the Commission's performance of its role as a decision maker. On this basis, we conclude that the communications in question were prohibited neither by Section 554(d) of the APA nor Commission Rule 10.9.(15)
The ALJ's decision emphasizes the need to harmonize the separation of functions rules of APA Section 554(d) and the ex parte communications prohibitions of APA Section 557(d). Section 554(d) was enacted as part of the original APA in 1946 and prohibits prosecutorial personnel from "participat[ing] or advis[ing]" in an agency decision.(16) Section 557(d) was enacted in 1976 and is directed against ex parte communications "relevant to the merits" of a proceeding between an agency's adjudicatory personnel and interested persons outside the agency. The ALJ sought to harmonize the two statutory provisions by holding that any communication between Division personnel and the Commission which was "relevant to the merits" within the meaning of Section 557(d) amounted to participation or advice in an adjudicatory decision or review of such decision under Section 554(d). However, the language Congress chose to describe the relevant prohibition in Section 554(d) is more narrowly focused. Moreover, since Section 557(d) was not added to the APA until 1976, its language is not a persuasive indication of Congress's intent in 1946 when it adopted the prohibition in Section 554(d).(17)
Respondents also contend that the communications at issue encroached on their procedural due process rights in addition to violating the APA. They assert that any communication about a pending case between Commissioners and agency prosecutorial employees necessarily violates due process principles without regard to the nature of the contact. Respondents' due process arguments echo their separation of functions concerns and are directed to the fact that, as is the case with most administrative agencies, the Commission possesses both prosecutorial and adjudicative functions. Such a combination of functions without more does not constitute a violation of due process. Withrow v. Larkin, 421 U.S. 35, 58 (1975). Respondents have failed to allege facts or circumstances that would support a finding that a risk of unfairness is "intolerably high" in these proceedings. Id. Accordingly, we reject these arguments.
In view of our analysis of the issues raised in Docket No. 97-2, as well as ALJ Painter's refusal to certify his rulings in Grain Land and Southern Thumb as appropriate for interlocutory review, we deny the applications for interlocutory review in Docket Nos. 97-1 and 97-3. See Rule 10.101(a)(5), 17 C.F.R. § 10.101(a)(5) (1997).
Accordingly, we grant the Division's application for interlocutory review and reverse the ALJ's show cause ruling in CFTC Docket No. 97-2 and deny the respondents' applications for interlocutory review submitted in CFTC Docket Nos. 97-1 and 97-3.
IT IS SO ORDERED.
By the Commission (Chairperson BORN and Commissioners DIAL, TULL, HOLUM, and SPEARS).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: September 12, 1997
1. In re Grain Land Cooperative ("Grain Land"), CFTC Docket No. 97-1, and In re Southern Thumb Co-op, Inc. ("Southern Thumb"), CFTC Docket No. 97-3, are assigned to Judge Painter. Judge Levine is assigned to In re Roger J. Wright et al. ("Buckeye"), CFTC Docket No. 97-2.
2. The substantive allegations in these cases--whether hedge-to-arrive grain contracts ("HTAs") violate the Commodity Exchange Act ("CEA" or "Act") and Commission Regulations--are not at issue here.
3. / The three complaints were brought against a total of six respondents. The four respondents in Buckeye are Buckeye Countrymark, Inc., a cooperative grain elevator in Xenia, Ohio; A.G. Edwards & Sons., Inc., a futures commission merchant headquartered in St. Louis; Phillip Luxenburger, an associated person in A.G. Edwards' Columbus, Ohio office; and Roger J. Wright, of Mechanicsburg, Ohio.
Southern Thumb is a cooperative grain elevator in Lapeer, Michigan, and Grain Land is a cooperative grain elevator in Blue Earth, Minnesota.
4. Commission Rule 10.10(a)(1), 17
C.F.R. § 10.10(a) (1997), defines Commission decisional employee as--
employees of the Commission who are or may reasonably be expected to be involved in the decisionmaking process in any proceeding, including, but not limited to: (i) Members of the personal staffs of the Commissioners; (ii) Members of the staffs of the Administrative Law Judges; (iii) The Deputy General Counsel for Opinions and Review and staff of the Office of General Counsel; (iv) Members of the staff of the Office of Proceedings; and
(v) Other Commission employees who may be assigned to hear or to participate in the decision of a particular matter.
5. The Division also argued that the communications did not deprive respondents of their procedural due process rights and contended that exposing the Commission's deliberative process to public scrutiny by placing such communications in the record would hamper the agency's regulatory mission.
6. See Order Denying Respondent's Motion to Show Cause Why This Proceeding Should Not Be Dismissed, CFTC Docket No. 97-1 (ALJ Painter Feb. 11, 1997) (Grain Land); Corrected Order Denying Respondent's Motion Styled "Motion to Show Cause Why This Proceeding Should Not Be Dismissed," CFTC Docket No. 97-3 (ALJ Painter Feb. 11, 1997) (Southern Thumb); Order Ruling on Motions to Show Cause, CFTC Docket No. 97-2 (ALJ Levine Apr. 2, 1997) (Buckeye).
7. The quoted order was issued in Grain Land. A substantially similar order was issued in Southern Thumb.
8. / The Division's application was filed on April 29, 1997, and was opposed in papers filed by respondents Buckeye and A.G. Edwards on May 6, 1997.
9. The applications in Grain Land and Southern Thumb were filed on April 17, 1997, and the Division responded on April 23, 1997.
10. As discussed more fully below, in light of our analysis of the issues raised in Buckeye, we deny interlocutory review in Grain Land and Southern Thumb.
11. Commission Rule 10.21 states that a proceeding commences when the Commission "authorizes service of a complaint and notice of hearing upon one or more respondents." In these cases the Commission had authorized complaints, but had directed that the filing and service of the complaints should be delayed pending settlement negotiations. We need not decide whether proceedings had commenced before the filing and service of the complaints.
12. Commission Rule 10.10(b)'s
prohibition against ex parte communications states that:
No interested person outside of the Commission shall make or knowingly cause to be made to any Commissioner, Administrative Law Judge or Commission decisional employee an ex parte communication relevant to the merits of a proceeding.
(emphasis added). An ex parte communication is defined as "an oral or written communication not on the public record . . . ." Id. at 10.10(a)(2).
5 U.S.C. § 557(d)(1)(A) of the APA provides that:
[N]o interested party outside the agency shall make or knowingly cause to be made to any member of the body comprising the agency, administrative law judge, or other employee who is or may reasonably be expected to be involved in the decisional process of the proceeding, an ex parte communication relevant to the merits of the proceeding . . . .
13. We also reject respondents' argument that the Commission intended to adopt broader coverage against ex parte communications than that provided in Section 557(d) when Rule 10.10 was adopted in 1977.
14. Because Section 554(d) of the APA has
broader applicability than Commission Rule 10.9, we focus our analysis on the former
provision. Section 554(d) provides in pertinent part:
An employee or agent engaged in the performance of investigative or prosecuting functions for an agency in a case may not, in that or a factually related case, participate or advise in the decision, recommended decision, or agency review pursuant to section 557 of this title, except as witness or counsel in public proceedings.
15. Judge Levine's order emphasizes language in Section 554(d) that can be read to impose a prohibition on ex parte communications independent of the prohibition reflected in Section 557(d). Section 554(d) indicates that the person who "presides at the reception of evidence" may not "consult any person or party on any fact in issue, unless upon notice and opportunity for all parties to participate." However, under the procedures followed in Commission enforcement matters, it is an ALJ, and not the Commission, who presides over the reception of evidence. Therefore, the communications did not violate this provision.
16. Congress enacted this rule in response to concerns raised with respect to the combination of prosecutorial and adjudicative functions in one administrative agency. Wong Yang Sung v. McGrath, 339 U.S. 33, 36-45 (1950).
17. Because Congress recognized that a combination of the functions of investigator, prosecutor, and decision maker in the members of the body comprising an agency was often necessary to the efficient administration of agency business, it also included language in Section 554(d) stating that its separation of functions rule was not applicable in any manner to "the agency or any member or members of the body comprising the agency." Commission Rule 10.9 includes a similar exclusion for "the Commission or a member or members of the Commission."