UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
_______________________________ : GRANDVIEW HOLDING CORP., : CFTC Docket No. CRAA-96-1 J. MICHAEL KING, and CCO, INC. : : OPINION AND ORDER v. : : NATIONAL FUTURES ASSOCIATION : _______________________________:
Petitioners Grandview Holding Corp. ("Grandview"), J. Michael King, and CCO, Inc. ("CCO") appeal, pursuant to Section 17(h)(2) of the Commodity Exchange Act ("Act"), 7 U.S.C. 21(h)(2)(1994), from a decision of the National Futures Association ("NFA") holding that the petitioners did not have the right to withdraw their settlement offer after it had been orally accepted by NFA's Hearing Panel. Having reviewed the record and considered the arguments presented by the parties, we reverse for the reasons stated below.
The parties agree that no material facts are in dispute. On June 21, 1994, NFA's Business Conduct Committee issued a complaint against Grandview and King. The complaint alleged that Grandview had violated NFA Compliance Rules 2-29(a)(1) and 2-8(a) in that, through a former employee and agent, it made false and deceptive representations to commodity futures customers and exercised discretion over customer accounts without written authority to do so. The complaint also alleged that Grandview had violated NFA Compliance Rule 2-10 by failing to keep required books and records and that Grandview and King had violated NFA Compliance Rule 2-9 by failing to supervise adequately their employees and agents.
Following petitioners' answer, as well as discovery and pre- hearing procedures, NFA's Hearing Panel scheduled trial dates on the matter for January 22 and 23, 1996 in Chicago, Illinois. On January 22, 1996, King appeared and submitted a written Offer of Settlement ("Offer") to the Hearing Panel on behalf of himself, Grandview, and CCO. The Offer was signed by King individually and "as President of Grandview Holding Corp. and CCO Incorporated," as well as by John E. Dolkart, as "Attorney for J. Michael King, Grandview Holding Corp. and CCO Incorporated."
King, his attorney John Dolkart, and Thomas Sexton, an attorney representing NFA's Compliance Section, all were present at the hearing. Dolkart told the Panel that King had called him the night before and that "in fairly short order" they had "hammer[ed] out" the settlement "with the cooperation of the NFA enforcement attorneys." (Tr. at 3.) Sexton then recommended that the Hearing Panel accept the petitioners' Offer. After some discussion, the Panel chairwoman stated: "The Panel has decided to accept your Offer." (Tr. at 8.) The hearing was then adjourned, and the witnesses (NFA's two customer witnesses who had travelled from California to testify) were released.
The following day, January 23, 1996, King sent a letter by facsimile and mail to Thomas Sexton which stated: "I withdraw my offer of acceptance [sic] made January 22nd." Nevertheless, the Hearing Panel issued a decision on January 24, 1996, accepting the Offer and imposing the penalties agreed to in the Offer. The decision did not mention the letter purporting to withdraw the Offer, and the record does not indicate whether the Hearing Panel was aware of the letter at the time of its decision.
In response to the Hearing Panel's decision, petitioners submitted a letter dated January 31, 1996 in which they contended that NFA Compliance Rules 3-11(b) and (c) gave King the right to withdraw the Offer and that the decision issued by the panel against King was, therefore, a legal nullity. On February 5, 1996, King and Grandview followed up this letter with a petition to vacate the Hearing Panel's written decision.
After NFA's President made a discretionary referral of the matter to the NFA Appeals Committee ("Committee") for review, pursuant to NFA Compliance Rule 3-11(b), based on the grounds raised by petitioners, the Committee issued an order setting forth the terms of the review. In its Order, the Committee stated that review would be limited to the issue of whether it is permissible under NFA Compliance Rules 3-11(b) and (c) for a party to withdraw an offer of settlement after it has been accepted by a Hearing Panel but prior to the issuance of a Decision memorializing that acceptance or, pursuant to Compliance Rule 3-11(b), 15 days after the date of the Decision.
Petitioners then filed a memorandum in support of their petition to vacate the January 24, 1996 decision. Petitioners relied on the language of NFA Compliance Rule 3-11(b), which provides that a decision on settlement by the Hearing Panel "shall become final and binding fifteen days after the date of the Decision," as well as the language of Compliance Rule 3- 11(c), which provides that "[a] settlement offer may be withdrawn before final acceptance by . . . the Hearing Panel. . . ." Applying these rules, petitioners argued that their settlement offer could properly be withdrawn after the "mere acceptance" of January 22, 1996, but before "final acceptance." For this purpose, they calculated the "final acceptance" date as January 24, 1996 (the date of the written decision) or as February 8, 1996 (15 days after the written decision).
In its brief in opposition, NFA's Compliance Section argued that the Hearing Panel made a final acceptance of the Offer on January 22, 1996, and that neither Rule 3-11(b) nor (c) permits withdrawal after acceptance by the Hearing Panel. The Compliance Section also argued that, under contract law principles, all traditional elements of a contract existed in this case when the panel orally accepted the Offer at the hearing.
The NFA Appeals Committee issued a decision holding that the Hearing Panel had made a final acceptance of petitioners' Offer at the hearing on January 22, 1996. The Committee construed the language of Rule 3-11(b) as "obviously contemplat[ing] a dynamic in which a settlement offer is accepted first and memorialized later by the issuance of a decision." Appeals Committee Decision at 6-7. It further concluded that petitioners' distinction between "mere acceptance" and "final acceptance" had "no basis in reality." Appeals Committee Decision at 7. Although it acknowledged that Rule 3-11(b) provides that a decision on a settlement becomes final and binding 15 days after the date of the decision, it nonetheless rejected the contention that this provision allows for withdrawal of a settlement offer within the 15-day time period. In this regard, the Committee reasoned that "the focus of that provision is on a very specific matter which is entirely unrelated to any discussion of the withdrawal of settlement offers." Appeals Committee Decision at 7-8.
The Committee further stated that the courts have recognized that "a settlement offer which is accepted is contractual in nature and binding on the parties." Appeals Committee Decision at 8. It concluded that "[i]n the present case, all of the recognized elements of a contract were present on January 22, 1996," id., and that the Hearing Panel also was "bound by its acceptance of the Offer." Appeals Committee Decision at 9.
Finally, the Committee concluded that petitioners' contention was unacceptable as a policy matter. It reasoned that to reward the attempts of the petitioners "would be to encourage bad faith and dilatory tactics which would seriously erode the effectiveness of NFA's hearing system." Appeals Committee Decision at 10. Accordingly, the Appeals Committee affirmed the result of the Hearing Panel's written decision in all respects.
This appeal followed.
The Commission's review of NFA's action is governed by the standard of review set forth in Commission Rule 171.34, 17 C.F.R. 171.34 (1996). Under that standard, the question before us is whether the NFA proceeding was conducted in a manner consistent with NFA's rules. 17 C.F.R. 171.34(a)(2) (1996).
This case presents an issue of first impression for the Commission. It is undisputed that under Compliance Rule 3-11(c) petitioners could have withdrawn the settlement offer before "final acceptance" by the Hearing Panel. Petitioners read the term "final acceptance" to mean 15 days after the date of the Hearing Panel's decision without further action by NFA's President. In contrast, NFA reads the term "final acceptance" to mean the time that there has been a "meeting of the minds" between the party and the Hearing Panel. According to NFA, once that "meeting of the minds" occurs, there is a "final acceptance" under traditional contract law principles notwithstanding the fact that the Hearing Panel has not yet issued a written decision confirming the settlement and that the Hearing Panel's decision is not final for purposes of appeal, and thus the settlement can be subsequently altered or even disapproved by the Appeals Committee. Thus, under NFA's construction of Rule 3-11(c), any attempt to withdraw the Offer after the Hearing Panel's oral acceptance on January 22, 1996, was ineffective.
Our reading of the rule leads us to a different conclusion from that reached by NFA. Applying the basic principles of rule construction, our starting point is the plain meaning of NFA's rule. Because NFA Rule 3-11 refers both to "accept[ance]" and "final acceptance," the Appeals Committee's conclusion that the concepts are synonymous is contrary to the plain meaning of the rule. Moreover, although the term "final acceptance" of a settlement offer is not specifically defined in Rule 3-11(c), the analogous term "final and binding" decision on settlement is, in fact, defined in the preceding subsection, Rule 3-11(b), to mean "fifteen days after the date of the Decision" unless NFA's president refers the matter to the Appeals Committee for review. Therefore, viewing the overall scheme of Rule 3- 11, we construe the plain language of the rule as providing that a settlement offer can be withdrawn at any time within the 15-day time period following the issuance of a written decision by the Hearing Panel or, if a referral occurs, at any time prior to a final decision of the Appeals Committee.
We conclude that petitioners were entitled to withdraw their offer of settlement in this case. Accordingly, we reverse NFA's decision, vacate the settlement, and remand this matter to NFA for further proceedings.
IT IS SO ORDERED.
By the Commission (Chairperson BORN and Commissioners DIAL, HOLUM, and SPEARS)(Commissioner TULL dissenting).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: March 18, 1997