UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
HUSEIN MOHAMED HAEKAL DOCKET No. 93-R109
REFCO, INC. and RONALD VON NEEFE OPINION AND ORDER
Complainant Husein Mohamed Haekal appeals from the Administrative Law Judge's ("ALJ") summary dismissal of his claim upon the ALJ's determination that the transactions at issue were outside the scope of the Commodity Exchange Act ("Act"), 7 U.S.C. §§ 1 et seq. (1994). We are unable to reach the substantive issues on appeal at this time because our review of the record reveals that the ALJ did not resolve properly a threshold procedural question concerning whether we have jurisdiction to decide Haekal's claim.
Haekal neither posted the bond required of nonresident complainants to gain access to the reparations forum nor adequately demonstrated that the bond requirement did not apply to him. The determination below that Haekal is exempt from the bond is not supported by the record. Given these circumstances, we grant complainant 45 days to show cause why his complaint should not be dismissed for lack of jurisdiction.
* * *
Haekal, a resident of Germany, filed a pro se complaint in April 1993, alleging that Refco, Inc., a registered futures commission merchant ("FCM"), and its associated person Ronald von Neefe had engaged in unauthorized trading, failure to disclose material facts, churning, and breach of fiduciary duty, in violation of the Act.(1)
Pursuant to Commission Rule 12.15(a), 17 C.F.R. § 12.15(a) (1997), on April 16, 1993, the Office of Proceedings forwarded the complaint to respondents Refco, Inc. and von Neefe with instructions to answer the complaint within 45 days. The forwarding letter apprised respondents that, "[u]pon receipt of your response, a decision will be made whether the case will be forwarded for adjudication . . . ."
On June 7, 1993, Refco, Inc. filed an answer and a motion for reconsideration of the Office of Proceedings' decision to forward the complaint. See Rule 12.18(b).(2) Refco, Inc.'s motion alleged that the complaint was defective for several reasons, including that "[t]he materials forwarded to Refco, Inc. do not contain evidence that Complainant either filed a bond or filed sufficient proof that a bond is not necessary . . . ." Motion for Reconsideration at ¶ 1. Substantively, Refco, Inc. alleged that Haekal's account was with Refco F/X Associates, Inc., not with Refco, Inc., and that as a non-registrant, Refco F/X was not subject to the Commission's jurisdiction. Motion for Reconsideration at ¶ 4. Finally, Refco, Inc. challenged the Commission's jurisdiction over the transactions at issue, stating that they "have nothing to do with commodity futures." Motion for Reconsideration at ¶ 5. Refco, Inc. also argued as grounds for dismissal that Haekal's complaint stated he had brought another action based on the same facts in another forum and that one of the respondents named was involved in bankruptcy proceedings. Motion for Reconsideration at ¶¶ 2-3.(3) Refco, Inc. contended that for all of the foregoing reasons, the complaint should not have been forwarded and should be dismissed. In the four-paragraph answer filed with its motion for reconsideration, Refco, Inc. reiterated that it was not a party to the transactions at issue and that the transactions did not involve futures contracts. On June 9, 1993, the Director of the Office of Proceedings denied Refco, Inc.'s motion for reconsideration, stating that "the criteria required for forwarding this complaint . . . exist."
Respondent von Neefe filed a separate answer and motion for reconsideration on June 11, 1993, in which he denied any wrongdoing in the handling of Haekal's account and, like Refco, Inc., asserted that the transactions executed for Haekal were not futures contracts. He did not raise the issue of the nonresident bond.(4) Respondent von Neefe's motion for reconsideration was denied by the Director of the Office of Proceedings on June 18, 1993.
The case was assigned to an ALJ on June 21, 1993 and discovery commenced. The ALJ ordered the parties to file prehearing memoranda by September 13, 1993, setting forth, inter alia, the issues for decision. Prehearing Order of June 23, 1993.
On July 9, 1993, Refco, Inc. filed a motion to dismiss, arguing again that Haekal's complaint did not state a cognizable claim under the Act because the transactions were physical currency trades, not futures, and because Haekal traded through Refco F/X, an unregistered company outside the CFTC's jurisdiction. Refco, Inc. noted that, because Haekal was a resident of Germany, further prosecution of the case "would prove to be an expensive and unnecessary burden" to all parties, see Motion to Dismiss at 2, but did not mention the nonresident bond or the other alleged procedural defects described in its motion for reconsideration. Haekal filed an opposition to the motion (styled "Motion to Accept") on July 26, 1993.
The ALJ denied the motion, ruling that the record was too undeveloped to permit him to determine the nature of the transactions at issue or whether von Neefe was acting on behalf of Refco, Inc. when he handled Haekal's account. See Order of August 2, 1993. His order set forth four questions to be answered by respondents and three questions to be answered by complainant bearing on the nature of the trades, von Neefe's relationship, if any, with Refco, Inc., and Haekal's communications with von Neefe. Id. The parties filed conclusory responses to the ALJ's questions by early September 1993.
On September 16, 1993, Refco, Inc. filed a motion for summary judgment. The respondent argued that the record, as further developed through discovery and answers to the ALJ's questions, clearly established the Commission's lack of jurisdiction over Haekal's transactions. The ALJ then ordered Haekal to show cause by October 5, 1993, why Refco's motion should not be granted and to respond to Refco's outstanding discovery requests. Haekal responded by filing his own motion for summary judgment, asserting that he traded foreign exchange futures with Refco, Inc. He also complied with the outstanding discovery requests.
The ALJ issued an order dismissing the complaint for lack of jurisdiction. See Order of Dismissal (October 8, 1993). He concluded that the transactions executed for Haekal's account were neither commodity futures nor options and that complainant had never traded or intended to trade futures or options.
Haekal timely noticed and perfected an appeal. His brief argues that the ALJ erred in concluding from the documentary record that he did not trade futures. He also seeks to supplement the record with oral argument, oral testimony of witnesses, and tapes of telephone conversations between himself and von Neefe that he believes to be in respondents' possession. Refco, Inc. has filed an answering brief urging affirmance of the order of dismissal, and von Neefe has adopted Refco, Inc.'s arguments as his own. Neither the ALJ's order of dismissal nor the parties' briefs address the jurisdictional defect that concerns us now.
Although the complaint was dismissed based on the nature of the transactions at issue, the furnishing of a nonresident bond is a prerequisite to the Commission's jurisdiction and may be raised at any stage of the proceeding.
The bond requirement is established by statute. Section 14 of the Act creates the reparations forum and delineates the scope of the Commission's authority in reparations cases. Subsection 14(c) provides:
In case a [reparations] complaint is made by a nonresident of the United States, the complainant shall be required, before any formal action is taken on his complaint, to furnish a bond in double the amount of the claim conditioned upon the payment of costs, including a reasonable attorney's fee for the respondent if the respondent shall prevail, and any reparation award that may be issued by the Commission against the complainant on any counterclaim by respondent: Provided, That the Commission shall have authority to waive the furnishing of a bond by a complainant who is a resident of a country which permits the filing of a complaint by a resident of the United States without the furnishing of a bond.
7 U.S.C. § 18(c) (1994).
The Commission's Part 12 Rules implement the authority of Section 14 of the Act. Commission Rule 12.13(b)(4) further addresses the bond, providing that a reparations complaint filed by a nonresident of the United States "shall not be considered duly filed in proper form" unless accompanied by: (A) A bond in double the amount of the claim . . . which . . . shall run to the respondent and be conditioned upon the payment of costs (including reasonable attorney's fees, for the respondent if the respondent shall prevail) and any reparation award that may be issued by the Commission against the complainant on any counterclaim asserted by respondent; or (B) A written request that the bond requirement be waived in accordance with section 14(c) of the Commodity Exchange Act, accompanied by sufficient proof that the country of which the complainant is a resident permits the filing of a complaint by resident of the United States against a citizen of that country without the furnishing of a bond. 17 C.F.R. § 12.13(b)(4) (1997); see also 51 Fed. Reg. 33506 (Oct. 6, 1986) (promulgation of Part 12 Final Rules).
Even if the issue is overlooked or abandoned by the parties, the Commission may address it sua sponte. See Martaglafonso, S.A. v. Merrill Lynch Futures, Inc., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,685 at 40,262 (dismissing, sua sponte, a Colombian plaintiff for failure to post a bond or to prove an exemption); see also Rendita Global Investment, A.G. v. Mercafe Clearing, Inc., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,958 at 44,646 (CFTC Feb. 20, 1997), citing Adham v. Drexel Burnham Lambert, Inc., [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,156 at 32,389 (CFTC July 9, 1986) (discussing the bond as a jurisdictional prerequisite).
As the record indicates, Haekal was aware of the general bond requirement for nonresidents, sought to establish that he was not required to post a bond, and evidently satisfied the Director of the Office of Proceedings on the point. In asserting a right to have the bond waived, Haekal submitted a document styled "Short expert opinion on the Question of the furnishing of Security by nonresident Plaintiffs of Foreign Nationality in the German/U.S.American Relationship," executed on August 31, 1992, and prepared by a law firm in Stuttgart, Germany.
The opinion makes two arguments in favor of Commission waiver of the bond requirement. First, the opinion states that German civil procedure contains no provision requiring that a bond be posted as "a security for the respondent's damage claims." The opinion states that, since no United States resident suing in a German court would face such a requirement, no such condition should be imposed on a German resident seeking reparations.
The opinion's second argument for waiver is that, while the German Civil Code does require nonresidents generally to post security for court costs, a "foreign plaintiff will not be obligated to provide security for the costs and expenses of [an] action if reciprocity is guaranteed." Opinion at 8. Expanding on this point, the opinion explains:
German law does not request from the foreign country to set an example with respect to the dispensation from the obligation to furnish security by nonresident plaintiffs of foreign nationality. If this were requested, there would never be a guarantee of reciprocity, as each country would first take a wait-and-see attitude. The BGH [Federal Court of Justice] has therefore decided several times that -- in cases subject to mutual reciprocity requirement -- the general preparedness to grant dispensation will suffice . . . ." Id. at 9. The opinion cites two cases, issued in 1981 and 1982, in support of this argument, both involving reciprocity between Germany and Iran. It notes that countries require nonresident plaintiffs of foreign nationality to post security bonds, but waive the requirement if reciprocity is guaranteed for their nationals. The opinion states:
However, experience was missing in the German-Iranian relationship. Irrespective of this fact, the Bundesgerichtshof [Federal Court of Justice] assumed such guarantee of reciprocity. Consequently, reciprocity is guaranteed with respect to proceedings in accordance with the Rules Relating to Reparation Proceedings.
Opinion at 9-10.
The arguments advanced in the opinion do not carry Haekal's burden of proving an exemption. The first argument, that Germany does not impose a bond to secure payment of a potential award on a counterclaim, is simply beside the point. The reciprocity provision of the Part 12 Rules does not ask whether a U.S. citizen may proceed in a German or other foreign court without furnishing a bond for the limited purposes of covering the respondent's counterclaims. It asks only whether a United States citizen may proceed without furnishing "a bond" for any purpose. It is clear from the opinion that German law provides no such blanket waiver for U.S. citizens.
The second argument, while relevant, is also deficient. Section 110 of the German Civil Code provides in pertinent part:
(1) Nationals of foreign states who appear as plaintiffs shall give the defendant security for the costs of the lawsuit if he so demands. The same is valid for stateless persons who are not residents of the country.
(2) This obligation does not arise:
1. if, under the laws of the state of which the plaintiff is a national, a German would not be required to give security in an identical case . . .
S. Goren, The German Civil Code § 110 (1990).
Section 110 cannot be read in isolation, however. Reciprocity between Germany and the United States is addressed by Article VI of the German-American Treaty of Friendship, Commerce and Navigation (the "Treaty") and Paragraph 6 of the Protocol to the Treaty.(5) Under the Treaty and Protocol, a United States national is exempt from posting security in a German court only if he or she has a permanent residence or corporate branch office in Germany or if he or she owns real property sufficient to meet the costs in the district of the court before which the action is pending.(6) The consistent view of the authority we have examined is that Section 110 of the German Civil Code must be read in conjunction with the Treaty and Protocol, which restrict the circumstances under which a United States resident is not required to furnish security.(7)
The burden of proving the pertinent provisions of foreign law rests on complainant, and Haekal has not carried that burden. Because we are not persuaded on this record that United States nationals (other than those resident in Germany) bringing actions in a German court would be exempt from the bond requirement, we cannot conclude that Haekal is exempt from posting the bond here. * * *
As separate matters, we note that Refco, Inc.'s motion for reconsideration of the decision to forward this complaint mentioned Haekal's "yes" answers to Items 6 and 8 of the Commission's complaint form, indicating that a parallel proceeding based on the same facts had been instituted in another forum and that a named respondent was insolvent. Either circumstance, if true, would be a basis for dismissing this matter under Rule 12.24, 17 C.F.R. § 12.24 (1997).
Commission Rule 12.24 instructs the Director of the Office of Proceedings not to forward a complaint when a parallel proceeding is pending and not to institute a proceeding against a respondent involved in bankruptcy or receivership proceedings. However, the restrictions of Rule 12.24 are subject to exceptions in appropriate circumstances. See Rule 12.24(e). Moreover, Haekal's "yes" answers on the complaint form are not dispositive, at least not on the issue of respondents' insolvency. Respondent von Neefe's answer stated affirmatively that he was not involved in receivership or bankruptcy proceedings, and any insolvency on the part of Refco, Inc. would have come to the Commission's attention in its capacity as Refco, Inc.'s regulator. Therefore, we request complainant to clarify and to amplify his answers to Items 6 and 8. Absent a demonstration by complainant that dismissal is not required under Rule 12.24, the Commission will dismiss the complaint.
For the reasons set forth above, we give complainant an opportunity within 30 days of the date of this order to post a bond in double the amount claimed or to submit a sufficiently supported and documented waiver request addressing the bond law applicable to U.S. resident complainants in the Federal Republic of Germany. He shall also have 30 days within which to clarify his answers to Items 6 and 8 on the reparations claim form. Respondents shall have 30 days to reply to any response by Haekal.
If no such showing is made by Haekal within the time allowed, the initial decision shall be vacated, and this proceeding shall be dismissed for Haekal's failure to comply with Section 14(c) of the Act and Commission Rules 12.13(b)(4) and 12.24. If Haekal makes an appropriate showing within the time
allowed, this matter will be the subject of a further order of the Commission addressing the merits issues on appeal from the initial decision.
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 26, 1997
Haekal's April 1993 filing was not his first attempt to file a
reparations claim, as shown by a letter that accompanied his complaint.
The letter, addressed to the Director of the Office of Proceedings, reads
in pertinent part as follows:
This is in response to your letter dated February 10, 1993. After you have received the required legal opinion informing you that residents of Germany do NOT need to comply with the bond requirement in this particular case, I submit herewith my new Complaint which complementing [sic] mine of March 26, 1992. . . .
The record of this matter does not include Haekal's 1992 complaint or the Director's letter to which Haekal refers.
2. Commission Rule 12.18(b) provides:
An answer may include a motion for
reconsideration of the determination to forward the complaint, specifying
the grounds therefor, which the Director of the Office of Proceedings, in
his discretion, may grant by terminating the case pursuant to 12.27, or
deny by forwarding the pleadings and matters of record for an elected
decisional proceeding pursuant to 12.26. The inclusion in an answer of a
motion for reconsideration shall not preclude a respondent, if the motion
is denied, from moving for dismissal at a later stage of the proceeding
for the same reasons cited in a motion for reconsideration pursuant to
17 C.F.R. § 12.18(b) (1997).
3. Item 6 of the standard complaint form furnished to prospective litigants by the Office of Proceedings asks: "Have you brought another action based on the same set of facts in another forum or civil court?" Item 8 asks: "To your knowledge, are any of the respondents you named the subject of an ongoing receivership or bankruptcy proceeding?" Complainant checked the "yes" box for both items.
4. Respondent von Neefe stated that he was not subject to a receivership or bankruptcy proceeding and that he was unaware of any pending arbitration or civil litigation based on the same facts.
5. See Treaty of Friendship, Commerce and Navigation between the Federal Republic of Germany and the United States of America, with Protocol and Exchange of Notes, signed at Washington, Oct. 29, 1954, entered into force July 14, 1956, 7 UST 1839, TIAS 3593.
6. Article VI, paragraph 1 of the Treaty reads in pertinent part:
Nationals and companies of either Party shall be accorded national treatment with respect to access to the courts of justice and to administrative tribunals and agencies within the territories of the other Party, in all degrees of jurisdiction, both in pursuant and in defense of their rights. . . .
Paragraph 6 of the Protocol to the Treaty provides:
With regard to Article VI, paragraph 1, nationals and companies of either Party appearing as plaintiff or intervening party before the courts of the other Party shall be exempt from obligation to post security for costs in such instances as nationals or companies of the other Party would be exempt; exemption, however, is only granted if:
(a) the nationals have their permanent
residence or the companies their establishment (main or branch),
(b) the nationals or the companies have sufficient real property to cover costs, in the territory of that Party before the courts of which the suit is pending.
7. See generally Martindale-Hubbell International Law Digest at GER-1-2 (1995). In addition, some German court decisions hold that reciprocity is not given to plaintiffs who are United States nationals unless they live or own property in Germany. See BGH decision of March 15, 1978, reprinted in 32 Wertpapier-Mitteilungen [WM] 737 (1978); decision of Oberlandesgericht Frankfurt of June 5, 1957, reprinted in F. Gamillscheg, Die deutsche Rechtsprechung auf dem Gebiete des internationalen Privatrechts 578 (Berlin 1962).