UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
_________________________ : In the Matter of : CFTC Docket No. 91-11 : THOMAS P. KENNEY : OPINION AND ORDER _________________________:
The Division of Enforcement ("Division") appeals from an Administrative Law Judge's ("ALJ") refusal to prohibit respondent Thomas P. Kenney permanently from trading on markets regulated by the Commission. The ALJ ruled that an eight-year trading prohibition was sufficient to protect the integrity of those markets. The Division argues that the ALJ misapprehended both the gravity of respondent's wrongdoing and his limited evidentiary showing. Kenney has not responded to the Division's appeal.
As explained more fully below, based on our independent assessment of the factual record, we impose a permanent trading prohibition on Kenney.
On June 6, 1991, the Division filed a five-count complaint against Kenney. Specifically, the first four counts alleged the following violations of the Commodity Exchange Act("Act"): (I) five violations of Section 4b(B), 7 U.S.C. 6b(B) (1988), for willfully entering and causing the entry of false records of contracts of sale of soybeans for other persons; (II) six violations of Section 4b(D) of the Act, 7 U.S.C. 6b(D) (1988), for knowingly filling orders of contracts of sale of soybeans by offset against the orders of contracts of sale of others; (III) two violations of Section 4c(a)(A) of the Act, 7 U.S.C. 6c(a)(A) (1988), for entering into accommodation trades; and (IV) two violations of Commission Regulation 1.38(a), 17 C.F.R. 1.38(a) (1988), for noncompetitive trading. With regard to the first four counts, the Division sought a cease and desist order, a suspension or revocation of all current registrations, a trading prohibition, and a civil money penalty.
Count V alleged that Kenney was subject to statutory disqualification from registration pursuant to Sections 8a(2)(D) and 8a(2)(E) of the Act, 7 U.S.C. 12a(2)(D) and 12a(2)(E)(1988), by virtue of his conviction for 17 felony violations in a previous criminal case. The complaint alleged that in 1991 a jury convicted Kenney of 11 felony violations of Section 4b of the Act, 7 U.S.C. 6b (1988), one felony violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), four felony violations of the federal mail fraud statute, and one felony violation of the federal wire fraud statute. In addition, Kenney was convicted of two misdemeanor violations of Section 4c(a)(A) of the Act. U.S. v. Kenney, 89 CR 666-18 (N.D. Ill.) ("Judgment Order").
Respondent filed an answer admitting he had been convicted of felony charges in the previous criminal case, but added that the case was on appeal before the United States Court of Appeals for the Seventh Circuit ("Seventh Circuit"). He accordingly denied all allegations set forth in the complaint.
In June 1991, the ALJ conducted a hearing on Count V relating to the revocation of Kenney's registration. Shortly thereafter, the ALJ issued an order which concluded that Kenney was statutorily disqualified from registration, suspended his floor broker registration for six months, and ordered him to show cause why his registration should not be revoked.
Despite an extension of time to respond, Kenney failed to file a response to the ALJ's order to show cause. In October 1991, the ALJ issued an order concluding that Kenney was statutorily disqualified from registration under Sections 8a(2)(D) and (E) of the Act and had not submitted any evidence showing that his continued registration was in the public interest. On this basis, the ALJ revoked Kenney's registration.
In the same order, the ALJ established a schedule for discovery and the submission of prehearing memoranda on issues relating to Counts I through IV of the complaint. After a lull in the proceedings due to settlement discussions,the Division filed a motion for summary disposition on liability. Kenney opposed the Division's motion and sought summary disposition for himself on the ground that any sanction imposed would violate the Double Jeopardy Clause of the Fifth Amendment to the Constitution. Kenney also urged the ALJ to delay any ruling on liability until the Seventh Circuit resolved his appeal.
In March 1992, the ALJ granted the Division's motion and rejected respondent's cross-motion. In the same order, the ALJ granted the parties 30 days to submit their recommendations on sanctions.
In its submission, the Division recommended that the ALJ issue a cease and desist order and a permanent trading ban but did not seek a money penalty. Kenney asked the ALJ for an oral hearing on sanctions, asserting that he had been punished gravely for the acts for which he was criminally convicted. He asked the ALJ to give him an "appropriate penalty" which would be less than the five-year trading ban imposed on another trader he characterized as more culpable.
In October 1992, the Seventh Circuit resolved Kenney's criminal appeal in U.S. v. Ashman, 979 F.2d 469 (1992) ("Ashman"). The court affirmed 14 of Kenney's 17 felony convictions and his two misdemeanor convictions. In November 1992, the Division filed a motion to amend the record to reflect the Seventh Circuit's decision. The Division contended that the 14 convictions that were affirmed were sufficient to support the sanctions sought in the complaint.
In December 1992, the ALJ issued his initial decision imposing sanctions on the basis of the briefs submitted. In re Kenney, [1992-1994 Transfer Binder], Comm. Fut. L. Rep. (CCH) 25,631 (ALJ Dec. 16, 1992) ("First Initial Decision"). He found that a cease and desist order was appropriate because the record established that there was a reasonable possibility that Kenney would repeat his illegal conduct.
On the issue of a trading prohibition, the ALJ did not give controlling weight to the sanctions imposed in the settlements cited by both Kenney and the Division, holding these settlements were not a reliable barometer of the appropriate sanction for Kenney. Concluding that Kenney's violations adversely affected the integrity of the futures market, the ALJ imposed a ten-year trading ban.
Both parties appealed, challenging the ALJ's analysis of the factors material to the imposition of a trading prohibition. In our first decision in this matter, we held that the ALJ abused his discretion by denying the parties an opportunity to develop the record on sanctions issues through an oral hearing. In this regard, we determined that the ALJ had not given substantial weight to the Congressional policy reflected in Section 9(b) of the Act, 7 U.S.C. 13(b) (1988). We went on to hold that, under Section 9(b) of the Act, the large number of Kenney's felony convictions under Section 4b of the Act raised a presumption that he should be banned permanently from trading. We therefore vacated the ten-year trading ban imposed by the ALJ and remanded for a hearing to permit Kenney to attempt to rebut this presumption. Further, we directed the ALJ to impose a permanent trading prohibition on Kenney unless respondent could establish, by the weight of the evidence, that his continued access to the markets regulated by the Commission would pose no substantial risk to their integrity. In re Kenney, [1992- 1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,839 (CFTC Aug. 13, 1993) ("Kenney I").
The hearing on remand took place in January 1994. In addition to his own testimony, Kenney offered the testimony of one witness. The Division presented two witnesses.
In describing the circumstances surrounding his wrongdoing, Kenney testified about the unusually hectic soybean market in the summer of 1988 due to severe drought. (Tr. at 43-44.) In addition, he took on another trader's business who was out due to an automobile accident. Id. As a result, Kenney claimed, he was overwhelmed by the sharp increase in customer orders and called in someone who "was a bad choice" to assist him. (Tr. at 43.)
Kenney did not describe specifically the nature of his wrongdoing but acknowledged that prearranged trades and curb trading were illegal. (Tr. at 52-53.) He also admitted that he knew at the time of his violations that it was his obligation to obey the exchange rules. Kenney acknowledged that he was ordered to pay restitution in the amount of $5,310 as part of his criminal sentence, but claimed he was the only convicted soybean trader who did not earn a financial benefit at the expense of his customers. (Tr. at 19, 44.)
Kenney also testified about the impact his conviction has had on his financial situation and his family. He stated that because he owed money to so many people he would never catch up. (Tr. at 48, 50.) He revealed that he now works 70 hours a week on two jobs, making $700--clerking in the CBOT bond room and delivering tickets for a ticket broker. Id. Additionally, Kenney's wife had to supplement the family income by taking a job as a waitress. (Tr. at 50.) Kenney explained that the consequences of his wrongdoing deeply affected his family; his wife started drinking, and his son would not talk to him. (Tr. at 51.) Kenney stated that if he were allowed to trade, life would be easier; he would be able to make a better living and spend time with his family. Id. Kenney acknowledged that he made "terrible, terrible mistakes." (Tr. at 48.) Overall, he maintained, he had now fulfilled his responsibilities and if he were allowed to trade he would not be a threat to the integrity of the market. (Tr. at 49-51.)
Scott Early, general counsel of the CBOT, testified that he had known Kenney personally for over five years. (Tr. at 23-24.) Early testified that Kenney's violations of the CBOT rules were serious but that they were not in the nature of violations for which the CBOT would normally expel or suspend people. (Tr. at 28.) Early related that he had observed Kenney's changed behavior since his return to the trading floor as a clerk, stating that while Kenney could break rules in such a position, he had not done so. (Tr. at 25.) Early stated that Kenney was "scared silly by his [criminal] involvement" and that the sanctions had "a severe effect on him." (Tr. at 39-40.)
On behalf of the Division, Charlotte Ohlmiller, chief regional investigator in the Chicago office, gave evidence concerning the illegal conduct committed by Kenney during late 1984 to 1985. According to Ohlmiller, she first began investigating Kenney during this period as part of an investigation which is referred to as the Segal matter and in which Kenney was named as a respondent. (Tr. at 9.) Ohlmiller testified that Kenney assisted Segal in carrying out an elaborate scheme to evade the speculative limits in pork belly and live hog futures by allowing his personal account to hold pork belly and live hog positions that belonged to Segal. (Tr. at 10.) Ohlmiller also claimed that Kenney had entered false records regarding the sale of soybean contracts and participated in a series of wash trades to transfer significant sums of money between accounts. Id.
The Division also offered the testimony of FBI special agent Richard Ostrom. Ostrom was assigned undercover duties from 1985 through early 1989 to act as a soybean trader. (Tr. at 54-55.) He testified that he knew Kenney and had seen him engaging in matching trades to pay back trading errors. (Tr. at 55-56.) He also testified that Kenney had engaged in illegal trades before, during, and after the period during which Kenney had claimed he was overwhelmed by the business and had relied upon the assistance of another broker. (Tr. at 57.) Ostrom stated that respondent's illegal activities occurred both when Kenney was acting as a floor broker and as a floor trader. Id.
The ALJ issued a decision on remand in May 1994. In re Kenney, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,079 (CFTC May 12, 1994) ("Second Initial Decision"). The ALJ concluded that Kenney's violations involved criminal conduct on the trading floor, and thus there was a nexus between Kenney's violations and a threat to the market's integrity. Id. at 41,566.
With respect to mitigation, the ALJ found that curb trading was a common practice in 1987-1988 and condoned by CBOT officials. He also noted that, while Kenney might have "undoubtedly derived indirect benefits from his illegal trading, no money came directly to him as a result of any of the wrongdoing for which he was convicted." Id. Nonetheless, the ALJ concluded that "the evidence of mitigation put forth by the respondent does not decrease the weight ordinarily accorded in favor of a lifetime trading ban for someone convicted of ten 4b felonies." Id. at 41,567.
As to aggravating circumstances, the ALJ ruled that respondent's misdemeanor convictions under 4c(a)(A) were related misconduct that decreased the weight accorded to respondent's mitigation evidence. Id. He declined, however, to treat the violations Kenney had acknowledged in settling the Segal matter as either aggravating circumstances or evidence that respondent was a recidivist. In this regard, he noted that the conduct at issue in Segal occurred before the conduct underlying Kenney's felony convictions and did not involve a violation of Section 4b of the Act. Id. at n. 22, n. 25.
With respect to rehabilitation, the ALJ determined that the passage of time (six years) since the misconduct underlying Kenney's convictions tilted the scales in favor of Kenney's rehabilitation. The ALJ also credited Kenney's testimony acknowledging his guilt. However, the ALJ held that it was too soon to declare Kenney fully rehabilitated and thus found him only partially rehabilitated.
Finally, as to the role Kenney intended to play in the marketplace, the ALJ found that Kenney did not seek to limit his role and instead would like to participate "to the fullest extent possible." Id. at 41,567.
Based on these assessments, the ALJ determined that the evidence of partial rehabilitation rebutted the presumption that Kenney should be banned permanently from trading. In view of the absence of mitigating evidence, the finding of only partial rehabilitation, and the role Kenney sought in the marketplace, however, the ALJ concluded that a ban of eight years was warranted. Id. at 41,568.
The Division appeals, arguing that the ALJ did not properly follow Commission guidance and precedents in weighing the evidence before him, particularly the criteria for establishing mitigation and rehabilitation. Kenney did not file a response to the Division's appeal.
With respect to the issue of mitigation, the Division argues that Kenney has failed to present any evidence of ameliorating factors concerning his illegal trades. In this regard, the Division asserts that Kenney was not a novice on the trading floor and should have known that he could not handle the overflow brokerage business during the summer of 1988. The Division also contends that Kenney's argument that he was merely curb trading is neither persuasive nor relevant because Kenney was convicted of violations involving customer fraud rather than simply trading after the closing bell. In addition, respondent's claim that he did not benefit financially at the expense of his customers deserves no credit, the Division argues, in view of the criminal convictions which were predicated on the finding that Kenney intended to defraud his customers.
With respect to Kenney's showing of rehabilitation, the Division argues that respondent's testimony at the hearing does not establish a changed direction. The Division contends that Kenney's testimony about being a model prisoner and having a clean record as a floor clerk is neither relevant nor probative to respondent's prior activities as a floor broker. Additionally, the Division argues that Kenney's financial and family difficulties do not justify restoring his trading privileges or reducing the sanctions.
We have considered the entire record and have determined that the weight of the evidence supports the imposition of a permanent trading ban. As noted above, Section 9(b) of the Act directs us to impose a trading prohibition of at least five years on any person convicted of a felony under the Act. In Kenney I, 25,839 at 40,750, we held that this statutory directive rests on a common sense judgment that, once an individual has undertaken serious wrongdoing, there is a substantial risk that he will undertake similar wrongdoing in the future. As a result, we held that, once the Division has demonstrated the appropriate type of felony violation, a presumption arises that respondent will pose a substantial risk to the markets regulated by the Commission for at least five years. Furthermore, we found that, as a general matter, the threat to market integrity posed by respondents convicted of more than five Section 4b felonies is sufficiently grave to support a presumption that a permanent trading prohibition is necessary. Id. at 40,751.
In Kenney I, we acknowledged that Congress's directive was not absolute--an exception from the requirement of a five-year trading prohibition is permitted if the Commission determines that imposition of a trading prohibition "is not required to protect the public interest." Id. at 40,750, quoting Section 9(b) of the Act. As a result, we held that respondent should be given an opportunity to rebut the presumption by showing that the weight of the evidence indicates that his continued access to the markets will "pose no substantial risk to their integrity." Id.
Kenney was convicted of ten felony violations of Section 4b of the Act and two misdemeanor violations of Section 4c(a)(A) of the Act. We must weigh Kenney's rebuttal evidence against the presumption raised by his ten felony violations of Section 4b. Since under Section 9(b), a single Section 4b felony conviction raises a presumption of unfitness for continued trading, ten felony convictions raise a very strong presumption to overcome. Further, even if the conduct underlying a single felony conviction were attributable to a unique misstep, Kenney's ten felony convictions reflect a pattern of conduct that establishes a strong likelihood the wrongdoing will be repeated. Cf. Precious Metals Assoc. v. CFTC, 620 F.2d 900, 912 (1st Cir. 1980) (holding that a proclivity to violate the law may be inferred from persistent attempts to interfere with legislatively protected rights). We have already determined that there is a clear nexus between the wrongdoing underlying Kenney's conviction and a threat to the market mechanism. Kenney I, 24,835 at 40,750.
We turn then to an assessment of the mitigation evidence offered by respondent. Kenney referred to the hectic trading conditions in the soybean market during the summer of 1988 and implicitly suggested that these unusual circumstances mitigate his resort to unlawful practices such as offsetting customer orders. The hectic trading conditions that often accompany volatile markets, however, are neither unusual nor unforeseeable. Such conditions are a fact of life in the futures markets that can neither justify nor mitigate resort to illegal practices. While we are aware that market conditions may have created incentives to cut corners, we conclude that the hectic market conditions during this period did not mitigate Kenney's wrongdoing. As the record indicates, Kenney was not a novice on the trading floor and had nearly ten years of trading experience at the time of his violations.
Similarly, the testimony Scott Early offered about the practice of curb trading at CBOT is unpersuasive. To the degree Early indicated that there was confusion as to the legality of curb trading, the record is to the contrary. At the time of Kenney's wrongdoing, all CBOT members were on notice that noncompetitive trading was unlawful because Commission Rule 1.38 provided that noncompetitive trades were unlawful unless executed "in accordance with written rules of the contract market which have been submitted and approved by the Commission." During the relevant time period, CBOT had no written rule that authorized the use of noncompetitive trades to execute orders after the close. In these circumstances, we cannot credit Early's testimony that there was legitimate confusion about the legality of curb trading. Even if the record established confusion on this issue, it would not mitigate the seriousness of Kenney's felony violations. Neither Kenney nor Early explained how "confusion" with regard to the legality of late trading caused Kenney to commit felony violations of Section 4b of the Act by aiding and abetting in the entry of false records and by offsetting customer orders to the customers' disadvantage.
In addition, Kenney's claim that he received no monetary benefit as a result of his misconduct is equally unpersuasive as a mitigating factor. As the ALJ indicated, Kenney derived indirect benefits from his illegal trading. Moreover, ten convictions of Section 4b establishes conclusively that Kenney willfully acted to the detriment of customers.
We also consider any aggravating evidence presented by the Division. As indicated above, in addition to his 10 felony violations of Section 4b, Kenney was convicted of four felony violations--one RICO, one federal wire fraud, and two federal mail fraud. In addition, he was convicted of two misdemeanor violations of Section 4c(a)(A) of the Act. This wrongdoing amounts to aggravating evidence relevant to the Commission's consideration of the appropriate trading ban.
The record also shows that Kenney violated the Act and Commission regulations in 1984 and 1985 as part of the Segal matter. Evidence of such prior wrongdoing is relevant to assessing the threat a respondent will pose to market integrity when, as in this case, it helps to establish a pattern of respondent's failure to comply with significant regulatory requirements.
Based on the foregoing analysis, we conclude that Kenney has failed to produce evidence sufficient to mitigate the seriousness of his wrongdoing. Indeed the evidence of previous wrongdoing by Kenney buttress Section 9(b)'s presumption that Kenney would pose a substantial risk to the markets if he were permitted to continue trading. Accordingly, we turn to the issue of "the changed direction of his activities," which is the focus of a rehabilitation analysis. Compare Horn, 24,836 at 36,940; In re Tipton, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,673 at 22,750 n.9 (CFTC Sept. 22, 1978); In re Akar, [1986- 1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) 22,927 at 31,709-10 (CFTC Sept. 22, 1978).
Kenney stated at the hearing that he recognized and regretted his wrongful conduct. However, Kenney's unwillingness to acknowledge that his conduct was harmful to customers raises a substantial question about his depth of understanding of the gravity of his wrongdoing. Given this limited showing on rehabilitation, we cannot find that Kenney has taken the type of changed direction in his activities that would justify the conclusion that his continued trading would pose no substantial risk to the market integrity.
We are aware that over six years have passed since the time of Kenney's wrongdoing and that he has worked as a floor clerk for at least three of those six years without incident. We have noted in the past, however, that the weight accorded such evidence must be limited when respondent is subject to an outstanding administrative complaint during the period at issue. In re Silverman, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,410 at 21,643 (CFTC Mar. 14, 1977), affirmed sub nom. Silverman v. CFTC, 562 F.2d 432 (7th Cir. 1977). In addition, Kenney's testimony about his penurious condition and family situation, while moving, was not relevant to whether he would repeat his wrongful conduct in the future, especially in light of information on the record that he had been guilty of repeated misconduct over a period of many years. Consequently, Kenney has not demonstrated a changed direction to the extent necessary for us to conclude that he will trade within the confines of the rules.
Finally, as to his proposed role in the market, Kenney seeks to return as a trader on the floor of the CBOT. Such a role does not limit the level of risk he may pose to market integrity, in that he would be in a position to cooperate with other floor brokers and floor traders in perpetrating violations similar to his past misconduct.
In light of our evaluation of the record as a whole, we conclude that respondent's limited evidence of mitigation and rehabilitation does not establish that his continued access to the markets we regulate will pose no substantial risk to their integrity.
We conclude that respondent should be prohibited permanently from trading on the markets regulated by us. The noncompetitive trading practices in this case require the Commission to impose a sanction of this magnitude to deter and to prevent this type of conduct in the future. The U.S. commodities markets are important mechanisms for price discovery and hedging. Open and competitive trade execution is vital to the proper functioning of these markets. To maintain the integrity of our markets and market users' trust in them, noncompetitive conduct like that engaged in by respondent Kenney cannot be tolerated. The trading practices brought to light in this case were a disgrace to the futures industry, as well as to respondent Kenney. The Commission hopes that recent improvements to the exchange's surveillance and audit trail systems have reduced the likelihood of such violations of law, as well as increased the likelihood of detection when such violations occur.
The trading prohibition, as well as the registration revocation and cease and desist order previously imposed by the ALJ, shall become effective 30 days from the date this order is served.
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: March 11, 1997