UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
In the Matter of : CFTC Docket Nos. 91-10 and SD93-17
JOHN H. RYAN OPINION AND ORDER
The Division of Enforcement ("Division") appeals from an Administrative Law Judge's ("ALJ") decision granting respondent John H. Ryan's application for registration as a floor trader and refusing to prohibit him from trading on markets regulated by the Commission. The Division challenges the ALJ's analysis as unsupported by the record and inconsistent with the Commission's precedent establishing guidelines for assessing these sanctions. Ryan opposes the appeal and maintains that the judge fairly considered and properly rejected all of the Division's arguments.
As explained more fully below, based on our independent assessment of the factual record, we deny Ryan's application for floor trader registration and impose a trading ban of six years.
This appeal arises out of two separate complaints the Division filed in 1991 and 1993. In June 1991 the Division filed a five-count complaint against Ryan ("First Complaint"). Counts I through IV charged Ryan with the following: (1) one violation of Section 4b(B) of the Commodity Exchange Act ("Act"), 7 U.S.C. § 6b(B)(1988), for willful entry, or causing the entry, of a false record; (2) two violations of Section 4b(D) of the Act, 7 U.S.C. § 6b(D)(1988), for (a) knowingly filling a customer order by offset and (b) willfully aiding and abetting another trader who filled an order by offset; (3) one violation of Section 4c(a)(A) of the Act, 7 U.S.C. § 6c(a)(A)(1988), for entering into an accommodation trade; and (4) one violation of Commission Regulation 1.38(a), 17 C.F.R. § 1.38(a)(1988), for executing a transaction in a manner other than by open outcry in the trading pit. The Division sought a cease and desist order, a registration revocation, a trading prohibition, and a civil money penalty as sanctions for Ryan's alleged wrongdoing.
Count V alleged that Ryan was statutorily disqualified 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 of four felony violations (three felony violations of Section 4b and a federal felony wire fraud violation) in a 1991 criminal case. The complaint also alleged that Ryan was convicted of one misdemeanor violation of Section 4c(a)(A) of the Act in that case. United States v. Dempsey, 768 F. Supp. 1277 (N.D. Ill. 1991). The fifth count sought revocation of Ryan's floor broker registration. The First Complaint directed the ALJ to hold a hearing on Count V within 30 days to determine whether Ryan was subject to a statutory disqualification. If the record established that Ryan was subject to a statutory disqualification, the First Complaint directed the judge to issue an order suspending Ryan's registration and requiring him to show cause why such registration should not be revoked.
In his answer to the complaint, Ryan admitted his criminal convictions, but denied the allegations describing the activities upon which the convictions were based. He also raised three affirmative defenses. Ryan first contended that because of an alleged lack of notice to him of prohibited conduct and an alleged delay in the action by the Commission against his misconduct, the doctrines of equitable estoppel and laches barred the assessment of civil sanctions. Second, respondent claimed that there were mitigating factors relevant to his conduct. Finally, he argued that the imposition of any civil sanction would violate the Double Jeopardy Clause of the Fifth Amendment to the United States Constitution.
In June 1991, the ALJ conducted a hearing on whether Ryan was subject to statutory disqualification as alleged in Count V of the First Complaint. In July 1991, after considering the parties' arguments, the ALJ found that Ryan was subject to statutory disqualification, suspended his floor broker registration for six months, and ordered him to show cause why his registration should not be revoked.
In response to the ALJ's show cause order, Ryan argued that suspension or revocation of his registration was neither supported by the evidence nor necessary to protect the public interest. He also contended that imposition of these sanctions would be cumulative, punitive, and unduly harsh. Further, Ryan emphasized the fact that the district court judge who presided over his criminal trial was empowered under the federal sentencing guidelines to prohibit him from engaging in trading and did not do so. After considering Ryan's response and the Division's reply, the ALJ issued an order in October 1991 revoking Ryan's floor broker registration because he had failed to present any evidence that his continued registration would be in the public interest.
As for Counts I through IV, the Division moved for summary disposition on liability issues in November 1991. The Division reasoned that Ryan was collaterally estopped from denying the allegations in the First Complaint which were based on the conviction in the underlying criminal proceeding. The ALJ granted the Division's motion and ordered the parties to file briefs on the issue of sanctions.
In January 1992, the Division filed a memorandum recommending that the ALJ impose a cease and desist order and a permanent trading prohibition. In his response, Ryan did not contest the entry of a cease and desist order. He argued, however, that imposition of a trading ban of any length would be a punitive measure prohibited by the Double Jeopardy Clause. Ryan also moved for a hearing on the issue of sanctions. The ALJ agreed to respondent's request and scheduled a hearing for February 1992.
In February 1992, the ALJ conducted a one-day hearing. In December 1992, the ALJ issued an initial decision imposing sanctions. In re Ryan, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,632 at 40,015 (ALJ Dec. 16, 1992)("First Initial Decision"). He concluded that a cease and desist order was appropriate because the record established that there was a reasonable possibility that Ryan would repeat his illegal conduct. As to the propriety of the trading ban, the ALJ reasoned:
Respondent's conduct cannot be characterized as 'technical violations;' rather it is part and parcel of the shadow market. Some trading ban is necessary if such conduct is to be deterred. Nevertheless, in view of the minor relative culpability of respondent, a lengthy ban is not called for. In this court's view, a ninety-day trading ban will serve to protect the public interest.
Id. at 40,019.
The Division 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 rejected Ryan's Double Jeopardy Clause challenge to the ALJ's sanction analysis, as well as the Division's claim that the ALJ should have given significant weight to the settlements it cited. In re Ryan, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,832 (CFTC Aug. 13, 1993)("Ryan I"). We concluded, however, that a remand was necessary so that the parties could develop the factual record in light of its guidance regarding the weight Ryan's felony violations of Section 4b should be given in determining the appropriate trading prohibition for the violations established on the record.
In explaining the significance of Ryan's felony convictions, we emphasized Congress's mandate that a trading prohibition of at least five years must be imposed on any person convicted of a felony under the Act unless the record shows that the imposition of such a trading prohibition "is not required to protect the public interest." Id. at 40,725, quoting Section 9(b) of the Act, 7 U.S.C. § 13(b) (1988). In view of this legislative mandate, we held that the Division's proof of Ryan's three felony violations of Section 4b raised a presumption that he should be prohibited from trading for between six and ten years. We held that Ryan could rebut the presumption, however, by showing either that no trading prohibition was required to protect the public interest or that a prohibition for some lesser period of time was consistent with that goal.
To assess the public interest in this context, we explained that we will look to whether the weight of the evidence shows that Ryan's continued access to the markets regulated by the Commission "will pose no substantial risk to their integrity." Id. We indicated that respondent's showing should focus on the following factors: (1) the nexus between the wrongdoing underlying his conviction and a threat to the market mechanism; (2) circumstances that mitigate the wrongdoing underlying respondent's conviction (i.e., evidence which tends to show that the weight that would ordinarily be accorded the presumption should be lessened); (3) evidence of rehabilitation (a changed direction in respondent's activities since the time of the wrongdoing underlying his conviction); and (4) the role respondent intends to play in the markets regulated by the Commission. Id.
Our opinion acknowledged that, at the time of the initial hearing in this matter, neither the parties nor the ALJ had clear notice of our views on the evidentiary burdens established by Section 9(b). Id. at 40,726. In these circumstances, we concluded that it would be inappropriate to resolve the parties' dispute on the record before us and remanded to give both sides an opportunity to develop the factual record more fully. Id.
During the pendency of the proceedings on the First Complaint, Ryan applied for registration as a floor trader. In response, the Division instituted a new proceeding in July 1993 to assess whether Ryan's application for floor trader registration should be denied in light of his felony convictions. Consistent with Commission Rule 1.66(b), the notice of intent to deny application ("Second Complaint") ordered the ALJ to ascertain initially whether Ryan was subject to a statutory disqualification from registration. If so, the ALJ was directed to issue an order within 30 days suspending respondent's no-action status and requiring him to show cause why his application for registration should not be denied.
In August 1993 the ALJ determined that Ryan was subject to statutory disqualification from registration pursuant to Sections 8a(2)(D) and (E) of the Act. On this basis, the judge suspended Ryan's no-action status and directed him to show cause why his application for registration as a floor trader should not be denied. Shortly thereafter, however, the ALJ vacated his order suspending Ryan's no-action status and ordered that the proceedings on the First and Second Complaints be consolidated.
In response, the Division sought interlocutory review of the judge's ruling. We ruled that interlocutory review was not contemplated under Commission Rule 1.66, but found that review was appropriate because the ALJ's action deprived the Division of its normal right to challenge the denial of a suspension request. In re Ryan, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25, 833 at 40,728 (CFTC Sept. 13, 1993)("Ryan II"). On the merits, we ruled that suspension of Ryan's no-action status was mandatory in the circumstances presented and that the judge had abused his discretion by consolidating proceedings without consulting the parties. In vacating the judge's order of consolidation, we noted that the parties could agree that the record developed at the hearing on the Second Complaint would serve as the basis for the ALJ's determination of the issues remaining under the First Complaint. Ryan II at 40,729.
The ALJ conducted a hearing on remand in January 1994. In addition to his own testimony, Ryan offered the testimony of Scott Early, then General Counsel of the CBOT, and three other witnesses. The Division cross-examined Ryan's witnesses but offered no witnesses of its own.
Ryan's testimony and the documents introduced at the hearing described the two transactions relating to respondent's felony violations of Section 4b. On September 8, 1987, Bruce Mittelstadt, a floor broker, matched three customers' market-on-close orders for November 1987 soybeans with Ryan, who acted as a floor trader. On November 24, 1987, acting as a floor broker, Ryan matched two customers' market-on-close orders for January 1988 soybeans with FBI undercover agent Richard Ostrom, a floor trader. In each case, Ryan designated the orders as having been filled during regular trading hours even though the trades were executed shortly after the market closed. In both transactions, the customers' orders were filled at prices within the closing range. Ryan received a profit of $25 in the first transaction. Ostrom received a profit of $25 and Ryan earned total commissions of $2.50 for their participation in the second transaction. (Tr. I at 79-83, 85-86; Respondent Exhibit 1 at 68, 70-76, 95-100; Division Exhibit 1 at 2-3; Division Exhibit 2 at 2; Division Exhibit 4 at 3-4; 5-6.)
Although Ryan offered little testimony about the transaction underlying his felony violation of the federal wire fraud statute, the documentary evidence introduced at the hearing was more revealing. On May 5, 1988, Ryan, acting as a floor trader, and James Nowak, a floor broker, engaged in a prearranged trade involving a customer's market order for November 1988 soybeans. Relying on Nowak's advice, Ryan had established a long position beforehand. Nowak then bought 50 contracts for Merrill Lynch from Ryan at 5.17 when the market price was 5.16. Ryan earned a profit of $900, which represented the amount Nowak owed Ryan for having previously absorbed a losing out trade. (Tr. I at 109-110; Division Exhibit 1 at 4; Division Exhibit 2 at 2; Division Exhibit 4 at 6-7.)
Finally, Ryan discussed the transaction resulting in his misdemeanor violation of Section 4c(a)(A) of the Act. On June 8, 1987, Ryan and David Skrodzki engaged in two prearranged trades for November 1987 for their personal accounts; no customer orders were involved. Skrodzki received a profit of $175, the amount Ryan owed Skrodzki for a profitable out trade resulting from trading on the previous day. (Tr. I at 88-89; Respondent Exhibit 1 at 37-40, 47; Division Exhibit 1 at 1-2; Division Exhibit 2 at 2; Division Exhibit 4 at 7-8.)
Ryan explained his Section 4b violations as resulting from trades which occurred after the market close. (Tr. I at 79-82; 85-86.) While Ryan acknowledged that the CBOT's rules prohibited such "curb trading," he claimed that both the CBOT and floor managers of various brokerage houses "encouraged this practice." (Division Exhibit 4 at 3, 4-5.) Respondent insisted that he had not known that these types of transactions could expose him to felony convictions. (Tr. I at 82, 106; Division Exhibit 4 at 4.) Ryan also testified that he did not know that it was illegal to put an incorrect market time period designation on an order executed after the close of trading. (Tr. I at 103; Division Exhibit 4 at 4.)
Ryan denied that he intended to violate any rules or law or to cheat or defraud any customers. (Division Exhibit 4 at 3-5.) Rather, he characterized his wrongdoing as a "misguided attempt" to carry out the instructions of customers who placed market-on-close orders. (Tr. I at 110-111; Division Exhibit 4 at 4.) Respondent stated his belief that the customers had entered market-on-close orders because they wanted to avoid exposure to interday price movement. Ryan testified that he filled the orders shortly after the close of trading in a manner that assured each customer a price "consistent with the closing range of the market for that day[.]" (Tr. I at 82-83.)
Ryan emphasized his small personal benefit and the minimal losses incurred by the customers. (Tr. I at 83; 86.) Respondent also noted the small amount of the restitution order and fine imposed upon him by the district court judge. (Tr. I at 92.)
Ryan also briefly explained the circumstances relating to his wire fraud conviction. He noted that his conviction was based on the testimony of FBI undercover agent Ostrom, who overheard Nowak's statement that he was giving Ryan a profitable trade at the expense of a customer. Respondent contended that Ostrom mistook the prices at which the trades were executed in the market and may also have misunderstood Nowak's statements. (Division Exhibit 4 at 6.)
With respect to the charges of accommodation trading, Ryan acknowledged that he may have settled an out trade during this period of time by engaging in a noncompetitive transaction. He emphasized, however, that no customer funds were involved. (Tr. I at 88-89.) Ryan also admitted he that he had executed trades after the close of trading hours on some occasions. (Tr. I at 110-111.)
Ryan's testimony also addressed his activities since the time of his wrongdoing. As an initial matter, Ryan reviewed the sanctions other regulators had imposed on him as a result of his wrongdoing. Thereafter he briefly described his trading activity following his convictions. After his return to the trading floor in October 1991, Ryan testified that he had traded as a floor trader for approximately two years without incident. (Tr. I at 91; Tr. II at 33-34.) He expressed his desire to continue trading solely for his own account as a floor trader. (Tr. II at 34-35.)
Ryan then described his remorse for his actions. He testified that "the last three years of my life have been just a nightmare personally, financially. I've brought shame to myself and my family, the Board of Trade and the futures industry . . . ." (Tr. I at 98-99.) He also claimed that it would be very difficult for him to find new employment outside the futures industry. Ryan testified that he would never again violate the Act or Commission rules. (Tr. I at 98.)
Scott Early, then General Counsel of the CBOT, supported Ryan's portrayal of his misconduct as insignificant. (Tr. I at 40-41.) In this regard, Early noted the minor sanctions imposed by the CBOT in its disciplinary action against respondent. (Tr. I at 28-32.) Early offered considerable testimony about the CBOT's enforcement policy regarding "curb trading" at the time that Ryan committed his violations. Noting that trading after the close in the soybean pit was a "common practice" prior to 1989, he testified that its purpose was to avoid overnight price risk by allowing floor brokers to finish filling orders for customers and floor traders to balance their accounts. (Tr. I at 33-34.) According to Early, the practice was "generally acknowledged" by both the CBOT and the Commission and was "monitored for abuse." (Tr. I at 34.) Although illegal "curb trading" ceased in 1989 following the issuance of criminal indictments against CBOT members, Early testified that the CBOT adopted a rule to legalize the practice in 1992, which the Commission approved. (Tr. I at 43-45; Tr. II at 13.)
Finally, Early testified regarding Ryan's claim that he was rehabilitated. While acknowledging that he did not know Ryan personally, Early testified that Ryan had a reputation for honesty and personal integrity among CBOT members and that respondent does not represent a threat to the integrity of the marketplace. (Tr. I at 27, 42, 57.) Early stated that no problems with respondent's conduct had come to the attention of the CBOT after his convictions. (Tr. I at 11, 32; Tr. II at 10.) Accordingly, Early asserted that Ryan should be granted full registration as a floor trader. (Tr. II at 11, 12-13.) He noted, however, that the CBOT was willing to act as a sponsor if Ryan were granted conditional registration. (Tr. II at 12.)
Other witnesses testified about Ryan's wrongdoing. John Ruth noted that Ryan's violations resulted from a "serious error in judgment," but emphasized the small amount of funds involved in the underlying misconduct. (Tr. II at 18, 21.) Ruth also suggested that Ryan's conduct resulted in part from his confusion as to the meaning of the exchange's rules. (Tr. I at 20.)
There was also testimony regarding Ryan's honesty and integrity. The witnesses offered their strong endorsement of Ryan's character and asserted that respondent's felony convictions did not affect this view. (Tr. I at 10-11, 12-13, 62-63, 69-70; Tr. II at 18, 26.) They also claimed that Ryan was rehabilitated. (Tr. II at 24, 29.) There was some testimony that Ryan regretted his wrongdoing and focused on respondent's remorse in terms of the personal hardship that he and his family have endured. (Tr. I at 63; Tr. II at 26, 30.) With respect to Ryan's post-conviction trading record, the witnesses testified that they were aware of no trading violations since his return to the trading floor. (Tr. II at 16, 24, 29.) Accordingly, they claimed that, if Ryan were granted full or conditional registration as a floor trader, there would be no risk that he would violate the Act, Commission regulations, or the CBOT's rules. (Tr. I at 15, 63, 70; Tr. II at 17, 19, 25, 26, 29, 30.)
The ALJ issued a decision on remand in April 1994. In re Ryan, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,053 (ALJ Apr. 15, 1994)("Second Initial Decision"). The judge concluded that Ryan had produced clear and convincing evidence to rebut the statutory presumptions that he was unfit to register with the Commission or trade in the markets regulated by the Commission for six to ten years. In assessing the record, the ALJ relied on the factors enunciated by the Commission in Ryan I to determine whether to impose a trading prohibition on respondent under Section 9(b). On the issue of nexus, the judge found that repetition of Ryan's conduct would pose a clear and unequivocal threat to market integrity because the conduct involved criminal wrongdoing on an exchange trading floor. Id. at 41,374.
With respect to mitigation, the ALJ ruled that Ryan had produced sufficient evidence of circumstances which lessened the seriousness of his wrongdoing. First, he held that Ryan's violations do not reflect an intent to cheat or defraud and that his conduct amounted to a crime of "convenience" rather than a crime of "greed." Id. at 41,374. Second, the ALJ found that curb trading played a significant role in Ryan's wrongdoing. Relying heavily on the testimony of Scott Early, the ALJ determined that curb trading "was not considered to be of major significance to Exchange and Commission personnel." Id. The ALJ also noted the Commission's approval of a rule permitting the CBOT to conduct a two-minute post-close trading session (see supra n.18) and indicated that "it appears that Ryan could, today, legally effect some of the transactions for which he was convicted." Id. Finally, the ALJ gave weight to a statement by the district court judge who presided over Ryan's criminal trial to the effect that Ryan's misconduct was "moderate" compared to that of the other criminal defendants in the case. Id. at 41,375.
The ALJ rejected the Division's claim that the seriousness of Ryan's wrongdoing was aggravated by the fact that he was a willing participant in a systematic scheme whereby traders made profits at the expense of the customers. He pointed out that Ryan had not been charged with conspiracy and explained that respondent had only participated in a "scheme" in the sense that other traders were committing violations similar to Ryan's at the same time. Id. While the judge acknowledged that respondent's misdemeanor conviction for accommodation trading was an aggravating factor, he noted that he had taken this evidence into account in assessing Ryan's evidence of mitigation. Id. at 41,375 n.13.
Turning to rehabilitation, the ALJ focused on the time that had passed since Ryan's wrongdoing, his expression of contrition, and the favorable assessment of his character offered by his witnesses. First, the judge noted that Ryan's last violation occurred in 1988 and that he had not been accused of any wrongdoing since that time. Id. at 41,375. Second, the ALJ explained that he gave significant weight to Ryan's statement of remorse because he did not know that he was engaging in prohibited activity at the time of his wrongdoing. The ALJ also observed that the practice of trading after the market close was "common." Id. Finally, the ALJ acknowledged that the witnesses "might not be deemed experts on rehabilitation issues," but found that their testimony regarding Ryan's character should be accorded "some weight." Id. at 41,376.
On the issue of Ryan's role in the marketplace, the ALJ noted that respondent was willing to limit his participation to floor trading and be supervised by a sponsor. Id.
In light of his findings on nexus, mitigation, rehabilitation, and proposed role in the market place, the ALJ concluded that Ryan had produced clear and convincing evidence to rebut the presumptions that his registration should be denied and that he should be denied access to the markets for six to ten years. On this basis, the ALJ granted Ryan's application as a floor trader and denied the Division's request for the imposition of a trading prohibition. Id.
On appeal, the Division challenges the ALJ's refusal to deny Ryan's application for registration or to impose a trading ban. Relying on Ryan's exhibits, which included transcripts from the criminal trial, the Division contends that Ryan's wrongdoing benefited brokers and traders at the expense of customers. Division Appeal Brief at 2.
With respect to mitigation, the Division challenges the ALJ's determination that Ryan did not intend to harm customers as inconsistent with the jury's conclusion in the criminal case. Division Appeal Brief at 17-18. The Division also maintains that the ALJ's decision ignores Scott Early's acknowledgment that the exchange took action when abuses occurred and contends that Ryan's misconduct was not the kind which Early described as harmless. Finally, the Division challenges the ALJ's consideration of the Commission's approval of the CBOT's rule change as a mitigating factor because the new rule does not permit private transactions such as those underlying Ryan's felony convictions. Division Appeal Brief at 18-21.
Turning to the issue of rehabilitation, the Division challenges the determination that Ryan expressed contrition for his wrongdoing. First, the Division emphasizes that Ryan continues to question the validity of the jury's verdict, protesting that the basis for his wire fraud conviction was "vague" and offering repeated excuses and rationalizations for his conduct. In addition, the Division argues that Ryan expressed regret about the personal consequences of his actions instead of acknowledging his wrongdoing. Second, the Division challenges the ALJ's finding that Ryan did not understand that he was engaging in prohibited activity because it conflicts with the jury's conclusion in the criminal case that he acted knowingly. Finally, the Division asserts that the character testimony of Ryan's witnesses is conclusory and fails to include any discussion of a specific change in the way Ryan conducted business since the time of his wrongdoing. Division Appeal Brief at 22-27.
We have reviewed the entire record and determined that the weight of the evidence supports the following findings and conclusions. We consider first the Division's arguments that Ryan's application for floor trader registration should be denied.
Proof of Ryan's statutory disqualification under Sections 8a(2)(D) and (E) of the Act raises a presumption that he is unfit to act as a Commission registrant. In re Horn, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,836 at 36,939 (CFTC Apr. 18, 1990). This presumption rests on the common sense inference that, once an individual has undertaken serious wrongdoing, there is a substantial risk he will undertake similar wrongdoing in the future. In re Akar, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,927 at 31,708 (CFTC Feb. 24, 1986). Thus, Ryan may only retain his registration by making a clear and convincing showing that his continued registration would not pose a substantial risk to the public. See Commission Rule 3.60(e)(1), 17 C.F.R. § 3.60(e)(1)(1996); Horn, ¶ 24,836 at 36,939 n.15.
Ryan was convicted of four felonies, including three felonies under Section 4b of the Act, for entering false records and illegally offsetting customer orders. The ALJ correctly concluded that Ryan's felony convictions constituted statutory disqualification from registration pursuant to Sections 8a(2)(D) and (E) of the Act. ALJ Order of August 13, 1993; First Initial Decision at 41,373 n.9. Ryan does not dispute that his convictions raised a presumption that he is disqualified from registration. Ryan claims that he did not intend to harm the customers whose orders were offset. Indeed, respondent claims that he was merely fulfilling the customers' intent to fill their orders before the close of trading. This contention, however, is inconsistent with the jury's conclusion in the criminal case. Ryan's conviction of three Section 4b violations establishes conclusively that he willfully acted to the detriment of customers.
Ryan also contends that the misconduct leading to his felony convictions did not harm his customers. In this regard, he emphasizes the small amount of the restitution order and the modest size of the trades at issue. However, the U.S. Court of Appeals for the Seventh Circuit specifically rejected this argument in the course of reviewing the appeal of Ryan and his co-defendants during the underlying criminal proceeding. The court found that the prices for matched trades were selected so that floor traders like Ryan would profit from the transactions. The court also found that customers were harmed by the practice of matching trades because the systematic assignment of prearranged prices to their orders denied them an opportunity to earn a profit. In light of Ryan's three Section 4b felony convictions and the wire fraud conviction, we cannot agree with Ryan's position that nothing harmful to customers occurred.
In addition, we are not persuaded that the fact of widespread trading after the market close at the CBOT, if true, mitigates Ryan's wrongdoing. First, to the degree that Ryan claims that this evidence shows "confusion" as to the legality of his conduct, we disagree. At the time of Ryan's violations, all CBOT members were on notice that noncompetitive trading was illegal. 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," and the CBOT did not have such a rule. Even if the record established that confusion resulted from prevalent trading after the market close, it would not mitigate the seriousness of Ryan's felony violations. Respondent does not explain how "confusion" with regard to the legality of such trading caused him to commit felony violations of Section 4b of the Act by deceiving his customers or offsetting customer orders to the customers' disadvantage.
Second, we cannot credit the implicit claim that former Commission Chairman Susan Phillips either condoned the practice of noncompetitive trading or indicated that she did not consider it a significant problem. The testimony of Scott Early on this point did not provide sufficiently detailed information about a conversation between Chairman Phillips and then CBOT Chairman Cunningham to determine whether Chairman Phillips or the Commission even knew that noncompetitive trading was occurring. (See Tr. I at 35-37.) Nor could mere silence be construed to ratify or excuse illicit conduct.
Third, the fact that other CBOT members may have also acted illegally during this period neither explains nor mitigates respondent's behavior. To the contrary, if an exchange is unable or unwilling to enforce compliance with applicable law, there is a greater need for the Commission to impose sufficiently significant sanctions to deter others from similar behavior and to protect the public interest. We do not believe that the fact that others at the CBOT may also have violated the Act and Commission rules in any way lessens Ryan's personal culpability.
In addition, we must consider evidence of circumstances aggravating Ryan's misconduct. Respondent's misdemeanor conviction for engaging in noncompetitive transactions and admissions of noncompetitive trading on other occasions provide additional indications that Ryan engaged in repeated illegal practices. Moreover, we note that the district court judge explicitly rejected the notion that Ryan was a "minimal" participant in the charged mail and wire fraud scheme. Ryan was considered a "minor" participant in terms of the number of trades and amount of customer funds involved in his criminal acts, but that in no way undercuts the fact that he engaged in a number of serious criminal acts on the floor of the exchange.
Based on the foregoing analysis, we conclude that Ryan has failed to produce significant evidence to mitigate the seriousness of his wrongdoing and that the presumption that arises as a result of his felony convictions is strengthened in this case by a pattern of illegal behavior. 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); Akar, ¶ 22,927 at 31,709-10.
Our rehabilitation inquiry begins with respondent's conduct from "the time of the wrongdoing underlying the statutory disqualification . . . ." 17 C.F.R. § 3.60(b)(2)(ii)(B) (1996). We consider initially Ryan's expressions of remorse for his wrongful conduct. In the circumstances presented, however, we do not find that Ryan's statements of regret establish a change in direction. We have previously noted that expressions of contrition following detection only deserve significant weight if the wrongful nature of the conduct was unclear at the time of the violations. Horn, ¶ 24,836 at 36,940. Respondent asserts that he did not understand that his misconduct would result in felony convictions, but that he will never again violate the applicable laws. However, as demonstrated above, Ryan has not shown that he was confused about the illegality of his conduct at the time of his wrongdoing. Thus, Ryan appears to be remorseful because of the personal consequences of his wrongful activities rather than regretting the misconduct itself.
We find that Ryan did not appreciate the gravity of his misconduct when he expressed remorse for his actions. We note that the district court judge found that Ryan was precluded from receiving a two-point reduction in sentencing for acceptance of responsibility due to his failure to recognize the criminality of his actions. U.S. v. Dempsey, 768 F. Supp. at 1290. Ryan has continued to assert throughout the proceeding before the ALJ that his misconduct did not harm any customers. Thus, Ryan has not even taken the important first step on the path of rehabilitation.
Ryan also urges us to consider the character testimony of his witnesses. As a general rule, we do not accord significant weight to the character testimony of a witness unless such witness was qualified as an expert. Compare In re Walter, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,215 at 35,015 (CFTC Apr. 14, 1988)(probation officer, who worked closely with respondent for significant period after his conviction, had experience and expertise that buttressed the reliability of his opinion that respondent did not present negative risk to community), with In re LeClaire, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,282 at 42,428 (CFTC Dec. 12, 1994)(noting that almost every respondent can produce evidence such as testimony from a friend or colleague attesting to the witness's trust in respondent and belief he will not repeat his violative conduct). Ryan did not attempt to qualify any of the witnesses as experts in the area of rehabilitation.
Even apart from this general weakness, the character testimony of Ryan's witnesses is not persuasive. The witnesses made only passing reference to the requirements of the Act or the Commission's regulations in analyzing respondent's conduct and the propriety of his noncompetitive trading. The testimony reflected at most a perfunctory concern with the customers harmed by Ryan's wrongdoing. In short, respondent's character witnesses showed limited appreciation for the interest of the public.
In addition, Ryan contends that he has committed no wrongdoing in the six years which have passed since the misconduct underlying his felony convictions. In particular, he emphasizes that he has traded without incident during the two years following his return to the market. The inference of a "changed direction" is undercut by the fact that Ryan was subject to an outstanding administrative complaint when he returned to the market. As we have noted in the past, the weight accorded such evidence must be limited in these circumstances. In re Silverman, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,410 at 21,643 (CFTC Mar. 14, 1977), aff'd sub nom. Silverman v. CFTC, 562 F.2d 432 (7th Cir. 1977). Ryan has offered no persuasive evidence of a change in trading practices that occurred prior to the issuance of our administrative complaint, and thus we accord limited weight to his evidence concerning his trade practices following his return to the market. Furthermore, under the circumstances we consider two years of trading without disciplinary action as insufficient to demonstrate a clear change in direction.
Ultimately, we must weigh Ryan's rebuttal evidence against the presumption raised by his convictions of four felony violations and one misdemeanor violation, including three felony violations of Section 4b. If, as Sections 8a(2)(D) and (E) indicate, a single felony conviction raises a presumption of unfitness for continued registration, four felony convictions raise a stronger presumption to overcome. Further, although the conduct underlying one felony conviction is conceivably attributable to a unique misstep, Ryan's four felony convictions reflect a pattern of conduct that establishes a 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).
In light of our evaluation of the record as a whole, we conclude that Ryan has failed to make a clear and convincing showing that his registration as a floor trader would pose no substantial risk to the public. Accordingly, based on the evidence that Ryan is subject to statutory disqualification from registration, we deny his application for registration.
We turn next to the Division's argument that Ryan should be prohibited from trading for a period of between six and ten years. Proof of Ryan's three felony convictions under Section 4b of the Act gives rise to the presumption that he should be banned from trading pursuant to Section 9(b) of the Act for six to ten years. Ryan I, ¶ 25,832 at 40,725. Thus, respondent may continue to trade only if he shows by the weight of the evidence that his continued access to markets regulated by the Commission will pose no substantial risk to their integrity. Id.
There is unquestionably a nexus between respondent's misconduct and the proper and honest functioning of the market. Ryan's violations involved criminal conduct on the exchange trading floor, and the repetition of such conduct creates a clear and unequivocal threat to the integrity of the markets. Id.
With respect to the role he intends to play in the market, Ryan proposes to trade as a floor trader, the same role in which he was functioning at the time of his wrongdoing. In essence, this would put him in a position to repeat his misconduct. Moreover, this proposal is based on the assumption that respondent's application for registration as a floor trader would be granted. As discussed above, we have determined not to grant Ryan's registration application.
Turning to mitigation, respondent's evidence (discussed above at 22-25) does not persuade us that the weight accorded to the presumption arising from three Section 4b felony convictions should be lessened, even in light of the less onerous weight of the evidence standard. A single Section 4b felony conviction raises a statutory presumption of a five-year trading ban under Section 9(b). We have found that under the terms of the statute the presumption arises without regard to the nature or gravity of the offense. In this case, Ryan was convicted of multiple felony violations of Section 4b.
Furthermore, the wrongdoing underlying Ryan's Section 4b felony convictions is aggravated by evidence of a pattern of related violative conduct. In addition to the accommodation trades and curb trading described above (see supra at 25-26), we note that Ryan was convicted of felony wire fraud. Such a pattern of misconduct establishes a strong likelihood that wrongdoing will be repeated. Cf. Precious Metals Assoc., 620 F.2d at 912. Based on the foregoing analysis, we conclude that Ryan has failed to mitigate the seriousness of his wrongdoing and that the presumption that arises as a result of his three Section 4b felony convictions is strengthened in this case by a pattern of illegal behavior. Moreover, as we discussed above, Ryan's evidence (discussed supra at 27-30) is not sufficient to support a finding of rehabilitation, even when assessed by the weight of the evidence standard.
In light of our evaluation of the record as a whole, we conclude that Ryan's limited evidence of mitigation and rehabilitation does not establish that Ryan's continued access to the markets we regulate will pose no substantial risk to their integrity. We believe that a person who has committed multiple felony violations of Section 4b and other wrongful acts on the floor of an exchange is precisely the type of person Congress sought to exclude from trading when it enacted Section 9(b). Accordingly, we find that Ryan should be prohibited from trading on markets regulated by the Commission for a period of six years.
In light of the mandates of Sections 8a(2) and 9(b) and our assessment of the record as a whole, we conclude that respondent should be denied registration as a floor trader and prohibited from trading on the markets regulated by the Commission for a period of six years. The trading prohibition and registration application denial, and the cease and desist order and registration revocation 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, Commissioners DIAL, HOLUM, and SPEARS) (Commissioner TULL, concurring in the result).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: April 25, 1997
Concurring Opinion of Commissioner Tull:
I reach the same result as the majority based on my assessment of the record and vote to deny Mr. Ryan's floor trader registration and prohibit him from trading on our markets for six years. However, I reject the use of the presumption announced by the Commission before my appointment in In re Ryan, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,832 (CFTC Aug. 13, 1993). In that decision, the Commission wrote that, "As a general matter, we believe the threat to market integrity posed by respondents who are convicted of two to four Section 4b felonies is sufficiently grave to support a presumption that a trading prohibition of between six and ten years is necessary to protect the markets regulated by the Commission." Id. at ¶ 25,832. While I do not question the seriousness of Mr. Ryan's violations or the need for the Commission to impose sanctions on any market participant with multiple felonies, I do not think it is wise to move beyond the statutory presumption set forth in Section 9(b) and apply a set formula based on the raw number of felonies. Rather, sanctions should be assessed based on the seriousness of the underlying conduct, with a view toward consistent treatment for similar violations. See In re Mark B. Fisher, CFTC Docket No. 93-2 (Commissioner Tull dissenting from Acceptance of Offer of Settlement of John P. Gandolfo).