UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
__________________________________ In the Matter of :CFTC DOCKET NOS. :92-11 and SD 93-13 : DANNY L. SCHECK :OPINION AND ORDER __________________________________:
The Division of Enforcement ("Division") appeals an Administrative Law Judge's ("ALJ") decision granting respondent Danny L. Scheck'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. Scheck opposes the appeal and maintains that the ALJ fairly considered and properly rejected all of the Division's arguments.
As explained more fully below, based on our independent assessment of the record, we deny Scheck's application for registration as a floor trader and impose a five- year trading prohibition.
This case arose out of the sting operation conducted by the Federal Bureau of Investigation ("FBI") at the Chicago Mercantile Exchange ("CME") in 1988. On November 15, 1989, respondent and two other traders were charged with criminal violations of the Commodity Exchange Act, 7 U.S.C. 1, et seq. (1988) ("CEA" or "Act"), and related federal crimes in a 20-count indictment filed in the United States District Court for the Northern District of Illinois. On July 9, 1990, a jury found respondent guilty of one felony count of aiding and abetting a violation of Section 4b(A) of the Act, 7 U.S.C. 6b(A) (1988). The jury was unable to reach a verdict on the 19 remaining counts. On March 27, 1991, Scheck entered into a plea agreement pursuant to which he pled guilty to two misdemeanor counts of accommodation trading in violation of Section 4c(a)(A) of the Act, 7 U.S.C. 6c(a)(A) (1988), in exchange for the government's dismissing the remaining counts of the indictment.
The conduct underlying Scheck's felony conviction occurred several minutes prior to the close of trading on March 8, 1988, and consisted of Scheck's buying two June Swiss Franc contracts from broker Robert D. Mosky at a price of .7365 while the prevailing market price was .7367. Mosky's customer lost two ticks on the two-lot trade, or a total of $50.
Scheck's misdemeanor convictions stemmed from two post-closing trades executed between himself and FBI agent Randall Jannett, who was posing as a trader. On April 4, 1988, Scheck bought two Swiss Franc contracts from Jannett after the close at the closing price of .7415. On June 6, 1988, Scheck sold Jannett five Swiss Franc contracts after the close at .7090, one tick below the closing price. On both occasions, Scheck falsely reported the trades as occurring during regular trading hours. Both men were trading for their own accounts.
On December 6, 1992, the federal district court entered a judgment order of conviction against Scheck on the jury's verdict and the plea agreement. Scheck was sentenced to serve six months in a community confinement program followed by five years' probation, and ordered to pay a fine of $15,000 and restitution in the amount of $4,250.
On December 17, 1991, the Commission issued a three-count administrative enforcement complaint against Scheck based on the misconduct underlying his criminal convictions. Count I alleged that Scheck aided and abetted another member of the CME in cheating and defrauding another person in connection with the execution of contracts of sale of Swiss Francs in violation of Section 4b(A) of the Act. Count II alleged that Scheck violated Section 4c(a)(A) by executing accommodation trades. Count III alleged that Scheck violated Regulation 1.38(a), 17 C.F.R. 1.38(a) (1991), by engaging in noncompetitive trading. As sanctions for the violations alleged, the Division requested a cease and desist order, suspension or revocation of all respondent's current registrations, a trading prohibition, and a civil monetary penalty.
On March 9, 1992, Scheck filed an answer admitting in part and denying in part the allegations of the complaint and raising affirmative defenses. After Scheck filed his answer, the Division moved for summary disposition, arguing that Scheck was collaterally estopped from contesting his liability in this proceeding because the facts material to the violations alleged in the complaint had already been determined against him in the criminal action. Respondent did not oppose the Division's motion. In May 1992, the ALJ granted summary disposition on liability. The parties then submitted written recommendations on sanctions.
On December 22, 1992, the ALJ issued his initial decision which rejected the Division's request for a permanent trading ban. Instead, the ALJ found that in light of the nature and the gravity of the violations and the evidence of mitigation and rehabilitation, a four-month trading ban served to protect the public interest. Both parties filed appeals with the Commission.
On appeal, the Commission held that Congress has mandated that under Section 9(b) of the Act, 7 U.S.C. 13(b)(1988), a person convicted of one felony under Section 4b of the Act must be prohibited from trading for a minimum of five years unless not required to protect the public interest. In re Scheck, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,834 (CFTC Aug. 13, 1993). The Commission held that Scheck's Section 4b felony conviction gave rise to a rebuttable presumption that such a ban should be imposed on him. It then announced a four-part standard against which any rebuttal evidence offered by Scheck should be weighed. As a separate matter, the Commission found that the ALJ had abused his discretion by denying the parties an opportunity to develop the record on sanctions through an oral hearing. The Commission vacated the initial decision and remanded for a hearing consistent with its opinion.
While this matter was pending on appeal to the Commission, Scheck sought registration as a floor trader. After he filed an application, he secured no-action status to act as a floor trader pending review of his application. The Commission opposed the application and commenced a statutory disqualification case against him by filing a Notice of Intent to Deny Application for Registration as Floor Trader on July 19, 1993. The notice alleged that by virtue of his felony conviction, Scheck was subject to a statutory disqualification pursuant to Sections 8a(2)(D) and (E) of the Act, 7 U.S.C. 12a(2)(D) and (E) (Supp. 1993). On August 13, 1993, the same day that the Commission issued its opinion and order of remand, the ALJ issued an order terminating Scheck's no-action status. On August 17, 1993, the ALJ issued an order vacating Scheck's suspension and consolidating CFTC Docket No. 93-13, the statutory disqualification case, with Docket No. 92-11, the pending administrative enforcement action. The Commission reinstated the suspension on September 13, 1993.
On November 8, 1993, the parties filed a joint motion requesting that the evidence adduced at the sanctions hearing mandated by the Commission's remand order also constitute the record for the statutory disqualification case. The ALJ granted the parties' motion and conducted an oral evidentiary hearing on January 20, 1994.
Scheck testified on his own behalf and presented two character witnesses. The Division presented the testimony of William A. Walsh, a floor broker at the CME during the relevant time. Scheck testified that he had no independent recollection of any of the trades that he made in 1988, including the three for which he was convicted. (Tr. at 44- 47, 59, 61-62.) Additionally, he testified that he did not realize that he was violating the Act when he conducted the trades that led to his criminal conviction. (Tr. at 63.)
Nevertheless, Scheck said he accepted responsibility for the trades underlying his convictions. (Tr. at 47.) He also testified that he has become highly sensitive to his obligation to trade in compliance with all applicable rules. He said that he frequently resorts to the trader-assistance hotline that the CME established in the wake of the FBI sting. He said he also moved his account from a clearing broker whom he felt had no interest in overseeing his trading to a firm that would actively monitor his trading for compliance with applicable rules. He also testified that the new clearing firm, owned by a former business partner of his father, had agreed to enter into a formal supervisory relationship if he were granted restricted registration.
On cross-examination, Scheck was asked about the trade underlying his felony conviction. He said that "I guess [I] aided and abetted" broker Robert Mosky, who, Scheck said, "gave me a trade that was underneath the market . . . ." (Tr. at 59.) He also was asked about the trades for which he had been indicted and tried, but as to which criminal charges had been dropped when the jury failed to return a verdict. Several of these trades were executed opposite Mosky on March 17, 1988, and led to charges that Scheck aided and abetted Mosky in committing fraud on Mosky's customers. Scheck said that he did not remember those trades with specificity, but "acknowledge[d] that I aided and abetted them [sic]," and "accept[ed] responsibility" for those trades. (Tr. at 60.) He gave a similar response with respect to charges arising from trades executed on April 14, 1988, and on December 15, 1988. (Tr. at 61-62.) Scheck admitted being charged with aiding and abetting Mosky in a separate incident on April 6, 1988, but denied that he engaged in the conduct charged and refused to accept responsibility for it. (Tr. at 61.) Scheck said that with respect to all of the incidents, "I did not know I was violating the Commodity Exchange Act." (Tr. at 63.)
Scheck also was asked on cross-examination about how he handled "out- trades"--trades whose execution contained errors that prevented their being cleared. An out-trade results, among other circumstances, when the quantities or prices of the buy and sell sides of a transaction do not match. Scheck said that in the past, when a broker approached him about a purported out-trade, he would assume that the error was his and adjust his records to match those of the person on the opposite side of the trade. He said he would give other traders the "benefit of the doubt," whether or not the adjustment resulted in a gain or a loss for him. (Tr. at 73, 83-84.) He said he no longer does this and now believes that "my biggest mistake down there trading was that I was too nice of a guy, and that brokers would come up and say yes, I did this trade with you, and I would take the other side of the trade." (Tr. at 76.) He said that now, "I would split them [out-trades] right down the middle unless I was positively and absolutely sure of a mistake, or another person owned up to a mistake. " (Tr. at 74.) He also said that "we would write checks" to settle the out-trade, rather than adjusting trading cards. (Tr. at 74.) Scheck was asked if he "[w]ould . . . ever be repaid" for taking the out-trade. He answered "No." (Tr. at 75.)
Gerald Beyer, executive vice president of the CME for legal, regulatory and financial affairs, testified that the curb trading practices for which Scheck was convicted were not regarded as serious when they occurred and would be legal at the CME today. He said that, prior to 1988, the CME instituted disciplinary action against curb trading only in "especially blatant cases." (Tr. at 12.) He also testified that the CME later adopted Rule 550 to allow customer orders received but not executed before the closing bell to be executed after the closing at the closing price. (Tr. at 13.)
As to Scheck himself, Beyer testified that since the sting and its aftermath, Scheck frequently sought assurances that his trading practices were in compliance with CME rules. (Tr. at 15, 33, 37.) Beyer testified that Scheck was "[e]xtremely" concerned and "almost obsessed" with complying with exchange rules. (Tr. at 37-38.) He also testified that Scheck frequently called the CME's member hotline, which was established quickly to answer member questions concerning floor trading rules. (Tr. at 13-14, 29.) Though Beyer did not know Scheck before Scheck's arrest, he testified that he believes Scheck has significant remorse for his past misconduct. (Tr. at 15.) He said he believes that, if Scheck were permitted to trade as a floor trader again, he would comply with CME rules and would not pose a risk to the public or the integrity of the futures markets. (Tr. at 15-16.)
Scheck's other witness, Marvin Wenger, testified concerning the respondent's rehabilitation and the proposed supervisory controls that would be employed if Scheck were permitted to trade. Wenger, a local trader at the Chicago Board of Trade and other exchanges since 1973 and a principal of the Singer-Wenger Trading Company, a clearing firm, since 1978, has known Scheck almost all his life because their fathers were business partners. (Tr. at 86-87, 89.) He gave Scheck his first job in the futures industry. (Tr. at 89.) Wenger testified that he believes Scheck is an honest and trustworthy individual and that he is remorseful about his misconduct. (Tr. at 92.) He also stated his opinion that if Scheck were permitted to trade as a floor trader, he would comply with CME rules and would not pose a risk to the public or the integrity of the markets. (Tr. at 96-97.) Finally, Wenger testified that his firm would sign a Supplemental Sponsor Certification Statement if Scheck were conditionally registered in this action. (Tr. at 96.)
The Division offered the testimony of William A. Walsh, a floor broker on the CME during the relevant time period, to show that the violations for which Scheck was convicted were not isolated instances of misconduct. Walsh also was indicted and pled guilty to criminal charges arising from the FBI investigation. (Tr. at 118.) When the Division asked Walsh if he had observed Scheck taking error trades from brokers, Walsh stated that he did not recall specific times when this occurred but that he believed that it happened. (Tr. at 107.) Walsh also testified that he recalled "matching orders"--another violative trade practice--with Scheck. (Tr. at 111-12.) He also testified that he had asked Scheck to take trading errors from him and that Scheck had done so willingly. (Tr. at 112-13, 131.) On cross examination, Walsh testified that in his experience, 90 percent of local traders would resolve trading errors the same way Scheck did. (Tr. at 130.)
On May 17, 1994, the ALJ issued his second initial decision. In re Scheck, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,081 (ALJ May 17, 1994). With regard to the administrative enforcement case, the ALJ analyzed the record in terms of the Commission's holding in its remand order that a respondent's conviction for a single felony violation raises a presumption under Section 9(b) in favor of a minimum five-year trading ban. Applying the Commission's four-part standard to determine whether the presumption had been rebutted, the ALJ at the outset found a clear nexus between the wrongdoing underlying Scheck's conviction and the integrity of the futures markets. Id. at 41,585-56.
The ALJ next looked to whether the seriousness of Scheck's wrongdoing was mitigated in any way and concluded that it was. Id. at 41,586. He found as to the felony conviction that "Scheck's fraud appears to be the . . . result of following a misguided policy [of giving floor brokers the benefit of the doubt on purported out- trades], rather than a premeditated theft." Id. He also found that the small loss to Mosky's customer ($50) mitigated the gravity of the offense.
Next, the ALJ addressed the Division's argument that the respondent's related violative conduct constituted aggravating evidence. He found that the criminal charges dismissed pursuant to Scheck's plea agreement were not "related violative conduct" because they did not result in findings of violations of the Act. On the other hand, the ALJ found that Scheck's misdemeanor convictions did constitute "related violative conduct." Nevertheless, the ALJ found that on balance, the evidence mitigating Scheck's felony conviction outweighed the evidence aggravating such conduct.
The ALJ also found Scheck to be fully rehabilitated. First, the ALJ noted that Scheck had not been found liable for or accused of any wrongdoing after 1988, the year of the trades at issue. Id. at 41,587. Second, the ALJ credited Scheck's promises not to do anything wrong and to comply with all applicable CME and federal rules and regulations, as well as any restrictions that the ALJ might impose on his trading. Id. Along these lines, the ALJ found that Scheck exhibited remorse, noting that Scheck's sentencing judge reduced his points under the Federal Sentencing Guidelines for accepting responsibility for his misdeeds. Id. Also, the ALJ cited Scheck's testimony that, at the time he made the trades that resulted in his convictions, he had no sense that he was engaging in prohibited activity. Id. at 41,587 n.14. In addition, the ALJ found that the testimony of Beyer and Wenger supported Scheck's claim of rehabilitation. Id. at 41,587.
Finally, with respect to Scheck's role in the marketplace, the ALJ noted that a respondent who agrees to limit his future participation in the market is in a better position to rebut the presumption that he will remain a threat to market integrity. The ALJ noted favorably that Scheck had agreed to act only as a floor trader and to trade under supervision. Thus, the ALJ concluded that Scheck had rebutted the presumption that he should be subject to a five-year trading ban and found that no trading ban was necessary to protect the public.
On the same record, the ALJ held that Scheck had rebutted with clear and convincing evidence the presumption under Sections 8a(2)(D) and (E) that he was disqualified from registration as a floor trader. He granted Scheck's pending application for registration as a floor trader.
The Division appealed the ALJ's initial decision.
On appeal, the Division argues that the ALJ improperly applied elements of the Commission's four-part standard in considering the need for a trading ban. The Division also argues that Scheck's mitigation evidence is weak. It contends that the gravity of his offense is not mitigated simply because the amount of money involved was small. Further, the Division argues that the ALJ improperly minimized the seriousness of Scheck's misdemeanor offenses by finding, based on Beyer's testimony, that the practice of "curb trading" was not considered a serious offense at the CME. In the Division's view, a self-regulatory organization's categorization of seriousness is not a relevant mitigating factor where, as here, there has been a clear violation of the Act. In the same vein, the Division contends that the CME's subsequent amendment to its Rule 550 cannot mitigate conduct that was wrongful at the time it was committed.
The Division also argues that the ALJ erred in failing to consider conduct underlying the dismissed criminal charges as aggravating evidence, since Scheck admitted much of this conduct at the hearing. The Division conceded that Scheck did not recall the specifics of these transactions, but said his lapse of memory was irrelevant since he reviewed documents from his criminal trial and accepted responsibility before the ALJ for the conduct for which he had been charged.
On the rehabilitation issue, the Division argues that Scheck's character witnesses did not offer any insight into changes in Scheck's character, in that Beyer did not know Scheck prior to his criminal indictment and Wenger holds the same opinion of Scheck now as he had before Scheck's conviction. The Division also argues that Scheck's proposed supervisory arrangement is inadequate because the supervisor is a family friend with whom Scheck sought a supervisory arrangement only after he was served with the notice of intent to deny his registration.
Finally, the Division argues that there is no credible record support for the ALJ's finding that Scheck had expressed contrition. According to the Division, Scheck's statements that he would be "the last person on earth to do something wrong"--because the criminal trial had caused a lot of grief to his family--merely expressed his regret over the consequences of his criminal activity, rather than an acceptance of responsibility for injuring both customers and the integrity of the markets. The Division also asserts that the ALJ erroneously concluded that Scheck was not aware he had engaged in prohibited activity. It emphasizes that the ALJ's holding completely disregards the jury's conviction of Scheck for "knowingly" aiding and abetting the defrauding of a customer.
Separately, the Division argues that the ALJ failed to distinguish the "weight of the evidence" burden of proof that applies in the administrative enforcement case from the more stringent "clear and convincing" burden that applies in the statutory disqualification case. The Division contends that the ALJ treated the two burdens as if they were the same, effectively allowing Scheck to rebut the presumption that he is unqualified to be registered with less than the required quantum of evidence. The Division contends that since Scheck's evidence is insufficient to satisfy the lesser evidentiary burden applicable in the enforcement case, it cannot meet the greater burden of the statutory disqualification case. Finally, the Division argues that the serious nature of Scheck's wrongdoing, when coupled with the fact that he committed his offenses as a participant in a scheme to negate market risk at the expense of customers, confirms the likelihood that he will engage in illegal conduct in the future. Accordingly, the Division concludes, his application for registration should be denied.
In response, Scheck argues that the ALJ properly considered the evidence presented to him by the parties and assessed the credibility of the witnesses. Scheck asserts that the Initial Decision reflects a reasoned application of the relevant factors identified by the Commission in its prior opinion remanding this matter for further proceedings. Scheck urges the Commission to defer to the ALJ's favorable assessment of his credibility and generally urges affirmance of the initial decision in all respects.
We consider first the parties' arguments relating to the ALJ's finding that respondent had rebutted the presumption under Section 9(b) of the Act that a five-year trading prohibition should be imposed on him. 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 Scheck, 25,834 at 40,732, we stated that this statutory directive rests on a common sense judgment that, once an individual has committed serious wrongdoing, there is a substantial risk that he will undertake similar wrongdoing in the future. We held that, once the Division has demonstrated the appropriate type of felony violation, a presumption arises that the respondent will pose a substantial risk to the markets regulated by the Commission for at least five years. Under the terms of the statute, this presumption arises without regard to the nature of respondent's felony violation.
In Scheck, we concluded that the statutory presumption was not conclusive. 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. quoting Section 9(b) of the Act. As a result, we held that a 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.
It should be noted that protection of the markets may require a longer trading ban than five years and that the Commission may impose such a longer trading ban as it finds to be in the public interest. Aggravation evidence may be the basis for such a longer ban. See In re Fetchenhier, CFTC Docket Nos. 91-12, SD 93-14 slip op. at 33- 34 (CFTC May 8, 1997).
First, we assess the gravity of Scheck's misconduct. Generally, when assessing the nature and gravity of the misconduct, we examine the misconduct itself. Scheck was convicted of one felony under Section 4b of the Act for willfully aiding and abetting Mosky in cheating and defrauding Mosky's customer on March 8, 1988. Scheck also pled guilty to two counts of accommodation trading on April 4 and June 6, 1988. Moreover, Scheck admitted during the hearing that he aided and abetted Mosky in committing fraud on customers in five separate transactions on March 17, 1988, and in one transaction on December 14, 1988. He also admitted that he had aided and abetted another floor broker, Mark Fuhrman, in cheating and defrauding customers on April 14, 1988. The evidence concerning the two misdemeanor counts of accommodation trading and the seven additional transactions on March 17, April 14, and December 14,1988 were presented as aggravating evidence to show that the wrongful transaction which resulted in Scheck's felony conviction was not an isolated incident. Moreover, the district court judge found that Scheck was part of an "ongoing scheme to defraud." United States v. Scheck, 783 F. Supp. at 1112. Based on this evidence, it is clear that Scheck's violations were extremely serious and repeated.
To counter the gravity of his offenses, Scheck contends that the amount of customer losses was small. In our view, the amount of out-of-pocket customer losses in this case does not mitigate Scheck's conduct. See In re Ryan, CFTC Docket Nos. 91-10 and SD 93-17, slip op. at 22-23 (CFTC Apr. 25, 1997). We have held previously that customers are harmed by the practice of matching trades because the systematic assignment of prearranged prices to their orders deprives them of an economic opportunity by denying them an opportunity to earn a profit. Id. (citing U.S. v. Ashman, 979 F.2d 469 (7th Cir. 1992), cert. denied sub nom. Barcal v. United States, 510 U.S. 814 (1993)). In addition, in light of Scheck's Section 4b felony conviction, his two misdemeanor convictions, his other admitted violations of Section 4b, and the court's finding that he schemed to defraud customers, we cannot agree with Scheck's position that the amount of customer harm was small.
Scheck's testimony that he did not mean to do anything wrong or to hurt anybody, is entitled to little weight in light of the jury's finding that he knowingly aided and abetted Mosky's fraud. Scheck's conviction of a Section 4b violation establishes conclusively that he willfully acted to the detriment of customers.
In addition, we find unpersuasive Scheck's argument based on Beyer's testimony that the curb trading to which he pled guilty would be legal under a new CME rule. This argument has already been rejected by the Commission. Scheck, 25,834 at 40,733 n.8 ("[S]ubsequent rule changes do not mitigate conduct that was wrongful at the time it was committed. At best, such a change might eliminate the possibility of a repeated violation of that particular rule.").
Further, we are not persuaded that testimony about widespread trading after the market close at the CME mitigates Scheck's wrongdoing. First, to the degree that Scheck claims that this evidence shows "confusion" as to the legality of his conduct, we disagree. All CME members, including Scheck, were on notice that noncompetitive trading was illegal. At the time of Scheck's violations, 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 to and approved by the Commission." The CME did not have a written rule that authorized members to use noncompetitive trades to execute trades after the market close, and Scheck's evidence does not demonstrate any legitimate confusion about the legality of his conduct.
Second, the fact that other CME members also may have 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 CME also may have violated the Act and Commission rules in any way lessens Scheck's personal culpability.
Third, even if trading after the close were prevalent, at best it would be relevant to Scheck's incidents of accommodation trading in violation of Section 4c(a)(A) of the Act and noncompetitive trading in violation of Commission Rule 1.38. Respondent does not explain how "confusion" with regard to the legality of late trading caused him to commit a felony violation of Section 4b by cheating and defrauding customers.
Nor does the CME's subsequent adoption of a rule permitting a limited period of trading after the market close justify Scheck's misconduct. The new rule does not permit prearranged transactions in which prices are assigned to the detriment of customers.
In addition, we must consider evidence of circumstances aggravating Scheck's misconduct. Respondent's misdemeanor convictions for engaging in accommodation trading provide additional indications that Scheck engaged in repeated illegal practices. Moreover, the gravity of Scheck's misconduct undisputedly is aggravated by his admissions of noncompetitive trading on other occasions. Ryan, slip op. at 25. The ALJ refused to consider the dismissed criminal charges as aggravation because no jury findings had been made regarding them. However, those violative trades for which he assumed responsibility in his testimony before the ALJ should properly be viewed as established on the record. Thus, Scheck clearly engaged in a pattern of violative trading.
Based on the foregoing analysis, we conclude that Scheck has failed to produce significant evidence to mitigate the seriousness of his wrongdoing and that need for a trading ban is clearly demonstrated in this case by his 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 In re Horn, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,836 at 36,940 (CFTC Apr. 18, 1990); 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 Feb. 24, 1986).
Scheck's evidence regarding rehabilitation does not establish the type of significant change that would warrant an inference that he poses no substantial risk to market integrity.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) (1997). In the circumstances presented in this case, we do not find that Scheck'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. Scheck appears to be remorseful because of the personal consequences of his wrongful activities rather than regretting the misconduct itself.
In addition, Scheck points out that he received points off under the Federal Sentencing Guidelines for accepting responsibility for his actions. Scheck did not acknowledge the gravity of the misconduct in purportedly taking responsibility for his actions. He has continued to argue that the harm to customers was only $50 in spite of the criminal court's finding that it was several thousand dollars. Nor has he demonstrated that he understands the harm to market integrity caused by his actions. Thus, Scheck has not even taken the important first step on the path of rehabilitation.
Scheck 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 Walter, 24,215 at 35,015 (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). Scheck did not attempt to qualify any of his witnesses as experts in the area of rehabilitation.
Even apart from this general weakness, the character testimony of Scheck'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 customer harmed by Scheck's wrongdoing. In short, respondent's character witnesses showed limited appreciation for the interest of the public.
Scheck contends that he has committed no wrongdoing since his guilty plea in 1991. We have noted in the past, however, that the inference of a "changed direction" is undercut when the respondent was subject to an outstanding administrative complaint when he returned to the market. 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). Moreover, the Commission has previously found that clean records for similar time periods were insufficient to establish rehabilitation. Compare In re Stevens, [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) 22,839 (CFTC Nov. 22, 1985) (five years not sufficient under circumstances); Akar, 22,927 at 31,710 (less than three years insufficient under the circumstances).
Scheck wants to return to the same role in the market he performed at the time of his wrongdoing, but proposes to do so under supervision. In essence, this would put him in a position to repeat his misconduct. Commission precedent indicates that such an arrangement is not a substitute for persuasive evidence of mitigation and rehabilitation. Horn, 24,836 at 36,942 n.23. The proposed supervisory arrangement cannot overcome the deficiencies of Scheck's mitigation and rehabilitation evidence. Moreover, this proposal is based on the assumption that respondent's application for registration as a floor trader would be granted. As discussed below, we have determined not to grant Scheck's registration application.
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 Scheck's access to the markets we regulate would pose no substantial risk to their integrity. Accordingly, we determine that Scheck should be prohibited from trading on markets regulated by the Commission for five years.
We turn next to Scheck's argument that his application for floor trader registration should be granted. Proof of Scheck'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. Horn, 24,836 at 36,939. Thus, Scheck may only retain his registration by making a clear and convincing showingthat his continued registration would not pose a substantial risk to the public. See Commission Rule 3.60(e)(1); Horn, 24,836 at 36,939 n.15.
Scheck argues that his evidence pertaining to the trading ban issue also shows that there is no need to deny his application for floor trader registration. As discussed above, Scheck's evidence of mitigation and rehabilitation is not sufficient to rebut the presumption under Section 9(b) that he should be banned from trading for at least five years. Since his evidence does not rebut the Section 9(b) presumption by the weight of the evidence, it follows that it does not meet the stricter clear and convincing standard applicable to Section 8a(2).
In light of our evaluation of the record as a whole, we conclude that Scheck 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, we deny his application for registration.
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 five years. The trading prohibition and registration application denial, and the 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: June 4, 1997