UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
CFTC Docket No. 94-R169
OPINION and ORDER
DANIEL STUART, GERALD,
INC., and TRINITY FINANCIAL
Complainant appeals the Administrative Law Judge's ("ALJ") dismissal of her claim for over $100,000 in trading losses, which she alleges resulted from respondents' fraudulent solicitation and mishandling of her account. On appeal, complainant seeks reversal, arguing that the judge's decision is contrary to the weight of the evidence.
Based on our independent assessment of the factual record, we reverse the ALJ and award full damages to complainant in the amount of $111,052.72 as against Daniel Stuart and Trinity Financial Group, Inc. ("Trinity"). This award is based on our finding that complainant was fraudulently induced to trade with respondents in violation of Section 4b(a) of the Commodity Exchange Act ("Act"), 7 U.S.C. § 6b(a) (1994). We affirm the ALJ's dismissal of the claim as against Gerald, Inc. ("Gerald").
Complainant, Gudrun Scheufler, is a woman in her early forties with a bachelor's degree in engineering and a master's degree in corporate finance. In account opening documents, Scheufler listed her liquid net worth as more than $900,000 and her annual income at about $60,000. Scheufler has spent at least the last ten years unemployed, caring for various elderly relatives. Proceeding pro se, complainant filed a 26-page complaint seeking the recovery of $111,052.72 in trading losses(1) against respondents Daniel Stuart, the broker who handled complainant's account; Stuart's employer, Trinity, a non-guaranteed introducing broker ("IB"); and Gerald, the futures commission merchant ("FCM") that carried complainant's account.
In her complaint filed on August 26, 1994, Scheufler made numerous allegations against Stuart that can be summarized as follows: that Stuart churned her account, breached his fiduciary duty, engaged in fraud by misrepresenting and failing to disclose the risks associated with commodities trading, and engaged in unauthorized trading. In addition, complainant alleged that Stuart and Trinity conducted a "boiler room" operation and that respondents Trinity and Gerald were liable for Stuart's violations.
With regard to her misrepresentation claim, Scheufler alleged that, in the summer of 1992, she saw a television "infomercial" promoting opportunities in heating oil options trading. Complaint at 6. Scheufler alleged that the program led her to believe that a one-cent rise in the price of heating oil would yield a return of $4,200 for every $10,000 invested. Id. Scheufler responded to the infomercial's 800 telephone number, and two days later on Friday, September 11, 1992, received an information packet from Trinity. On Monday, September 14, 1992, complainant was called by Stuart. Complaint at 6-7. Scheufler claimed that during the call Stuart "urged" her to invest in heating oil options, insisting "[Scheufler] had to act now or it would be too late," as the opportunity was "an almost guaranteed investment." Complaint at 7.
The call ended with no action by Scheufler. Scheufler claimed that Stuart called back an hour later and "badgered," "browbeat," and "bombarded" her with "alleged facts and figures [about] how this was a virtual iron-clad money-making opportunity" that she had to act on "immediately." Complaint at 7. Complainant claimed that Stuart told her he "knew with his life's blood that the price [of heating oil was] going to go up" and that Scheufler would "feel stupid and really regret" missing the opportunity to invest. Complaint at 12.
After she agreed to invest, Scheufler claimed that Stuart told her where to sign and how to fill out the account forms--which she said she had not read. Scheufler indicated on account opening documents that her previous investment experience was limited to one year of investing in bank certificates of deposit and stocks. Both the account forms and Scheufler's check for $20,000 were picked up by a courier sent by Stuart within an hour of the second telephone call. (Tr. at 15.)
Scheufler's unauthorized trading claim is based on her allegation that she and Stuart agreed in their conversations on September 14, 1992, that he would purchase February heating oil options for her account. Scheufler claimed that, when Stuart talked with her later, she was "very disturbed" to learn that January rather than February heating oil options had been purchased, but she did not attempt to correct the order. She said that, when she raised the issue in a subsequent conversation with Stuart, he told her that there "was nothing that could be done" about the purchase. Complaint at 10-11.
Scheufler's allegation that respondents conducted "boiler room operations" rests on assertions that they made repeated attempts to persuade her to increase her investment.(2) Complaint at 19. According to the complaint, Stuart solicited an additional $98,000 from Scheufler on September 15, 1992, the day after the initial $20,000 investment, followed by another $47,000 two days later on September 17, 1992, for a total of $165,000.(3) Complaint at 13-14. Complainant alleged that she was persuaded by Stuart's claims that her investment would yield at least $400,000. Scheufler said Stuart told her he could not "guarantee" this outcome, but that Scheufler should "trust [him]." Complaint at 12.
Scheufler's nondiscretionary account remained open from September 15, 1992 through December 30, 1992. Six transactions were executed, all occurring between September 15th and October 22, 1992. A review of account statements attached to the complaint indicates that 14 January 1993 heating oil call options were purchased on September 15, 1992. One hundred twenty five options were purchased on September 17, 1992 (in two lots of 50 and 7), along with 25 January 1993 heating oil put options. Scheufler paid $32,800 in commissions.
Scheufler's positions eroded. On October 21, 1992, her 139 heating oil call options were liquidated pursuant to a stop-loss order producing a loss of $111,052. The next day, Scheufler instructed Trinity to liquidate the heating oil put options, leaving an ending account balance of $53,948. No further trading took place. Trinity went out of business shortly thereafter. Scheufler received a check for her account balance sometime after December 30, 1992.
Respondents Gerald and Stuart filed separate answers to the complaint, denying all liability and asserting affirmative defenses. The defunct respondent Trinity failed to answer the complaint or otherwise to participate in the proceedings. In his answer, Stuart maintained that Scheufler was fully informed of the risks and mechanics of trading and that Trinity's compliance department confirmed all trades prior to their execution. Stuart Answer at 12. Transcripts of conversations between Scheufler and Trinity's compliance department were attached to Stuart's answer. Gerald asserted that it had no involvement in Scheufler's account other than to clear her trades and that, since Trinity was a non-guaranteed IB, Gerald had no liability as a matter of law. Gerald's Answer p.4, ¶ 10.
All parties engaged in discovery. A hearing was held on April 23, 1996, in San Francisco, at which Scheufler and a Gerald employee testified. Scheufler testified that "the whole thing started with the infomercial that I'd seen on television." (Tr. at 7.) Asked by the ALJ what the infomercial said, Scheufler testified that:
[I]t said that it's a great time to invest in heating oil options. And then for--that for just a one-cent move, you could make a profit of $4,200 on an investment of $10,000. And that on the average for the last years that on an investment of $10,000 you can easily make a hundred thousand dollars. Virtually no risk involved whatsoever. And basically, they were just pushing heating oil options, to get into it.
(Tr. at 8.)
The ALJ asked whether the person who answered her call to the 800 number identified himself or herself as being from Trinity or Gerald. Complainant said no, that the person simply promised to send some information and asked for her telephone number. Two days later she received a package from Trinity, "[s]o obviously I assumed that Trinity was affiliated with the infomercial." (Tr. at 9.) Stuart's solicitation call followed.
Scheufler testified that Stuart told her that profits "[c]ould be enormous for just a small amount of investment," but that he "legally [could not] guarantee" profits. (Tr. at 11-12.) Scheufler added that "basically he wanted to get me to invest. He said, 'Please,' you know, 'let me do this for you' were exact--his exact words. 'Let me do this for you. I can make you a lot of money'." (Tr. at 11.) Scheufler said that Stuart told her to "make this investment quickly" or the opportunity would be lost. (Tr. at 14.) In response to the ALJ's questions, Scheufler testified that Stuart said "nothing" to her about the infomercial and that she did not mention it to him. (Tr. at 11-12.) Scheufler testified that about an hour elapsed between the time she finished speaking with Stuart and the arrival of a Federal Express courier to pick up her check and the account documents. (Tr. at 14-15.)
Scheufler testified that Stuart persuaded her to invest with Trinity the first day they spoke (September 14, 1992) and then testified that Stuart called back the next day and "kept me on the phone for hours and hours," trying to get her to invest another $200,000. (Tr. at 17.) Scheufler testified that "I was . . . scared. . . . I had never invested in anything but CDs. . . . And I was already a little bit skeptical . . . about the 20,000 the day before." Id.
Scheufler further testified that, despite her doubts, Stuart persuaded her to substantially increase her position over the next two days, after which she refused all urgings to invest more money. She said that on September 18 she told him she was "having second thoughts or third thoughts about the whole investment" and asked "can I get out of it? . . . And I was told I cannot. 'It's done. You cannot get out of it. You have no recourse. . . . '" (Tr. at 27-28, 46.)
Scheufler said that after September 23, 1992, she never heard from Stuart again. (Unbeknownst to Scheufler, Stuart left Trinity's employment on September 25, 1992.) She said her account was transferred to Cary Statlander, who gave her several status reports but never attempted to solicit her to make trades. Scheufler said that on October 13, 1992, Statlander told her that her positions had lost 40 percent of their value and that he advised her to consider repositioning her stop-loss order to reflect the market shift. (Tr. at 29.) Complainant declined to do so. Scheufler said she next heard from Trinity's compliance director, Ron Alarcon, who told her on October 21, 1992, that all her calls had been "automatically sold off and that I had lost 111,000. It was gone." (Tr. at 30.)
Stuart failed to appear at the April 23, 1996, hearing and was found in default. The ALJ subsequently granted his motion to set aside the default and convened a supplemental hearing on July 26, 1996, to take Stuart's testimony.(4) Testimony from this hearing is cited as ("Tr.2 at __.") In answer to the ALJ's questions, Stuart testified that Scheufler's name was among five given to him by his sales manager. (Tr.2 at 10.) He was told only that she "called in on an infomercial show." Id.
Stuart testified that he began his initial solicitation by telling Scheufler that trading options in futures is "like rolling the dice. . . . You could lose part or all of your money." (Tr.2 at 11.) Stuart further testified that Trinity was recommending a long position in heating oil to its customers. "I never gave her a figure of what the exact profit would be. But she did say that she was watching the infomercial and for every one penny move there was a nice profit there. She explained that to me." (Tr.2 at 12.)
Stuart also testified that he and Scheufler had discussed an initial investment of $10,000 and that he questioned why she sent a check in the amount of $20,000. (Tr.2 at 22.)
Stuart denied telling Scheufler he could "stake [his] life on heating oil going up" or making similar extravagant statements or any sort of guarantee. (Tr.2 at 22-23.) He also denied ever having a conversation with Scheufler in which she expressed a desire to get out of the market, calling her representation on that point "a bald-faced lie." (Tr.2 at 58.) Stuart testified that he no longer remembered whether Scheufler ordered January or February options. (Tr.2 at 48.) Stuart said he left Trinity a few days after Scheufler began trading in the wake of an argument with his sales manager. Stuart also introduced a document called "Special Report on Heating Oil Prepared for the Clients of Trinity Financial Group." He said he had nothing to do with its preparation and had never discussed it with Scheufler. (Tr.2 at 8.) Nevertheless, he said Scheufler would have received the document in the mail. Id. Scheufler said the document was "new" to her. Id.
In a November 27, 1996 initial decision, the ALJ ruled that complainant failed to establish that she suffered damages as a result of unlawful conduct by Stuart, Trinity, or Gerald. Initial Decision at 10. In resolving complainant's misrepresentation claim, the ALJ found that neither Scheufler nor Stuart "gave reliable testimony concerning the discussions of risk prior to the opening of Scheufler's account." Initial Decision at 7. Nevertheless, he concluded that, "[d]espite short-comings in Stuart's testimony . . . Scheufler was fully informed of the risk of trading options prior to the placement of a single order in her account." Id. at 8. The ALJ rested this finding principally on the transcripts of the compliance tapes submitted by Stuart and the fact that Scheufler had received a risk disclosure statement from Trinity before speaking to Stuart. The ALJ rejected Scheufler's testimony that she had not read the risk disclosure statement, concluding without explanation that "she read and understood" it. Id. Elsewhere, the ALJ found that Scheufler "relied on the infomercial data in deciding to invest" rather than on high-pressure sales tactics by Stuart. Id. at 3. The judge also found that "the sponsors of the infomercial transmitted Scheufler's name to Trinity, and that Trinity furnished the name to Stuart, who solicited Scheufler to invest $10,000.00 in commodity options." Initial Decision at 10.
The ALJ also rejected Scheufler's unauthorized trading claims. With regard to her assertion that the wrong month's options were purchased, he found that Scheufler "unequivocally ratified" the purchase of the January heating oil options as evidenced by the compliance tapes and her failure to make a timely protest of the transaction. Initial Decision at 4-5. The ALJ also rejected Scheufler's claim that her 139 call options were liquidated without her consent, finding that the liquidation occurred pursuant to a valid stop-loss order. The ALJ dismissed Scheufler's churning claim, finding that she failed to prove that respondents controlled her account or that there was evidence of excessive trading. Initial Decision at 9.
On appeal, Scheufler argues that the ALJ's decision is contrary to the weight of the evidence and should be reversed. Appeal Brief at 4-5. In addition, Scheufler argues that the ALJ was biased, an issue not raised below. As evidence of such bias, Scheufler cites adverse rulings against her throughout the proceeding, the ALJ's conduct at the hearing, and the fact that on two occasions, the ALJ's legal staff, "acting on [the ALJ's] instructions," gave complainant improper legal advice.(5) Appeal Brief at 11.
Respondents Gerald and Stuart filed answering briefs seeking affirmance
of the initial decision. In addition, Stuart argues that the appeal is
untimely. The parties submitted additional filings further developing
their arguments on appeal.
Complainant's notice of appeal was filed on December 13, 1996, and her appeal brief should have been filed by Monday, January 13, 1997. See Commission Rule 12.401, 17 C.F.R. § 12.401 (1997). Scheufler's certificate of service indicates that she mailed her appeal brief on January 14, 1997.(6) In view of Scheufler's pro se status, dismissing her appeal would be an unduly harsh sanction disproportionate to her failure to comply strictly with our filing rules. In light of the fact that her filing was only one day late and our preference for decisions on the merits, dismissal of the appeal is not warranted. See Jenne v. Painewebber, Inc., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,329 (CFTC Aug. 31, 1988).
The ALJ's conclusion that Scheufler failed to prove her fraudulent inducement claim is contrary to the weight of the evidence. The ALJ's refusal to hold the respondents liable appears to rest primarily on his determination that Scheufler was persuaded to trade options by the infomercial and that Stuart's solicitation was of little influence. The ALJ failed to attribute the infomercial to the respondents. In addition, although the ALJ specifically disbelieved Stuart's testimony that he adequately informed Scheufler of trading risks, the ALJ nevertheless found that Scheufler did not rely on what Stuart said. For these reasons, the ALJ found no causation between respondents' conduct and complainant's losses.
The ALJ's first error lay in refusing to draw a connection between the infomercial and Trinity and Stuart. It is undisputed that the infomercial dealt with trading options according to a strategy based on seasonal trends in heating oil prices; Scheufler received a Trinity information packet on a Friday, two days after she responded to the infomercial, followed on the succeeding Monday by Stuart's call; Trinity obtained Scheufler's name from a list of respondents to an infomercial; Trinity distributed a "Special Report on Heating Oil" to its sales representatives and customers that discussed opportunities to profit from trading options according to a strategy based on seasonal price trends in that commodity; and Trinity's sales representatives were advised to recommend investing in heating oil options. Scheufler discussed the infomercial with Stuart without his disavowing it or correcting its representations. (Tr.2 at 12.) Based on the foregoing, we believe that it is valid to infer that, at a minimum, Trinity was aware of the contents of the infomercial and intentionally relied on its message to convince customers to invest in heating oil contracts. The infomercial and Trinity's sales message were too much alike for the similarity to be coincidental. Whether or not Trinity produced the infomercial and paid for its airing is immaterial, since it is clear that Trinity used its marketing message and adopted the contents of the infomercial for its own purposes. We also have no difficulty in concluding that the infomercial, as described by Scheufler, was fraudulent. Scheufler testified that the infomercial promoted options trading as a "[v]irtually no risk" investment and advised viewers that "for just a one-cent move, you could make a profit of $4,200 on an investment of $10,000." (Tr. at 8.) She testified that it also represented that "on an investment of $10,000 you can easily make a hundred thousand dollars." Id. It plainly exaggerated the profit potential of options trading while minimizing its risk. Scheufler's testimony is internally consistent and plausible. We find her testimony credible and of sufficient weight to establish the fraudulent nature of the infomercial. We turn now to the question of Stuart's individual liability. Though Stuart testified that he adequately disclosed trading risk, we, like the ALJ, find that his testimony on this point was not credible. See Initial Decision at 3. His failure to make adequate risk disclosure compounded the impact of the infomercial's exaggerated predictions of profit. The attractive prospect of making a $4,200 profit on a $10,000 investment was necessarily rendered more appealing by Stuart's failure to provide a realistic picture of trading risks. Scheufler's actions in investing substantial amounts of money are fully consistent with her testimony that she relied on what she learned from the infomercial and from Stuart--that she was going to make very high profits with very little risk. The fact that complainant was furnished with a risk disclosure document is unavailing. Where appropriate, we will look beyond risk disclosure documents to what is said to induce an individual to invest. In this regard, we have held that "conduct can vitiate the effect of the risk disclosure statement mandated by our rules." Hannay v. First Commodity Corp. of Boston, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,936 at 34,282 (CFTC Sept. 21, 1987).(7)
Based on the foregoing discussion, we hold Trinity and Stuart directly liable for Scheufler's losses. Trinity also is liable for the conduct of Stuart pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. § 2(iii) (1994). No liability attaches to Gerald, since there is no evidence that Trinity acted as Gerald's agent or that Gerald was aware of the fraudulent misrepresentations.(8)
In light of our finding that Scheufler was fraudulently induced to invest, we award her damages in the full amount of her investment, pursuant to Section 14(a)(1)(A) of the Act, 7 U.S.C. § 18(A)(1)(a) (1994). Having found that Stuart and Trinity are liable for fraud in the solicitation of her account, it is unnecessary to reach the other issues raised in the appeal. Scheufler's motions seeking an oral hearing and permission to supplement the record are denied. Scheufler is awarded damages from Stuart and Trinity in the amount of $111,052.72, with pre-judgment interest on this amount calculated at the rate of 5.60 percent per annum from October 21, 1992, to the date of payment, plus $50 in filing fees.
IT IS SO ORDERED.(9)
By the Commission (Chairperson BORN and Commissioners DIAL, HOLUM, and SPEARS; Commissioner TULL dissenting).
Catherine D. Dixon
Assistant Secretary of the Commission
Commodity Futures Trading Commission
Dated: September 30, 1997
Gudrun Scheufler v. Gerald, Inc., Daniel Stuart and Trinity Financial
CFTC Docket No. 94-R169
Dissenting Opinion of Commissioner TULL
I respectfully disagree with the majority's opinion that Daniel Stuart's activities in connection with Ms. Scheufler's investment with Trinity Financial Group proximately caused her losses. Based upon my independent review of the record, I find that Ms. Scheufler invested with Trinity as a result of the information contained in the infomercial. While Ms. Scheufler claims that Mr. Stuart also made fraudulent statements, I find that one, she is not a credible witness, and two, even if what she says is true, she did not rely upon anything Mr. Stuart may have said in deciding to invest. While it is unfortunate that Ms. Scheufler lost her money, she had the burden of proof in this case, and she failed to meet that burden.
1. In addition to actual damages, complainant also sought punitive damages of $222,105. Complaint at 24. Complainant was informed by the Commission's Office of Proceedings that her allegations of wrongdoing did not meet the criteria for punitive damages as set forth in Section 14(a)(1)(B) of the Act, 7 U.S.C. §18(a)(1)(B) (1994). See September 6, 1994 Letter from Office of Proceedings.
2. Scheufler's additional investments also appear to form the basis of her churning claim. Complaint at 12, 19. She claimed that respondents churned her account by "running [her] investment up to $165,000" by repeatedly soliciting funds. Complaint at 19.
3. Scheufler rejected Stuart's request that she invest $200,000 on September 16, 1992, as well as his request for $85,000 on September 17, 1992. Repeated unsuccessful attempts to persuade Scheufler to increase her investment were made by Stuart from September 21 through 23, 1992.
4. In the judge's June 6, 1996 Order setting aside the default, he found that Stuart had not received notice of the original hearing date and was otherwise unavailable at the time of the hearing due to hospitalization following a car accident. Order at 1-2.
5. Scheufler argues that the ALJ's staff advised her not to have a friend, Keith Coyne, testify so as not to "annoy and antagonize" the ALJ. Appeal Brief at 11. Scheufler argues separately that the ALJ's staff gave her incorrect advice resulting in her failure to perfect an interlocutory appeal filed earlier in the case. Appeal Brief at 15.
6. Scheufler argues that her late filing should be excused because as a pro se complainant she was "unclear" on the filing deadlines and was otherwise distracted. See Complainant's Motion at 2-3.
7. The ALJ attached significant weight to transcripts of compliance conversations between Scheufler and a Trinity compliance officer to support his finding that Scheufler was apprised of the risks of trading. This evidence is not dispositive of this point. The carefully scripted compliance conversations comprise only a fraction of the communications that took place between Scheufler and Trinity. The important conversations, for our purposes, are those between Stuart and Scheufler, and the record contains no tapes or other documentary evidence reflecting those conversations. In these circumstances, we decline to embrace the broad inference drawn by the ALJ on the basis of this evidence.
The ALJ also relied on the compliance conversations to discount Scheufler's unauthorized trading claims. The ALJ found that Scheufler ratified the choice of January options by confirming the orders to Trinity's compliance personnel immediately before the trade was entered, yet failed to address Scheufler's testimony that she complained to Stuart after the trade was executed. Although resolution of this issue will not affect our holding, clarification of the ALJ's erroneous ratification analysis is appropriate. The Commission has stated that a customer's adoption of an unauthorized trade must be "clear from all the circumstances . . . ." Sherwood v. Madda Trading Co., [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,728 at 23,020 (CFTC Jan. 5, 1979). In making the determination that a complainant intends to adopt disputed trades, the Commission will look at the complainant's knowledge and activity after the disputed transaction occurred.
8. Trinity's status as a non-guaranteed IB of Gerald is clear on the record, as is the absence of any participation by Gerald in the handling of this account. An FCM that carries the accounts of a non-guaranteed IB does not thereby become liable for the IB's misconduct. See Reed v. Sage Group, Inc., [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,144 at 32,367 (CFTC July 9, 1986).
9. Under Sections 6(c) and 14(e) of the Commodity Exchange Act (7 U.S.C. §§ 9 and 18(e) (1994)), a party may appeal a reparation order of the Commission to the United States Court of Appeals for only the circuit in which a hearing was held; if no hearing was held, the appeal may be filed in any circuit in which the appellee is located. The statute also states that such an appeal must be filed within 15 days after notice of the order and that any appeal is not effective unless, within 30 days of the date of the Commission order, the appealing party files with the clerk of the court a bond equal to double the amount of the reparation award.
A party who receives a reparation award may sue to enforce the award if payment is not made within 15 days of the date the order is served by the Proceedings Clerk. Pursuant to Section 14(d) of the Act (7 U.S.C. § 18(d) (1994)), such an action must be filed in United States District Court. See also 17 C.F.R. § 12.407 (1997).
Pursuant to Section 14(f) of the Act (7 U.S.C. § 18(f) (1994)), a party against whom a reparation award has been made must provide to the Commission, within 15 days of the expiration of the period for compliance with the award, satisfactory evidence that (1) an appeal has been taken to the United States Court of Appeals pursuant to Section 6(c) and 14(e) of the Act or (2) payment has been made of the full amount of the award (or any agreed settlement thereof). If the Commission does not receive satisfactory evidence within the appropriate period, such party shall be automatically suspended from registration under the Act and prohibited from trading on all contract markets. Such prohibition and suspension shall remain in effect until such party provides the Commission with satisfactory evidence that payment has been made of the full amount of the award plus interest thereon to the date of payment.