UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
________________________________ : MAI SYMON : : CFTC Docket No. 95-R110 v. : : OPINION AND ORDER GARY FULLET, JEFFREY MONAGO : and STAR COMMODITIES, a.k.a., : TARGET TRADING : _______________________________:
Complainant Symon appeals from an order of an Administrative Law Judge ("ALJ") dismissing the majority of her reparations claims. The ALJ found that complainant had failed to prove her allegations of misrepresentation, improper order execution, churning, and all but one instance of unauthorized trading. The Judge awarded Symon $15,633.80 in damages on a single transaction he found had been executed without proper authority. On appeal, complainant challenges all aspects of the ALJ's decision denying her claims. Respondent Monago opposes the appeal and requests that the Commission affirm the initial decision. Respondents Star Commodities ("Star") and Gary Fullet did not file answering briefs.
On June 21, 1995, complainant filed this reparations action pursuant to Section 14 of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 18 (1994), against her broker, Jeffrey Monago, his supervisor, Gary Fullet, and their employer, Star Commodities.(1) Star Commodities was registered with the Commission as an introducing broker ("IB") from July 1991 through October 1996, and was guaranteed by Linnco Futures Group, a registered futures commission merchant ("FCM").(2) Her complaint alleges unauthorized trading, churning, misrepresentation, and improper order execution. According to Symon, respondent Monago first contacted her in September 1994 to solicit her to open a futures account. At the time, Symon had maintained an account at Lind-Waldock for five months, her first experience in trading futures. Symon rejected Monago's overtures and continued trading through Lind-Waldock. Symon alleges that Monago contacted her again in December 1994 and persuaded her to open a non-discretionary futures trading account with Star. Symon's account statements show that she invested $70,000 in late December 1994 and another $50,000 in January 1995. Symon, who was 64 at the time, drew on her retirement funds to trade futures.
Her account was traded actively for the next four months and closed with a small debit balance in May 1995. More than 150 trades were executed during that time, and Symon alleges that a substantial portion of these trades were either unauthorized or intentionally designed to make her lose money.
About six trades account for most of her losses. Two large, losing trades occurred within the first few months of trading, so that by February 4, 1995, Symon's initial account equity had been halved to $60,000. Symon's pro se complaint describes a series of alleged incidents occurring over the life of her account in which Monago variously refused to follow specific instructions regarding particular trades, advised her badly, entered trades without her authority, refused to execute orders she asked him to place, or otherwise abused his role as her account executive. Symon submitted account statements with her complaint and challenges almost every losing trade.
Symon also alleges that, as her account incurred losses, Monago repeatedly made promises to make her whole. For example, Symon claims that "[w]hen I told him I wanted him to liquidate everything and send me what was left he'd keep telling me that he'll make it up even if he has to dig ditches and that he'll send me $60,000, but I mustn't tell anyone, etc. which he has been promising me since February 4th." (Compl. at 5.)
All respondents filed separate answers to the complaint. Star asserted in its answer that Symon made false and misleading statements in her complaint and that she was simply unhappy with her losses. Star contended that Symon controlled the trading in her account and that no trades were executed without her consent. In support of its denial of Symon's unauthorized trading claim, Star submitted with its answer telephone logs showing frequent conversations between Monago and Symon. These records indicate that Symon and Monago often spoke between ten and thirty times a day. Both Monago and Fullet also filed answers describing Symon's allegations as "grossly inaccurate."
The ALJ then opened the discovery period. In her answers to respondents' interrogatories, Symon stated that Monago made false promises to reimburse her for losses. She stated that Monago promised to visit her in New York, bring her $50,000 or $60,000, and build up her account to its original size. (Complainant's Answers to Written Questions at 5.) In addition, she claims that Monago made collect phone calls to her away from Star's office and told her he made these calls because the call would be recorded if he telephoned from the office. (Answers to Written Questions at 6.) Symon attempted no discovery during the time allowed.(3)
On February 23, 1996, the ALJ ordered the parties to submit order tickets for Symon's account and to file a report on the number of executed day trades and the amount of commissions charged. Star complied with this request on March 19, 1996.
The ALJ conducted a three-hour hearing in New York on April 2, 1996, at which complainant, Monago, and Fullet appeared pro se. Star was represented by its president, Rita M. Juhlin, a non-lawyer. Symon testified and was cross-examined by respondents. In her direct testimony, Symon began by describing the large losses she incurred soon after her account began trading, saying that respondents "reduced me within weeks. They reduced my 120 [thousand dollars] to 60, maybe 40. [I]t's in the [account] statements here, just within weeks." (Tr. at 11-12.)
The ALJ then raised the allegations in Symon's pleadings to the effect that respondents made certain promises to her and asked why she continued trading in the face of mounting losses. She said that, after she lost the first $60,000 of her account equity, Monago began promising to reimburse her. (Tr. at 12-16.) She testified that "[h]e said you must come to Long Island. He wants to come to Long Island. He wants to meet me. He wants to give me this money, but I must keep it a secret." (Tr. at 17.)(4) The ALJ then asked complainant about "[a]ny other representations that Mr. Monago made to you to cause you to keep trading," but she was unable to remember any. (Tr. at 19.)
The ALJ next asked complainant whether she or Monago chose the trades for her account and whether any trades were entered without her prior consent. She testified that she generally followed his suggestions and she also discussed with him trading recommendations from a futures newsletter to which she subscribed. She also testified that "some" trades were executed without her prior knowledge and consent, explaining that "[t]here's some silver in January that--too many silvers. Then there were some silvers in April. And there was one instance where he covered six contracts . . . . [H]e had me cover these contracts at the real bottom--he would--so that the loss would be and not in addition to the three of them. Was it twelve? I don't remember if it was six, or twelve, or three, and six." (Tr. at 21.)
When cross-examined by Monago about unauthorized trading, Symon reiterated that on one occasion six silver contracts were traded for her account though she had ordered only three and that on another occasion Fullet purchased 20 silver contracts though she had ordered ten. (Tr. at 39-40, 41-42.) When Monago asked her generally to discuss her misrepresentation claim, she responded by saying he had given her bad trading advice. (Tr. at 40-41.)
Juhlin asked Symon why she had never complained to Monago's supervisors about being controlled by him. Symon said that she had complained to Monago about the results of his trading recommendations. (Tr. at 49-50.) Juhlin introduced into evidence Star telephone bills showing calls between Monago and Symon, along with transcripts of telephone conversations between them taped in the ordinary course of business by Star.(5) During questioning by the ALJ, Fullet, and Monago, Symon did not deny that she and Monago spoke frequently.
When Monago testified, the ALJ questioned him extensively about Star's system for entering and clearing customer orders. The ALJ stated that the high volume of short-term trading in Symon's account created a situation where unlawful allocation of trades might take place undetected. Monago denied that such allocations had taken place. Monago also testified that Symon initiated most of her own trades based on newsletter recommendations. (Tr. at 75.) Under questioning by Juhlin, Monago denied ever promising Symon money or trading her account without her knowledge. (Tr. at 73.)
Fullet testified that he and Monago sat near each other and he therefore was aware of the "constant communication" between Monago and Symon and that "at no time was there ever a situation where I was notified as a branch manager of any compliance issues" until May, just before trading ceased. (Tr. at 87.) Fullet also testified that, after Symon lost half her account equity, he suggested that she stop trading and she decided to continue. (Tr. at 88.).
After all witnesses had testified, the ALJ recalled Symon to afford her an opportunity to expand her earlier direct testimony. During re-cross-examination by Fullet, Symon was asked why she had her account statements mailed to her seasonal home in Pennsylvania, although she lived most of the time in New York. She responded that "I expected to make a what is it I think, a killing, so then I thought I was going to save on taxes in Pennsylvania, filing a Pennsylvania address . . . ." (Tr. at 98-99.)
Monago, on re-cross-examination, asked Symon about specific trades that she alleged in her complaint were unauthorized. Using her handwritten contemporaneous notes, he then sought to show that she had recorded the trades at the time they were entered. (See generally Tr. at 105-14.)
On June 25, 1996, the ALJ issued an initial decision dismissing the bulk of Symon's claims. However, Symon prevailed on the claim that ten silver contracts were purchased without authorization on May 5, 1995.(6) The ALJ did not make findings as to authority for the remainder of the trades Symon alleged had been executed without her permission. Instead, the ALJ proceeded immediately to the affirmative defense of ratification, concluding that even if these trades had been unauthorized, Symon adopted the trades as her own, and thus ratified them, by failing to protest at the first reasonable opportunity. Indeed, the ALJ found that, even when Symon did complain to Monago about particular trades, she eventually adopted the trades "in the hopes of making a profit." (Initial Decision at 10.)
As to Symon's claim of misrepresentation, the ALJ credited her testimony and found that Monago had made false and improper guarantees of reimbursement after her account lost half its equity. For example, the ALJ found that Monago promised to bring Symon $50,000 if she would meet him in Long Island and to "dig ditches," if necessary, in order to repay her. However, the ALJ ruled that Symon did not remain in the market in reliance on Monago's misrepresentations and thus failed to prove that they proximately caused her damages. (Initial Decision at 15.)
The ALJ found that Symon also failed to prove a claim of churning. Analyzing this case under the three-prong test established in In re Paragon Futures Association, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,266 at 38,847 (CFTC Apr. 1, 1992), the ALJ found that complainant had failed to satisfy the second prong of the test, namely, that the trading was excessive in light of her objectives. In support, the ALJ noted that the content of the transcripts of telephone conversations between Monago and Symon, as well as the frequency of those conversations, showed that Symon intended to engage in frequent trading.
Finally, the ALJ rejected Symon's claim of improper order execution, explaining that Symon based her claim on "bald allegations, and introduced no specific evidence to prove her claim." (Initial Decision at 15.) In addition, he noted that the transcripts of telephone conversations showed that Monago sometimes persuaded Symon not to enter a trade that she had requested and held that dissuading a customer from entering a trade is not a violation of the CEA.(7)
On July 15, 1996, Symon filed a notice of appeal with the Commission, seeking review of all aspects of the ALJ's decision except the one on which she prevailed. In her appeal brief, Symon reiterates the arguments raised in her complaint. Symon further argues that she did lodge complaints about Monago, that he intentionally tried to confuse her, and that she believed his "false promises." Respondent Monago requests that the Commission affirm the initial decision.
We turn first to complainant's claim that respondents executed trades that she did not authorize. We find that there is no reliable basis in the record to support the ALJ's conclusion that Symon ratified the trades in question. The Commission has held that an ALJ commits "clear legal error" by narrowly focusing a ratification analysis on the timeliness of a customer's protest of an unauthorized trade. Gilbert v. Refco, Inc., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,081 at 38,058 (CFTC June 27, 1991). A customer ratifies an unauthorized trade "only where it is clear from all the circumstances presented that the intent of the customer was to adopt, as his own and for all time, the trades executed for his account without authorization." Sherwood v. Madda Trading Company, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,728 at 23,020 (CFTC Jan. 5, 1979). This record reveals no such intent on Symon's part.
When considering the affirmative defense of ratification, the first step is to examine the customer's knowledge of the agent's wrongdoing and the legal right to avoid financial responsibility for unauthorized trades. Gilbert, ¶ 25,081 at 38,058. The record does not establish that, at the time of the allegedly unauthorized trades, Symon was aware that Star was legally obligated to remove unauthorized trades from her account without charging her for accrued losses.
Moreover, the timing of Symon's discovery of the unauthorized transactions is, at best, ambiguous on this record. The ALJ found that Symon was not receiving her account statements promptly and did not receive accurate verbal confirmation of her trades. Symon claims that she did not read some of the account statements she received until the end of April, making it unclear at what point she learned of the alleged wrongdoing. Respondents have presented no evidence to challenge Symon's claim. In these circumstances, the record does not support the ALJ's conclusion that respondents have met their burden of establishing the defense of ratification.
As a result of the ALJ's error in his ratification analysis, he did not assess Symon's demeanor and credibility as to her claim of unauthorized trading. Without such a record, we are unable to undertake de novo review and make any determination as to whether the alleged unauthorized trades were in fact executed without Symon's approval.
As noted above, the ALJ found that Monago had made material misrepresentations to Symon, but found that complainant's own testimony established that she did not believe the misrepresentations. The ALJ's analysis amounts to a finding that Symon failed to prove reliance, a necessary link between a misrepresentation and complainant's damages. The ALJ's assumptions that Symon did not believe Monago's false assurances is not supported by the record. In response to the ALJ 's question, "[y]ou didn't think he meant it I guess, right," Symon gave the following halting response: "[h]e was telling me it's not -- I don't know what you call it, legal or professional. But it's -- he is -- he said it. He said he was going to see to it that --" (Tr. at 18). Symon also testified that she continued trading despite mounting losses because Monago "was telling me we were going to build it up and he actually did give me a few profits." (Tr. at 18.)
There is significant evidence that Monago actively attempted to persuade Symon to continue trading by illegally promising to reimburse her losses, and the ALJ so found. When asked why she did not quit trading despite mounting losses, Symon answered that there were a few instances where she tried to quit, but Monago persuaded her to continue. On remand the parties should be permitted to introduce additional testimony on whether Symon relied on Monago's false and illegal representations.
We turn now to Symon's claim that Monago churned her account. In the circumstances established on this record, the weight of the evidence does not support this claim. A claimant must satisfy three criteria to establish a claim of churning: (1) the broker controlled the level and frequency of trading in the account; (2) the overall volume of the broker's trading was excessive in light of the customer's objectives; and (3) the broker acted with intent to defraud or in reckless disregard of the customer's interest. Paragon Futures, ¶ 25,266 at 38,847.
Symon has not demonstrated that Monago's trading was excessive in light of her objectives, and the record does not contain a clearly articulated statement of Symon's trading strategy. The telephone records indicate that Symon and Monago, on occasion, spoke between ten and thirty times a day. There were also instances in which Symon wanted to engage in more trades than Monago was willing to place. These circumstances suggest that complainant intended to engage in frequent trading and support the ALJ's conclusion that her volume of trading was not excessive in light of her objectives.(8) On this basis, we agree with the ALJ's conclusion that the record does not support a finding that respondents churned Symon's account.
We next turn to Symon's claim of improper order execution. The ALJ found that Symon failed to plead or prove this claim with enough specificity to support a liability finding. However, the telephone transcripts clearly reveal that Monago, on occasion, tried to dissuade Symon from placing an order, ignored her request, or simply hung up the telephone. Monago's failure to place authorized orders as requested is consistent with his execution of orders without authorization and demonstrates his refusal to follow his customer's instructions. We remand for further development of the record on this aspect of Symon's claim.
Finally, in awarding damages to complainant, the ALJ stated that Linnco would be liable for the satisfaction of judgment in the event that respondents failed to pay. Linnco has not been named as a party to this proceeding. On remand, Symon shall be given the opportunity to amend her complaint to add Linnco as a respondent.
For the foregoing reason, we remand the case for further proceedings consistent with this opinion.(9) The ALJ shall hold an oral hearing to develop a record sufficient to make findings on complainant's unauthorized trading claim, her claim of improper order execution, and her claim of reliance on Monago's misrepresentations and lulling behavior. We affirm the judge's liability finding as to the ten unauthorized silver trades and resulting award of $15,633.80 plus interest and fees. We also affirm the judge's findings that complainant did not prove churning.
By the Commission (Chairperson BORN and Commissioners DIAL, TULL, HOLUM, and SPEARS).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: August 7, 1997
1. Respondent Star Commodities was headquartered in Minnesota, but Symon traded with Star through its Chicago office where Star did business as Target Trading. Monago became registered in 1993 and came to Star in November 1994. Respondent Gary Fullet is a registered associated person who served as Monago's supervisor and the manager of Star's Chicago office. Symon claims that Fullet occasionally participated in trading her account during the relevant time period.
2. Symon failed to name Linnco as a respondent in her complaint.
3. On March 18, 1996, Symon made a belated discovery request asking respondents to furnish her with order tickets for approximately 52 trades. Respondent Star objected to this request as untimely, and the ALJ refused to compel production.
4. The following exchange took place between the ALJ and the witness on this point:
ALJ: Well, did you have tea prepared when he got there, or did he get there?
ALJ: He didn't get there.
Symon: No, I wasn't encouraging him.
ALJ: Did you keep trading with him?
(Tr. at 17-18.)
5. The transcripts are undated and cannot be easily linked to specific trades in Symon's account. Moreover, the transcripts are incomplete and only reflect some of the conversations between Symon and Monago.
6. The ALJ found that Symon did not authorize that trade and that Monago's explanation that he had merely made a mistake by "push[ing] the wrong buy/sell button" was false and deceptive. Regarding respondents' affirmative defense of ratification, the ALJ found that Symon did not learn of the unauthorized trade until the trade confirmation Star had mailed to her in Pennsylvania was forwarded to her in New York . The judge found that, after complainant discovered the unauthorized execution, she promptly protested to Monago and, shortly thereafter, mailed a written complaint to Star's president. On this basis, the ALJ concluded that ratification had not been established and awarded Symon her $15,633.80 loss on this trade. The ALJ further concluded that in the event that respondents fail to satisfy the judgment, Linnco Futures Group, as the guarantor of Star Commodities, would become liable for Symon's loss.
7. Complainant also alleged improper activity with regard to "Off-Exchange Transactions." The ALJ found, however, that the record showed no evidence that complainant engaged in any off-exchange transactions.
8. The volume also is consistent with her level of trading in her account at Lind-Waldock, records for which were introduced by respondents.
9. Complainant has now retained counsel and submitted a motion to reopen the record so that she can subpoena exchange records relating to her trading. Complainant's request is in effect a motion to seek evidence from non-parties, see Commission Rule § 12.31, 17 C.F.R. § 12.31 (1997), and the ALJ should consider the motion on remand.