UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
In the Matter of CFTC Docket Nos. 91-8 and SD 93-11 John A. Vercillo OPINION AND ORDER
Both the Division of Enforcement ("Division") and respondent John A. Vercillo appeal from an Administrative Law Judge's ("ALJ") decision denying Vercillo's registration as a floor trader for five years and imposing a five-year trading prohibition. The Division argues that the ALJ misapprehended both the gravity of respondent's wrongdoing and his limited evidentiary showing in mitigation. Furthermore, the Division challenges the ALJ's analysis as unsupported by the record and inconsistent with Commission precedent establishing guidelines for assessing these sanctions. Vercillo argues that the ALJ's denial of his registration as a floor trader and the five-year trading prohibition were excessive under the circumstances, maintaining that he did not initiate any of the trades that formed the basis of his criminal conviction and that he did not intend to harm customers.
As explained more fully below, based on our independent assessment of the factual record, we affirm the floor broker registration revocation and the cease and desist order previously imposed by the ALJ, deny Vercillo's application for floor trader registration, and impose a permanent trading ban.
This appeal arises out of two separate complaints that the Division filed in 1991 and 1993. On June 6, 1991, the Division filed a three-count complaint against Vercillo ("First Complaint"). Specifically, the first two counts alleged the following six violations of Section 4b of the Commodity Exchange Act("Act"): (I) four violations of Section 4b(B), 7 U.S.C. 6b(B) (1988), for willfully aiding and abetting a floor broker who willfully entered false records of contracts of sale of soybeans for other persons; and (II) two violations of Section 4b(D) of the Act, 7 U.S.C. 6b(D) (1988), for willfully aiding and abetting a floor broker who filled orders by offset. With regard to these two counts, the Division sought a cease and desist order, a suspension or revocation of all current registrations, a trading prohibition, and a civil money penalty.
Count III alleged that Vercillo was subject to statutory disqualification from registration pursuant to Sections 8a(2)(D) and 8a(2)(E) of the Act, 7 U.S.C. 12a(2)(D) and 12a(2)(E)(1988), by virtue of Vercillo's conviction for 11 felony violations in a previous criminal case. The First Complaint alleged that in 1991 a jury convicted Vercillo of six felony violations of Section 4b of the Act, 7 U.S.C. 6b (1988), one felony violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), one felony violation of the federal mail fraud statute, and three felony violations of the federal wire fraud statute. U.S. v. Vercillo, 89 CR 666-18 (N.D. Ill. May 31, 1991) ("Judgment Order"). The First Complaint directed the ALJ to hold a hearing on Count III within 30 days to determine whether Vercillo was subject to a statutory disqualification. If the record established that Vercillo was subject to a statutory disqualification, the complaint directed the judge to issue an order suspending Vercillo's registration and requiring him to show cause why such registration should not be revoked.
In June 1991, the ALJ conducted a hearing on Count III relating to the revocation of Vercillo's floor broker registration. Shortly thereafter, the judge issued an order which concluded that Vercillo was statutorily disqualified from registration, suspended his floor broker registration for six months, and ordered him to show cause why his registration should not be revoked.
In response to the order to show cause, Vercillo contended that revocation of his floor broker registration was barred by the Double Jeopardy Clause of the Fifth Amendment to the United States Constitution ("Double Jeopardy Clause"). At the same time, he moved to dismiss the complaint as to Counts I and II, arguing that the imposition of any civil sanctions also would violate the Double Jeopardy Clause. In October 1991, the ALJ denied Vercillo's motion to dismiss and revoked his floor broker registration because Vercillo had failed to provide any evidence that his continued registration would be in the public interest. The ALJ also ordered Vercillo to answer the first two counts of the complaint.
In his answer to the complaint, Vercillo admitted his criminal convictions, denied the allegations describing the activities upon which the convictions were based, and set forth mitigating factors. He also stated that the convictions were on appeal before the Seventh Circuit. As an affirmative defense, Vercillo again raised the Double Jeopardy Clause.
In November 1991, the Division moved for summary disposition on the issue of liability. Eleven days later, the ALJ granted the Division's motion and ordered the parties to file briefs on the issue of sanctions. Vercillo moved to vacate the ALJ's order. Citing Commission Rule 10.91(a) which provides 20 days for an adverse party to oppose summary disposition, he requested leave to file an opposition to the Division's motion. In January 1992, the ALJ denied Vercillo's motion to vacate summary disposition, finding that Vercillo was collaterally estopped from denying that he committed the acts underlying the criminal convictions and which formed the basis of the complaint. The ALJ, however, granted the parties additional time to file briefs on sanctions.
In its submission on sanctions, the Division recommended that the ALJ issue a cease and desist order and a permanent trading ban but did not seek a money penalty. In his response, Vercillo set forth mitigating arguments, asked that the minimum sanction be imposed, and requested a sanctions hearing.
Without regard to Vercillo's request for a hearing, in December 1992 the ALJ issued a decision on sanctions. In re Vercillo, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,643 at 40,066 (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 Vercillo would repeat his illegal conduct. On the issue of a trading prohibition, the ALJ did not give controlling weight to the sanctions imposed in the settlements cited by the Division, holding these settlements were not a reliable barometer of the appropriate sanction for Vercillo. Rejecting Vercillo's arguments on mitigation and rehabilitation, the ALJ concluded that respondent's violations adversely affected the integrity of the futures market and imposed a seven-year trading ban. Both parties appealed.
In August 1993, the Commission issued a decision finding that the ALJ abused his discretion by denying the parties an opportunity to develop the record on sanctions issues through an oral hearing. In this regard, the Commission determined that the ALJ must give substantial weight to the Congressional mandate reflected in Section 9(b) of the Act, 7 U.S.C. 13(b) (1988). The opinion went on to hold that, under Section 9(b) of the Act, the large number of Vercillo's felony convictions under Section 4b of the Act raised a presumption that he should be banned from trading permanently and therefore vacated the seven-year trading ban imposed by the ALJ and remanded for a hearing to permit Vercillo to attempt to rebut this presumption. Further, it directed the ALJ to impose a permanent trading prohibition on Vercillo unless respondent could establish, by the weight of the evidence, that his access to the markets regulated by the Commission would pose no substantial risk to their integrity. The Commission directed that respondent's rebuttal evidence 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. In re Vercillo, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,836 (CFTC Aug. 13, 1993) ("Vercillo I").
During the pendency of the appeal, Vercillo applied for registration as a floor trader. In response, the Division challenged the application by instituting a new proceeding in July 1993 to assess whether Vercillo's application for floor trader registration should be denied in light of his 11 felony convictions. Consistent with Commission Rule 1.66(b), 17 C.F.R. 1.66(b) (1997), the notice of intent to deny registration ("Second Complaint") ordered the ALJ to ascertain whether Vercillo 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 Vercillo to show cause why his application for registration should not be denied.
In August 1993, the ALJ determined that Vercillo was subject to a statutory disqualification pursuant to Sections 8a(2)(D) and (E) of the Act. On this basis, the ALJ suspended Vercillo's no- action status and directed Vercillo to show cause why his application for floor trader registration should not be denied. Shortly thereafter, however, the ALJ vacated his order suspending Vercillo's no-action status and ordered that the proceedings underlying the First and Second Complaints be consolidated.
In response, the Division sought interlocutory review of the ALJ's ruling. We issued an order holding that interlocutory 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 Vercillo, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,837 at 40,742 (CFTC September 13, 1993) (Vercillo II). On the merits, we ruled that suspension of Vercillo's no-action status was mandatory under the circumstances presented and that the ALJ had abused his discretion by consolidating proceedings without consulting the parties. We then reinstated Vercillo's suspension and vacated the ALJ's consolidation of the proceedings on the First and the Second Complaint, but 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 issues remaining under the First Complaint. Vercillo II at 40,743.
The ALJ conducted a hearing on remand in January 1994. In addition to his own testimony, Vercillo offered the testimony of three witnesses. The Division presented the testimony of FBI undercover agent Richard L. Ostrom.
Vercillo's testimony and the documents in the record describe the transactions underlying his felony convictions. The first incident took place on July 27, 1988. After the close of trading and as a result of Vercillo's complaining about prices, James Nowak, a floor broker, sold a customer's contracts to Vercillo at a price well below market. Vercillo, acting as a trader, sold the contracts at a $1,400 profit immediately after purchasing them. (Vercillo's Statement Pursuant to Section 3.60(b)(2)(ii), SD 93-11, filed November 2, 1993, at 6-7 ("Vercillo's Statement"); Div. App. Br. at 9, citing Cr. Tr. at 4201.) As a result of this transaction, Vercillo was convicted of one felony violation of wire fraud and one felony violation of Section 4b(B) (aiding and abetting the entry of a false record).
The second incident took place on August 2, 1988. Vercillo and Nowak matched a trade after the close because Nowak owed Vercillo money, giving a $400 profit to Vercillo at the expense of customers. Vercillo recorded the trades on his trading cards as occurring during regular trading hours. (Vercillo's Statement at 7; Div. App. Br. at 10, citing Cr. Tr. at 4203-4206.) As a result of this transaction, Vercillo was convicted of one felony violation of wire fraud; one felony violation of Section 4b(B) (aiding and abetting the entry of a false record); and one felony violation of Section 4b(D) (aiding and abetting the fill of customer orders by offset).
The third incident took place on August 23, 1988, when Nowak matched several customer orders at a profitable price to Vercillo. Even though the trades occurred after the close, Vercillo recorded the information as if the trades had been executed during regular trading hours. (Vercillo's Statement at 7; Div. App. Br. at 11, citing Cr. Tr. at 4208-4210, 4505-4507.) As a result of this transaction, Vercillo was convicted of one felony violation of mail fraud; one felony violation of Section 4b(B) (aiding and abetting the entry of a false record); and one felony violation of Section 4b(D) (aiding and abetting the fill of customer orders by offset).
The fourth incident occurred on September 12, 1988. One of Nowak's customers placed an order to buy at a fixed market price. In order to settle debts that Nowak owed Vercillo, Nowak purchased contracts for the customer from Vercillo above the market price. (Vercillo's Statement at 8; Div. App. Br. at 11, citing Cr. Tr. at 4470-4472, 4500.) As a result of this transaction, Vercillo was convicted of one felony violation of wire fraud and one felony violation of Section 4b(B) (aiding and abetting the entry of a false record).
Vercillo claimed that by engaging in these transactions he had helped Nowak complete customers' orders or correct out trades. (Tr. at 94-95, 100.) Vercillo explained that he and the broker split the out trades evenly, because the same result would have been achieved by submitting them to arbitration. (Tr. at 94.) Vercillo testified that, although at the time of the wrongdoing he knew it was illegal to be paid with customer orders, he thought he was offering a market to a broker to fill his order. (Tr. at 97, 100).
Vercillo testified that he had become a changed man. He claimed that he had been humbled by his convictions and subsequent incarceration, which had stripped him of control and self-confidence. "It was like . . . being the living dead, just being away from everything and not being able to effect any change in my existence," he related. (Tr. at 83-84.) Vercillo stated that he was sorry for his wrongful conduct and testified that the district court judge found him extraordinarily remorseful. (Tr. at 85, 93.) He also expressed sorrow for the humiliation he brought on his family and associates. (Tr. at 86, 93.) He added that he had returned to the CBOT floor in June 1993 and resumed trading for about 9 weeks without incident. Id.
Scott Early, former General Counsel of the CBOT, testified as to CBOT's enforcement policy regarding "curb trading" at the time Vercillo committed his violations. Noting that trading after the close in the soybean pit was a practice "that had been ongoing . . . for many years" prior to 1989, Early testified that its purpose was to avoid the risk of overnight movements in the market by liquidating open positions. (Tr. at 54-55.) Early declared that, while the CBOT monitored trading after the close for serious abuses, curb trading was condoned generally as a "necessary part of the marketplace, simply because markets don't stop on a dime regardless of when the clock does." Id. Early testified that, shortly after the indictments of the soybean traders, the CBOT adopted a modified closing call rule which allows limited trading after the close. (Tr. at 56-57.)
Early also testified that he knew Vercillo only by reputation prior to 1989 as a "large, aggressive, successful" trader. (Tr. at 52.) Early recounted that he had monitored Vercillo in 1993 and found that Vercillo's trading style was "more conservative" than characterized by his reputation. (Tr. at 53.) Finally, Early opined that Vercillo would not be a threat to market integrity and stated that the CBOT was prepared to sign a supplemental sponsor certification and engage in surveillance of Vercillo beyond that which it normally does for its members. (Tr. at 58-60.)
Vercillo's two character witnesses, Henry Shatkin and Mark Gold, testified as to respondent's rehabilitation.They opined that, despite his convictions, Vercillo would not be a risk to the integrity of the market. (Tr. at 13, 75.) Shatkin asserted that Vercillo was a changed person, "the cockiness and the spunkiness were gone." (Tr. at 11.) Shatkin testified that he had encouraged Vercillo to return to the market in order to regain his self-confidence. (Tr. at 12.) Shatkin observed that, upon his return to trading, Vercillo no longer displayed risky behavior and stayed within the rules and regulations. (Tr. at 13.) Gold also attested to Vercillo's change in character and remorse. (Tr. at 75-78.)
FBI undercover agent Richard Ostrom testified on behalf of the Division. (Tr. at 17-18.) Ostrom described several schemes of traders and brokers to withhold customer orders from the market and to trade them after the market had closed for their own profit at the expense of customers. (Tr. at 19-23.) Demonstrating that the acts for which Vercillo was convicted were not isolated incidents, Ostrom testified that he had engaged in a number of money passes with Vercillo. (Tr. at 44.) Ostrom also testified that he had observed Vercillo engage in prearranged trades in order to settle a debt with a broker. (Tr. at 25-27.) In addition, Ostrom testified that Vercillo used the practice of trading after the close as an extension of his regular trading day to initiate and to offset new positions, conduct that would not be permitted under the CBOT new modified closing call rule. (Tr. at 29-30.) According to Ostrom, on several occasions Vercillo tried to disguise his illegal conduct, even stating, "I don't trade on the curb. It's against the law." (Tr. at 30-31.) VI.
The ALJ issued a decision on remand in May 1994. In re Vercillo, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,083 (CFTC May 23, 1994) ("Second Initial Decision"). The ALJ concluded that Vercillo had produced clear and convincing evidence to rebut the presumption that he should be barred permanently from registration with the Commission. In addition, the judge held that Vercillo had rebutted, by the weight of the evidence, that he should be denied access permanently from the markets regulated by the Commission. Id. at 41,595. The ALJ examined the record as to the trading prohibition by referring to the factors set forth by the Commission in Vercillo I. While the judge found a nexus between Vercillo's wrongdoing and the market integrity, he found that the threat of repetition of the violative conduct had been eliminated by a subsequent rule change by the CBOT. Id. at 41,593.
With respect to mitigation, the ALJ held that Vercillo had produced sufficient evidence of circumstances which lessened the seriousness of his wrongdoing. First, the ALJ decided that Vercillo's wrongful transactions did not reflect an intent to cheat or defraud customers and that his conduct amounted to crimes of "convenience" rather than crimes of "greed." Id. Second, the ALJ accorded great weight to the testimony of Scott Early and found that, at the time of the wrongdoing, trading after the close was a common practice condoned by CBOT officials. Id. In reliance on the rule change permitting a post-close trading session at the CBOT, the ALJ concluded that "some of the conduct for which Vercillo was convicted would be legal today." Id. Finally, the ALJ determined that the Division did not argue that there were aggravating circumstances. Id.
Turning to rehabilitation, the judge focused on the time that had passed since Vercillo's wrongdoing, noting that Vercillo's illegal conduct took place in 1988 and that he had not been accused of any wrongdoing since then. Id. at 41,594. Second, despite testimony that Vercillo knew the wrongful nature of his conduct and sought to disguise it, the ALJ concluded that Vercillo did not think he was defrauding customers. Thus, the judge found that Vercillo's expressions of contrition were genuine. Id. Finally, the ALJ acknowledged that the witnesses "might not be deemed experts on rehabilitation issues," but held that their testimony regarding Vercillo's character should be accorded "some weight" in evaluating Vercillo's rehabilitation. Consequently, the ALJ found that Vercillo had shown some degree of rehabilitation. Id. On the issue of Vercillo's role in the marketplace, the ALJ noted that Vercillo was willing to limit his participation to floor trading and to be supervised by a sponsor. Id.
The ALJ concluded that Vercillo had rebutted, by clear and convincing evidence, the presumption that his registration should be denied permanently and held that he could reapply in five years. In addition, the ALJ found that Vercillo had rebutted, by the weight of the evidence, the presumption that he should be prohibited permanently from trading and imposed a five-year trading ban. Both the Division and Vercillo appealed.
On appeal, Vercillo urges us to accord deference to the ALJ's favorable findings of mitigation and rehabilitation and contends that the ALJ's decision to deny his registration and to impose a trading ban for five years was excessive. Additionally, Vercillo contends that the imposition of a five-year ban at this time is a greater penalty than the seven-year ban originally imposed because the first trading ban was imposed more than two years ago.
With respect to mitigation, Vercillo urges us to take into account the fact that, while he knew it was wrong to trade after the close, the practice was condoned by the CBOT and customers routinely anticipated and took advantage of the "curb market." (Resp. App. Br. at 8-9.) Second, Vercillo contends he did not initiate a single illegal trade but merely accommodated one broker. (Resp. App. Br. at 10.) Finally, respondent argues that the relatively small restitution amount--$1,800--indicates that he did not engage in these trades for profit. In addition, he asserts that traders sanctioned with far less than a five-year ban had caused much greater harm to customers. Id.
With respect to rehabilitation, Vercillo argues that there would be no harm to the market integrity if he were allowed to return to the trading floor. Vercillo avers that he obeyed exchange trading rules during his nine weeks on the floor in 1993 and that he has committed no other violations since 1988. He also stresses the crediting of his expression of remorse by the ALJ and the district court judge and the testimony of his witnesses. (Resp. App. Br. at 10-11.) Finally, Vercillo urges us to consider the time he has been away from the markets as sufficient to demonstrate his rehabilitation.
For its part, the Division argues that the ALJ should have imposed a permanent trading ban and that Vercillo's registration denial should not have been limited to five years. Relying on portions of the transcript from the criminal trial, the Division contends that Vercillo's wrongdoing reveals a "willful and flagrant" scheme that benefited brokers and traders at the expense of customers. (Div. App. Br. at 8.)
The Division challenges the ALJ's finding that Vercillo did not intend to defraud customers as inconsistent with the jury's conclusion in the criminal case. (Div. App. Br. at 16; Div. Ans. Br. at 6.) In addition, the Division contends that the CBOT's rule change is not a mitigating factor because the modified closing call rule does not permit the type of illegal transactions underlying Vercillo's felony convicti ons. (Div. App. Br. at 17-18.) Turning to the issue of rehabilitation, the Division argues that the nine-week period that Vercillo resumed trading on the floor was too brief to be indicative of a significant change in character. Challenging the ALJ's finding that Vercillo expressed genuine contrition for his wrongdoing, the Division asserts that Vercillo's showing of regret was not adequate or reliable since he knew that his conduct was wrong at the time of the violations and never apologized to the customers. (Div. App. Br. at 23-25; Div. Ans. Br. at 7.) Finally, the Division avers that the character testimony of Vercillo's three witnesses is conclusory and unreliable. (Div. App. Br. at 25-26.)
We have reviewed the entire record and determined that the weight of the evidence supports the following findings and conclusions. We consider first the denial of Vercillo's application for floor trader registration.
Proof of Vercillo'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 committed 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, Vercillo may only retain his floor broker registration and qualify for floor trader 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)(1997); Horn, 24,836 at 36,939 n.15.
First, we assess the nature and gravity of Vercillo's misconduct. Vercillo was convicted of 11 felonies, including six felonies under Section 4b of the Act, for entering false records and illegally offsetting customer orders. Vercillo does not dispute that his felony convictions raise a presumption that he should be disqualified from registration. Vercillo's claim that he did not intend to harm the customers is inconsistent with the jury's conclusion in the criminal case. Vercillo's conviction of six Section 4b violations conclusively establishes that he willfully acted to the detriment of customers.
The Seventh Circuit's opinion in Ashman, 979 F.2d at 492, describes Vercillo as a local trader who functioned as a "bagman" for Nowak. The court stated that "Vercillo [was] well aware that [he was] part of an ongoing and flexible agreement to commit fraud as the need--or perhaps the opportunity--arose." Id. The court set forth an example: when Nowak had trouble picking a price for a trade with FBI undercover agent Ostrom, it was Vercillo who suggested that the prices be set to give Ostrom the maximum available profit. The defendants, including Vercillo, "agreed to commit a pattern of racketeering activity." Id. Based on the evidence, it is clear that Vercillo's violations were numerous, intentional and serious.
Vercillo nevertheless contends that the small amount of the restitution ordered evidences that his conduct did not harm customers. However, the Seventh Circuit specifically rejected this argument in the course of reviewing the appeal of Vercillo 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 Vercillo 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 Vercillo's felony convictions under Section 4b of the Act, RICO, and the federal mail and wire fraud statutes, it is clear that Vercillo caused grave harm to customers and the market place.
We do not agree with Vercillo that alleged widespread trading after the market close at the CBOT--even if true-- mitigates his wrongdoing. First, to the degree that Vercillo claims that this evidence shows "confusion" as to the legality of his conduct, we disagree. All CBOT members, including Vercillo, were on notice that noncompetitive trading was illegal. At the time of Vercillo's violations, Commission Rule 1.38, 17 C.F.R. 1.38 (1988), 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 CBOT did not have a written rule that authorized members to use noncompetitive trades to execute trades after the market close, and Vercillo's evidence does not demonstrate any legitimate confusion about the legality of his conduct. Second, respondent does not explain how the prevalence of late trading caused him to commit six felony violations of Section 4b of the Act by deceiving his customers or offsetting customer orders to customers' disadvantage.
Third, we view evidence that others at the CBOT may have acted illegally during this period as providing little basis for mitigation. To the contrary, we view the exchange's inability or unwillingness to enforce compliance with applicable law as giving rise to a greater need for the Commission to impose sufficiently significant sanctions to deter others from similar behavior and to protect the public interest. Nor do we believe that the fact that others at the CBOT also may have violated the Act and Commission rules in any way lessens Vercillo's personal culpability.
Nor does the CBOT's subsequent adoption of a rule permitting a limited period of trading after the market close justify Vercillo's misconduct. The new rule does not permit prearranged transactions such as those entered by Vercillo in which prices are assigned to the detriment of customers.
Based on the foregoing analysis, we conclude that Vercillo has failed to produce significant evidence to mitigate the seriousness of his wrongdoing and that the presumption that arises as a result of his numerous 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). Vercillo contends that he recognized and regretted his wrongful conduct soon after the underlying misconduct. (Resp. App. Br. at 11.) In support of this argument, Vercillo points out that the district court judge had observed that he exhibited extraordinary acceptance of responsibility for his conduct and granted him an additional point reduction under the Federal Sentencing Guidelines. (Resp. App. Br. at 3.)
We have previously noted that expressions of contrition following detection deserve significant weight only if the wrongful nature of the conduct was unclear at the time of the violations. Horn, 24,836 at 36,940. As demonstrated, Vercillo has not shown that he was confused about the illegality of his conduct at the time of his wrongdoing.
Vercillo 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, [1994-1996 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). Vercillo 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 Vercillo's witnesses is not persuasive. These 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 illegal trading. The testimony reflected at best a perfunctory concern with the customers harmed by Vercillo's wrongdoing. In short, respondent's character witnesses showed limited appreciation for the interest of the public.
In addition, Vercillo contends that he has committed no wrongdoing in the six years which have passed since the misconduct underlying his felony convictions. Respondent emphasizes that he traded without incident during the period following his return to the market in the summer of 1993. The inference of a "changed direction" is undercut by the fact that, at the time of the hearing before the ALJ, Vercillo had resumed trading for only nine weeks out of the last six years and he 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). At any rate, we consider nine weeks of trading without disciplinary action as too short a period to demonstrate a change in direction.
Ultimately, we must weigh Vercillo's rebuttal evidence against the presumption raised by his 11 felony convictions, including six 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, 11 felony convictions raise a much stronger presumption to overcome. Further, although the conduct underlying one felony conviction is conceivably attributable to a unique misstep, Vercillo's 11 felony convictions reflect a pattern of conduct that establishes a strong likelihood that the wrongdoing will be repeated.
In light of our evaluation of the record as a whole, we conclude that Vercillo has failed to make a clear and convincing showing that his registration either as a floor broker or floor trader would pose no substantial risk to the public. Accordingly, we deny Vercillo's application for registration.
We turn next to the Division's argument that Vercillo should be prohibited from trading permanently. Proof of Vercillo's six felony convictions under Section 4b of the Act gives rise to the presumption that he should be banned permanently from trading pursuant to Section 9(b) of the Act. Vercillo I, 25,836 at 40,740. 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 substantive risk to their integrity. Id. We have already determined that there is a nexus between respondent's wrongdoing and a threat to the market mechanism. Id. at 49,739.
With respect to the role he intends to play in the market, Vercillo 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 as a floor trader would be granted. As discussed above, we have determined not to grant Vercillo's registration application.
We have already assessed respondent's mitigation evidence. Even in light of the less onerous weight of the evidence standard, we are not persuaded that the weight accorded to the presumption arising from six Section 4b felony convictions should be lessened. 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, Vercillo was convicted of multiple felony violations of Section 4b.
Furthermore, the wrongdoing underlying Vercillo's Section 4b felony convictions is aggravated by evidence of a pattern of related violative conduct. In addition to the six felony violations under Section 4b, Vercillo was convicted of RICO, and mail and wire fraud violations. Such a pattern of misconduct establishes a strong likelihood that wrongdoing will be repeated. Based on the foregoing analysis, we conclude that Vercillo has failed to mitigate the seriousness of his wrongdoing and that the presumption that arises as a result of his six Section 4b felony convictions is strengthened in this case by a pattern of illegal behavior. Moreover, as we established above, Vercillo's evidence 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 Vercillo's limited evidence of mitigation and rehabilitation does not establish that Vercillo's continued access to the markets we regulate would pose no substantial risk to their integrity. Accordingly, we find that Vercillo should be prohibited permanently from trading on markets regulated by the Commission.
Based on 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 permanently from trading on the markets regulated by the Commission. The noncompetitive trading practices in this case require us to impose a sanction of this magnitude to deter and to prevent this type of conduct in the future. The U.S. commodities markets are important mechanisms for price discovery and hedging. Open and competitive trade execution is vital to the proper functioning of these markets. To maintain the integrity of our markets and market users' trust in them, noncompetitive conduct like that engaged in by respondent Vercillo cannot be tolerated. The trading practices brought to light in this case were a disgrace to the futures industry, as well as to respondent Vercillo. The Commission hopes that recent improvements to the exchange's surveillance and audit trail systems have reduced the likelihood of such violations of law, as well as increased the likelihood of detection when such violations occur.
The trading prohibition and the floor trader registration application denial, and the cease and desist order and the floor broker 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, and Commissioners DIAL, TULL, HOLUM, and SPEARS).
Catherine D. Dixon
Assistant Secretary of the Commission
Commodity Futures Trading Commission
Dated: May 30, 1997