Before the

In the Matter of


In the Matter of


In the Matter of


In the Matter of


In the Matter of


In the Matter of



On November 26, 1996, the Commission issued an order ("Order Taking Review") under Section 8c(b) of the Act, 7 U.S.C. 12c(b) (1994), and Commission Rule 9.31(b), 17 C.F.R. 9.31(b) (1997), taking sua sponte review of the Chicago Board of Trade's ("CBOT" or "Exchange") settlement of six related disciplinary proceedings. The Order was in response to a recommendation of Commission staff that the Commission take review because, in the staff's view, the CBOT's resolution of the proceedings was deficient. See Report on Chicago Board of Trade March 1996 Wheat Future Expiration on March 20, 1996, Division of Trading & Markets ("T&M") and Division of Enforcement ("Enforcement") (together the "Divisions"), in Consultation with Division of Economic Analysis ("EA"), November 26, 1996 ("Staff Report" or "Report"). In each of the settled proceedings, the CBOT alleged that the respondent traded after the close and issued a letter of reprimand. In the Divisions' view, the sanction imposed by the CBOT was not commensurate with the gravity of the alleged violation and otherwise failed to conform to Commission guidance on sanctions. The Commission took review to consider the issues raised in the Report.

Based upon our review of the Report, the parties' responses to the Commission's Order Taking Review and the record of the exchange disciplinary proceedings, we are setting aside the Exchange decisions, vacating the settlements and remanding the disciplinary proceedings to the CBOT for further consideration. In our view, simple reprimands fail to reflect the gravity of the alleged offense and will not deter similar misconduct in the future. In order to protect the integrity of the markets, the exchanges must vigorously enforce their rules concerning trading hours and impose meaningful sanctions in disciplinary proceedings alleging trading after the close. We believe that imposing reprimands for misconduct as serious as that alleged here, even in the context of settled proceedings, reflects an apparent unwillingness on the part of the CBOT to enforce its rules in the manner necessary to ensure an effective self-regulatory disciplinary program.


A. The Staff Report

The Staff Report is the product of an investigation commenced immediately following the extraordinary expiration of the March 1996 wheat futures contract on March 20, 1996--an expiration during which the price of the contract spiked over two dollars within a few minutes. Its conclusions are based on information derived from various sources including observations of Commission floor surveillance staff during the expiration, transcripts of interviews and work-product of the CBOT generated in the course of its investigation,(1) and information independently obtained by Commission staff.(2)

The Report describes trading during the expiration on March 20, 1996, and the CBOT's disciplinary and regulatory responses. In addition to its recommendations concerning the six disciplinary proceedings which are the subject of this proceeding, the Report contains recommendations concerning the CBOT's modified closing call ("MCC") procedures and CBOT's designation of the closing period on March 20, 1996 as a FAST market.(3)

According to the Report, the expiration followed a period of tight supplies in the wheat market. (See Report at 4 n.4.) These conditions caused the CBOT to heighten surveillance and to attempt to achieve an orderly liquidation by the major market participants in the March contract. (See Report, Attach. 1 at 1-2.) As the expiration approached, total open interest markedly decreased, and no problems with the liquidation were anticipated.(4) (Id. at 2-3.)

The closing period for March wheat was scheduled to run from 12:00 P.M. to 12:01 P.M.(5) (See id. at 11.) At the start of the close, buy orders totaling 85 contracts were held in the wheat pit by brokers Jay P. Ieronimo, George F. Frey, Jr., and John C. Bedore and sell orders totaling 24 contracts were held by R. Timothy Ratty and Bedore. (Id. at 9.) Two locals, J. Brian Schaer and Donald W. Scheck, entered the pit at or around the start of the close. (Id. at 17.) The major long in the market was Louis Dreyfus Corporation ("Dreyfus"). Dreyfus held a long position of 3.47 million bushels (694 contracts) and, according to the Report, had informed its representative on the floor that it intended to stand for delivery. (Id.)

According to the Report, three trades representing 24 contracts were executed at $5.30 or $5.35 a bushel within the first ten seconds of the close. These prices were in line with the morning's trades. (See id. at 8, 15.) No other trades were executed before 12:01, leaving buy orders for 61 contracts unfilled at the end of the close. Frey and Bedore, who held market-on-close orders, took turns incrementally increasing the bid during the close and continuing thereafter. (Id. at 16.)(6) By 12:01 the price had been bid up to approximately $6.00 without a response from other members of the pit. (Id.)

With regard to the trades that occurred after the close (12:01), the Staff Report states the following (id. at 19-20):

According to Time and Sales, the offer [by Schaer] at $7.00 was made at approximately 12:02 p.m. Time and Sales further indicates that at approximately 12:02:12, Schaer sold a total of 31 contracts at $7.00 to Frey and Bedore. Scheck then offered at $7.50 and Schaer matched Scheck's offer.

. . . The final trades were reported on Time and Sales as taking place at 12:02:50 p.m., at $7.50, at which price Scheck sold 14 contracts to Ieronimo and Schaer sold a total of 16 contracts opposite the remaining buy orders held by Frey and Ieronimo.(7)

Kevin Drumm, the Exchange's wheat pit reporter, had difficulty entering the rapidly rising price quotes into his computer terminal and resorted to entering them in ten-cent increments, which were smaller than the actual increases in price.(8) (Id. at 16-18.) The Divisions acknowledge that the difficulties in entering the price quotes apparently resulted in a lag between quotes made in the pit and the quotes entered into the Market Price Reporting and Information System ("MPRIS"), which maintains the Exchange's Time and Sales register. (Id. at 18.)

The Report next addresses various discussions that occurred among CBOT officials, including CBOT Chairman Patrick Arbor, regarding the appropriate response to what had just transpired. These discussions were documented in memoranda prepared by CBOT staff. One of the memoranda states that those participating in one of the discussions "began to discuss whether or not the trades which occurred after 12:02 should be cleared." (Id. at 22-23.) That memorandum goes on to state that "[i]t appeared . . . that Mr. McCabe then informed Chairman Arbor, Messrs. Ghilarducci and Sgaraglino and the CFTC regulators that the trades after 12:02 P.M. would stand because of special circumstances." (Id.)

Ieronimo, who also served as Chairman of the Wheat Pit Committee (id. at 9 n.12), solicited input from various traders and the pit about holding an MCC.(9) Schaer was the only trader to indicate a willingness to participate in an MCC, and he was interested in participating only if the MCC range was set at the low end of the actual range of prices executed during the close. (Id. at 28.) A bull horn was used to announce that an MCC would be held from 12:14 P.M. to 12:16 P.M.(10) (See id. at 25, 28.) A few seconds before the start of the MCC, an Exchange official announced that the MCC price range would be $5.30 to $5.32 per bushel. (Id. at 29.)

During the MCC, Ray Czupek offered to sell at $5.32 per bushel.(11) In response, Schaer and Scheck bought from him and thus were able to offset the entire position they had just initiated during the close. (Id. at 31-32.) Schaer's and Scheck's profits from trading during the close and the MCC were $434,800 and $152,600, respectively. (Id. at 40-41.) No other trades were made during the MCC.

The Report contains additional information about the financial consequences of trading during and after the close for the brokers and their customers. (Id. at 35-42.) Bunge suffered a trading loss of approximately $300,000. One of Frey's customers lost $30,168, and another lost $101,068. Two of Bedore's customers lost $8,500, and a third lost $7,000. The Report does not contain information on the trading losses suffered by Bedore's other customers. According to its counsel, Dreyfus was required "to spend an additional amount in excess of $400,000 to cover the 305,000 bushels that it sold in the MCC, leaving it unhedged by that additional amount of April commitments." (Id. at 41.) Ieronimo, Frey, and Bedore earned commissions of approximately $51, $17, and $23, respectively, for trades executed during and after the close. (Id. at 36, 38, 39.)

The Exchange's Office of Investigations and Audits ("OIA") quickly investigated the March wheat expiration, forwarding its final report to the Business Conduct Committee ("BCC") on March 29, 1996.(12) (Id. at 34.) Approximately one month later, the BCC issued preliminary charges against six individuals (Scheck, Schaer, Frey, Bedore, Ieronimo, and Czupek) and three firms (Produce, Dreyfus, and Term). Scheck, Schaer and Produce were charged with violating CBOT Rule 1007.00--Transactions After the Hours for Trading.(13) Frey, Bedore, and Ieronimo were charged with violating CBOT Rule 350.05(h)--Executing Orders After the Hours for Trading.(14) Czupek and Term were charged with violating CBOT Rule 1007.02--Modified Closing Call.(15) Dreyfus was charged with entering new orders in violation of CBOT Rule 1007.02 and with violating Rule 425.02--Bona Fide Hedging Positions in Futures. (Id. at 35-42.)(16)

Between June 10, 1996, and August 21, 1996, the BCC entered into settlements with each of the individuals (except Czupek) and firms against whom preliminary charges had been issued. In these settlements, the CBOT sanctioned Ieronimo, Frey, Bedore, Schaer, Scheck, and Produce by issuing letters of reprimand against each. The settlement entered into with Dreyfus and Term differed from the others in that it included an admission that those firms had violated the CBOT Rule 1007.02 prohibition on the entry of new orders during the MCC, imposed a $10,000 fine, and dropped the Rule 425.02 charge against Dreyfus as well as the Rule 1007.02 charge against Czupek. (Id. at 35-42.)

The Divisions then forwarded the Report to the Commission recommending that the Commission take sua sponte review. Based on their analysis of Time and Sales Reports and eyewitness testimony, the Divisions concluded that there is "no dispute that trading did continue for nearly two more minutes after the scheduled end of the close at 12:01 p.m." (Id. at 47.)(17) Although the Report acknowledges that the "Exchange did not cause trading to end promptly at the close of the official hours of trading," it maintains that "Exchange floor members either knew, or should have known, that the close had ended." (Id. at 48, 61.) The Divisions' assessment in this regard was influenced by evidence that loud buzzers signaling the end of the close sounded, Exchange staff visually signaled the end of the close, large wall clocks hung above the pit, and one individual made a statement from which it could be inferred that he was responding to indications that the market was closed. (Id. at 14, 48, 61.)(18)

The Divisions also urged that the sanctions imposed in the six disciplinary proceedings were inadequate in light of the gravity of the violations and that they were unlikely to deter future violations. (Id. at 52.)(19) They additionally criticized the apparent disparity of these settlements relative to the Dreyfus and Term settlements. (Id. at 53.) According to the Divisions, the Commission has viewed any disregard of established trading hours--even in the absence of fraud--as a violation warranting a vigorous sanction because it calls into question the fairness and integrity of the market.(20) Moreover, the Divisions took the position that the fact that the firms (Dreyfus and Term) were fined while individual members were not evidences disparate treatment for which the CBOT has not provided any justification.

Based on the above, the Divisions recommended that the Commission (a) institute a review of the settlements; (b) permit the subjects of the settlements and the CBOT to file appropriate submissions; (c) remand the settlements to the CBOT with instructions to vacate them, to reopen the record as to the matters indicated in the Report, and to augment appropriately the sanctions; and (d) make the Report part of the record.

On November 26, 1996, the Commission issued its Order Taking Review. In that Order, the Commission directed the Proceedings Clerk to include a copy of the Staff Report in the record of each proceeding and to serve a copy of the Report along with its Order Taking Review on the respondents in the CBOT disciplinary proceedings and on the CBOT. The Order Taking Review established a schedule for the respondents, the CBOT, and Commission staff to file responses. Responses have been filed by each of them.

B. Respondents' and CBOT's Responses

i. Commission Authority; The Report

The CBOT and respondents initially raise arguments regarding jurisdiction. Specifically, CBOT argues that Section 8c(b) of the Act does not authorize the Commission to institute review of CBOT's disciplinary actions. According to the Exchange, Section 8c(b) is intended solely to authorize disciplined members in an exchange proceeding to seek an appeal to the Commission. (Submission of CBOT at 5.) (21) The CBOT also argues that a remand of these settlements will in effect compromise the respondents' rights under Section 8c(b), because respondents' only avenue of appeal after a remand would be to the Commission that previously asked for augmented sanctions. (Id. at 5-6.)

Assuming jurisdiction, the CBOT and respondents further contend that the record on which the Divisions based their conclusions is incomplete, inadequate, and unreliable. Respondents submit that the CBOT conducted the interviews in a manner such that skewed or questionable testimony was a likely result. For example, they state, "many of the witnesses . . . were [CBOT] employees who were asked, by other [CBOT] employees, whether they had done their jobs well." (Submission of Scheck at 5.) Respondents also point out that they were not present at the interviews and that none of the witnesses was cross-examined. (Submission of Ieronimo at 11-12; Submission of Scheck at 6.) They also assert that not all the witnesses whom respondents would have called at hearing in this matter were interviewed by the Exchange. (Submission of Schaer at 3 & n.1.) Furthermore, respondents argue, the Divisions relied on only the transcripts when reviewing witness testimony, many of which indicate that they were prepared from "inaudible" audio tape recordings. (Submission of Scheck at 5.) The CBOT also questions the reliability of on-site observations by an EA staff member. (Submission of CBOT at 17-18.) In light of these circumstances, these parties suggest that any Commission action (including a remand) on the existing record would be inappropriate and not in accord with due process. (Submission of Scheck at 2.)

The CBOT and respondents also dispute the Report's core conclusion that trading continued for nearly two minutes after the close. The CBOT asserts that the Report's reliance on CBOT's Time and Sales Report is inappropriate because, in this case, the Time and Sales Report did not constitute an accurate reflection of the trades due to the extreme pressure placed on the system. (Submission of CBOT at 15.) The CBOT asserts that the Report ignores the evidence challenging the accuracy of the Time and Sales Report. (Id.) The CBOT and respondents point to evidence showing that price quotes appearing on boards above the pit lagged behind the actual bids. For example, they cite to the statement of the Market Report Supervisor, Kimberly Lindfors, which refers to the difficulty Drumm encountered entering the rapidly escalating bids and the delayed price reporting that resulted. (Submission of CBOT at 16.) (See also Submission of Scheck at 7-8 (citing the statement of Lindfors and the May 17, 1996 letter from Carol A. Burke, Executive Vice President and General Counsel, CBOT, to T&M and Enforcement ("Burke Letter")); Submission of Bedore at 7 (citing the testimony of Drumm, Richard Eisen, Co-Chairman of the Wheat Pit Committee, and Robert Williams, Member of the Wheat Pit Committee).) Finally, one respondent asserts that the fact that the trades were accepted by Exchange officials--rather than refused as had been done in the past with post-close trades--indicates that the trades occurred during the official close. (Submission of Frey at 1.)

Even assuming that the trades were made after the official end of the closing period, the CBOT and respondents argue that it was reasonable for market participants to believe the period lasted longer than it actually did. First, several respondents stated that they did not hear the buzzer that regularly signals both the start and end of the closing period, possibly due to the unusually loud crowd that had gathered to watch the trading in the wheat pit. (See, e.g., Submission of Scheck at 9; Submission of Schaer at 6; Submission of CBOT at 20.) Second, they assert, various Exchange and Commission officials present at the expiration made no attempt to stop the trading or cancel trades. (Submission of Schaer at 6; Submission of Bedore at 6.) One respondent points out that the Wheat Pit Committee Chairman was trading in the pit. (Submission of Scheck at 9.) As a result of these factors, respondents and the CBOT contend that traders could not have been expected to recognize that there were restrictions on trading. In addition, since CBOT rules authorize the extension of the closing session in certain situations, respondents and the CBOT maintain that the circumstances could have suggested that a proper extension had been granted. (See, e.g., Submission of CBOT at 19.)

Furthermore, respondents argue that any harm caused by trades that allegedly occurred after the official close was minimal. They assert that the benefits of a competitive market were ensured because trades were made by open outcry with market participants as witnesses and that there was no evidence of fraud or prearranged trading. While customers may have incurred significant losses, respondents argue that their actions carried out their customers' wishes and protected them from possibly greater losses in a volatile cash market or from having to stand for delivery. (Submission of Schaer at 11; Submission of Bedore at 11.)

The individual respondents also raise several arguments specific to their own cases. Produce argues that it should not have been disciplined and that any sanction is inappropriate. It submits that it had placed an order with an independent broker, Ieronimo, at 11:48:10 A.M.--well in advance of the close--and had given him discretion and authority to fill the order as he saw fit. (Submission of Produce at 2.) Produce also argues that, because it "prides itself on its history of regulatory compliance," a letter of reprimand constitutes a severe sanction in its specific circumstances. (Id.)

Scheck denies trading after the official end of the close and points to a lack of eyewitness testimony that indicates otherwise. Even if he did trade after the close, Scheck perceives justification for his actions: (1) the high trading price did not alert him to any problems because it appeared to him that "the bidders were large commercial firms that would have no reason to pay a price at variance with the cash market," and (2) his trades were entered into with risk in light of his lack of knowledge of concurrent conditions in the cash market. (Submission of Scheck at 9.) Furthermore, Scheck maintains that the good faith he demonstrated by providing needed liquidity to the wheat trading pit should be considered a mitigating factor.

Without conceding any violation, Schaer states that the Report unfairly considers only the profits earned as a result of the March wheat trades. He argues that the appropriateness of the sanction must be viewed in light of his entire trading position. (Submission of Schaer at 11.) Schaer also contends that he traded in good faith and fulfilled his duty as a local to provide needed liquidity. (Id. at 4.) Finally, Schaer claims that when entering into the trades he did not know that he would make a sizeable profit during the MCC and that he incurred significant risk. (Id. at 5.)

Without conceding any violation, Bedore and Ieronimo argue that their low commissions support the appropriateness of letters of reprimand. (Submission of Bedore at 11; Submission of Ieronimo at 4.) Having earned only $23 and $43.50, respectively, from the alleged post-close trades, Bedore and Ieronimo dispute the position that these negligible financial gains warrant augmented sanctions. (Id.)

Respondents and the CBOT reiterate the above assertions to demonstrate that the sanctions reached by settlement were reasonable. The CBOT contends that it would have had difficulty proving violations. Respondents state that they did not want to incur litigation expenses. Thus, they all claim that the sanctions imposed were appropriate under the circumstances. Furthermore, the CBOT disputes the Divisions' contention that T&M's rule enforcement reviews and the treatment of Dreyfus and Term demonstrate that the Exchange's actions were inadequate. The CBOT describes as imperfect the Divisions' analogy to past rule enforcement reviews in which exchanges punished clearly established and admitted violations with only warning letters. Furthermore, according to the CBOT, the settlements reached with Dreyfus and Term varied from the settlements reached with respondents because (1) the specific charges were different; (2) Dreyfus and Term consented to a finding of a violation; and (3) the CBOT agreed to dismiss other preliminary charges against Dreyfus, Term, and Czupek as a condition of the settlement. (Submission of CBOT at 23-25.) (22)

Finally, the CBOT affirmatively represents that the BCC considered the factors suggested in the Commission's 1994 Policy Statement on Sanctions. The Exchange stresses, however, that consideration of these factors is not mandatory and that it was thus free to formulate its own system of analysis. (Id. at 28-29.)(23) Accordingly, it concludes that a remand would amount to a serious and unwarranted interference with its self-regulatory process and would create a disincentive for potential disciplinary respondents to participate in the settlement process.

ii. Motions

The CBOT's response contains a motion to dismiss and a request for oral argument. The motion to dismiss is based on the Commission's asserted lack of authority to initiate this proceeding under Section 8c. See discussion at p. 13, supra. Respondents Schaer, Bedore and Ieronimo have also requested oral argument.(24)


i. Commission Authority; The Report

T&M filed a submission that responds to the arguments of respondents and the CBOT. First, T&M takes the position that both Section 8c(b) and Commission Rule 9.31(b) authorize the Commission to review the disciplinary actions of the Exchange. It argues that the plain language of the first sentence of Section 8c(b) allows the Commission to review without limitation all exchange decisions that result in a disciplinary action against a person. T&M finds further support for its interpretation by contrasting that sentence to the restriction in the second sentence of that section which by its terms limits review "upon application" by persons "adversely affected." (Submission of T&M at 2-6.)(25) As additional support for its interpretation, T&M cites early Commission interpretations of Section 8c(b) that refer to situations analogous to

the one in this proceeding. (Id. at 4 (quoting a 1978 Commission statement in the Federal Register that sua sponte review proceedings are appropriate when "a member receives a nominal fine for egregious conduct detrimental to the market").) While conceding that the Exchange possesses a "significant degree of discretion in the sanctioning process" (id. at 18-19), T&M maintains that this is not equivalent to a principle that the Commission should abandon its oversight role.

T&M next argues that there is "ample evidence" in the record to demonstrate that respondents traded after the scheduled end of the close. (Id. at 13.) It points to what it characterizes as "abundant, unrebutted evidence" compiled from statements of Exchange officials, market participants, Commission staff, and Exchange records to the effect that trading occurred after 12:01 P.M. (Id. at 6-13.) In addition, T&M discounts as not material the CBOT's contention that it is not possible "definitively" to establish the "precise time when trading actually ceased." (Id. at 13 (quoting from Submission of CBOT at 16).)

In response to the argument that the Time and Sales Report is inaccurate, T&M points to the testimony of the Exchange's price reporter that the timing of the final trade --recorded at 12:02:50 P.M.--was accurate within two seconds and reflected a trade well after the official end to the closing period. (Id. at 12 (citing the testimony of Drumm).) Moreover, pointing to statistics that it characterizes as showing a relatively light day of trading, T&M urges the Commission to place no weight on the argument advanced by the CBOT that the conditions surrounding the expiration "pressed [systems and procedures] to their limits." (Id. at 12-13.)

T&M also characterizes as not credible the claim that respondents were confused about whether the close had been extended. In T&M's view, not only does the evidence demonstrate that no extensions were authorized, but such extensions were rare in light of the MCC procedure. Finally, T&M asserts in this regard that any claims of confusion also must be evaluated in light of evidence that buzzers were activated at a sound level "equivalent to the sound of a jet airplane take-off," that pit reporting staff used other methods to signal the end of trading, and that the traders' knowledge of and concern for applicable rules was admittedly weak. (Id. at 13-16, 22.)

Applying the standards for review set out in Commission Rule 9.33(c), T&M next contends that the Exchange's actions do not "otherwise accord[] with the Act and the rules, regulations and orders of the Commission thereunder[,]" namely Section 5a(a)(8) of the Act, 7 U.S.C. 7a(a)(8) (1994),(26) the Commission's 1994 Policy Statement on Sanctions (see note 19, supra), and the Commission's order in In re First Commodity Corporation of Boston, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) 23,694 at 33,801-33,802 (CFTC May 29, 1987) ("FCCB"). First, T&M argues that the sanctions were not "commensurate with the gravity of the violation." (Submission of T&M at 19.) In addition to the general problems of interference with the "price discovery role of the Exchange," possible "loss of confidence in CBOT prices," and failing to protect Exchange customers, T&M contends that respondents' actions resulted in significant financial losses. (Id. at 19-20.) Respondents' contention that they saved their customers from a volatile cash market and "unables" is untenable in T&M's view because such conditions are inherent in the risk their customers initially assume. Second, T&M argues that the letters of reprimand will not "deter similar misconduct in the future." (Id. at 19.) It reasons that using the "mildest" sanction available does not deter conduct that can be enormously profitable. (Id. at 23.) Thus, T&M argues, more severe sanctions would serve as an incentive for members to respond to indications that the market is closed and would force them to educate themselves about applicable rules.

T&M next contends that a remand of these proceedings to the Exchange would allow the Commission to exercise its oversight role while permitting the CBOT to retain the lead position in the disciplinary process. It argues that this approach is "consistent with the principles of self regulation espoused by the CBOT" and "appellate practice." (Id. at 24.) T&M's remand recommendation varies slightly from the Report's similar recommendation, as it explicitly accounts for the possible contingency that, on remand, the Exchange may be unable to augment sanctions without a hearing. Accordingly, T&M's final recommendation is that the Commission set aside the settlements, and then direct CBOT to reopen the proceedings against the respondents and either (1) reach settlements that reflect the gravity of the violations or (2) augment its prior investigations, as appropriate, and conduct full disciplinary hearings consistent with the requirements of Part 8 of the Commission's regulations. (Id. at 25.)

ii. Responses to Motions

T&M also responds to the CBOT's motions. It states its belief, for the reasons discussed above, that the CBOT's motion to dismiss for lack of jurisdiction is without merit. T&M also opposes the CBOT's and respondents' requests for oral argument asserting that there is ample basis for the Commission to make a decision without oral argument.(27)

D. Prior Commission Rulings Concerning the Record

In their responses to the Order Taking Review, T&M, the CBOT and certain respondents filed motions concerning the record. We addressed those motions, as well as a subsequently filed motion of the CBOT, in orders dated July 2, 1997, and September 30, 1997 ("July 2d Order" and "September 30th Order," respectively).

The July 2d Order granted T&M's motion to accept as part of the record certain documents comprising the disciplinary files of the Exchange and a memorandum of Commission staff. Accordingly, on July 24, 1997, the CBOT filed six separately bound records containing the following documents related to each of the underlying disciplinary proceedings: (i) charging letters, (ii) OIA statement transcripts, (iii) OIA memoranda, (iv) the OIA Report, (v) CBOT Time and Sales Reports, (vi) trading cards and order tickets for trades executed during the close, (vii) minutes of BCC meetings, (viii) settlement agreements, and (ix) a transcript of a BCC meeting ("CBOT Record"). Pursuant to the July 2nd Order, on July 17, 1997, T&M filed the March 28, 1996 memorandum of the Division of Economic Analysis concerning the expiration of the March 1996 wheat futures contract ("EA Memorandum").

The September 30th Order addressed additional issues that had been raised concerning the record. In that Order, we denied the CBOT's motion to strike the Staff Report or portions of it from the record. We also denied the motions of the CBOT and certain respondents to seal the CBOT Record and to keep the EA Memorandum confidential and non-public. Finally, we granted the motion of certain respondents that the CBOT Record and the EA Memorandum be produced to them and directed the CBOT to serve on each respondent a copy of the particular CBOT Record concerning that respondent and to serve the CBOT Record on T&M.(28)


A. Commission Authority

The CBOT has challenged the Commission's authority to institute this proceeding, moving to dismiss our Order Taking Review. We find no merit to that challenge. We agree with T&M that the plain language of Section 8c(b) authorizes the Commission to initiate this proceeding and reject the CBOT's contention that Section 8c(b) is intended solely to authorize disciplined members of an exchange to seek an appeal to the Commission. The first sentence of Section 8c(b) authorizes the Commission to review "any" decision by an exchange whereby a person is disciplined or denied access to the exchange. That review is not limited to cases where the person disciplined or denied access appeals to the Commission. In contrast, the second sentence of Section 8c(b) authorizes the Commission to review "any other exchange action" adversely affecting a person "upon application" of such person. Consistent with our longstanding interpretation of Section 8c(b),(29) we consider the first sentence of Section 8c(b) to be of sufficient breadth to authorize review of exchange disciplinary proceedings whether initiated by the member disciplined or by the Commission on its own motion. Accordingly, we deny CBOT's motion to dismiss the Order Taking Review.(30)

We also disagree with the CBOT's assertion that a remand will compromise respondents' rights because their only avenue of appeal after a remand would be to the Commission that previously asked for augmented sanctions. If the Commission adopted this argument, we would effectively nullify our authority to act on our own initiative under Section 8c(b) if that action could result in a subsequent appeal to the Commission.(31) Further, at this juncture, there is no certainty that any greater sanctions will be imposed. The Exchange may be unable to impose a greater sanction through negotiation and may have to proceed to hearings with one or more of the respondents. Depending on the record developed before the Exchange, such a hearing may or may not result in any sanction being imposed. Even if a greater sanction were to be imposed on a respondent, any resulting appeal to the Commission would be decided on the basis of that record, the arguments of the respondent, and those of the Exchange in defense of its decision. The Commission has that responsibility under Section 8c, and there is no reason to assume that the Commission would be unable or unwilling to discharge that responsibility fairly. In any event, as T&M observes, we see little that differentiates our handling of this matter from the manner in which federal and state courts handle matters coming before them that result in a remand.(32)

B. Adequacy of the Sanctions

We instituted this proceeding to consider the issues raised by the Report about the adequacy of the sanctions in the Exchange's disciplinary proceedings. The Report specifically questioned whether the sanctions were adequate in light of the gravity of the violations alleged, the need to deter future violations, and the apparent inconsistency of the reprimands with sanctions imposed in other settlements. At the core of these issues is whether or not the CBOT, in choosing the sanctions it imposed, adequately fulfilled its self-regulatory responsibilities. In our view, the sanctions chosen by the CBOT are inadequate in light of the seriousness of the violations alleged, the likelihood that they will not deter future violations, and their reflection of an apparent failure in the self-regulatory system.

Congress charged the Commission in Section 8c of the Act with the responsibility for reviewing exchange disciplinary actions to ensure that they accord with the policies of the Act. 7 U.S.C. 12c(c) (1994). Two important policies of the Act underlying Commission review of exchange disciplinary proceedings are that: (1) in exercising their self-regulatory responsibilities, exchanges should take vigorous action against those who engage in activities which violate their rules and (2) the discipline imposed by exchanges must be fair and have a reasonable basis in fact. See 43 Fed. Reg. at 59,349-59,350. An exchange's adherence to sanctioning guidelines established over a decade ago assists the Commission in determining whether a disciplinary action taken by the exchange accords with these policies of the Act. The sanctioning guidelines were first enunciated by the Commission in 1987 in FCCB, 23,694 at 33,801, a Section 8c review proceeding, and were more recently reaffirmed by the Commission in its 1994 Policy Statement on Sanctions.(33) The guidelines identify the factors that exchanges should consider in fashioning remedies. Among the factors identified are the gravity of the offense and whether the penalty will be sufficiently remedial to deter future violations by the respondent and others.(34)

As we long ago recognized, it is not the Commission's role to substitute its judgment for that of the exchanges when reviewing exchange disciplinary proceedings. FCCB, 23,694 at 33,801. Rather our task is more limited. We review the sanction chosen by the exchange to determine its "reasonableness under all of the circumstances." Id.

We do not determine in this proceeding whether any particular respondent traded after the close. The Exchange proceedings were commenced and settled based on the CBOT's determination that there was "reason to believe" that trading had occurred after the close. (See Submission of T&M at 7 n.23. ) Rather than dispute the factual underpinnings of the proceedings before the CBOT, the respondents elected to settle. The CBOT made no findings that trading occurred after the close. Our task is to determine whether it was reasonable under all the circumstances--including the fact that these proceedings were settled--to sanction allegations of post-close trading solely with a reprimand.(35)

Although the record does not establish conclusively that trading occurred after the close--nor do we so conclude--we note that the record contains substantial evidence to support the contention that trading did occur after the close. This evidence is reviewed in the Staff Report and T&M's Response. (See Report at 22-23 and Response of T&M at 8-12.) (36) Furthermore, the CBOT Record contains substantial evidence to support the contention that trading occurred after the close. Virtually contemporaneous memoranda and statements of Exchange and Commission staff refer to trading occurring after 12:01 P.M.(37) Some of the respondents acknowledged the possibility that trading may have occurred after 12:02 P.M.(38) One trader discussed timestamping an order after 12:01 P.M. when he believed trading was still going on.(39) Notwithstanding the apparent problems with the Time and Sales Report, the pit reporter stated that Time and Sales was accurate within two seconds for the final trade which was reported as occurring at 12:02:50.(40) This record was not--as CBOT now suggests (Submission of CBOT at 16)--so unclear as to justify mere reprimands. More meaningful sanctions could have been imposed.

Respondents and CBOT also contend that, assuming trading occurred after the close, certain mitigating factors demonstrate the reasonableness of the sanctions. They argue that the traders were unaware the close had ended, that the trades were accepted by CBOT officials, and that market conditions were unique. The Divisions challenge the credibility of respondents' assertions that they were unaware that the close had ended, but acknowledge that there was conflicting testimony concerning whether the floor members heard the 12:01 P.M. buzzer. (Report at 14.) T&M also contends that, although prices reached unprecedented highs during the close, the volume of contracts traded (85), the number of trades (13), and the number of traders (six) were not so extraordinary as to cause CBOT "systems and procedures [to be] pressed to their limits." (Submission of T&M at 13, citing Submission of CBOT at 22.)

Even accepting these arguments about mitigating factors, we believe that the sanctions imposed here are inadequate in light of the gravity of the violations alleged. In measuring gravity, the Commission considers the extent to which a violation impedes or threatens the underlying purposes of the Act. Violations of core provisions of the Act generally warrant more serious sanctions than recordkeeping or decorum violations. The Commission considers the provisions of the Act governing trade practices to be among the Act's core provisions.(41) The Commission has also specifically disavowed the notion that trade practice standards can be viewed as mere technicalities in the absence of fraud or deceit. See In the Matter of Buckwalter, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,995, at 37,688 (CFTC Jan. 25, 1991). The gravity of trade practice violations is reflected in the fact that willful violations of Section 4c(a) of the Act, 7 U.S.C. 6b(a) (1994), which prohibits fictitious and other noncompetitive trades, are felonies under Section 9(a)(2) of the Act, 7 U.S.C. 13(a)(2) (1994).(42)

We agree with T&M that any disregard of established trading hours should be viewed as a significant violation. Rules governing the time, place, and manner of trading help to ensure a fair and open market. No one of these requirements is less important than the others, and noncompliance with any one of them may be as damaging to the market as noncompliance with all of them. Even when done in the pit by "open outcry," post-close trading threatens an open and competitive market because a large segment of the market--those who obey the rules governing trading hours--are excluded from participating. See Buckwalter, 24,995, at 37,683 (recognizing "the important distinction between the mere formality of open outcry in the pit and meaningful open outcry"). As former Commission Chairman Philip Johnson has observed, the rationale for prohibiting trading other than during official trading hours is that "true competition is only present in the marketplace during normal hours of trading." I Johnson & Hazen, Commodities Regulation 314 (1989).(43) The absence of "true competition" calls into question the price discovery role of the exchange and could result in loss of confidence in CBOT prices. As we recently stated, "[o]pen and competitive execution is the bedrock underlying public confidence in the objectivity and fairness of futures trading."(44)

Trading hour infractions should be sanctioned as significantly as any other serious violation regardless of the quantifiable harm resulting to the market or public customers in any particular case. See In re LaMantia, [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) 21,472, at 26,216-26,217 (CFTC Feb. 25, 1982).(45) While evidence of the existence of such harm may provide a basis for increased sanctions or additional charges, we do not view the absence of such evidence as an appropriate mitigating factor.(46)

We must also consider the deterrent effect of the reprimands. In the context of serious violations such as trading after the close, we believe that a reprimand generally will not be sufficiently remedial to deter future violations by the respondent or others. Disciplinary proceedings offer other exchange members and the public their only real insight into the seriousness with which the self-regulatory organization views its rules. An exchange that sanctions a particular violation with a reprimand will likely signal its members that the first violation is not very serious and that it will be tolerated similarly in the future. We cannot condone this approach to an exchange's enforcement of its rules concerning trading hours as it does not serve any meaningful deterrent purpose or accord with the policies of the Act.

Here, a simple reprimand amounts to little more than a slap on the wrist for what should be considered a serious breach of the Exchange's rules and appears to reflect an unwillingness on the part of the CBOT to enforce its rules. We are concerned that the CBOT appears less than enthusiastic about enforcing its own rules as evidenced by its apparent failure to stop post-close trading here or to reject the late trades that resulted from this failure. The CBOT's approach in these cases could seriously undermine its ability to operate effectively as a self-regulatory organization.


In light of our views expressed herein concerning the gravity of the alleged violations and the deterrent value of reprimands when sanctioning serious violations, we have decided to set aside the Exchange decisions to accept the settlements and issue the reprimands and to remand these cases to the CBOT for further consideration. Since we are acting in an oversight capacity, we decline to make a specific recommendation as to the appropriate sanction in each proceeding. However, as is evident from the foregoing discussion, we believe that a sanction greater than a reprimand generally is warranted for violations relating to trading hours. We direct the CBOT to reopen the proceedings against the respondents and either (1) reach new settlements which reflect the gravity of the violations charged or (2) augment its prior investigations, as appropriate, and conduct full disciplinary hearings consistent with the requirements of Part 8 of the Commission's regulations.

For the reasons discussed above, we also deny the CBOT's motion to dismiss this proceeding. Finally, we deny the requests for oral argument.


By the Commission (Chairperson BORN and Commissioners DIAL and SPEARS) (Commissioners TULL and HOLUM dissenting by separate opinions).

Edward W. Colbert
Deputy Secretary of the Commission
Commodity Futures Trading Commission

Dated: Novewmber 6, 1997

In the Matter of CBOT's Settlement of Disciplinary Charges Against Donald W. Scheck et. al. Related to the March Wheat Expiration on March 20, 1996

Dissenting Opinion of Commissioner Barbara Pedersen Holum

Upon consideration of the Commission staff analysis and a careful review of the record of the exchange disciplinary proceedings, I find that the settlements in this CBOT disciplinary action are reasonable in light of the extenuating circumstances surrounding the trading in question.

Therefore, I dissent from the majority's Opinion and Order finding the sanctions inadequate and remanding the cases to the CBOT for further consideration.

Consistent with its self-regulatory responsibility, the CBOT promptly investigated the trading during the expiration of the March 1996 wheat contract and took appropriate action. In this respect, it is noteworthy that the record does not demonstrate a history of trading after the close at the CBOT or by the named individuals. As the majority opinion states, the Commission's role is not to substitute its judgement for that of the exchange, but to review the sanction chosen by the exchange to determine its "reasonableness under all of the circumstances."

Furthermore, the CBOT has not ignored its responsibility for the disorderly expiration. It conducted an internal review and made significant changes to its rules and procedures. Most notably, the CBOT deleted the provision under which the close of an expiring contract could be extended from one minute to two minutes, thus eliminating potential confusion among floor members about the appropriate duration for a close in an expiring contract. The CBOT also now precludes the pit reporters from accepting price quotations more than 30 seconds after the close for futures in order to assure that trading is halted on time.

Therefore, I disagree with the majority's finding that the settlement "appears to reflect an unwillingness on the part of the CBOT to enforce its rules" and that it "could seriously undermine its ability to operate effectively as a self-regulatory organization."

Commissioner Barbara Pedersen Holum

In re CBOT's Settlement of Disciplinary Charges Against Donald W. Scheck, J. Brian Schaer, John C. Bedore, George F. Frey, Jr., and Jay P. Ieronimo, related to the March Wheat Expiration on March 20, 1996, CFTC DOCKET NOS. 97-E-1, 97-E-2, 97-E-3, 97-E-4, AND 97-E-5, Dissenting Opinion of Commissioner John E. Tull, Jr.

Although I agree with the majority's discussion and analysis of the issues, I respectfully dissent from the majority's decision to remand these disciplinary proceedings to the Chicago Board of Trade ("CBOT" or "Exchange"). I believe that remanding these matters for reassessment of sanctions at this time will serve no purpose, since the true fault lies with CBOT officials and pit committee members who failed to halt trading properly in accordance with their own rules. I am particularly troubled by the fact that, after improperly allowing trading to occur after the close, the Exchange accepted the trades for clearing, thereby endorsing them.

My decision not to remand does not mean I condone the CBOT's actions in this matter. Any disregard of established trading hours should be viewed as a serious violation irrespective of the quantifiable harm resulting to the market or public customers in any particular case.

The events surrounding the expiration of the March 1996 wheat futures contract were not welcomed by the industry we regulate and were the type of activity that undermines public trust in the futures markets. It is commendable that the Exchange acted promptly to address the problem by changing their rules and procedures, which make this event unlikely to reoccur. I hope the exchanges we regulate will be vigilant to guard against a replay of this or a similar serious breakdown. It is in their best interest, as well as ours, to avoid fiascoes such as this one to ensure that the U.S. futures and options exchanges remain, as they are today, the most transparent, liquid, and competitive in the world.

1. According to the Report, Commission staff decided to defer conducting interviews to allow the CBOT to conduct its own expedited investigation and interviews. Commission staff later determined that, pending the final outcome of the CBOT's investigation and proceeding, it would not be necessary to re-interview the persons interviewed by the Exchange. The CBOT conducted 38 interviews, submitted the transcripts of those interviews to Commission staff, propounded follow-up questions to 19 persons at the request of Commission staff, and then submitted the second round of interview transcripts to Commission staff. The CBOT also provided Commission staff with trading documents, including trading cards, order tickets, and Time and Sales Reports, which Commission staff had requested. (See Report at 4-6.) The documentation that the CBOT provided to Commission staff has now been made a part of the record in this review proceeding. See pp. 23-24, infra.

2. Information independently obtained by Commission staff includes interviews with commercial participants, market analyses, trading profiles of the two locals involved in the expiration, a trade practice investigation, review of data to determine compliance with speculative position limits, and a review of the "gap" function in the CBOT's price reporting system. (See Report at 7.)

3. Specifically, in addition to recommending that the Commission take review of the disciplinary proceedings, the Report recommended that the Commission (1) send a letter to the CBOT transmitting the Report, recognizing the CBOT's improvements in its procedures for setting the settlement price for the MCC trading session, directing the CBOT to respond to the Report, and reminding the CBOT of its critical self-regulatory responsibilities and (2) treat the period of trading activity under review as if a FAST market had not been designated and advise the Exchange to treat this period similarly in any future proceeding. (See Report at 1-2.)

4. The Report concludes that the CBOT conducted its surveillance activities in a proper and thorough manner. (Report, Attach. 1 at 4.)

5. CBOT Rule 1007.00 provided that the pit committee could authorize a one-minute extension of the closing period.

6. Frey and Bedore's market-on-close orders accounted for 32 of the 61 contracts that were unfilled at the end of the close. The remaining 29 contracts were the subject of a buy order for 119 contracts held by Ieronimo on behalf of Produce Grain, Inc. ("Produce"), a subsidiary of Bunge Corporation ("Bunge"). (Id. at 9.) Produce's order had been partially filled before 12:01 P.M.

7. The Report indicates that Ieronimo contacted Produce after the close to discuss how to handle the balance of Bunge's order. (Report at 19-20.)

8. Drumm stated that he reported the quotes in ten-cent increments at the direction of Bedore. According to the Report, Bedore had no authority to direct Drumm to do so. (Report at 18.)

9. The Report indicates that Ieronimo may have also discussed the MCC and the MCC price range with Exchange staff and officials, including Arbor and Patrick Sgaraglino, the Exchange Pit Reporter Floor Supervisor. (Report at 21 n.42, 28.)

10. An MCC is a two-minute post-close trading session which may occur after the end of a trading session and allows market users to close out unliquidated positions. Pit committees schedule MCC sessions only when there is an expression of interest. The MCC settlement price, which serves as the basis for the trading range during the MCC session, is selected by the pit committee. It may vary from the final or clearing settlement price. (Report at 25-26.)

11. Czupek was the floor manager and broker for Term Commodities ("Term"), which is a wholly-owned subsidiary of Dreyfus. Notwithstanding its earlier expressed intent to stand for delivery, Dreyfus reportedly decided to participate in the MCC following discussions between Czupek and a Dreyfus employee about the conditions in the pit during the close. (See Report at 29-31.)

12. OIA recommended charges against Bunge and Dreyfus. It did not recommend any charges against Ieronimo, Frey, Bedore, Schaer, or Scheck. (Report at 35-42.)

13. At the time of these events, Rule 1007.00 stated, in pertinent part:

On the last day of trading in an expiring future, a bell shall be rung at 12 o'clock noon designating the beginning of the close of the expiring future. Trading shall be permitted thereafter for a period not to exceed one minute and quotations made during this time period shall constitute the close. When in the opinion of the relevant Pit Committee extraordinary conditions prevail any such one minute period may be extended to two minutes by special authorization of the relevant Pit Committee. However, the above constraints do not apply to contracts which close by public call.

14. Rule 350.05 provides, in pertinent part, that

[t]he following acts are detrimental to the welfare of the Association: . . . (h) for a member to execute any order after the closing bell is sounded except in a call market close.

15. CBOT Rule 1007.02 provides:

Immediately following the prescribed closing procedure for all contracts, there shall be a two (2) minute trading period (the "modified closing call"). All trades which may occur during regularly prescribed trading hours may occur during the call at prices within the lesser of the actual closing range or a range of three (3) official trading increments, i.e., one (1) increment above and below the settlement price, or at prices within the lesser of the actual closing range or a range of nine (9) official trading increments, i.e., four (4) increments above and below the settlement price, as the Regulatory Compliance Committee shall prescribe; (ii) no new orders may be entered into the call; (iii) cancellations may be entered into the call; (iv) stop, limit and other resting orders elected by prices during the close may be executed during the call; and (v) individual members may trade as a principal and/or agent during the call. In accordance with the determination of the Regulatory Compliance Committee, CBOT contracts shall be traded during the Modified Closing Call as follows: Lesser of actual closing range or nine trading increments [for] Wheat Futures and Options.

16. The Report is unclear on the nature of the alleged misconduct which was the subject of the BCC's charge that Dreyfus violated CBOT's bona fide hedging rule. The OIA report, however, concluded that its investigation indicated that Dreyfus had failed to liquidate its position in an orderly manner in accordance with sound commercial practices as required by CBOT Rule 425.02 because it did not liquidate any of its March 1996 position during the close even though the market was bid and traded well above equivalent cash market values. The Report goes on to note that OIA in reaching this conclusion never acknowledged that the market traded well above the equivalent cash market values only after the official close of trading at 12:01. (Report at 41 n.73.)

17. The Divisions also concluded that there is no dispute that the close for the expiring March 1996 wheat futures contract was scheduled to end at 12:01 and that the Wheat Pit Committee never authorized an extension or communicated notice of such an extension to the pit. (Report at 47.)

18. The Report states (at 14; footnote omitted):

Pit reporters also stated that they heard one broker, Frey, make statements to the effect of "we're still open" or "no way that we're done here" after the end of the close was signaled by those Exchange officials.

19. The Divisions noted that gravity and deterrence are two factors specifically identified by the Commission in the guidance provided to self-regulatory organizations for determining appropriate penalties. (Report at 48; see CFTC Policy Statement Relating to the Commission's Authority to Impose Civil Money Penalties and Futures Self-regulatory Organizations' Authority to Impose Sanctions (Nov. 1994) ("1994 Policy Statement on Sanctions").)

20. The Divisions noted that in two rule enforcement reviews T&M has criticized two other exchanges for their handling of disciplinary matters involving trading outside of designated trading hours and recommended that those exchanges impose meaningful sanctions in such cases. (Report at 51-52; see Rule Enforcement Review of the New York Mercantile Exchange (Feb. 20, 1991); Rule Enforcement Review of the Coffee, Sugar & Cocoa Exchange, Inc. (Sept. 30, 1996).)

21. Similarly, Produce argues that the Commission is without authority to discipline the respondents because the Exchange has not "fail[ed] to act." (Submission of Produce at 1 n.1.) Produce relies on Section 8c(a)(1) of the Act which authorizes the Commission, in accordance with the rules of the exchange, to discipline an exchange member if an exchange has "fail[ed] to act." 7 U.S.C. 12c(a)(1) (1994).

22. One respondent also suggests that the stronger litigating positions against Dreyfus and Term resulted from the "easily verifiable facts" relating to violating the prohibition against entering new orders during the MCC. (Submission of Ieronimo at 7 n.5.).

23. The CBOT also asserts that nothing in Commission Rule 9.33(c), 17 C.F.R. 9.33(c) (1997), requires exchange disciplinary actions to accord with Commission "Policy Statements." (Response of CBOT at 5-6.)

24. The CBOT's response also contains certain "objections." The CBOT objects to Enforcement's participation in this proceeding on the ground that nothing in the Act or the regulations authorizes Enforcement to participate. The CBOT also asserts that all staff members of each of the offices and divisions that prepared or concurred in the Report, including the Office of General Counsel, should be barred from participating in an adjudicatory role in this proceeding and from having ex parte communications with the Commission about this matter.

25. The first and second sentences of Section 8c(b) provide:

The Commission may, in its discretion and in accordance with such standards and procedures as it deems appropriate, review any decision by an exchange whereby a person is suspended, expelled, otherwise disciplined, or denied access to the exchange. In addition, the Commission may, in its discretion and upon application of any person who is adversely affected by any other exchange action, review such action.

26. Section 5a(a)(8) requires an exchange that has been designated as a contract market such at the CBOT to:

enforce all bylaws, rules, regulations, and resolutions, made or issued by it or by the governing board thereof or any committee, that (i) have been approved by the Commission pursuant to paragraph (12) of this section, (ii) have become effective under such paragraph, or (iii) must be enforced pursuant to any Commission rule, regulation, or order; and revoke and not enforce any bylaw, rule, regulation, or resolution, made, issued, or proposed by it or by the governing board thereof or any committee, that has been disapproved by the Commission[.]

27. T&M also briefly responds to the CBOT's "objections." With regard to the CBOT's objection to Enforcement's participation in this proceeding, T&M asserts that there is nothing in the Act or regulations that bars Enforcement from participating. T&M also responds that it has not and will not participate in an "adjudicatory" role in this proceeding and represents that, since the initiation of this proceeding, Commission staff involved in the preparation of the Report have complied with Commission Rule 9.26, 17 C.F.R. 9.26 (1997), concerning off-the-record communications with decisional employees. (Id. at 28-29.) Furthermore, T&M argues that the general prohibition against ex parte communications in the Administrative Procedure Act, 5 U.S.C. 557(d) (1994), is inapposite because it only applies to communications between persons outside the agency and Commission decisionmakers and then only to "adjudications required by statute to be determined on the record after opportunity for an agency hearing." (Id. at 29-30.)

28. For a complete discussion of issues concerning the record, we refer the reader to our July 2d and September 30th Orders.

29. See 43 Fed. Reg. 59,343, 59,344 (1978). That interpretation originally was codified at 17 C.F.R. 9.50. 43 Fed. Reg. at 59,353.

30. In its response, the CBOT objects to the Divisions' suggestion in the Report that, rather than remanding the settlements to the Exchange, the Commission "could act in the alternative itself to augment sanctions without referral to the Exchange." (Submission of CBOT at 5 n.2, quoting from Report at 55 n.92.) The CBOT asserts that the Commission's authority to modify exchange disciplinary proceedings under Section 8c(c) does not encompass the authority unilaterally to alter the terms of a settlement. As the CBOT acknowledges, the Divisions have not recommended that the Commission modify the sanctions imposed by the settlements. Furthermore, we are not undertaking to do so. Therefore, we need not address at this time whether the Commission could alter the terms of a settlement in an exchange disciplinary proceeding without remanding the matter to the exchange.

31. Moreover, Produce's argument that we may not review the actions in these cases because the CBOT has not "fail[ed] to act" is inapposite because the Commission has proceeded here under Section 8c(b), not Section 8c(a). Further, under Produce's theory, a pattern of exchange "actions" resulting in mild sanctions in the face of egregious conduct could effectively evade appropriate Commission review under Section 8c on the basis that the exchange had not "failed to act."

32. We believe that T&M has adequately addressed the CBOT's objections (CBOT Submission at 13) to Enforcement's participation in this proceeding and to the staff that worked on the Report participating in an "adjudicatory role" in this proceeding and having ex parte communications with decisional employees. (See Submission of T&M at 28-30 and note 27, supra.) Nothing in the Act or the Commission's regulations prohibits Enforcement's role in preparing the Report or the T&M Submission in this Section 8c proceeding. Based on this record, we can discern no reason to disqualify Enforcement from such participation.

Further, we note that although we have chosen to include provisions prohibiting ex parte communications in Commission Rules 9.3 and 9.26, this is not a proceeding governed either by the separation of functions or the ex parte provisions of the Administrative Procedure Act. Those provisions are implicated only if the agency's decision is required by statute to be determined on the record after an opportunity for an agency hearing. Here, however, Section 8c authorizes Commission review of exchange decisions in accordance with "such standards and procedures" as the Commission deems appropriate. See Board of Trade of the City of Chicago v. CFTC, No. 89-C-4300 (N.D. Ill. Sept. 27, 1989) (Memorandum Opinion and Order at 25) (when reviewing an exchange disciplinary proceeding--in that case an appeal by an aggrieved member--the Commission "is itself a board of review and not the original decisionmaker.").

In any event, no member of the staff who has advised the Commission in reaching its decision in this proceeding participated in the preparation of, or concurred with, the Report or the T&M Submission or participated in the investigation of the March wheat expiration.

33. The CBOT's assertion that nothing in Rule 9.33 requires an exchange disciplinary action to accord with Commission "Policy Statements" (Submission of CBOT at 5-6) conveniently ignores the fact that Part 9 of the Commission's regulations implements Commission authority under Section 8c of the Act. That section specifically charges the Commission to review exchange action to determine whether it accords with the "policies" of the Act. Further, the fact that the CBOT may have considered the factors in the 1994 Policy Statement on Sanctions does not preclude us from reviewing whether the Act's policies have been effectively carried out by the Exchange's decision.

34. The Commission's 1994 Policy Statement on Sanctions also lists "[t]he history of similar rule violations by other members" as one of the factors that should guide exchanges in determining the sanctions to be imposed in a particular case. The Report identified the apparent disparity of the settlements with these six respondents with certain settlements with other members--Dreyfus and Term--as a basis for taking review under Section 8c. We believe that self-regulatory organizations such as the exchanges should strive to ensure consistency among sanctions for similar rule violations. However, we do not find that the CBOT failed to do so here. The CBOT and respondents have provided a reasonable basis for imposing different--and apparently harsher--sanctions on Dreyfus and Term. See p. 17, supra.

In light of our resolution of this issue, we will not take any action against the CBOT for its failure to satisfy that part of our July 2nd Order that required it to produce copies of the charging letters and settlement documents relating to Dreyfus, Term, and Czupek. See September 30th Order at 5, n.2.

35. We have, of course, recognized in the past that settlements may result in a reduction in the level of sanctions imposed. See In the Matter of Gordon, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,667, at 40,181 n.4 (CFTC Mar. 16, 1993). Although we recognize the important functions served by settlements, our responsibility to ensure that exchange disciplinary actions accord with the policies of the Act outweighs the exchanges' interest in facilitating the settlement process. (See Submission of CBOT at 31.)

36. We are mindful that the "evidence" we rely on has not been subjected to the rigors of cross-examination or the other disciplines of a formal hearing. Nevertheless, for purposes of this review proceeding, we believe that it is appropriate to rely on the record that has been developed. We reiterate that the Order Taking Review did not place any limitations on the nature or content of the responses to be filed by the parties. See July 2nd Order at 3 n.2. Moreover, respondents remain free on remand to assert in a hearing before the Exchange that trading did not occur after the close.

37. See, e.g., March 22, 1996 Memorandum of Laura J. Taylor to the Files (CBOT Record at Volume V, Tab 3); March 25, 1996 Statement of Kimberly Lindfors at 24, lines 11-16 (CBOT Record at Volume I, Tab 2); March 25, 1996 Statement of Kevin Drumm at 20, line 20 through 21, line 9 (CBOT Record at Volume I, Tab 2); March 28, 1996 Memorandum of the CFTC's Division of Economic Analysis. See also May 13, 1996 Statement of Laura Taylor at 7, lines 21-24 (CBOT Record at Volume V, Tab 2).

38. March 26, 1996 Statement of George Frey at 18, lines 15-17 (CBOT Record at Volume II, Tab 2); March 26, 1996 Statement of Jack Bedore at 13, lines 11-14 (CBOT Record at Volume II, Tab 2). Furthermore, Ieronimo's statement that "prior to the close we had no idea that the expiration would take this long" suggests that trading may have occurred after the close. (See March 26, 1996 Statement of Jay Ieronimo at 26, lines 22-23 (CBOT Record at Volume II, Tab 2).)

39. March 27, 1996 Statement of Raymond Czupek at 30, line 12 through 31, line 16 (CBOT Record at Volume III, Tab 2). See also March 27, 1996 Statement of Bruce Ritter at 26, lines 1-24 and 40, lines 3-14 (CBOT Record at Volume III, Tab 2). The order was time-stamped at 12:02:12 P.M. (March 27, 1996 Statement of Ray Czupek at 18, lines 3-10 (CBOT Record at Volume III, Tab 2).)

40. March 25, 1996 Statement of Kevin Drumm at 20, line 20 through 21, line 1 (CBOT Record at Volume I, Tab 2).

41. See CFTC, A Study of CFTC and Futures Self-Regulatory Organizations Penalties 36-37 (Nov. 1994).

42. Produce's suggestion that its situation differs from that of the other respondents because its order was executed by an independent broker pursuant to an order placed prior to the close ignores evidence in the record that a Produce representative was present on the floor and authorized the trade to be executed after the close. See March 26, 1996 Statement of Jay Ieronimo at 24, lines 1-4 (CBOT Record at Volume II, Tab 2).

43. Thus, Commission Rule 1.38 requires competitive execution of futures and option transactions "during the regular hours prescribed by the contract market for trading in such commodity or commodity option." 17 C.F.R. 1.38 (1997).

44. In the Matter of Craig J. LaCrosse, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,944 at 44,575 (CFTC Jan. 21, 1997), appeal pending (7th Cir. Feb. 3, 1997) (No. 97-1239).

45. In LaMantia, 21,472 at 26,216-26,217, we stated (emphasis added):

[I]n deciding that trades that do not cause direct injury to customers or other traders do not warrant the imposition of sanctions under the Act, the judge has effectively countermanded a prior judgment made by Congress--namely, that certain activities are prohibited without regard to whether any specific customer or trader has been injured by the activities. Similarly, whether the number of respondent's transactions had any actual appreciable effect on the market is of no mitigative consequence. Congress has determined that activities like those in which respondent engaged are malum in se, and it is our duty to assure that this legislative determination is effectuated.

46. Nevertheless, we note that the record here does contain information suggesting that some of the customers with market-on-close orders may have fared worse than they would have if their trades had been executed during the MCC or they had entered the cash market. Conversely, the locals who traded opposite those customers appear to have fared quite well.