UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
In the Matter of
CFTC Docket No. 92-21
Solomon Mayer, et al.
AMENDED OPINION AND ORDER
This appeal arises out of a 23-count complaint filed by the Division of Enforcement ("Division") alleging multiple violations of the Commodity Exchange Act ("Act") in the heating oil pit of the New York Mercantile Exchange ("NYMEX"). The eight respondents were charged with recordkeeping, registration, trade practice, and supervisory violations.
After evaluating the record developed by the parties, the Administrative Law Judge ("ALJ") found the respondents liable on 22 of the 23 counts alleged in the complaint. The respondents received various sanctions including registration suspensions, trading prohibitions, and civil monetary penalties.
Respondents appeal, raising both procedural and substantive challenges to the ALJ's decision. They contend, among other things, that the ALJ denied them a fair hearing, that the evidence does not support the ALJ's findings, and that the ALJ imposed excessive sanctions.
Based on our independent assessment of the record, we conclude that the record supports the liability of respondents as to most of the charges in the complaint, but that certain findings of the ALJ should be vacated. However, we find that the violations for which respondents are liable warrant the imposition of more stringent sanctions than those chosen by the ALJ and have imposed sanctions accordingly.
A. Procedural History
1. The Complaint
On April 24, 1992, the Commission issued a 23-count complaint charging Solomon Mayer ("SMayer"), Barry Mayer ("BMayer"), SHB Commodities, Inc. ("SHB"), Maye Commodities Corp. ("MCC"), Robert S. Halper ("Halper"), Steven Gelbstein ("Gelbstein"), Edmond Mekertichian ("Mekertichian"), and Isaac Mayer ("IMayer") with multiple violations of the Act and Commission regulations arising out of their trading activities in the heating oil pit of NYMEX from April 1987 through June 1989.(1)
The complaint alleged violations of the Act's recordkeeping, supervision, registration, and trade practice requirements.
Specifically, in the recordkeeping counts, SMayer, BMayer, Gelbstein, Halper, and Merkertichian were charged with failure to retain their trading cards as required by Commission Rule 1.35, 17 C.F.R. § 1.35 (1997). SHB and SMayer, as controlling persons under Section 13(b) of the Act, 7 U.S.C. § 13c(b) (1988), were charged with failing to retain floor order tickets for five years as required by Commission Rule 1.35; failure to time stamp floor order tickets as required by Section 4g(1) of the Act,(2) 7 U.S.C. 6g(1) (1988), and Commission Rules 1.31(a), 1.35(a), 1.35(a-1), and 1.35(d), 17 C.F.R. §§ 1.31(a), 1.35(a), 1.35(a-1), and 1.35(d); and failure to supervise diligently the agents and employees responsible for the order ticket violations in violation of Commission Rule 166.3, 17 C.F.R. § 166.3 (1988).(3)
The alleged trade practice violations relate to the accounts allegedly owned and controlled by the Mayers.(4) The complaint alleged that SMayer, BMayer, and Mazel each owned one-third of SHB and were the only members of the board of directors. The complaint alleged that SMayer, president, directed and controlled the activities of SHB. While the trades for the SHB house account were generally executed by BMayer, vice-president, SMayer had authority to trade the account and did in fact do so.
The complaint also alleged that SMayer was president and BMayer vice-president of MCC, that SMayer directed and controlled the firm and its activities, that they both directed and controlled trading of the MCC proprietary account, and that while the trades for the MCC house account were generally executed by SMayer, BMayer had authority to trade the account and did in fact do so. The complaint also alleged that both SMayer and BMayer each directly or indirectly had an ownership interest in MCC. The complaint listed seven accounts that SMayer controlled or directed and in which he had an ownership interest.
The complaint alleged four categories of trade practice violations.(5) Specifically, the complaint alleged that SMayer, BMayer, SHB, and MCC knowingly engaged in a series of noncompetitive trades to achieve wash results by trading the SHB and MCC house accounts opposite each other ("the Schedule A trades"). The Schedule A trades were divided into: (1) Schedule A-1, 73 alleged occasions between April 28, 1987, and June 27, 1989, in which the MCC house account bought and sold heating oil futures contracts from and to the SHB house account in spread transactions; and (2) Schedule A-2, 41 alleged occasions from May 13, 1987 through May 24, 1989, in which the MCC house account bought and sold heating oil futures contracts from and to the SHB house account in outright transactions.
In the second category of trade practice violations, the complaint alleged that on various trading days between February 18, 1987 and December 14, 1987 in simultaneous or nearly simultaneous transactions which were executed opposite one or two floor brokers or traders, SMayer bought futures contracts for one of the seven accounts he controlled while selling an equal number of the same contracts at the same price for another of the controlled accounts. Consequently, the complaint alleged, SMayer, SHB, and MCC knowingly engaged in a series of noncompetitive trades to achieve wash results, and Gelbstein, Halper, and Mekertichian accommodated them by buying and selling the same or a similar quantity of the same contracts at the same or nearly the same price ("the Schedule B trades").
Third, the complaint alleged that between June 29, 1987, and May 4, 1989, SMayer knowingly engaged in a series of noncompetitive trades by bucketing customers' orders or willfully and knowingly, and without the prior consent of such customers, becoming the buyer in respect to selling orders or the seller in respect to buying orders. The complaint further alleged that Gelbstein, Halper, Merkertichian, and other floor traders and brokers accommodated SMayer by buying (or selling) contracts from or to SMayer and then selling (or buying) the same or similar quantity of the same contracts at the same or almost the same price in simultaneous or near simultaneous transactions ("the Schedule C trades").
Fourth, the complaint alleged that from January 19, 1988, through December 19, 1988, SMayer bucketed his customers' orders or willfully and knowingly, and without the consent of his customers, became the buyer in respect to selling orders or became the seller in respect to buying orders. The complaint alleged that SMayer achieved this result by engaging in simultaneous or nearly simultaneous transactions whereby a floor broker employed by SHB sold (or bought) heating oil contracts to Gelbstein for a customer of SHB with SMayer's knowledge and SMayer, trading for the MCC house account, bought (or sold) an equal or nearly equal number of the same contracts from Gelbstein at the same or nearly the same price ("the Schedule D trades").
With respect to the alleged trade practice violations, the complaint charged that certain respondents cheated and defrauded customers in violation of Section 4b(A) of the Act, 7 U.S.C. § 6b(A) (1988); bucketed customer orders or took the opposite side of customers' orders without their prior consent in violation of Section 4b(D) of the Act, 7 U.S.C. § 6b(D) (1988), and Commission Rule 1.38, 17 C.F.R. § 1.38 (1988); entered into wash, fictitious, and accommodation trades in violation of Section 4c(a)(A) of the Act, 7 U.S.C. § 6c(a)(A) (1988); caused non-bona fide prices to be reported in violation of Section 4c(a)(B) of the Act, 7 U.S.C. § 6c(a)(B) (1988); and engaged in noncompetitive trading in violation of Commission Rule 1.38(a), 17 C.F.R. § 1.38(a) (1988). Pursuant to Section 2(a)(1)(A) of the Act, 7 U.S.C. § 4 (1988), and Commission Rule 1.2, 17 C.F.R. § 1.2 (1988), the complaint charged that SHB and MCC were liable for any and all violations of SMayer and BMayer because they acted within the scope of their employment.(6)
On December 16, 1992, the Commission accepted settlement offers from Halper and Mekertichian. We found that Halper and Mekertichian each violated Sections 4c(A) and 4c(B) of the Act and Commission Rule 1.38 and that in addition, Halper violated Section 4g(1) of the Act and Commission Rules 1.31(a) and 1.35(d).(7)
The hearing was held in New York City. On May 1, 2, 3, and 4, 1995, the Division presented the testimony of 18 witnesses. The respondents presented seven witnesses on June 12, 13, and 14, 1995.
a. Expert Testimony
In accordance with the ALJ's prehearing order, the direct testimony of the expert witnesses was submitted in writing prior to the hearing. The experts were cross-examined at the hearing.
Marshall Horn(8) testified as an expert for the Division. Regarding the allegations that accounts owned and controlled by the Mayers were traded against each other, Horn stated that, "[w]here . . . futures trades are done between various accounts controlled by the same trader . . . the essential elements of competitive, bona fide trading involving separate parties who each assume market risk simply does not exist." (Horn Dec. at 5.)
John M. Schobel(9) provided expert testimony on behalf of respondents. Schobel complained that the Division had not provided adequate documents for review. (Schobel Ver. State. at 2-3.) Schobel acknowledged that it would have helped his analysis to have had the order tickets, which had been subpoenaed but not produced by the respondents. (Tr. at 1106.)
Schobel contended that the Mayer brothers traded openly and independently.(10) To demonstrate that none of the trades in Schedule A were wash trades, Schobel submitted a table allegedly showing that, although the trades were executed between SHB and MCC house accounts, in no instance were equal and offsetting positions for any contract month created and liquidated. (Schobel Ver. State. at App. B Table I, Tr. at 1058.) Schobel contended that the tables he constructed demonstrate that the trades were done for the SHB account in an attempt to profit. Schobel argued that control of the accounts, not ownership, should be the criterion to determine wash trades. (Schobel Ver. State. at 5-7.) Schobel further contended that SMayer's opportunity to control is not the same as whether he actually exercised control over the accounts.(11) (Id. at 7.)
Turning to the sequences in Schedules B, C, and D, Schobel claimed that some of the alleged accommodation trades do not meet the pattern requirements of an accommodation trade because price and quantity do not match.(12) (Id. at 4-5.) Schobel opined that the Division had not advanced a motive for either accommodation trading or bucketing trades and offered an alternative explanation of each of the trade sequences in Schedules C and D.(13) Many of Schobel's explanations attempted to demonstrate that the trades were consistent with scalping or dual trading. Additionally, for each of the trade sequences in Schedules C and D, Schobel contended that, absent indicia such as audit trail irregularities and without proof that SMayer took the other side of customer orders, it cannot be said that it was more likely than not that these trades were executed noncompetitively.(14) (Schobel Ver. State. at App. C at 1-355-356, App. D 1-87.) Schobel asserted that the presence of audit trail irregularities does not mean that a transaction was executed noncompetitively, but only that the irregularities should be "looked at." (Tr. at 1091.)(15) Further, Schobel argued that there is no evidence that SMayer had knowledge of SHB's orders and therefore the allegation that he bucketed trades with Gelbstein accommodating as a conduit is baseless. (Schobel Ver. State. at 14-15.)
b. Testimony of Fact Witnesses
i. Alleged Recordkeeping Violations
With regard to the alleged recordkeeping violations, BMayer, SMayer, and Gelbstein testified that they were unaware of the requirement to keep their trading cards.(16) (Tr. at 633, 932, 978, 998-999.) The respondents claimed that, until NYMEX adopted a rule requiring retention of the cards, they matched them against transfer sheets and kept them only long enough to assure that there was no possibility of error. (Id.) SMayer testified that he kept transfer sheets instead of trading cards. (Tr. at 931.) Respondents maintained that since the rule was changed they have kept all of their trading cards. (Tr. at 636, 933, 978-979, 999.) However, Michael Burns, a former SHB broker, testified that he gave his trading cards to the clerks and that when he needed them for a compliance interview they were in a box in the SHB office. (Tr. at 222-223.) Additionally, Jacob Eis testified that, as operations manager for SHB, he was responsible to make sure that SHB was in compliance with the rules of all regulatory bodies and he oversaw the files. (Tr. at 467, 471.) Eis testified that he never told any of the employees to keep the trading cards because his responsibilities were limited to the clearing aspects of the business and his compliance duties did not cover floor brokerage. (Tr. at 471.) Eis stated that no one at SHB was responsible for the compliance function with respect to the floor brokerage operation. (Tr. at 468, 472.) SMayer attributed SHB's inability to produce some floor order tickets to human error. (Tr. at 937.)
ii. Alleged Trade Practice Violations
Most of the hearing testimony focused on the trade practice violations. The Division introduced evidence that SHB and MCC were owned and controlled by SMayer and that SMayer controlled the trading for their accounts. While MCC and SHB were originally created by different individuals at different times as separate entities, the testimony revealed little current organizational difference between them.(17) The two entities shared offices,(18) and the bookkeeping and accounting functions for the two companies were performed by the same individuals, Irving Olshever, Marvin Insler, Leonard Rosen,(19) and Jacob Eis,(20) all four of whom testified at the hearing. In 1989 Rosen recommended that, because SHB and MCC were duplicative and resulted in doubled costs, MCC be closed and that the Mayers stop trading the SHB house account and instead open a Mayer account as a non-customer account of SHB.(21) (Tr. at 760-761). Furthermore, Sarah Mayer Hammerman testified that the Mayers disposed of MCC because the family did not need two companies. (Tr. at 410.)
According to the testimony, SMayer, Hindi Mayer Mazel, and BMayer each owned a third of SHB.(22) (Tr. at 356, 607.) Although he was a part owner and even though SMayer received capital gains for the same period, BMayer testified that he received a salary but no capital gains from SHB during 1987-1989. (Tr. at 656.)
With regard to the ownership of MCC, Olshever testified that MCC had been formed by the Mayer parents. (Tr. at 244.) Hammerman testified that, after her husband's death, she had assigned SMayer responsibility for managing the company. (Tr. at 386-387.) According to Olshever, Hammerman and SMayer determined that MCC would pay no salaries and that the profits would be divided equally between Hammerman and SMayer. (Tr. at 250-252, 257-259.) SMayer maintained that he did not know why he had reported capital gains from MCC since he was not a shareholder. (Tr. at 856, 861.) Even though he had testified in a deposition in an earlier proceeding that he was a 50 percent shareholder, SMayer claimed that, subsequent to that testimony, he had learned that he was a co-executor with his mother in his father's estate and that he was not an owner. (Tr. at 804-805, 854-856.)
The witnesses testified that all of the family members drew funds from both companies. Olshever and BMayer testified that Hammerman, SMayer, BMayer, and Mazel signed checks on the MCC account at their own discretion. (Tr. at 268-269, 639, 662, 666-672.) Eis stated that Hammerman received salary checks from SHB as an employee, but provided no services.(23) (Tr. at 416.)
There was also testimony that money was transferred between entities. Eis testified that money was transferred from SHB to MCC and Manor Securities(24) but he did not know why. (Tr. at 422, 424, 434-439.) Olshever testified that SMayer lent money to SHB at various times. (Tr. at 276-279.) Hammerman stated that SMayer made all the trading decisions with regard to her account and that SMayer had total discretion to transfer monies wherever he wanted. (Tr. at 407-408.) Additionally, Eis reported that the house portion of the SHB daily trade register was reviewed by SMayer or his clerks and that the bookkeeping entries show that the SHB house account traded opposite the MCC house account. (Tr. at 456, 458.)
The testimony revealed that SMayer was the president of both MCC and SHB. Olshever testified that SMayer managed both SHB and MCC. (Tr. at 247-248.) SMayer maintained that he ran both MCC and SHB, SHB with help from BMayer and Mazel.(25) (Tr. at 865.) SMayer related that he traded the MCC account and, as president of MCC, he drew profits whenever he needed money. (Tr. at 863-864, 882.) SMayer also admitted that he signed the majority of checks for SHB and made most of the decisions for SHB, although Eis, BMayer, and Mazel provided input regarding certain personnel matters. (Tr. at 865-867.)
SMayer testified that he went to the office for at least one hour every day before trading opened and reviewed the trading activities in the accounts of the SHB house and its customers. (Tr. at 869, 871, 873-875.) With regard to the house account, which was traded primarily by BMayer and sometimes by SMayer, SMayer asserted that he looked only at the bottom line. (Tr. at 873-874, 878, 882.) While SMayer conceded that he knew open positions for customers because he wanted to know "if there was a danger to the company of them going in deficit or losing more money than they had," he denied that he decided which SHB brokers would be assigned to a particular transaction for customers' orders. (Tr. at 864-874.) On occasion, SMayer stated, he traded for SHB's customers. (Tr. at 883.)
To demonstrate that SMayer and BMayer had participated in wash sales, the Division presented Glenn Spann, CFTC Futures Trading Investigator, who analyzed data from computer reports regarding the heating oil trades of BMayer opposite SMayer. (Tr. at 117.) Spann presented pie charts showing that, in the years 1987-1989, 75 percent of BMayer's business was in the platinum/palladium pit and 30 percent of the transactions that BMayer executed in the heating oil pit, which also constituted 64 percent of his heating oil contracts, were with his brother SMayer.(26) (Tr. at 118-138, 143-144, Gov. Ex. 504A, 505A.)
Both BMayer and SMayer insisted that they traded independently from one another. BMayer stated that between 1987 and 1989 he traded primarily as a local trader for the SHB house account and only occasionally for the MCC pension plan. (Tr. at 612, 673-674.) BMayer stated that it took only five or ten seconds to walk between pits. (Tr. at 629, 696.) BMayer submitted that he was able to go from the platinum/palladium pit to the heating oil pit, assess the market in less than three minutes, and put on a single independent position opposite SMayer. (Tr. at 680-681.) SMayer stated that he watched the prices in all energy pits because there is an economic relationship between them. (Tr. at 808-809.)
BMayer testified that he did not specifically recall the transactions listed in the schedules. (Tr. at 616.) He denied ever prearranging a trade, trading noncompetitively with anyone, or accommodating anyone. (Tr. at 617-618.) BMayer testified that, when he traded with his brother, he traded his own account, took risk, traded on the basis of his own independent trading decisions, and had never done a wash trade. (Tr. at 618-619.) While he carpooled to work with his brother, BMayer claimed that they did not discuss their trading intentions because they did not know what they would do before the bell rang. (Tr. at 619.) Further, BMayer maintained that all of his trades with his brother were by open outcry and that he had proved it by using the cross-trading rule whereby a committee member signs the pit cards so it would not appear as if the brothers were doing anything wrong. (Tr. at 618-627.)
SMayer submitted that he and BMayer consulted each other about their trading "very, very rare[ly]." (Tr. at 884-885.) Even though it was possible that BMayer may have asked SMayer his opinion about the market, SMayer claimed that BMayer traded by himself the entire day and made his own decisions. (Tr. at 886, 892, 896.) Like BMayer, SMayer testified that he did not discuss what he was going to trade with his brother on the way to work. (Tr. at 817-818.)
To explain why the brothers traded opposite each other, SMayer suggested that it was due to his trading every spread position in every month. (Tr. at 896.) Additionally, if SHB had a large number of open buy positions and MCC had a large number of open sell positions, the brothers might trade against each other. (Tr. at 896-897.) SMayer stated that when he made a market he was willing to trade with anybody, including his brother, and that, "before we would trade with each other, we made sure that every other broker in the ring had an opportunity to trade with [BMayer first]." (Tr. at 818-819.) SMayer explained that they used the cross trade methodology in trading because "we wanted everything to be above board in case we were looked at." (Tr. at 820.) SMayer asserted that he only took the opposite side if he had no customer order and if he wanted to trade opposite the way BMayer wanted to trade. (Tr. at 890.)
SMayer admitted that he had a financial interest in both SHB and MCC. (Tr. at 864, 881.) SMayer also admitted that he knew when he traded the MCC account opposite BMayer that BMayer was trading an account in which both of them had a financial interest. (Tr. at 944-945.) SMayer submitted that, even though he may have had a financial interest in the outcome, that was not what was on his mind; his mind was on the trading and the positions. (Tr. at 892.)
With regard to the Schedule B trades, the Division presented three witnesses who testified that they had accommodated SMayer during 1987-1990.(27) Robert Halper(28) testified that accommodation trading was a matter of etiquette, and Edmond Mekertichian(29) testified that accommodation trading was not a preconceived or premeditated act but part of the culture of the business. (Tr. at 230.) Halper stated that all the trades were by open outcry and that he never did a trade with SMayer below the bid or above the offer. (Tr. at 349-350.) Mekertichian explained that some people are so skilled and so fast in bidding and offering that others in the pit are precluded from responding. (Tr. at 232.) While neither Mekertichian nor Halper could remember specific trades with SMayer, Halper stated that it "was unlikely that the list of trades is without accommodation trades." (Tr. at 229, 347.)
Lewis Helfer(30) testified to three specific trades in which he accommodated SMayer. Helfer testified that he knowingly accommodated SMayer on February 18, 1987 in 100 March/April 1987 heating oil spreads by taking one side of the spread and then immediately taking the other side, resulting in a flat trade. (Tr. at 171-175, 192-194.) However, he stated, the streetbook(31) shows an hour's difference in the transactions because he and SMayer chose the prices in the trading range. (Tr. at 174-175.) Helfer testified to a second accommodation trade on February 23, 1987 in which he bought 50 lots of May heating oil from SMayer and then sold the same quantity to Edmond Mekertichian who sold the 50 lots back to SMayer. (Tr. at 177-179.) Helfer testified that they did the flat trade this way because it would be less obvious. (Tr. at 178-179.) Helfer admitted to a third accommodation trade on February 27, 1987 in which he bought 25 lots of March heating oil from SMayer and sold it back to him at the same price five minutes later. (Tr. at 179-180.) Helfer testified that he had no intention of taking a position in the market. (Tr. at 180.) Helfer testified that all three of the accommodation trades were done by open outcry in the pit and that other traders heard them. (Tr. at 190, 191, 196.)
In response to the accommodators' testimony that they knew they were accommodating SMayer because he had published a flat rate(32) (Tr. at 175, 193, 195, 234-237.), both SMayer and BMayer suggested examples of legitimate reasons for publishing a flat rate.(33) (Tr. at 627-628, 812-815.) SMayer denied ever publishing a flat rate in an effort to find someone to accommodate him. (Tr. at 815-816, 826-828.) SMayer testified that, although he did not remember the trades in the schedules,(34) he never prearranged a trade, always traded by open outcry, and never attempted a wash trade with his brother; that all of his trades involved risk; and that he had never executed a trade outside the pit. (Tr. at 816.)
To show that SMayer had bucketed trades (the Schedules C and D trades), the Division presented Earl Carlile, CFTC Futures Trading Specialist, who introduced charts depicting bucketing of customer orders by SMayer for trade sequences found in Schedule C. (Tr. at 146-157.) One of Carlile's charts (Gov. Ex. 601) shows that SMayer executed 56 transactions at a price not reflected in the NYMEX Time and Sales Report. (Tr. at 151-152.) James Morrissey, Director of the Trade Practice Unit of NYMEX's Compliance Department, testified that, even though the Time and Sales Report does not record every trade, the compliance department, NYMEX members, and customers rely on it and therefore it is in the broker's interest to make sure that prices are posted. (Tr. at 60-62.) To demonstrate audit trail irregularities in SMayer's trading, Carlile created a chart of changes in pit card entries showing 14 trade sequences in which there was a change in quantity, three trade sequences in which there was a change in the opposite broker, 14 trade sequences in which there was a change in price, and four trade sequences for which there was another kind of change. (Tr. at 154-155, Gov. Ex. 602.) One chart shows that 15 trades in Schedule C were trades executed before the close, but processed and time-stamped during the close. (Tr. at 55, 155-157, Gov. Ex. 603.)
As additional evidence of bucketing by SMayer, Michael Burns testified that he worked for SHB as a floor broker trading crude oil, heating oil, and gasoline from June 1988 through June 1989. (Tr. at 208-209.) Burns testified that he was instructed by SMayer to inform him about large orders prior to executing them, a request with which he complied on an "as could" basis. (Tr. at 212-215.) Burns stated that, when so informed, SMayer would ask Burns if he needed help filling the order, instructed Burns to fill the order, or took the order to fill himself. (Tr. at 217.)(35)
In response to Burns's testimony, SMayer claimed that he had asked Burns to show him large orders because Burns was not a good trader and because SHB was responsible for Burns's mistakes. (Tr. at 829.) Thus, SMayer explained, he provided guidance or executed certain orders himself. (Id.) SMayer denied that he ever took advantage of a customer order based on information received in this manner. (Id.) SMayer asserted that he usually gave his customers a better price than he gave himself. (Tr. at 831.) SMayer declared that it was company policy not to trade against customer accounts. (Tr. at 888.)
The Division tried to show that Gelbstein had a motive to accommodate SMayer based upon their close relationship. Mazel testified that Gelbstein was a friend of the family. (Tr. at 381.) Hammerman stated that she considered Gelbstein to be like her own child. (Tr. at 404.) Additionally, Hammerman acknowledged signing a membership guarantee for Gelbstein. (Tr. at 403-404.) Eis testified that bookkeeping entries show that money went from MCC to Gelbstein's account. (Tr. at 452.)
Gelbstein explained that on several occasions he had loaned money to SMayer, but that he did not write checks for the loans, there were no written agreements or other documents reflecting the loans, and the transfers between his account and the Mayer accounts reflect loans and repayments. (Tr. at 959-965, 1012-1013, 1019.) Gelbstein could not explain entries in ledgers, but did state that sometimes payments (for the NYMEX seat he leased to SHB) were made by check and sometimes by crediting his account.(36) (Tr. at 1013-1017.)
Gelbstein admitted that he had shared opinions with SMayer and others in the pit regarding market movements but denied that they discussed specific positions. (Tr. at 965-966, 990-991.) Gelbstein stated that he stood next to SMayer in the pit and acknowledged that, when his clerk was out, he sometimes used SMayer's clerk. (Tr. at 967, 993-994.) Gelbstein contended that he traded against SMayer because they did not always agree as to where the market was going. (Tr. at 976.) Gelbstein testified that he knew SMayer was a dual trader and that he saw clerks give things to SMayer which could have been orders. (Tr. at 968.) While claiming that he did not know whether SMayer was trading for himself or a customer, Gelbstein contended that he could make an educated guess, but that he was wrong half the time. (Tr. at 968-970, 984, 986.) Gelbstein added that while he saw SMayer receive customer orders he did not know precisely which trades were for customers nor did he know whether they were market orders, orders at a price not trading at that point in time, spread trades, outright trades, for immediate execution or to be executed later in the day. (Tr. at 984-986, 1020.)
Gelbstein claimed that he had no specific recollection of the trades with which he was charged and that he always traded by open outcry.(37) (Tr. at 979-980.) Gelbstein, like the Mayers, responded to the testimony of the accommodators by giving examples of legitimate reasons as to why he would have made a flat market.(38) (Tr. at 973-976.) Gelbstein claimed that there was no understanding between himself and anyone opposite whom he traded; he always intended to effectuate a bona fide trade. (Tr. at 981.) Gelbstein testified that he never saw accommodation trading and that he never accommodated anyone. (Tr. at 1018, 1023-1024)
4. Initial Decision
On May 15, 1996, the ALJ issued an initial decision finding respondents liable on 22 of the 23 counts alleged in the complaint. In re Mayer, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,736 (CFTC May 15, 1996).
a. Alleged Recordkeeping and Supervisory Violations
The ALJ found that SMayer, BMayer, SHB, MCC, and Gelbstein were required to keep their trading cards or similar records(39) for a five-year period pursuant to Section 4g(1) of the Act and Commission Rules 1.31(a), 1.35(a), and 1.35(d). The ALJ held that SMayer and BMayer were liable for violations of Section 4g(1) of the Act and that SMayer, BMayer, and Gelbstein were liable for violations of Commission Rules 1.31(a) and 1.35(d).(40)
The ALJ found that SHB failed to retain its floor order tickets for 27 trades for a five-year period as required by Section 4g(1) of the Act and Commission Rules 1.31(a), 1.35(a), and 1.35(a-1) and that SHB and SMayer were liable under Section 4g(1) of the Act. The ALJ also found that SHB and SMayer were liable for failing properly to time-stamp floor order tickets for 35 trades outlined in Schedule E in violation of Section 4g(1) of the Act.(41) The ALJ held that SMayer was liable for SHB's violations as a controlling person pursuant to Section 13(b) of the Act. The ALJ also concluded that, because SHB and SMayer failed to ensure the proper time-stamping and retention of all relevant floor order tickets, SHB and SMayer individually had failed to supervise diligently the handling of all SHB commodity accounts and other activities of SHB's partners, officers, employees, and agents in violation of Commission Rule 166.3.
b. Schedule A Trades
Turning to the alleged trade practice violations, the ALJ first addressed the control and ownership of SHB and MCC. With respect to SHB, the ALJ found that SMayer, a one-third owner, president, and CEO of SHB, directed SHB's trading activities and derived financial benefits from the trading of the firm's house account as indicated on his personal tax returns. The ALJ also found that BMayer, a one-third owner and vice-president of SHB, derived financial benefits from SHB's trading activities. The ALJ concluded that both SMayer and BMayer had discretionary trading authority over SHB's house account, had executed commodity transactions on the NYMEX for the SHB house account, and had acted as agents or employees of SHB in executing customer orders. The ALJ also found that BMayer owned or controlled the SHB customer account of one of the MCC pension plans.
With respect to MCC, the ALJ found that SMayer, president of MCC, directed the trading for the MCC house account and that BMayer, vice-president of MCC, occasionally traded for the MCC house account. The ALJ found that both SMayer and BMayer had a financial stake in MCC's trading activities and derived direct or indirect financial benefits from the trading of the MCC house account.
Based on these findings, the ALJ determined that SMayer and BMayer each had control of and a financial stake in both sides of the Schedule A trades. He decided that respondents knew that, when they traded the SHB and MCC house accounts, they were, in effect, buying and selling to themselves and that there was no bona fide change in positions.(42) The ALJ held that the spread and outright trades between the SHB house account and the MCC house account as well as between the SHB customer account of an MCC pension plan and the MCC house account represented transactions in which SMayer and BMayer knowingly engaged in wash sales, fictitious sales, and noncompetitive trades, causing the reporting of prices which were not bona fide.(43) Therefore, the ALJ concluded that SMayer and BMayer violated Sections 4c(a)(A) and 4c(a)(B) of the Act and Commission Rule 1.38(a) and that SHB and MCC were liable as principals for each of the Schedule A trades pursuant to Commission Rule 1.2.
c. Schedule B Trades
The ALJ found credible Helfer's and Mekertichian's testimony that accommodation trading was "rampant" on the NYMEX floor and that they had accommodated SMayer. However, the ALJ found that Gelbstein did not provide credible testimony about his knowledge of accommodation trading in the pit. Based upon Helfer's and Mekertichian's testimony, the pattern of trading found in Schedule B, and the absence of required audit trail records, the ALJ concluded that SMayer engaged in wash sales, fictitious sales, and noncompetitive trades and caused the reporting of non-bona fide prices and that, for the three trades with which he was charged, Gelbstein accommodated SMayer and engaged in wash sales, fictitious sales and noncompetitive trading and caused the reporting of non-bona fide prices in these trades. Therefore, the ALJ held that SMayer and Gelbstein violated Sections 4c(a)(A)and 4c(a)(B) of the Act and Commission Rule 1.38(a) and that SHB and MCC were liable as principals for each of the Schedule B trades pursuant to Commission Rule 1.2.
d. Schedules C and D Trades
The ALJ concluded that 67 of the Schedule C trades between SMayer and Gelbstein involved a distinctive pattern of buying and selling the same commodity at or about the same time, at the same price and opposite the same broker and were therefore accommodation trades.(44) The ALJ also found such a pattern for those trades in which the quantity or price differed slightly and for the remaining 102 Schedule C trades which occurred between SMayer and other floor brokers or traders who were not respondents in this proceeding. The ALJ determined that in trade C-116, SMayer indirectly sold to his own customer at a price notably higher than the reported market price in the Time and Sales Report and credited Morrissey's testimony that this type of transaction constitutes "suspicious trading." Id. at 44,052-44,053. Since both SMayer and Gelbstein failed to retain the required trading records which could clarify the order of these trade executions, the ALJ found that SMayer, trading for a Mayer family account, first executed a sale to Gelbstein and that Gelbstein immediately sold the same commodity at the same price back to SMayer, who was then trading for a Mayer family account. The ALJ also concluded that in Trade C-54, SMayer sold to his own customer at a higher price than the reported market price in the Time and Sales Report. The ALJ found that the distinctive trading pattern coupled with the defendants' decision not to retain the required trading records established by a preponderance of the evidence that SMayer, aided by Gelbstein and various other accommodators, engaged in noncompetitive trading in order indirectly to bucket SMayer's customer orders.
The ALJ found that, for 24 of the trade sequences in Schedule D, SMayer, accommodated by Gelbstein, arranged to trade an MCC account opposite an SHB customer order. Based on the distinctive trading pattern, SMayer's and Gelbstein's side by side positions in the ring, and SMayer's and Gelbstein's failure to retain records of these trades, the ALJ concluded that a preponderance of the evidence showed that SMayer, accommodated by Gelbstein, arranged indirectly to bucket SHB customer orders. For the remaining four Schedule D trade sequences, the ALJ concluded that BMayer, trading for an SHB customer, first executed a sale to Gelbstein and that Gelbstein immediately sold the same commodity at the same price back to SMayer, who was trading for the MCC house account. The ALJ found that SMayer, accommodated by Gelbstein, indirectly bucketed SHB customer orders in these trades.
The ALJ held that each of the Schedules C and D trades represented a wash sale, fictitious sale, and noncompetitive trade and caused the reporting of prices that were not bona fide. Therefore, the ALJ found that SMayer and Gelbstein violated Sections 4c(a)(A) and 4c(a)(B) of the Act and Commission Rule 1.38(a). In addition, the ALJ concluded that SMayer violated Sections 4b(A) and 4b(D) of the Act. The ALJ also concluded that SHB and MCC were liable for each of SMayer's violations in the Schedules C and D trades pursuant to Section 2(a)(1)(A) of the Act and Commission Rule 1.2.
After criticizing the exchange for its "archaic trading methods," insufficient supervision and lax enforcement by exchange officials, and dual trading, the ALJ imposed various sanctions. Mayer, ¶ 26,736 at 44,058. The ALJ: (1) ordered SMayer, BMayer, SHB, MCC, and Gelbstein to cease and desist from violating the Act and Commission Regulations; (2) revoked the registrations of SMayer, BMayer, and SHB; (3) imposed a five-year trading ban on SMayer, BMayer, and SHB, and a 30-day trading ban on Gelbstein; and (4) assessed civil monetary penalties of $200,000 upon SMayer, $100,000 each upon BMayer, SHB, and MCC, and $25,000 upon Gelbstein.
1. Appeal by the Mayers
On August 15, 1996, SMayer, BMayer, SHB, and MCC ("the Mayers") filed a joint appeal from the ALJ's initial decision and requested oral argument before the Commission.(45) The Mayers seek: (1) reversal of the initial decision; and (2) dismissal of the complaint or a new hearing. Alternatively, they seek a reduction in the sanctions against them. The Mayers assert that the ALJ's decision was based upon occasional coincidences in timing and trading among the respondents; the testimony of four collaborators; family relationships and friendships among respondents; and the ALJ's perception that the exchanges were not enforcing rules requiring maintenance of records.
Generally, respondents charge that the ALJ assumed illegality and impermissibly shifted the burden to respondents to prove their innocence. The Mayers contend that the ALJ's bias and prejudice against the exchanges' audit trail systems affected his decision. The Mayers argue that the ALJ unreasonably drew negative inferences from the fact that they did not retain their trading cards. The Mayers assert that the Division did not show that respondents committed trade practice violations. The Mayers contend that all of the trades were made with the intent to take a bona fide position in the market which exposed them to risk. Respondents further argue that because witnesses testified to accommodating SMayer pursuant to settlement agreements their credibility is undermined.(46)
With respect to the Schedule A trades, the Mayers challenge the Division's characterization of control and ownership of the accounts and contend that there is no evidence that these are wash trades. They assert that the Division did not show that the execution prices were not bona fide or that SMayer and BMayer engaged in non-competitive trading. SMayer and BMayer claim that they exercised an "unusual degree of caution" by executing these trades as if they were cross trades pursuant to NYMEX Rule 6.40 showing that the trades were competitively traded.
The Mayers argue that the Division did not establish a pattern to support the ALJ's finding of illegal trading for the Schedules B, C, and D trades. With respect to the Schedule B trades, they claim that the Division did not present any analysis (other than the pattern set forth in the schedules) demonstrating any violations. The Mayers contend that the Division selected a small number of trades in comparison to the volume of trading done by SMayer. With respect to the Schedules C and D trades, the Mayers assert that the Division did not allege that they had executed trades to their advantage at the expense of their customers. Therefore, the Mayers argue that the ALJ's sua sponte analysis of the Schedule C trades, finding that they had cheated and defrauded their customers, denied respondents due process. Moreover, the Mayers contend that, had the ALJ applied the appropriate analysis, it would have been clear that all three trades analyzed by the ALJ (Trades C-116, C-53, and C-54) were spread trades and were executed at a price better than the customer's order. Instead of reviewing only one side of the spread to determine whether the trade was within the market price range, the Mayers assert that the ALJ should have determined (1) the spread price chosen by the customer; (2) whether the spread price complied with the order; and (3) that the prices of both sides of the spread trade conformed with NYMEX Rule 6.08A.(47)
The Mayers contend that the Division did not provide any analysis of the Schedule D trades but relied on SMayer's failure to produce his trading cards. They argue that the Division "hand-picked" 28 of hundreds of thousands of trades executed by SMayer during the relevant time period. The Mayers also argue that the Division should have submitted into evidence and the ALJ should have reviewed the unredacted pages of both the NYMEX streetbook and the Time and Sales Reports for each trade so that the prices could be properly analyzed. The Mayers claim that their defense was substantially impaired and their due process rights were violated when their requests to subpoena unredacted pages from the NYMEX streetbook were denied.
Last, the Mayers assert that the sanctions imposed by the ALJ are excessive, unfair, and inconsistent with Commission precedent. The Mayers argue that their suspensions are not rationally related to the number of alleged trading violations when compared to their total number of executed trades. Respondents claim that they do not pose a substantial risk to the public because: the alleged violations against SMayer occurred six to eight years ago and there is no evidence that he has engaged in similar conduct since then; the alleged violations against BMayer did not involve customer trades; and SHB stopped clearing floor brokers' orders two years ago and now only clears trades for local floor traders and accepts orders from some public customers. They also contend that the monetary penalties should correlate with the financial benefit accrued to them or with the losses suffered by their customers and that the Division did not present any evidence on this issue.
2. Gelbstein's Appeal
On August 15, 1996, Gelbstein filed an appeal from the ALJ's initial decision and requested oral argument before the Commission. Gelbstein seeks reversal of the initial decision and dismissal of the complaint.
Gelbstein argues that the Division did not make a prima facie case establishing that he violated the Act and the Commission's Regulations because it did not offer any testimony or evidence of his trading violations.(48) Gelbstein claims that each of his trades was executed competitively and by open outcry.
Even assuming a prima facie case, Gelbstein contends, the Division did not prove its case against him by a preponderance of the evidence. Gelbstein asserts that the Division of Trading and Markets knew NYMEX did not require trading cards to be kept by traders in the time period at issue. Gelbstein contends that he did not believe that he was required to maintain his trading cards since he did not execute customer orders. Gelbstein maintains that neither his relationship with SMayer nor alleged accommodation trading at NYMEX is sufficient to infer his knowing participation in any violative conduct. Gelbstein contends that the Division did not present any analysis of the 102 trade sequences that involved him and that more than 75 percent of the challenged transactions did not conform to the alleged trading pattern.
Finally, Gelbstein asserts that, without proof of violations, sanctions should not have been imposed. He also contends that sanctions are inappropriate since eight years have passed since the alleged violations occurred, his primary livelihood is as a floor trader, and there were no prior or subsequent allegations of violations against him during his 20-year trading career.
3. The Division's Reply
In its answering brief, the Division argues that the record supports the ALJ's findings of fact and conclusions of law.
The Division asserts that respondents' allegations of ALJ bias lack merit because none of the alleged examples of bias establishes "the appearance of an unfavorable disposition" or stems from an extrajudicial source. (DBr. at 51.) The Division argues that the ALJ's refusal to issue a subpoena for certain unredacted streetbook pages did not deprive respondents of a fair hearing because it would only impose an unduly burdensome demand on the exchange to produce hundreds of "irrelevant" pages. (Id. at 46.)(49) The Division submits that the ALJ reasonably drew adverse inferences from respondents' failure to retain records.
With regard to the Schedule A trades, the Division contends that the record shows that SMayer and BMayer engaged in wash sales or fictitious sales by executing trades in which they both had financial interests on both sides of the trade. The Division also argues that the evidentiary record supports the ALJ's findings of culpability with respect to the participation of SMayer, SHB, MCC and Gelbstein in the Schedule B trades. (DBr. at 24-26.) The Division points to the testimony of three individuals--each of whom admitted to engaging in accommodation trading with SMayer--as sufficient evidence in support of the ALJ's findings of liability. The Division urges that the Commission follow its normal policy of deference to the ALJ's findings with respect to credibility. (Id. at 25-26.)
With regard to the trades in Schedules C and D, the Division maintains that it proved that SMayer used accommodating brokers to bucket or indirectly to trade opposite SHB customer orders and that Gelbstein acted as an accommodating trader. Noting the "scores of transactions" that create a "suspicious trading pattern," the Division maintains that "[p]rearrangement can . . . be inferred" and that "open outcry cannot sanitize otherwise collusive trading." (Id. at 29-32.) The Division points to (1) the pattern of trading which allowed SMayer indirectly to sell to his own customer at a price notably higher than the reported market price; (2) the existence of audit trail irregularities; and (3) the corroborating testimony of three brokers that SMayer sought accommodation trades. The Division contends that the evidence of extensive audit trail irregularities is "indicative both of noncompetitive trading and a respondent's knowing participation in such trading." (Id. at 34.) The Division urges that the imposed sanctions be affirmed.
With respect to issues of credibility, as referenced below, we have deferred to the findings of the ALJ. (See, e.g., note 63 infra.) In addressing the other issues raised by the respondents, we have reviewed the record de novo and have made our own findings.(50)
1. Procedural Challenges
a. The Alleged Bias of the ALJ
The ALJ began the discussion section of his initial decision with the following remarks:
Testimony during the trial of this matter suggests that many floor members have, on occasion, engaged in accommodation, wash, and fictitious trading. Dual trading provides a broker with an opportunity, albeit unlawful, to profit at the expense of an unknown customer, and the archaic trading methods employed on the floor makes (sic) it extremely difficult to detect such abuses. In sum, the inducement to violate the law is great and the risk of detection slight. It is no surprise that floor brokers of ordinary rectitude might fail to observe the letter and the spirit of the law in connection with the handling of customer orders, and that traders with equal rectitude might accommodate a broker in such an endeavor. Short of a ban on dual trading, more supervision by exchange officials and rigorous enforcement of exchange record keeping rules would do much to discourage bucketing of customer orders. Dual trading, in the opinion of this Court, mocks the notion of an open and competitive market, and virtually invites the abuses charged and proven in the case at hand.
Mayer, ¶ 26,736 at 44,058. The Mayers charge that this language reveals the ALJ's predisposition to find them guilty of violating the trading rules.
Additionally, the Mayers point to several media interviews given by the ALJ prior to the hearing. According to the Mayers, the ALJ was quoted in various media as making the following separate statements:
The exchanges are not prohibiting the failure to maintain records.
* * *
Why don't we go after the exchange and clean up this act, instead of going after three or four traders out of 3,000.
* * *
[Audit trail irregularities] . . . lead you to the conclusion that there was bucketing. And if (the CME) enforces their (sic) own rules, we wouldn't have this. But, by not enforcing their own rules, they're making a ton of money.
(MBr. at 68-70.)(51)
The Mayers also cite to the ALJ's statements in In re Reddy, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,544 at 43,387 (ALJ Nov. 2, 1995), wherein he remarked about the advantages of technological trading and allegedly implied that the exchanges are aiding and abetting trading abuses committed by their members. (MBr. 68.) For example:
Exchange officials and members are, in the view of the Court, aware that practices such as those alleged and proven in this case occur with some regularity. These practices will not end until the exchanges, voluntarily or otherwise, bring them to a halt.
Reddy, ¶ 26,544 at 43,429.
The Mayers contend that these remarks taken together demonstrate that the ALJ was biased against them to a degree that violated their due process rights. They characterize his statements as "articulat[ing] a personal bias and deepseated (sic) antagonism about the credibility of contract markets, exchanges, and their members, which make it evident that the Court was unfavorably predisposed towards the Respondents in this case." (MBr. at 69.)
Generally, in examining allegations of bias we apply Commission Rule 10.8(b)(2), 17 C.F.R. § 10.8(b)(2) (1997),(52) which we have interpreted to require disqualification if the record establishes that a presiding officer has: (1) a personal bias stemming from an extrajudicial source; or (2) a deep-seated favoritism or antagonism that would make a fair judgment impossible.(53) See also In re Shahrokh Nikkhah, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,635 at 43,670 (CFTC Mar. 1, 1996).
Bias, at a minimum, reflects an unfavorable disposition toward a party or his case. Liteky v. United States, 114 S. Ct. 1147, 1155 (1994). In addition, the party seeking disqualification must show that the unfavorable disposition is wrongful or inappropriate "either because it is undeserved, or because it rests upon knowledge that the subject ought not to possess . . . or because it is excessive in degree . . . ." Id. Put more succinctly, "'[d]isinterestedness does not mean child-like innocence'." Id., quoting In re J.P. Linahan, Inc., 138 F.2d 650, 654 (2d Cir. 1943). On their face, the quoted remarks of the ALJ do not establish even the appearance of an unfavorable disposition toward the defendants.(54) The remarks simply suggest that the ALJ believes that the type of trade practice violations at issue in this case occur "with some regularity" and that there are shortcomings in the system for auditing open outcry trading on futures exchanges. Respondents' liability does not turn on the general frequency of trade practice violations or futures exchanges' purported lack of enthusiasm for technological innovation. The views reflected in the ALJ's decision do not establish that he did not assess the evidence properly in determining that respondents actually committed the specific wrongdoing alleged in the complaint. See In re Fisher, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,752 at 44,114 (July 22, 1996). Nor do the views expressed by the ALJ in Reddy evidence bias against the respondents in this case. Past writings in earlier decisions are not considered evidence of judicial bias and do not indicate preconceived notions as to the culpability of the respondents or sanctions imposed in this case. See Garver v. U.S., 846 F.2d 1029, 1031 (6th Cir. 1988). Views about law and policy formed on the basis of prior adjudications of similar issues do not presuppose that the decisionmaker has formed an opinion as to the factual issues, thereby disqualifying the decisionmaker from hearing the case before him or her. See Rombough v. Federal Aviation Administration, 594 F.2d 893, 900 (2d Cir. 1979).
The Mayers also allege that the ALJ's prejudice affected the conduct of the hearing. They argue that the ALJ prevented their counsel from asking Morrissey of the NYMEX Compliance Department whether he believed accommodation trading was prevalent on NYMEX from 1988 to 1989. (MBr. at 70 citing Tr. at 88.) The ALJ stated, "Well, Mr. Kaplan, take it from me, I think there have been one or two events at these various exchanges in cases I've heard in the past, so you don't have to ask him that question." (MBr. at 71 citing Tr. at 89.) The Mayers contend that these remarks reflect a presumption of wrongdoing and inappropriate predetermined opinions about exchanges and their members. However, the respondents can hardly complain that the ALJ accepted a fact that they were trying to prove through the curtailed testimony. The ALJ's attempt to expedite matters is not evidence of bias. Liteky, 114 S. Ct. at 1157 ("A judge's ordinary efforts at courtroom administration . . . remain immune."). Our examination of the hearing record reveals even-handed treatment of counsel and procedural and evidentiary rulings that were fair and balanced.
In his appeal, SMayer contends that the ALJ deprived him of adequate notice when the ALJ found sua sponte that SMayer traded for himself at prices that were better than his customers' price. Respondents also charge that the ALJ improperly used the Time and Sales report to arrive at the allegedly unfair price determination. Additionally, the Mayers contend that, when executing spread trades, the price differential is important in determining profit/loss and that the ALJ analyzed spreads as if they were outright trades. Furthermore, the Mayers have moved to reopen the record to receive additional evidence concerning the ALJ's finding that respondents executed trades at prices that were more advantageous to them than those received by their customers.
The Division responds that the ALJ's analysis is correct and opposes the motion to reopen. (DBr. at 38-43, Mem. in Opp.) It argues that the ALJ first isolated a suspicious pattern of trading and found additional evidence in the record to find SMayer's trades unlawful. (DBr. at 38-39, Mem. in Opp. at 2.) The Division asserts that there was scant evidence that the alleged bucketed trades were indeed spread trades and that supplemental evidence showing that these trades were "spread trades" should not alter the ALJ's finding that they should have been executed competitively.(55) (Id. at 8.)
As discussed more fully below, the calculation of financial loss to a customer is unnecessary to a finding that bucketing harms customers and the integrity of the market. Accordingly, we vacate the ALJ's findings concerning the preferential pricing. Respondents' motion to reopen the record is therefore denied.
Respondents applied to the ALJ for a subpoena duces tecum to obtain from NYMEX the unredacted versions of its streetbook for 59 trades.(56) The ALJ denied the subpoena three times, and the Commission denied interlocutory review twice.(57)
On appeal, respondents argue that the ALJ committed error in denying their application for a subpoena, thereby allegedly impairing their ability to present a defense and denying their right to due process. (MBr. at 56, GBr. at 23 n.17.) Respondents argue that the redacted pages, which reflect SMayer's trading and delete the trading by other NYMEX brokers, deprive them of exculpatory material that their expert, Schobel, could have used to determine "the level of activity of a particular broker and the quality of the fill the customer received" in comparison to similar transactions executed by other brokers. (MBr. at 57, 61.)
The Division argues that the ALJ did not abuse his discretion by denying the subpoena. Pointing to respondents' limited use of the unredacted streetbook pages which were supplied, the Division submits that the unredacted streetbook pages did not have to be produced because they are not relevant. (Div. Br. at 46.) Moreover, the Division argues that to require NYMEX to produce hundreds of pages of streetbook which are not relevant is unduly burdensome.
Under Commission Rule 10.68(a)(2), 17 C.F.R. § 10.68(a)(2) (1997), an application for a subpoena duces tecum must contain a "statement or showing of general relevance and reasonable scope of the evidence sought." Commission Rule 10.68(a)(3), 17 C.F.R. § 10.68(a)(3) (1997), states the standard for issuance of a subpoena duces tecum:
The Administrative Law Judge considering any application for a subpoena duces tecum shall issue the subpoena requested if he is satisfied the application complies with this section and the request is not unreasonable, oppressive, excessive in scope or unduly burdensome. No attempt shall be made to determine the admissibility of evidence in passing upon an application for a subpoena duces tecum and no detailed or burdensome showing shall be required as a condition to the issuance of any subpoena.
Unless the unredacted pages can be used to show that SMayer did not trade unlawfully, they are not relevant. The Mayers have not pointed to anything likely to appear in the unredacted streetbook that would refute the specific charges contained in the complaint. Moreover, the Mayers admit, in their Motion to Reopen Hearing to Receive Additional Evidence at 2, that the unredacted pages of the streetbook "had no direct relevance to the charges." Even if SMayer obtained favorable prices for his customers, if he did not submit his customers' orders to the market he bucketed them in violation of Section 4b(D). For the purpose of determining whether SMayer committed the violations, it is unimportant whether SMayer, directly or indirectly traded for himself at prices that were better or worse than his customers' prices. Accordingly, we do not find that the ALJ's refusal to issue a subpoena was error, and we deny the motion to reopen.
2. Substantive Challenges
a. The Recordkeeping Violations
Commission Rule 1.35(a) requires FCMs and members of contract markets to retain certain documents, i.e., records, data, memoranda, including trading cards and orders, which have been prepared in the course of their business. Further, Commission Rule 1.35(a-1) requires FCMs and members of contract markets to time-stamp a customer's order ticket to the nearest minute it was received and the time, to the nearest minute, it was transmitted for execution. Commission Rule 1.35(d) specifies that trading cards or similar records be made by members of contract markets and that this information be recorded thereon. Under Commission Rule 1.31 all books and records are to be kept for five years.
The ALJ found that respondents SHB, SMayer, BMayer, and Gelbstein failed to produce any trading cards or similar records for the years charged in the complaint. The ALJ also found: (1) that SHB violated Section 4g(1) of the Act and §§ 1.31(a) and 1.35(a-1) of the Commission's Regulations by failing to time-stamp floor order tickets and by failing to retain floor order tickets for the required period of time; (2) that SMayer was liable as a controlling person for SHB's violations pursuant to Section 13(b) of the Act; and (3) that SMayer was separately liable for failing to supervise SHB diligently in violation of Commission Rule 166.3. Mayer, ¶ 26,736 at 44,046-44,047.
The ALJ further concluded that the failure to retain trading cards for each trade was deliberate and constituted a significant audit trail irregularity, thus entitling him to draw adverse inferences from the absence of these fundamental records. Mayer, ¶ 26,736 at 44,047. It appears that the ALJ drew an adverse inference based upon the absence of the trading cards, in conjunction with SMayer's contradictory testimony. Mayer, ¶ 26,736 at 44,046. According to the ALJ, while SMayer had claimed during discovery that the unreliable nature of the transfer forms rendered him unable to answer some of the discovery requests, SMayer testified at the hearing that he discarded the trading cards because the transfer forms provided a record of the trades.(58) (Tr. at 44,046-44,047.)
i. The Trading Cards
Respondents assert that their failure to keep the trading cards was not a deliberate attempt to disguise violative trading. Rather, they claim that under NYMEX rules they were not required to keep the trading cards and that they discarded the cards after checking to make sure that the orders were properly recorded on the transfer forms.
Respondents argue that they were justified in their belief that it was unnecessary to retain the trading cards. They point to the testimony of the Division's witness Morrissey, who stated that the pit card identifies the "essential information that the Compliance Department relies on in reviewing the trading of the members." (MBr. at 79 citing Tr. at 40.) Respondents contend that NYMEX considered retention of trading cards to be a hindrance to audit trail efficiency. (MBr. at 79 citing "Request for Exemption from the Operation of Regulation 1.35(d) and for Delay in the Implementation of Rule 6.90 Pending Consideration Thereof" dated October 12, 1987; GBr. at 37.) Further, the Mayers assert that, while the Division of Trading and Markets suggested that NYMEX adopt a rule requiring the creation of trading cards, the Commission did not order NYMEX to do so. Finally, respondents assert that the Division's inability to produce trading cards of 20 non-respondent accommodating brokers in Schedule C who were not presented during the hearing is proof that the cards were not commonly kept. (MBr. at 40-41.) Consequently, respondents maintain that they believed that they did not need to keep the trading cards.
Respondents submit that their ability to produce trading cards for the period after NYMEX changed its rule to require their retention evidences their good faith.(59) The Mayers conclude that the ALJ had no reasonable basis for drawing adverse inferences from respondents' failure to keep the trading cards and "no basis for the inference that the [r]espondents destroyed these cards with the malicious, secretive motive that permeates the Court's analysis." (MBr. at 83.) Likewise, Gelbstein contends that he relied on the NYMEX rules in good faith and that any recordkeeping violations were unintentional and technical in nature. (GBr. at 38.)
* * *
There is no question that respondents violated per se the Commission's recordkeeping requirements. The Act and regulations are very clear that the records must be kept. Section 4g of the Act states that floor brokers must keep records as required by the Commission. Commission Rule 1.35(a) requires FCMs and members of contract markets to retain any documents, i.e., records, data, memoranda, including trading cards and orders, which have been prepared in the course of their business. Under Commission Rule 1.31, all books and records are to be kept for five years. Consequently, respondents were on notice that they were required to maintain their trading records. Moreover, NYMEX Rule 8.50(B), amended effective September 16, 1986, required its members to keep records in compliance with Commission regulations. The exemption (cited by respondents) for which NYMEX applied pertained to Commission Rule 1.35(d)--the requirement to create trading cards and the specific information to be included thereon. Because the Commission's staff declined to recommend the exemption to the Commission, no exemption from the rule was ever granted. Furthermore, there is no indication that respondents knew at the time that NYMEX had requested an exemption, nor is there any allegation or evidence that respondents failed to create trading cards. Rather, respondents were charged with failing to keep the trading cards that they had created.
SMayer failed to produce, at a minimum, 202 trading cards.(60) BMayer failed to produce at least 84 trading cards. Gelbstein failed to produce at least 65 trading cards. Accordingly, we find that each failure by SMayer, BMayer and SHB to produce a requested trading card constitutes a violation of Section 4g of the Act and Commission Rules 1.31 and 1.35(a) and that each failure of Gelbstein to produce records constitutes a violation of Commission Rule 1.31. However, we vacate the ALJ's finding that respondents violated Commission Rule 1.35(d), because the ALJ did not find, nor have we identified, any evidence that respondents failed to create trading cards or other records of the trades.
ii. The Floor Order Tickets
Floor order tickets provide time stamps which are useful in reconstructing and analyzing trades. Respondents do not challenge the ALJ's finding that SHB failed to time-stamp and retain floor order tickets. The record clearly establishes that SHB was unable to provide all of the requested tickets. The only explanation for SHB's failure is SMayer's testimony that SHB had a policy to retain floor order tickets and that, while most of the order tickets were provided, some were lost due to human error. (Tr. at 847.) Accordingly, we sustain the ALJ's findings that: (1) in 27 instances between June 29, 1987, and May 4, 1987, SHB failed to retain floor order tickets in violation of Section 4g(1) of the Act and Commission Rules 1.31(a) and 1.35(a-1); and (2) on 35 occasions between June 12, 1988 and November 1, 1988, SHB violated Section 4g(1) of the Act by failing to time-stamp order tickets. In view of the numerous violations for which SMayer is directly liable, we find it unnecessary to consider his liability for SHB's failure to maintain records.
3. Trade Practice Violations
"[T]he central characteristic" of fictitious trades is the "use of trading techniques that give the appearance of submitting trades to the open market while negating" risk and price competition. In re Collins, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,982 at 31,902 (CFTC Apr. 4, 1986) clarified, ¶ 23,401 (Nov. 26, 1986), rev'd on other grounds sub nom., Stoller v. CFTC, 834 F.2d 262 (2d Cir. 1987). Wash trades and accommodation trades are forms of fictitious trades. (See note 12 supra.) In a wash sale, the trader effectively buys from and sells to himself so that there is no change in financial position. Collins, ¶ 22,982 at 31,902. The price of the orders is of little consequence. Id. The intentional creation of a nullity is not deemed a bona fide transaction "even when the trader's facially independent purchase and sale are executed by open and competitive outcry." In re Bear Stearns & Co., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,994 at 37,663 (CFTC Jan. 25, 1991).
The schedules attached to the complaint depict a pattern of trading between various entities owned and controlled by SMayer and BMayer. The accounts ("Mayer family accounts") include SHB and MCC house accounts, two MCC pension accounts, the personal accounts of SMayer and Sarah Mayer Hammerman, and a joint account of SMayer and BMayer. The distinctions between the financial interests of the Mayer family entities appear to be largely illusory. While he denied being a part owner of MCC, SMayer reported capital gains from MCC in an amount equal to that of his mother, the only avowed owner. Consequently, we conclude that SMayer owned half of MCC. SMayer and BMayer together owned two-thirds of SHB.(61) SMayer admitted that he had a financial interest in both accounts. SMayer controlled the trading at MCC. Both SMayer and BMayer traded the SHB account. SMayer managed and controlled the operations of SHB. Funds were transferred between the two entities without documentation of any underlying obligation, and witnesses were unable to explain the reasons for various transfers. Additionally, all family members had authority to withdraw funds from the accounts at their own discretion.
Because the accounts had a common ownership, a losing trade in one account was offset by a winning trade in the other account. Since the Mayers had a financial stake in both sides of the trades, we conclude that there could not have been a change in the overall financial position of the Mayers. Accordingly, we find that the transactions listed in the Schedules between Mayer accounts were wash trades.
i. The Schedule A Trades(62)
In addition to the wash character of the trades, the trading activity between the Mayer brothers bears additional indicia of fictitious trading. BMayer traded primarily in the platinum/palladium pit. SMayer traded primarily in the heating oil pit. Every so often, during 1987-1989, BMayer walked out of the platinum/palladium pit into the heating oil pit, executed a trade, and went back to the palladium pit. In the years 1987-1989, 30 percent of the transactions that BMayer executed in the heating oil pit, constituting 64 percent of his heating oil contracts, were with his brother SMayer. Further, while there is no prohibition against two brothers trading with each other, the brothers asked an exchange official to sign the pit card attesting to open outcry. The brothers state that they followed the cross trading procedure (see note 10 supra) and obtained the signature because they "wanted everything to be above board." (MBr. at 46 citing Tr. at 820.) Since the certification procedure they followed is used only when a broker trades two of his own customer orders and two customer orders were not being traded, the brothers were misusing the procedure. Consequently, we believe that the attestation to open outcry, rather than helping the Mayers' cause, raises further questions as to why they went out of their way to ensure that there was a witness to the open outcry.
SMayer managed both SHB and MCC and reviewed daily the daily trade register listing every transaction in the SHB account which traded opposite the MCC account. SMayer testified that he knew when he traded opposite BMayer that they both could have been trading accounts that belonged to the Mayer family. (Tr. at 944-945.) They carpooled into work together each morning. SMayer was in the heating oil pit daily and tracked the trading in all energy pits. BMayer traded primarily in the platinum and palladium pit and entered the heating oil pit only rarely. Sometimes BMayer was in the heating oil pit only long enough to execute a single trade. The streetbook shows that, on more than one occasion, BMayer executed two trades in both pits during the same minute. SMayer testified that traders in one energy pit must actively keep abreast of the prices in other energy pits because there is an economic relationship between the prices. Yet BMayer testified that he traded the SHB account "arbitrarily." Under those circumstances and given their joint financial interests in the accounts, it strains credulity to assume that the brothers traded independently. Further, we note the testimony of the accommodators who stated that they executed accommodation trades with the Mayers through open outcry. We conclude that the weight of the evidence demonstrates that SMayer and BMayer prearranged trades using a cooperative strategy.
Prearrangement is one of the more common forms of fictitious sales forbidden by Section 4c(a)(A) and is also a form of anticompetitive trading that violates Commission Rule 1.38. The transaction may appear to be the result of open outcry but negates both the risk and price competition incident to an open outcry market because it is in reality a private transaction arranged outside the trading pit. Collins, ¶ 22,982 at 31,903; In re Gimbel, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,213 at 35,003 (CFTC Apr. 14, 1988). When a prearranged transaction in the pit is structured to produce a wash result, it is both a fictitious sale and a wash sale under Section 4c(a)(A) of the Act. We conclude that BMayer and SMayer prearranged the 113 trade sequences of wash transactions found in Schedule A in violation of Section 4c(a)(A) of the Act. Accordingly, we find that: (1) BMayer committed 113 violations of Section 4c(a)(A) of the Act and Commission Rule 1.38 by entering into 113 prearranged wash transactions; (2) SMayer committed 113 violations of Section 4c(a)(A) of the Act and Commission Rule 1.38 by entering into 113 prearranged wash transactions; and (3) since BMayer and SMayer were acting within the scope of their employment, SHB and MCC are liable for 113 violations of Section 4c(a)(A) of the Act and Commission Rule 1.38 pursuant to Section 2(a)(1)(A(iii) of the Act and Commission Rule 1.2.
ii. The Schedule B Trades
In addition to the wash nature of the trades between the Mayer family accounts, there is both direct and indirect evidence that the trading activity underlying the sequences listed in Schedule B had the character of a wash sale. Schedule B depicts 16 trade sequences in which there is one trade between one of the Mayer family accounts and an account owned or controlled by another individual and then a trade a short time later at the same or similar price with the same individual (in two transactions, there are two individuals involved in between) and one of the Mayer family accounts. SMayer executed these trades with various accommodators.
In appropriate circumstances a pattern marked by characteristics unlikely to occur in an open and competitive market is indicative of noncompetitive trading. In re Rousso, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,133 at 45,308 (CFTC July 29, 1997) citing In re Buckwalter, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,995 at 37,682-37,683 (CFTC Jan. 25, 1991), and Bear Stearns, ¶ 24,994 at 37,663. "Moreover, the existence of such a pattern permits the inference that the trades that form the pattern were intentionally achieved by noncompetitive means." In re Rousso, ¶ 27,133 at 45,308 citing Collins, ¶ 22,982 at 31,900 n.16 and Gimbel, ¶ 24,213 at 35,003 n.6. The NYMEX streetbook indicates that SMayer repeatedly traded, for the Mayer family accounts, the opposite sides of the same or similar quantity of the same commodity at the same price with the same individuals within very short time intervals. This pattern strongly supports the inference that the trades were noncompetitive.
Further, several of the individuals who traded opposite SMayer in these trades testified that they had accommodated SMayer and that the trades had no economic purpose. Helfer specifically described three of the transactions in his testimony.(63) This testimony supports the inference that the pattern set forth in the trade sequences was intentionally achieved by accommodation trading.
Gelbstein participated in three of the Schedule B trade sequences, B-9, B-14, B-15. There is no discernible difference between the transactions executed by Gelbstein and those executed by the witnesses. In all three trade sequences, Gelbstein sold heating oil to SMayer who acted on behalf of one of the Mayer family accounts and, either in the same minute or one minute later, purchased the same quantity at the same price from SMayer acting on behalf of another Mayer family account.(64) We therefore find unpersuasive Gelbstein's assertion that there is no pattern of improper trading (GBr. at 30-31) and that his trades are consistent with an inference that he was merely scalping or engaging in spread trades (GBr. at 46-47, 49 & n.46).
Consequently, we affirm the ALJ's finding that all 16 of the trade sequences listed in Schedule B show SMayer participating in wash trades with an accommodator. We find that: (1) SMayer committed 16 violations of Section 4c(a)(A) of the Act by entering into 16 wash sale transactions; (2) Gelbstein accommodated SMayer in three wash sale transactions and thereby committed three violations of Section 4c(a)(A); and (3) since SMayer was acting within the scope of his employment, SHB and MCC are liable for 16 violations of Section 4c(a)(A) of the Act pursuant to Section 2(a)(1)(A(iii) of the Act and Commission Rule 1.2.
iii. Schedules C and D Trades
Schedule C lists trade sequences showing Gelbstein and others trading with SMayer, who was acting as a broker trading a customer account, and within a short time frame thereafter, trading the same commodity at the same or similar price with SMayer who was then trading one of the Mayer family accounts. The Schedule D trade sequences depict Gelbstein as buying and selling the same commodity at the same or similar price within a short time frame between trades executed by either SMayer or another SHB broker (including four by BMayer) on behalf of a customer account and then on behalf of one of the Mayer family accounts.(65)
In the complaint, Schedule C contained 174 alleged bucketed and fictitious trade sequences by SMayer. The Division filed a corrected complaint on March 15, 1994, and reduced the number of alleged illegal trade sequences to 172. With the Division's agreement, the ALJ dropped trades 151 and 170 from the list. Thus, 170 trade sequences were alleged to be bucketed. In his initial decision, the ALJ found that 67 of the listed trades were bucketed by SMayer aided by Gelbstein and that SMayer bucketed 102 listed trades with the aid of brokers and traders not respondents in this proceeding in violation of Section 4b(D) of the Act.(66) The ALJ also found that SMayer knowingly engaged in the 28 trade sequences listed in Schedule D which resulted in the bucketing of SHB customers' orders in violation of Section 4b(D) of the Act. Based on these findings, the ALJ decided that SMayer had cheated and defrauded his customers in violation of Section 4b(A) of the Act.
Respondents and their expert argue that the pattern identified by the Division is consistent with scalping. In their testimony, they gave several examples of legitimate flat trading which can be attributed to scalping or other legitimate purposes. Although these examples explain why a broker or trader may publish a flat trade, they do not explain why another trader would agree to both sides of the flat trade. Generally,
when a broker or trader legitimately publishes a flat market, it would be expected that each side of the flat trade would be executed with different traders. Here, in trade after trade, both sides of the flat market were executed with the same trader. Respondents' examples do not explain why these flat trades, with no apparent economic purpose, happened so often with the same individuals.
SMayer denies bucketing customer orders, apparently relying on the argument that if his customers received a competitive market price the orders were not bucketed. (MBr. at 26.) The Mayers contend that the ALJ concluded that the customers were harmed because the ALJ mistakenly analyzed the trades as if they were outrights rather than spreads and that, had he examined the trades properly as spreads, he would have found that the customers received good prices. Bucketing consists of a broker's trading opposite his or her own customer's order without open and competitive execution. The price the customer received is irrelevant to a determination of whether SMayer bucketed SHB customer orders. SMayer's attempt to argue that the trades were spreads is unavailing. If SMayer traded against his customer noncompetitively, it does not matter whether the trade was outright or spread.(67) It is still illegal. The evidence clearly indicates that SMayer executed SHB customer orders against Mayer family accounts by using Gelbstein and others to execute wash trades between SHB's customers and Mayer family accounts. Consequently, we find that SMayer bucketed these customer orders in violation of Section 4b(D) of the Act.
Furthermore, SMayer breached his fiduciary duty by not submitting orders to the pit and pursuing the best price possible. "Failure to pursue the best price possible can, without more, constitute fraud regardless of whether the customer is harmed financially." In re Rousso, ¶ 27,133 at 45,310 citing U.S. v. Ashman, 979 F.2d 469, 477-478 (7th Cir. 1992), cert. denied, 510 U.S. 814 (1993) (finding failure to submit customers' orders to the marketplace deprives them of economic opportunity and constitutes fraud). Consequently, we find that SMayer cheated and defrauded his customers in violation of Section 4b(A) of the Act.
As an accommodator, Gelbstein facilitated SMayer's bucketing of trades by executing wash trades between the Mayer family accounts and SHB customers. Gelbstein makes several arguments with respect to the lack of a definitive pattern. (GBr. at 46 nn.36-37, attempting to refute the C and D trades the ALJ discussed in his initial decision). Specifically, Gelbstein states that "75% of the cited trades involving Gelbstein do not fit within [the pattern]," asserting that there are "slight deviations" in the price and/or quantity involved in some of the trade sequences, and that many trades were not executed simultaneously.(68) (GBr. at 30, 47.) However, de minimis differences in price, time, and quantity do not change the substantive nature of the wash trades evident in the schedules.
Gelbstein also contends that the Division did not prove his knowing participation in the illegal trades. To determine whether participation was willful, we look for factors that are relevant to a facilitating respondent's knowledge of wrongdoing at the time he participated in a challenged trade and are independently significant. Bear Stearns, ¶ 24,994 at 37,665. Gelbstein was at the center of the bucketed trades. For each bucketed trade, Gelbstein executed a buy order and a sell order for the same commodity at the same time or shortly thereafter at the same or similar price with brokers who were acting on behalf of an SHB customer for one trade and a Mayer family account for the other. Gelbstein was a longtime friend of SMayer. He stood next to him in the trading pit. Gelbstein could not help but be aware of the pattern of trading that he was facilitating. Gelbstein played a critical role in both stages of the transaction. Given his central role as accommodator, the frequency of the violative trades, and his close relationship with SMayer, we believe there is an adequate basis for concluding that Gelbstein knew of the wrongful nature of the challenged trade at the time of his participation. Id. See also, Gilchrist, ¶ 24,993 at 37,651.
Gelbstein challenges the ALJ's finding that his testimony was not credible:
Unlike the other witnesses who openly acknowledged that accommodation trades were a regular practice in the pit, SGelbstein testified that he never took SMayer's or anyone else's bid and offers when they did a flat market, he never saw accommodation trading, and he did not know how to define accommodation trading.
Mayer, ¶ 26,736 at 44,052 (emphasis added). Gelbstein argues that this statement demonstrates that the ALJ believed that it would be highly unusual to find a trader acting properly and that a trader who makes such a claim is not credible. However, in light of the number of examples in Schedules C and D of flat trading by Gelbstein that appear to contradict his testimony, we see no reason to deviate from our usual practice of deferring to the credibility determination of the ALJ. Heilman v. First Nat'l Monetary Corp., [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,207 at 32,569 (CFTC Aug. 14, 1986). Because Gelbstein repeatedly enabled SMayer to trade against either customer orders or accounts in which he had a financial interest, we find that Gelbstein knowingly participated with SMayer in his violations of Section 4c(a)(A) of the Act.
In summary, we find that: (1) SMayer committed 169 violations of Section 4c(A) of the Act by entering into 169 wash transactions listed in Schedule C as enumerated by the ALJ; (2) SMayer committed 169 violations of Section 4b(A) and (D) of the Act by entering into 169 bucketed transactions listed in Schedule C as enumerated by the ALJ; (3) SMayer committed 28 violations of Section 4c(a)(A) of the Act by entering into 28 wash transactions listed in Schedule D; (4) SMayer committed 28 violations of Section 4b(A) and (D) of the Act by bucketing 28 transactions listed in Schedule D; (5) Gelbstein committed 67 violations of Section 4c(a)(A) of the Act by knowingly participating in 67 wash transactions listed in Schedule C as enumerated by the ALJ; (6) Gelbstein committed 28 violations of Section 4c(a)(A) of the Act by knowingly participating in 28 wash transactions listed in Schedule D; (7) since SMayer was acting within the scope of his employment, SHB and MCC are liable for 394 violations of Section 4c(a) and Section 4b(A) and (D) of the Act pursuant to Section 2(a)(1)(A(iii) of the Act and Commission Rule 1.2.
iv. Reporting of Non-Bona Fide Prices
Respondents were charged with reporting, and the ALJ found that respondents had reported, non-bona fide prices. The only bona fide prices are those obtained competitively in the pit. In re Murphy, [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,798 at 31,352. Because the noncompetitive transactions in which respondents engaged were reported to NYMEX, they resulted in prices being reported, registered, or recorded which were not true and bona fide prices. Bear Stearns, ¶ 24,994 at 37,666 and Buckwalter, ¶ 24,995 at 37,684. Accordingly, SMayer committed 145 violations of Section 4c(a)(B) by causing non-bona fide prices to be reported in connection with 73 spread transactions and 40 outright trades set forth in Schedule A and 30 outright trades and two spread transactions listed in Schedule B.(69) BMayer committed 113 violations of Section 4c(a)(B) by causing non-bona fide prices to be reported in connection with 113 trade sequences listed in Schedule A. Gelbstein committed three violations of Section 4c(a)(B) by causing non-bona fide prices to be reported in connection with three outright trades in Schedule B. SMayer committed 376 violations of Section 4c(a)(B) by causing false reports to be made in connection with 376 trades in Schedules C and D. Gelbstein committed 200 violations of Section 4c(a)(B) by causing false reports to be made in connection with 200 trades (two of the trades were spreads, the rest were outrights) set forth in Schedules C and D. Since SMayer and BMayer were acting within the scope of their employment, SHB and MCC are liable for their 634 violations of Section 4c(a)(B) pursuant to Section 2(a)(1)(A(iii) of the Act and Commission Rule 1.2.
With regard to SMayer, BMayer, and SHB, the ALJ imposed a cease and desist order, revoked their registrations, and imposed a five-year trading ban. The ALJ imposed a cease and desist order upon MCC as well. The ALJ imposed on Gelbstein a cease and desist order and a 30-day trading prohibition. SMayer was assessed a civil monetary penalty of $200,000, BMayer, SHB, and MCC were assessed $100,000 each, and Gelbstein was assessed a $25,000 civil monetary penalty.
The Mayers argue that the sanctions imposed by the ALJ are excessive, triggered by the ALJ's prejudice, and inconsistent with the Commission's precedents. They claim that the harsh and excessive nature of the sanctions does not advance any remedial or public policy goal.
The Mayers also challenge the sanctions as being excessive in comparison to cases in which similar wrongdoing was alleged. In re GNP Commodities, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,360 (CFTC Aug. 11, 1992). They also refer to In re Gordon, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,667 (CFTC Mar. 16, 1993), for the proposition that the fines must comport with the financial benefit that accrued to respondents or to the losses suffered by customers as a result of the wrongdoing. Further, the Mayers fault the ALJ for failing to consider whether they may have been rehabilitated.
The Mayers charge that the revocation of SHB's registration as an FCM was unfounded. They submit that the alleged violations relate to SHB as a floor brokerage entity, not to its clearing member capacity. The Mayers point to the harm to SHB's 35 nonparty employees and their nonparty sister who is a part-owner. Additionally, the Mayers maintain that, since SHB has ceased its floor brokerage business and operates only to clear trades for local floor traders, this sanction is inappropriate.
Gelbstein asserts that sanctions should not have been imposed on him since no violations were proven against him. He also contends that eight years have passed since the alleged violations occurred and there were no prior or subsequent allegations of violations against him over his 20-year trading career, rendering the sanctions inappropriate. Gelbstein also states that the ALJ found his violations were not as grave as those of the other respondents.
The Division argues that the ALJ acted within his discretion and urges that the imposed sanctions be affirmed.
In enforcement proceedings we impose sanctions "to further the Act's remedial policies and to deter others in the industry from committing similar violations." In re Volume Investors Corp., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,234 at 38,679 (CFTC Feb. 10, 1992). In determining the measure of damages commensurate with the gravity of the violation, we are not limited by the sanctions chosen by the ALJ, but exercise our independent judgment. In re Grossfeld, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,921 at 44,467 (CFTC Dec. 10, 1996). We do not rely on a specific formula in assessing de novo the appropriate level of sanctions, but instead focus on the relative gravity of respondents' misconduct in light of the following factors: (1) the relationship of the violation at issue to the regulatory purposes of the Act; (2) the respondent's state of mind; (3) the consequences flowing from the violative conduct; and (4) respondent's post-violation conduct. In addition, we consider any mitigating or aggravating circumstances presented by the facts. Id. at 44,467-44,468.
BMayer and SMayer repeatedly, over the course of two years, traded accounts in which they both had significant financial interests opposite other accounts in which they both had significant financial interests. Thus, a losing trade in one account would have been a winning trade in another account owned and controlled by the same individuals with no overall change in the financial position of the owners of the accounts. No risk was taken; no true price discovery occurred. This repeated wash trading undermined a central purpose of the market, that is, price discovery. Further, as we discussed above, respondents prearranged these noncompetitive trades, undermining the open outcry system of trading.(70) Consequently, we conclude that respondents knew that their trading was wrongful, went out of their way to disguise their noncompetitive trading by securing a witness to open outcry as a ruse to the prearranged trade, and thereby gravely damaged the integrity of the open outcry system.
SMayer indirectly and directly bucketed his customers' orders over a two-year period. SMayer breached his fiduciary duty and did not submit customers' orders to the market, but traded against them. "Brokers have more information than any of their customers because they know all of their customers' orders." Dial, 757 F.2d at 165. If a broker wants to profit from this knowledge, he can generate orders in such a way as to make the price rise or fall and rig the market against a customer. Id. at 165-166. When SMayer traded for customers as fiduciary, he implicitly represented that he would obtain the best price in the market. In trading opposite his customers noncompetitively, he misled them for his own purposes and deprived them of the protection of a competitive market. This conduct is fraudulent. Id. at 168; Ashman, 979 F.2d at 478. Consequently, we find that, when SMayer bucketed his customers' orders, he undermined the confidence on which successful trading depends, harming the exchanges, the markets, and society at large which depends on the efficient functioning of the markets. We also find that customers were harmed because they were deprived of an economic opportunity. In re Mosky, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,097 at 45,187 (CFTC June 25, 1997), citing Ashman, 979 F.2d 477-478.
SMayer would not have been able to trade illegally without the cooperation of others in the trading pit. Three respondents testified to accommodating SMayer in wash and bucketed trades. Gelbstein did not admit to accommodating SMayer, but it is clear from the evidence that SMayer would not have been able to trade noncompetitively and to bucket his customers' orders without the active and knowing cooperation of Gelbstein, who made the trades possible by his accommodation trading. Consequently, we find that Gelbstein knowingly aided and abetted SMayer in undermining the regulatory purposes of the Act and thereby harmed the exchange, the market, and SHB's customers.
We conclude that the illegal activities of respondents were very grave because they undermined the very essence of open trading on exchanges. In addition, respondents' numerous recordkeeping violations demonstrated a profound disregard for regulatory and statutory obligations.
Respondents have not submitted evidence that they are rehabilitated and that their trading has been reformed. Respondents have repeatedly denied that their conduct was illegal and intentional. SMayer testified that he did not change the way he traded after he was charged with violations. (Tr. at 852.) The only change of behavior evident is respondents' claims that they have begun keeping their trading cards. While respondents have not been charged with additional violations, we accord limited weight to that fact because the inference of a changed direction is undercut by the outstanding administrative complaint. Mosky, ¶ 27,097 at 45,188, citing In re Silverman, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,410 at 21,643 (CFTC Mar. 14, 1977), aff'd sum nom. Silverman v. CFTC, 562 F.2d 432 (7th Cir. 1977). Consequently, we find no evidence of rehabilitation.
We have determined that the following sanctions are warranted:
1. Cease and Desist Order. Cease and desist orders are appropriate where there is a reasonable likelihood the conduct will be repeated. In re GNP Commodities, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,360 at 39,223 (CFTC Aug. 11, 1992). One indicator of the likelihood of future violations is the existence of a pattern of past conduct. Id.
In this case there is a marked pattern of repeated misconduct. The underlying violations numbered in the hundreds and occurred over a two-and-one-half year period. Under these circumstances, cease and desist orders are entirely appropriate. Accordingly, all respondents are ordered to cease and desist from violating the Act and Commission Rules.
2. Registration Revocation. Because we find that SMayer, BMayer and SHB violated provisions of the Act, we find that they are subject to statutory disqualification from registration pursuant to Section 8a(3)(A) of the Act, 7 U.S.C. § 12a(3)(A) (1994). The gravity of respondents' offenses supplies the foundation for imposing the most stringent possible sanctions. The record indicates that respondents' offenses were not isolated incidents but part of a pattern of illegal trading practices involving hundreds of violations over a two-and-one-half year period. Such a pattern of conduct establishes a strong likelihood that the wrongdoing will be repeated. Cf. Mosky. These respondents, in a very significant manner, breached the duty that they owed to their customers and to the futures markets. To ensure against such conduct in the future, we conclude that the public interest can best be served by revocation of respondents' registrations. Cf. In re Sundheimer, [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,245 at 25,220 (CFTC Sept. 16, 1981), aff'd Sundheimer v. CFTC, 688 F.2d 150 (2d Cir. 1982), cert. denied, 460 U.S. 1022 (1983). Accordingly, we revoke the registrations of SMayer, BMayer and SHB.(71)
3. Trading Prohibition. The Commission articulated standards for establishing trading prohibitions in In re Citadel Trading Co. of Chicago, Ltd., [1986-87 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,082 at 32,191 (CFTC May 23, 1986):
The factors to be considered in imposing a contract market trading ban and the length of such a ban include the existence of a nexus between the violation and the integrity of the futures market and, if such a nexus is found, a correlation between the gravity of the offense, the length of the ban, and the impact the ban will have on the respondent.
Where as here, the proven offenses directly abuse the respondents' market trading privileges and occur on the floor of the exchange, the nexus requirement is met. In re Murphy, [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,798 at 31,355 (CFTC Sept. 25, 1985).
A ban is appropriate when there is "an injury to the integrity of the market in the public eye." In re Miller, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,440 (CFTC June 16, 1995), quoting Monieson v. CFTC, 996 F.2d 852, 863 (7th Cir. 1993). Respondents' offenses represent repeated and direct assaults on the integrity of the marketplace and erode public confidence in futures markets. Respondents' repeated violation of the Act over the course of two-and-one-half years present the likelihood of a continuing risk to the market. Id. Because of the seriousness of this risk, we impose a permanent trading ban on SMayer, MCC, and SHB. We impose ten-year trading bans on BMayer and Gelbstein.(72)
4. Civil Monetary Penalties. The respondents criticize as excessive the civil penalties imposed by the ALJ.(73) Invoking Gordon, respondents argue that the amount of a civil monetary penalty should be determined by reference to the financial benefit to respondents and the losses suffered by customers. Gordon is inapposite, however, because it involved fraudulent solicitation of retail customers. The methods used to determine the gravity of solicitation fraud offenses are not readily transferable to trade practice cases where, as here, financial harm to customers is difficult to measure and the violative conduct has the potential for threatening the integrity of the markets and the confidence of all those who rely on them for risk shifting and price discovery.
Sanctions imposed in an enforcement proceeding should be commensurate with the gravity of the violation. In re Brody, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,081 at 32,181 (CFTC May 20, 1986). Serious violations warrant the imposition of substantial civil monetary penalties. In re Murlas Commodities, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,440 at 35,929 (CFTC Apr. 24, 1989). As we have discussed above, respondents' violations go to the very core of the Act. Their violations were numerous, were committed knowingly, and occurred repeatedly over the course of more than two years.
The penalties we impose on these respondents reflect and seek to deter the betrayal of the public interest inherent in respondents' abuse of a regulated public market. We find that the amounts assessed by the ALJ do not reflect sufficiently the gravity of these violations. We believe that effective deterrence occurs when it is no longer worthwhile for a wrongdoer to risk engaging in acts that threaten the integrity of the markets.(74) In setting the appropriate amount we also have looked to other trade practice cases in which civil monetary penalties were assessed.(75) A severe penalty is particularly appropriate as to respondents SMayer, SHB, and MCC whose proscribed conduct involves fraud, because such conduct decreases the likelihood of detection. We find that the wrongful conduct of Gelbstein and BMayer in harming market integrity and the interests of the public also warrants substantial civil monetary penalties.
Accordingly, we assess SMayer a civil monetary penalty of $500,000; BMayer a civil monetary penalty of $150,000; Gelbstein a civil monetary penalty of $150,000; SHB a civil monetary penalty of $250,000; and MCC a civil monetary penalty of $250,000.
In light of the foregoing, the ALJ's decision is affirmed in part, vacated as indicated, and modified in part. The cease and desist order, registration revocations, trading bans, and civil monetary penalties, as modified, shall become effective 30 days from the date this order is served.(76)
IT IS SO ORDERED.
By the Commission (Chairperson BORN, Commissioners TULL, HOLUM and SPEARS).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: February 25, 1998
1. 1/ Leon and Sarah Mayer had four children: Solomon, Hindi, Barry, and Rachel. Hindi's married name is Mazel. Sarah remarried after the death of Leon; her new name is Hammerman. Rachel, the youngest daughter, was not involved in any of the commodities businesses. Isaac Mayer, Leon's younger brother, was also named in the complaint.
2. 2/ The Commodity Exchange Act was redesignated and amended in part by the Futures Trading Practices Act of 1992 ("FTPA"), Pub. L. No. 102-546, 106 Stat. 3590. As the complaint was issued under the Act as it existed prior to enactment of the FTPA, references to the Act's provisions are to their pre-FTPA designations.
3. The recordkeeping violations were set forth in Schedules E and F attached as appendices to the complaint.
4. MCC was owned by Leon and Sarah and was a vehicle for his trading. After Leon's death, MCC was run by his son Solomon. SHB, an FCM and clearing firm, was started before Leon's death, but he was not involved in it.
5. 5/ The trade practice violations were presented in chart form in four appendices to the complaint and purportedly reveal a pattern of illegal trading (Schedules A - D). Schedule A shows trades between Mayer-controlled accounts. Schedules B through D show a pattern whereby there is a buy or sell in a contract and a nearly simultaneous, nearly identical reverse transaction in the same contract by one of the parties to the first transaction. In March 1994, the Division filed a motion to correct typographical errors to the four appendices which described the trade practice violations (Schedules A - D). The ALJ granted the Division's motion in April 1994. The complaint identified 331 trade sequences in which SMayer engaged in trade-related violations, 118 trade sequences for BMayer, 103 trade sequences for Gelbstein, 38 trade sequences for Halper, and 6 trade sequences for Mekertichian.
6. The alleged registration violations relate to IMayer. The complaint charged that IMayer, SMayer, and SHB knew or should have known that IMayer was not registered as an associated person of SHB in violation of Section 4k(1) of the Act, 7 U.S.C. § 6k(1) (1988). Finding that the Division did not meet its burden of proof, the ALJ dismissed these charges. Since the Division did not appeal, we will not consider the alleged registration violations.
7. We imposed on Halper a cease and desist order, a one-year trading ban and a civil monetary penalty of $55,000 and revoked his floor broker registration. Halper agreed not to seek reinstatement of his floor broker registration for one year and to seek conditioned registration if he sought re-registration less than two years after the Commission's order. With respect to Merkertichian, we entered a cease and desist order, suspended his floor broker registration for six months, prohibited him from appearing on the trading floor of any contract market during trading hours, imposed a six-month trading ban, conditioned his registration for the year following the lifting of the suspension, and imposed a $20,000 civil monetary penalty.
8. 8/ Chief, Market Surveillance Group, Eastern Regional Office, CFTC.
9. 9/ Schobel is an attorney. He was Assistant Director of the CFTC Division of Trading and Markets from June 1975 to November 1976. Subsequently, he became Vice President of the New York Coffee & Sugar Exchange, Inc. where he had oversight of compliance. Schobel left the exchange in 1979 and worked at various entities trading or supervising trading in various capacities until 1991 when he began private law practice.
10. 10/ Schobel relied on the signature of a floor committee member on the pit cards attesting to the trades having been executed by open outcry in accordance with NYMEX Rule 6.40 regarding cross trades. NYMEX Rule 6.40 allows a member who has "in hand at the same time both buy and sell orders of different principals for the same commodity for future delivery in the same delivery month . . . [to] execute such orders for, and directly between, such principals at the market price when the conditions of this Rule § 6.40 are met." One of the conditions of the rule is certification by a floor committee member that such trades were executed in accordance with the rules. (See also testimony of Morrissey of NYMEX's compliance department, Tr. at 34, 84, 97.) While he acknowledged that the cross trade rule cannot be used to trade against the broker's own customer, Schobel maintained that, by initialing a pit card, a floor committee member attests that the trades reflected on the card were made in the ring at the prevailing price. (Schobel Ver. State. at 8, Tr. at 1040.) Although the pit cards for the Schedule A trades bear a floor member's signature, there is no evidence that either of the Mayer brothers had in hand buy and sell orders for different principals for the same commodity.
11. 11/ Schobel's analysis indicated that SHB traded independently of MCC. He gave an example of a butterfly spread executed by BMayer with SMayer. According to Schobel, BMayer held the position for more than two months while SMayer liquidated a substantial part of the spread on the same day. (Schobel Ver. State. at 8 n.13.)
12. 12/ Accommodation trading is "[n]on-competitive trading entered into by a trader, usually to assist another with illegal trades." The CFTC Glossary: A Layman's Guide to the Language of the Futures Industry, at 1 (CFTC Jan. 1997) ("Glossary"). Accommodation trading is often evidenced by wash sales. See Sundheimer v. CFTC, 688 F.2d 150, 152 (2d Cir. 1982) (citing the Glossary). The essential and identifying characteristic of a wash sale is the intent not to transact a genuine, bona fide trade. Id. Bucketing is "[d]irectly or indirectly taking the opposite side of a customer's order into a broker's own account or into an account in which a broker has an interest, without open and competitive execution of the order on an exchange." Glossary at 4. See also In re Marks, 22 A.D. 761, 774 (July 16, 1963); Committee on Agriculture, Nutrition and Forestry, 95 Cong. 2d Sess., Futures Trading Act of 1978, Glossary of Terms Used in Commodity Futures Trading (Comm. Print 1979).
13. 13/ Schobel claimed that the allegation that a "huge trader like [SMayer] would 'bucket' one or two contracts in order to gain for his personal account defies logic." (Schobel Ver. State. at 13.) However, Schobel admitted that completion of a customer order may be the motivation for bucketing it. (Tr. at 1076.)
14. 14/ However, Schobel admitted that there were certain audit trail irregularities. For example: (1) in trade sequences 89 and 105 (Schedule C), the pit cards had been changed (Schobel Ver. State. at App. C at 183-184, 217, Tr. at 1082, 1089-1090); and (2) the trades in trade sequence 23 were submitted out of sequence. (Tr. at 1087-1089.)
15. 15/ Schobel further asserted that, absent audit trail irregularities, it is impermissible even to make an allegation of noncompetitive trading. (Schobel Ver. State. at 16.)
16. 16/ Gelbstein contended that he kept track of his trades on a trading pad or card, trading cards from other exchanges, or any kind of paper because NYMEX did not supply trading cards. (Tr. at 976, 995-996.) Gelbstein claimed that he was not aware that he was supposed to keep the cards until NYMEX enacted a rule as to how to fill them out. (Tr. at 978, 998-999.)
17. 17/ Irving Olshever, a CPA who did the accounting for the Mayer family and their businesses from 1978 until his employment was terminated in September 1989, testified that MCC was established in 1980 as a trading vehicle for Leon. (Tr. at 243-244, 246-247, 249, 279-280.) Olshever reported that SHB was formed in 1984 (before Leon's death) by SMayer, Mazel, and BMayer, with SMayer acting as CEO and BMayer and Hindi as employees; the parents neither owned nor were involved in SHB. (Tr. at 247-248, 282, 286.)
SMayer testified that SHB opened for customer brokerage business in 1986 as an FCM and clearing member. (Tr. at 798-799.) When SHB first opened for business, it had 10-15 customers, and Jacob Eis was the only employee. (Tr. at 801-803.) During 1987-1989, SHB had 50-75 customers and 25-45 employees. (Id.) SHB primarily cleared locals trading on the floor of NYMEX and had 10-15 retail customers. (Tr. at 801.) Both Irving Olshever and SMayer testified that SHB had a house account and customer accounts, whereas MCC had only a house account. (Tr. at 247, 853-854.)
18. 18/ Testimony of Marvin Insler, a CPA who did the accounting for MCC in 1989. (Tr. at 489.)
19. 19/ Leonard Rosen, a CPA, was retained by SHB in 1989 to install accounting procedures in response to a settlement in connection with a NYMEX audit. (Tr. at 756-758.)
20. 20/ Eis was SHB operations manager.
21. 21/ Rosen also explained that when the Mayers traded the house account, margin calls affected capital requirements on a daily basis, but if they traded as a customer, the capital of the firm would not be jeopardized by margin calls. (Tr. at 762-763.) BMayer testified similarly. (Tr. at 640-643.)
22. 22/ Mazel testified that company meetings were held whenever the siblings were together and needed to discuss something. (Tr. at 357-358.)
23. 23/ SMayer testified that Hammerman received money from SHB because, after Hammerman's husband passed away, her children supported her. (Tr. at 802.) Hammerman claimed that she was a participant in the MCC pension fund but not the SHB pension fund, and did not know why her signature appears as president of the SHB pension fund. (Tr. at 392-394.)
24. 24/ Manor Securities was owned by SMayer.
25. 25/ Mazel testified that SMayer was president of SHB, BMayer was vice-president, and she was secretary-treasurer. (Tr. at 358.) Mazel stated that she did the billing for the brokerage before SHB was sold to its employees. (Tr. at 361.) With regard to his duties at SHB, BMayer testified that he had limited responsibilities and that he did not supervise anyone, review the house account, or know if the account was making or losing money on a daily basis. (Tr. at 651-652.) While he had testified earlier that SMayer set all the salaries including BMayer's, at the hearing BMayer stated that SMayer discussed the salaries with him before setting them. (Tr. at 653-656.)
26. 26/ SMayer confirmed that his expertise was in heating oil, where he did 90 percent of his trading, and that BMayer's expertise was in platinum and palladium, where he spent 90 percent of his time. (Tr. at 877-878.)
27. 27/ The Division also presented Jeffrey Schondorf who admitted to accommodating many people and that SMayer may have been one of them, but denied having said that he accommodated SMayer or that SMayer accommodated him. (Tr. at 299-302, 308-309.)
28. 28/ Halper is a heating oil trader at NYMEX who was conditionally registered as a floor trader with the CFTC at the time of the hearing. (Tr. at 320.) He had been registered as a floor broker since 1983 (until the registration was revoked in 1992), but did not do customer business in 1987-1990. (Tr. at 320-321.)
29. 29/ At the time of the hearing, Mekertichian managed his own investments and leased out his NYMEX seat. He had been registered as a floor broker since 1983. (Tr. at 225-227.) From 1983 to at least 1984, SHB guaranteed his trades. (Tr. at 228.)
30. 30/ Helfer is a former floor trader and member of NYMEX who stopped trading two years prior to the hearing. (Tr. at 163.) Helfer entered into a settlement with the CFTC on February 14, 1992, whereby he agreed to cooperate and was not charged in the complaint. (Tr. at 181.) Helfer has been registered with the CFTC as a floor broker since 1982.
31. The NYMEX streetbook is a database created by NYMEX showing the history of all of the transactions. "The information that comes into the system from the pit card and is enriched by both the buyer and the seller with the additional information of clearing member involved and indicator code--order numbers are added as well--and that becomes the streetbook." (Testimony of Morrissey, Tr. at 47-48.) It is available in hard copy and computer formats. Id.
32. 32/ The testimony indicates that, by "publishing a flat rate," the witnesses meant that the broker or trader bids and offers at the same price in the same quantity for the same contract at the same time.
33. BMayer explained that he publishes a flat rate in order to encourage the market to move to the price at which he is willing to do business or to round off his position. (Tr. at 627-628.) SMayer testified that he may publish a flat rate in order to avoid crossing two customers who have similar orders, as a ruse to confuse other traders as to the market trends, or to short the market for his own account and to go long for his customer's account. (Tr. at 813-815.)
34. 34/ SMayer defined himself as a market maker in heating oil, trading outright and spreads simultaneously for all months. (Tr. at 807-808, 812.) SMayer stated that he also trades cracks and the crack spread market. (Tr. at 808-809.) (A crack in energy futures is "the simultaneous purchase of crude oil futures and the sale of petroleum product futures to establish a refining margin." Glossary at 11.) SMayer opined that he was the largest dual trader in the pit in 1987-1989, estimating that daily he averaged 450 separate transactions constituting 2,000 to 2,500 lots and that on a busy day he traded 600 to 700 transactions constituting 6,000 lots. (Tr. at 810-811.)
35. 35/ Burns admitted that he had been fined $10,000 and suspended for five months for trading ahead. (Tr. at 218-219.)
36. 36/ Gelbstein owns four exchange seats, two at NYMEX (one of which he leases to SHB at market) and two at other exchanges. (Tr. at 999-1000.)
37. 37/ Gelbstein testified that at the time of the hearing, he had been trading between 15 and 20 years and that prior to this proceeding, no charges or complaints had been filed against him. (Tr. at 956.) Gelbstein considered himself a large spread trader and scalper in 1987-1988, trading between 600 and 1,000 contracts a day. (Tr. at 971-972.)
38. The examples were methods of scalping the market. Scalping is "[t]he practice of trading in and out of the market on very small price fluctuations." Glossary at 35.
39. 39/ The ALJ had previously issued an order that respondents' retention of NYMEX transfer forms did not satisfy the recordkeeping requirements of the Act.
40. 40/ The ALJ concluded that respondents deliberately failed to retain their trading cards for each of the alleged trade violations listed in Trade Schedules A, B, C, and D, which constituted a significant audit trail irregularity and from which he would draw adverse inferences.
41. 41/ The ALJ dismissed seven additional trades included in Schedule E since they occurred prior to the date range alleged in the complaint.
42. 42/ The ALJ found that respondents misapplied the NYMEX cross-trading procedure because the trades did not involve customer orders.
The ALJ also found the testimony of both expert witnesses "neither useful nor reliable." Mayer, ¶ 26,736 at 44,049.
43. 43/ Although the ALJ identified Schedule A trades as violations of the Act in his Conclusions of Law, he did not specifically mention trades A2-26 through A2-41 in his discussion and findings regarding the Schedule A trades.
44. 44/ The ALJ listed the 67 trades specifically but did not mention Trades C-28 and C-153 between SMayer and Gelbstein which also appear to fit the pattern.
45. 45/ On the same day, pursuant to Commission Rule 10.107, 17 C.F.R. § 10.107 (1997), the Mayers filed a motion to reopen the hearing in order to submit additional evidence into the record. The motion is denied. They also request that the Commission authorize the issuance of a subpoena to NYMEX for "source documents." The request is denied.
46. Moreover, the Mayers claim that Halper, Mekertichian, and Schondorf "denied knowledge of specific accommodation trades with [SMayer]." (MBr. at 25.) They emphasize that Schondorf denied accommodating SMayer. (Id.) The Mayers also assert that Helfer's testimony was full of inconsistencies and that he did not recall any accommodation trades with SMayer that involved a public customer. (Id. at 25-26.)
47. 47/ NYMEX Rule 6.08A requires: (1) that the pricing of spread trades be in line with the current spread differentials between the two months traded; and (2) that the price of each leg of the trade be within the permissible range.
48. 48/ Gelbstein argues that the Division presented only four witnesses (Burns, Hammerman, Mazel, and Morrissey) and five exhibits (GX 42-43 and GX 50-52) that referred to him at the hearing and that none of this evidence established improper conduct by him. Gelbstein states that: (1) Burns testified that Gelbstein generally stood next to SMayer in the pit; (2) Hammerman and Mazel stated that Gelbstein was a family friend; and (3) Morrissey testified that NYMEX had never filed any complaints against Gelbstein during his 20-year trading career. Gelbstein claims that the exhibits merely showed that he had made two loans to SMayer, one for $200,000 and one for $300,000, which were repaid within one week and one month, respectively.
49. 49/ The Division questions the relevance of using unredacted streetbook pages to impeach the ALJ's analysis since "the fact that times shown on the streetbook for Schedule C and D trades do not correlate to the NYMEX time and sales report remains the same whether the streetbook page is redacted or unredacted." (DBr. at 46.)
50. 50/ The Division and respondents have requested oral argument. Oral argument is denied. The Mayers also request that we accept a brief in reply to the Division's brief. The request is denied. See Commission Rule 10.102(b)(3), 17 C.F.R. § 10.102(b)(3) (1997).
51. 51/ Respondents also cite to Joanne Morrison, "Judge Assails CFTC Plan to Ease Derivatives Trading Rules," The Bond Buyer, Dec. 15, 1994 at 3, alleging that the ALJ was reported to have "criticize[d] a Chicago Board Of Trade plan to ease the burdens on floor traders of tracking information" and subsequently telling the reporter that "we may as well close up shop if we're going to wipe out audit trails." (MBr. at 69.)
52. 52/ This rule provides that a party may seek disqualification on grounds of "personal bias, conflict or similar bases."
53. 53/ Some of the Commission's precedent refers to this second ground for disqualification as "pervasive" bias. See Olson v. Ulmer, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,987 at 37,627 (CFTC Jan. 23, 1991).
54. 54/ Respondents claim that an appearance of partiality would be sufficient to require disqualification. While Commission precedent is silent on this issue, recent decisions in the Second and Seventh Circuits do not support respondents' position. See Greenberg v. Board of Governors of the Federal Reserve System, 968 F.2d 164, 167 (2d Cir. 1992) (heightened standard of 28 U.S.C. § 455(a) does not apply to Administrative Law Judges); DelVecchio v. Illinois Department of Corrections, 31 F.3d 1363, 1372 (7th Cir. 1994) (due process does not mandate disqualification for bad appearances; there must be evidence of "the incentive for bias" or "a real possibility of bias").
55. 55/ The Division also asserts that referring to these trades as spread trades is inappropriate because the two legs of the trades in question were not executed simultaneously. (See Mem. in Opp. 9.) This point is buttressed by the "notable absence" of designations of spread trades in the streetbook. (See id. at 8-10.)
56. The Division charged that more than 300 trades were unlawful. The schedules in the appendices attached to the complaint contained portions of the NYMEX streetbook. The Division supplied unredacted pages for some of the trades, redacted pages for 59 of the trades, and no streetbook pages for the rest. The redacted version of the NYMEX streetbook deleted all names of the clearing members and brokers in all other transactions on each page of the relevant portions of the streetbook. Specifically, the Division provided copies of the streetbook segregated by broker reflecting the transactions executed by SMayer, BMayer, and Gelbstein, as well as pit cards, transfer forms, floor order tickets, Time and Sales Reports, and portions of more than 100 NYMEX streetbooks in unredacted form relating to trades charged in Schedule C of the complaint, and portions of unredacted streetbooks covering all of the trades charged in Schedule D of the complaint.
Prior to the hearing, a discovery dispute arose when respondents sought access to an unredacted version of the NYMEX streetbook. Respondents requested the unredacted streetbook from NYMEX. Asserting that the redacted information was confidential, NYMEX stated that it would not release the information unless ordered to do so. The Mayers contended that the information regarding trades other than those for which they were charged was necessary for the preparation of their expert's testimony and their pre-hearing memorandum because it would allow them to demonstrate that their trading activity was lawful. Accordingly, respondents requested issuance of a subpoena duces tecum.
The ALJ declined to issue a subpoena duces tecum for the unredacted streetbook three times. Respondents twice sought interlocutory review of the ALJ's refusal to issue a subpoena which the Commission denied, first on March 24, 1995, and again on April 26, 1995.
With respect to the 66 Schedule C trades outlined in ¶ 90 of the initial decision, respondents state that the Division did not submit Time and Sales Reports for 27 trades and that the Division submitted redacted NYMEX streetbook pages for 32 trades. They contend that a complete trade analysis was not possible because the ALJ had complete pages of the NYMEX streetbook and Time and Sales Reports for only 17 of the 66 trades.
With respect to the 89 Schedule C trades outlined in ¶ 96 of the initial decision, respondents state that the Division did not submit Time and Sales Reports for 31 trades. Furthermore, they claim that 71 of the trades were executed at a price that was within the market price range of either the NYMEX streetbook or the Time and Sales Reports.
57. 57/ Under Section 8(a)(1) of the Act, 7 U.S.C. § 12(a)(1) (1994), the Commission may publish statistical information gathered from boards of trade but may not publish data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers. However, it may disclose this information in connection with an administrative proceeding under the Act. Section 8(b) of the Act, 7 U.S.C. § 12(b) (1994).
58. In an order issued January 5, 1995, the ALJ found that retention of NYMEX transfer forms does not satisfy the requirements of Section 4g(1) of the Act and Commission Rules 1.31(a) and 1.35(d). The ALJ stated: "Respondent Mayer may argue that retention of the NYMEX transfer forms is a mitigating circumstance, but he may not argue that retention of the NYMEX forms absolves him of the responsibility to create and retain original trading cards or records."
59. NYMEX Rule 6.90, which requires the creation of trading cards and specifies the information to be contained thereon, became effective in December 1989.
60. The record does not enable us to determine with certainty precisely how many trading cards respondents failed to produce. More than one of the violative trades occurring in a short time frame may have been recorded on the same card. However, trades occurring several hours apart are unlikely to have been recorded on the same card since generally no more than 20 trades are recorded on the same card. While we could thus hold respondents liable for a failure to produce a trading card for each of the trades charged in the complaint, we have determined to resolve all conceivable doubts on this score in favor of respondents by basing our calculation of violations on the assumption that they created only one trading card per day. Consequently, even though respondents were charged with multiple violations on the same day, we have found only one violation of the requirement to retain the trading card for that day.
61. 61/ Those trades which involve the pension plans as a customer of SHB traded by BMayer against SMayer are included in our analysis. While it is not clear from the record who all of the beneficiaries are and how the ownership is divided, both BMayer and SMayer appear to be included.
62. 62/ Schedule A-1 trades are spread trades and Schedule A-2 are outright trades. Both Schedules A-1 and A-2 trades were executed by SMayer and BMayer opposite one another. The complaint alleges, and the ALJ found, that they were wash trades. There are 113 trades listed in Schedule A.
63. Respondents attack the testimony of the accommodators as inherently not credible because they testified as a condition of settlement with the Commission. Respondents expressly attack Helfer's testimony because Helfer claimed to recall the specifics of a conversation that had taken place eight years before. The ALJ found the witnesses credible. Generally, we defer to the credibility findings of the ALJ. Ahlstedt v. Capitol Commodity Services, Inc., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,131 at 45,290 n.12 (CFTC Aug. 12, 1997); In re Abrams, [1994--1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,479 at 43,136 (CFTC July 31, 1995). An agreement to cooperate and testify does not demonstrate that the witnesses fabricated testimony, and we reject respondents' challenge to their credibility.
64. Gelbstein argues that the failure to prove motive is one of the flaws in the Division's case. (GBr. at 46 n.38.) However, once significant links to a suspicious trading pattern are established, it is permissible to infer that respondent knowingly participated in noncompetitive trades even in the absence of a clear understanding of the motivation. In re Gilchrist, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,993 at 37,651-37,652 (CFTC Jan. 25, 1991). See also, Buckwalter, ¶ 24,995 at 37,670, 37,671, 37,685 nn.3, 7, 38 (finding wash sales in violation of Section 4c where a trader set up several customer accounts under a pseudonym at several FCMs and, with others, used the accounts to disguise the transfer of funds to him by trading his own account against these pseudo-customer accounts). Furthermore, the evidentiary record shows that Gelbstein had several possible motives to accommodate SMayer, including his personal and business relationship with him. Whether it was considered etiquette or providing favors, there is also testimony that accommodation trading was the culture in the NYMEX pit.
65. 65/ SMayer had instructed Michael Burns to show him orders. See summary of hearing, supra. Five of the pattern trades involve trades with Burns on one side and Gelbstein on the other and, nearly simultaneously, a reverse of the trade between Gelbstein and SMayer. (DBr. at 38.)
66. The specific trades are enumerated in Mayer, ¶ 26,736 at 44,053-44,054.
67. 67/ Similarly, Gelbstein's explanation that he was making spread trades is ill- supported. Absent from the streetbook are the code numbers that would identity the trades at issue as spread transactions. Without Gelbstein's trading cards to support his explanation, the evidence does not sustain a conclusion that these trades were spread trades. See Trade Schedules B, C, and D.
68. 68/ Simultaneity is not an essential element of fictitious trades. Buckwalter, ¶ 24,995. In identifying trading patterns which indicate violative trading, "simultaneous" means either simultaneous "or practically so." Collins, ¶ 22,982 at 31,900-31,901.
69. We have calculated the violations by counting the number of non-bona fide prices reported. Where trade sequences involved outright trades, each trade was counted as a separate violation, because the price reported for an outright trade is significant. However, only the price differential is significant in a spread transaction. Consequently, each side of a spread in a spread transaction, rather than each trade, was counted as a separate violation.
70. "If trading is `rigged' on all commodity futures exchanges, there will be less commodity futures trading, period, and the social benefits of such trading . . . will be reduced." United States v. Dial, 757 F.2d 163, 165 (7th Cir.), cert. denied, 474 U.S. 838 (1985).
71. 71/ Because the Mayers testified that SHB had been sold to its employees, we checked with NFA regarding its current owners and officers. NFA's records do not indicate any change in ownership.
72. See also, Mosky, ¶ 27,097, wherein we imposed a permanent trading ban on a floor broker who had committed seven felonies on the trading floor. Under Section 9(b) of the Act, 7 U.S.C. § 13(b) (1988), a single criminal conviction for Section 4b felony raises a presumption of unfitness for continued trading. Respondents have committed violations of Section 4b and/or Section 4c which far exceed in number the violations for which Mosky lost his trading privileges. The extent and seriousness of the wrongdoing revealed on this record certainly rivals that found in Mosky.
73. 73/ In setting these penalties, the ALJ did not discuss respondents' net worth. The complaint filed in April 1992 alleges conduct in 1987-1989, before the effective date of the FPTA. Accordingly, in assessing civil money penalties, the former Section 6(d) of the Act governs rather than current Section 6(e)(1). Thus, the ALJ should have considered not only the gravity of the offenses, but also the net worth of the offenders. Rousso, ¶ 27,133 at 45,311 n.23, citing Gordon, ¶ 26,326. Nevertheless, respondents have not raised the issue of net worth on appeal, nor did they request a net worth hearing. Accordingly, we treat the issue of their net worth as waived.
74. The record contains substantial evidence of the earnings, income, and assets of the respondents, which is indicative of the magnitude of their earnings from the relevant trading accounts. See Gov. Exs. 14, 15, 16, 17, 18, 19, 22, 23, 24, Tr. at 963-965, 999-1000, 1013-17, Mayer ¶ 27,736 at 44,045-44,046.
75. We also have factored in the passage of time with respect to such cases to account for inflation.
76. A motion to stay the effect of this decision pending reconsideration by the Commission or notice of appeal seeking review by the relevant United States Court of Appeals must be filed within 15 days of the date this order is served. See Section 6(c) of the Act, 7 U.S.C.§ 9 (1994) and Commission Rule 10.106, 17 C.F.R. § 10.106 (1997).