UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
In the Matter of
SEAN G. KELLY
CFTC DOCKET NO. 97-6
OPINION AND ORDER
Both the Division of Enforcement ("Division") and respondent, Sean G. Kelly ("Kelly"), a registered commodity trading advisor ("CTA"), appeal from the decision of an Administrative Law Judge ("ALJ"). The ALJ granted the Division's motion for summary disposition of a Commission complaint, found that Kelly had violated Section 4n(3)(A) of the Commodity Exchange Act ("Act"), 7 U.S.C. § 6n(3)(A) (1994), and Commission Rule 1.31, 17 CFR § 1.31 (1996), revoked Kelly's registration as a CTA, and ordered him to pay a civil monetary penalty of $25,000. The Division asks the Commission to affirm the initial decision in all respects except that, in addition to the other sanctions imposed, it seeks the imposition of a cease and desist order. Kelly asks that the Commission enforce an alleged settlement agreement to which, he claims, the Division had agreed and upon which he relied to his detriment. Upon review of the record, we affirm the ALJ's liability findings. However, we are modifying the sanctions by imposing a cease and desist order and a six-month suspension of registration instead of the registration revocation and by lowering the civil monetary penalty to $10,000.
On February 26, 1997, the Division filed a one-count complaint alleging that Kelly, a registered CTA, had violated Section 4n(3)(A) of the Act and Commission Rules 1.31 and 4.33, 17 C.F.R. § 4.33 (1996). The complaint stated that on September 4, 1996 the Division sent a request to Kelly pursuant to Commission Rule 1.31 requiring him to provide by September 18, 1996, among other things, the names and addresses of his customers, the account opening documents and trading records for those customers, and any correspondence between Kelly and those customers. (Complaint at ¶¶ 5-6.) According to the complaint, the Division staff contacted Kelly on October 2, 1996, to inquire why it had not received the documents, and Kelly replied that he no longer had the documents because he had discarded them. (Complaint at ¶ 7.)
At the request of both parties, on April 8, 1997, the ALJ granted a stay of proceedings pending settlement discussions. (ALJ Order Apr. 8, 1977.) On May 30, 1997, the ALJ issued an order lifting the stay and establishing a prehearing procedure. (ALJ Order May 30, 1997.)
Kelly claimed that, during settlement discussions, Division staff assured him that, if he produced the documents and appeared and testified, the Division would recommend settlement with a three-month suspension of his registration. (Ans. at ¶ 15.) Kelly stated that, in reliance upon this assurance, he appeared and testified, but that the Division was unwilling to recommend an offer of settlement with a three-month suspension, insisting instead on a settlement offer with a five-yearsuspension. (Id. at ¶¶ 17, 20-21.) Kelly contended that, because the Division breached an agreement with him, the proceeding should be dismissed or, alternatively, the agreement should be enforced with no more than a three-month suspension. (Id. at ¶¶ 22-23, 25.) Finally, Kelly requested that, since the Division reneged on its agreement, the statements and information given by him to the Division should be quashed and stricken from the record. (Id. at ¶ 33.)
The Division responded by moving for summary disposition. The Division contended that the following facts were undisputed:
1. Kelly was a registered CTA since January 1996. (Div. Statement of Undisputed Facts at ¶ 1.)
2. On September 4, 1996, the Division mailed a request to Kelly pursuant to Commission Rule 1.31 requiring Kelly to produce by September 18, 1996, certain records, none which were more than five years old. (Id. at ¶ 2.)
3. Kelly did not provide the documents by the due date. (Id. at ¶ 3.)
4. On October 2, 1996, Division staff contacted Kelly by telephone asking him why the Division had not received the documents. Kelly told the Division that he no longer had the documents because he had discarded them. (Id. at ¶ 4.)
5. On January 15, 1997, Kelly telephoned the Division and stated that he did not have the requested books and records.1 (Id. at ¶ 5.)
6. On February 26, 1997, the Division filed a complaint charging Kelly with failure to maintain and furnish books and records upon request as prescribed by the Commission. (Id. at ¶ 6.)
7. On March 4, 1997, Kelly produced some of the requested records to the Division. (Id. at ¶ 7.)
8. Kelly stated that he did not comply with the Division's request because he "didn't think that [he] wanted to help [the Division]. [He] didn't want to be involved. . . . [he] just looked at the [September 4, 1996 letter from Division staff] and basically just tossed it." (Id. at ¶ 8 citing Kelly Deposition at 66, 69.)
9. Kelly produced the requested documents because he realized "that they could fine [him] all kinds of money and stuff, that's when [he] decided [he]'d better do something." (Id. at ¶ 9 citing Kelly Deposition at 67.)
The Division argued that there was no need to develop further facts on the record. (Div. Mem. of Law in Support of its Motion for Summary Disposition at 2.) The Division contended that the facts set forth and Kelly's admissions established that he did not provide records requested by the Commission pursuant to its statutory authority. (Id.) Furthermore, the Division argued that Kelly's testimony revealed that the reason he did not furnish the documents is that he did not care to help the Division with an ongoing investigation. (Id.) The Division argued that: (1) Kelly violated Section 4n(3)(A) of the Act in that he failed to have books andrecords open to inspection in a manner prescribed by the Commission's Rules; and (2) Kelly violated Commission Rules 1.31 and 4.33 by failing to provide promptly the requested records to a representative of the Commission. (Id. at 9.) Consequently, the Division maintained that, under Commission Rule 10.91(b), 17 C.F.R. § 10.91(b) (1997), it was entitled to summary disposition. (Id. at 5-9.)
Kelly countered with a cross-motion asking the ALJ: (1) to dismiss the complaint based upon an alleged settlement agreement with the Division; or (2) to set aside a reference to the deposition testimony because Kelly allegedly did not waive his right to counsel. (Notice of Cross Motion.) Kelly attached his own statement of undisputed facts alleging that: (1) the Division agreed to terminate the proceeding and recommend a maximum three-month suspension in return for Kelly's cooperation; (2) in reliance on the agreement, Kelly cooperated; and (3) the Commission breached the agreement by not terminating the proceeding in return for a three-month suspension. (Kelly Statement of Undisputed Material Facts at ¶¶ 1-3.)
Kelly also replied to the Division's motion, conceding that he did not provide the requested documents until after the Commission charged him with violations. (Kelly's Reply to Div. Statement of Undisputed Facts at ¶¶ 2, 3, 6, 7.) In mitigation, Kelly asserted that, when he spoke to Division staff on October 2, 1996, he believed that he did not have the books and records requested and that, because he was no longer associated with the enterprise, the request wasirrelevant.2 (Id. at ¶ 4.) Kelly stated that he cooperated with the Commission's investigator on the telephone and that he was "reluctant to revisit" the financial losses and distress that AVCO already had caused him. (Kelly Aff. at ¶ 5.) Kelly stated that, when he received the renewed request for records in January 1997, he was in negotiations with AVCO for restitution, "repeated [his] unwillingness to talk or produce documentation without subpoena or legal process, and  specifically requested that [he] be allowed to retain and consult counsel." (Id. at ¶ 8.) Kelly stated that he produced the requested records and that his only wrongdoing was that he produced the records in May 1997 rather than in September 1996 as originally requested. (Id. at ¶¶ 11, 22.) On the other hand, Kelly attached a memorandum to the file from Division staff, dated January 7, 1997, regarding a telephone conversation, which states:
Kelly said that he was not interested in talking to us with or without a subpoena. He stated that he doesn't have to answer our questions and that he knew his rights. [Staff] responded that it was true that he did have a right not to respond to our questions invoking the Fifth Amendment right to avoid self-incrimination, but that there were ramifications to such an action that he should consult an attorney to have it explained. . . .
. . . [Kelly] wanted to know what "was in it" for him. He explained that if we could guarantee in writing that nothing he said would be used againsthim after he talked with us that he might consent to answer our questions. I explained that we could not make such a guarantee, and that we were past the place where he should be considering what was in it for him. (Kelly Mem. in Opposition to Div. Motion for Summary Disposition and in Support of Res. Cross Motion for Summary Disposition at Ex. B.)
Kelly argued that he entered an enforceable oral contract with the Commission. (Kelly Mem. in Opposition to Div. Motion for Summary Disposition and in Support of Res. Cross Motion for Summary Disposition at 2-4.) Kelly stated that he rejected at least one offer by the Division and would not have gone to New York to testify had there been no agreement. (Kelly's Reply Aff. at ¶ 17.) Kelly emphasized the voluntary nature of his appearance without an attorney based on his belief that there was an agreement. (Id. at ¶ 18.) Additionally, Kelly stated that he was duped into testifying and deceived into thinking he did not need counsel and that the Commission reneged on the settlement offer. (Id. at ¶ 20.)
Kelly also argued that he did not clearly waive his right to counsel and that any waiver was conditional and limited. (Kelly Mem. in Opposition to Div. Motion for Summary Disposition and in Support of Res. Cross Motion for Summary Disposition at 4-5.) Kelly maintained that any intent to waive counsel must be clearly established and cannot be inferred from his equivocal response, "It depends on what you ask me." (Id. at 5.)
The Division responded contending that Kelly had admitted the material facts and that summary disposition was appropriate. (Div. Mem. in Opposition to Cross Motion at 3.) Moreover, the Division asserted, no settlement agreement was ever reached. (Id. at 6.) The Division maintained that there were only preliminarydiscussions concerning settlement, subject to approval by the Commission, and that Kelly indicated his understanding of the procedure. (Id.) The Division also argued that Kelly had waived his right to an attorney because on several occasions it had informed Kelly that he could and should consult an attorney and he chose not to do so. (Id. at 8-9.)
THE INITIAL DECISION
On February 24, 1998, the ALJ issued an initial decision granting summary disposition and concluding that Kelly violated § 4n(3)(A) of the Act and Commission Rule 1.31. (Slip op. at 3.) The ALJ revoked Kelly's registration as a CTA and ordered him to pay a $25,000 civil monetary penalty, but denied the Division's request for a cease and desist order. (Id. at 4.) The ALJ determined that the record revealed the following undisputed facts.
The ALJ found that Kelly has been a CTA registered with the Commission since January 12, 1996. (Id. at 5.) During an investigation of AVCO, a company that made and marketed a computer software program, the Division invoked Commission Rule 1.31 and sent a letter to Kelly demanding certain documents by September 18, 1996. (Id. at 5-6.) Kelly failed to comply, and when the Division contacted him on October 2, 1996, to ascertain why, Kelly responded that he no longer had the documents. (Id. at 6-7.) On January 6, 1997, the Division again attempted to gain access to the documents by subpoena, and Kelly maintained his original story. (Id. at 7.) On January 15, Kelly left a telephone message reiterating that he had not kept the documents. (Id.)
The ALJ inferred that the Division apparently believed Kelly's story, stopped trying to obtain the documents, and issued a complaint charging him with failure to maintain books and records and to furnish them upon request. (Id. at 7-8.) The ALJ found that, upon receiving the complaint, Kelly understood the consequences of his actions, found the records in the first place he looked, and delivered them to the Commission on March 4. (Id. at 8.)
The ALJ found that the parties had reached an agreement in principle on settlement terms pending Commission acceptance or rejection of the offer and that Kelly testified before Division staff as part of the settlement process. (Id. at 9.) The ALJ found that the Division staff informed Kelly when it served him with a subpoena that he could be accompanied by counsel and that his statements could be used against him, asked him at the beginning of the deposition if he wanted to testify without an attorney, and again warned him that his statements could be used against him. (Id. at 9-10 and n.26.)
The ALJ determined that the Division learned for the first time at the deposition that Kelly's failure to produce the records was not a result of inadvertence but of willful defiance because Kelly testified that (1) he "tossed" the request for records, (2) "at that time [Kelly] didn't think [he] wanted to help [the Division]. [Kelly] didn't want to be involved," and (3) at the time of the initial request, Kelly had reason to believe that he still had the records and knew where they were located. (Id. at 10-11 and n.30 citing Kelly's deposition at 66, 68-69.) The ALJ concluded that the Division was taken by surprise and, based on the new information,recommended a settlement with sanctions more severe than originally contemplated. (Id. at 11 and n.31 citing Div. Mem. in Opposition to Cross Motion at 7-8, Little Aff. at ¶¶ 2-4, Ans. at ¶ 21.)
Citing Commission Rule 10.91, 17 C.F.R. § 10.91 (1997), the ALJ found that the Division was entitled to summary disposition on the charge that Kelly violated the record production requirement of the Section 4n(3)(A) of the Act. (Id. at 13-14, 16, 18.) In making that finding, the ALJ stated that Section 4n(3)(A) requires every registered CTA to maintain books and records as prescribed by the Commission, to open them for inspection by a Commission representative, and to furnish the name and address of each client. (Id. at 16.) The ALJ determined that the duty is absolute and that the Division met its burden of proof by demonstrating that (1) Kelly was a CTA, (2) Kelly was registered, (3) Kelly had clients, and (4) Kelly failed to respond to a request for documents for six months and did so only after initiation of this proceeding. (Id. at 16-18.) Relying on Commission Rule 1.31 which requires production "promptly," the ALJ held that a CTA has a reasonable amount of time under the circumstances and concluded that the undisputed facts establish violation of Section 4n(a)(3)(A) of the Act as a matter of law. (Id. at 18 and n.55.)
The ALJ found that Commission Rule 1.31 imposes an independent record production requirement broader than the requirement imposed by Section 4n(a)(3)(A) of the Act and concluded that the same facts which support a violation of that section also support a violation of Rule 1.31. (Id. at 20-23.) The ALJrejected Kelly's assertion that the violation was de minimis, finding that there is no de minimis exception and that the rule was promulgated in order to facilitate a more efficient inspection mechanism than that available under a subpoena duces tecum. (Id. at 23.) He found that, once the point of promptness has passed and the recordkeeper has failed to produce the records, the violation is complete. (Id. at 24.) Therefore, the ALJ found that, as a matter of law, Kelly violated Commission Rule 1.31 and granted summary disposition to the Division. (Id.)
On the other hand, the ALJ found that the Division had abused its authority because it "misrepresented its authority to `direct' Kelly to provide any customer correspondence" and requested records which are not required by law to be kept.3 (Id. at 24-26 n.67.)
The ALJ then turned to Kelly's cross motion and determined that the relief Kelly sought was not merited because he did not come with clean hands by "`act[ing] fairly and without fraud or deceit as to the controversy in issue.'" (Id. at 28-30 quoting Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 814 (1945).) The ALJ found that Kelly negotiated the settlement terms on the basis of misrepresentations because he told the Division that he had discarded the records and then testified that he believed he had the records but did not want to locate them. (Id. at 33.) The ALJ decided that Kelly'smisrepresentation was material to the parties' negotiations concerning sanctions and that, therefore, Kelly had unclean hands. (Id. at 34.)
The ALJ also denied Kelly's request for exclusion of his deposition because he found that Kelly manifested an adequate waiver of his right to counsel under constitutional principles. (Id. at 39.) The ALJ stated that he was "especially comfortable" with this finding because Kelly had been proceeding pro se for the two months between the filing of the complaint and the deposition and had ample opportunity to hire counsel if he had desired. (Id. at 42.)
The ALJ refused to issue a cease and desist order finding that the likelihood that wrongful behavior will be repeated cannot be inferred from one intentional violation. (Id. at 45.) The ALJ concluded that Kelly's lack of honesty created no doubt that he was unfit for Commission registration and revoked Kelly's registration. (Id. at 51.) The ALJ found that a civil monetary penalty was appropriate because Kelly's violation was serious in that it undermined the integrity of the Commission's inspection authority. (Id. at 55-56.) Both parties appealed.
On appeal Kelly admits that most of the facts are undisputed, but disputes the ALJ's acceptance of the Division's version of the facts. (Kelly Ap. Br. at 3.) Kelly claims that, when the Division first contacted him, he "genuinely believed that he no longer had the requested documents and records" because he had placed the documents with the trash and that he informed the Division that it could obtain duplicate copies from the FCM. (Id. at 4-5.) Kelly states that the Division "scared,bullied, and intimidated [him] into fully cooperating." (Id. at 7.) Thus, "[f]earing for his professional life, Kelly searched his garage in the hope that the requested records had not, in fact, been thrown out with the bulk trash." (Id.)
Kelly argues that the totality of the circumstances must be considered in determining whether he waived his right to counsel. (Id. at 16.) Kelly accuses the Division of pressuring him and deceiving him into testifying by Little's promise that if he appeared voluntarily he would not be punished severely for his record production violations. (Id. at 7-8.) Kelly claims that he told the Division staff that he would testify in exchange for immunity and that he was afraid that he might say the wrong thing without the advice of an attorney. (Id. at 5.) While admitting that the Division advised him to retain an attorney, Kelly contends that, "[d]espite [his] repeated requests for an attorney, [he] did not receive the advice or assistance of counsel to protect himself." (Id. at 6-7.) Kelly argues that in response to the deposition question, "Do you waive the right to have an attorney represent you?" his answer, "It depends on what you ask me. Yes." is equivocal and "cannot reasonably be viewed as a knowing, informed waiver of counsel, especially given the circumstances of the promise previously made by the Division." (Id. at 9 citing deposition at 4.) Moreover, Kelly contends that the Division had an "obligation to clarify upon what Kelly's equivocal waiver depended." (Id. at 15.)
Kelly argues that the harsh sanctions imposed by the ALJ discourage cooperation and defeat public policy because he would have been better off had he not produced the records. (Id. at 11.) Citing the ALJ's decision, Kelly argues thatthe original demand for documents was improper and cannot serve as the basis for imposing sanctions and faults the ALJ for overlooking his own finding that the Division engaged in "misconduct of the most serious kind" by demanding documents that it had no authority to request. (Id. at 12 quoting slip op. n.27, 17.) Kelly contends that the first proper request for documents was the January 6 subpoena and that he produced the requested documents on March 4 and May 6. (Id. at 17.) Since there is no allegation of incompleteness, Kelly argues, he can be guilty only of delay which cannot reasonably result in registration revocation and a $25,000 civil monetary penalty. (Id. at 17-18.)
The Division argues that the ALJ's decision should be affirmed, arguing that Kelly's own statements support the ALJ's findings, that there was no settlement, and that its request for documents was proper. (Div. Ans. Br.) Additionally, the Division contends that Kelly waived his right to counsel even under criteria applied to criminal cases. (Id. at 25.)
However, the Division appeals from the ALJ's failure to issue a cease and desist order. The Division argues that there is a reasonable likelihood of future violations because Kelly's refusal to comply with the request for documents involved a pattern of misconduct and multiple misrepresentations to the Division, the violation was willful and intentional, Kelly "flaunted" the law until the complaint was filed, and "continues to assert that his conduct was lawful." (Div. Ap. Br. at 2.)
A grant of summary disposition is reviewed de novo. In re Staryk, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,206 at 45,807 (CFTC Dec. 18, 1997). Thus, we have reviewed the record de novo and have made our own findings.
Under Commission Rule 10.91(e), 17 C.F.R. § 10.91(e) (1997), summary disposition is appropriate when the evidence shows that there is no genuine issue as to any material fact, there is no necessity that further facts be developed in the record, and a party is entitled to a decision as a matter of law. We first address Kelly's procedural challenges and examine the record evidence of Kelly's liability and then consider appropriate sanctions.
Alleged Denial of Due Process
Kelly contends that his constitutional right to due process was denied when he testified without an attorney present. As to right to counsel, the courts recognize differences between civil and criminal litigants.4 This is a civil case.
Commission Rules 10.11(a)(2) and 11.7(c), 17 C.F.R. §§ 10.11(a)(2) and 11.7(c) (1998), provide for representation by counsel in Commission adjudicatory proceedings and investigations. However, the right to counsel can be waived. Mendenhall v. U.S., 556 F.Supp. 444, 450 (D. Nev. 1982). Due process in a civil action requires only the right to obtain counsel. Id., citing Goldberg v. Kelly, 397 U.S. 254, 270 (1970). The government is not obligated to provide counsel. Nees v. SEC, 414 F.2d 211, 221 (9th Cir. 1969). Furthermore, given Kelly's admission that the Division advised him to retain counsel and the Division's documentation of that advice, Kelly's contention that the Division induced him to waive counsel is disingenuous.5 (Kelly Ap. Br. at 6, 15; Kelly Mem. in Opposition to Div. Motion for Summary Disposition and in Support of Respondent's Cross Motion for Summary Disposition at Ex. A, Ex. B.) Moreover, not only was Kelly advised to consult an attorney, but he was warned that his testimony could be used against him. (Kelly Deposition at 7.) Having been warned, Kelly should not have been surprised that his incriminating testimony was used against him.
Was There a Settlement?
Kelly argues that the Commission must enforce the alleged settlement agreement. The principal question, however, is whether a binding settlement was reached between the parties.6 Commission Rule 10.108, 17 C.F.R. § 10.108 (1998), sets forth the procedure to be followed when there is an offer of settlement. The rule requires that all offers of settlement be in writing. Moreover, the rule specifies what must be included in the written offer and requires that the written offer be submitted to the Division which shall present it to the Commission for approval. Kelly did not submit a written settlement offer, nor were any of the other procedures set forth in Commission Rule 10.108 followed. Consequently, there was no settlement agreement.
Kelly's reliance on the oral negotiating position taken by a Division staff attorney during settlement negotiations is misplaced. Kelly was fully aware that any final settlement and the sanctions imposed thereby would be determined by the Commission, not the Division.7 Furthermore, Commission registrants areheld to know the content of Commission regulations, including the need for Commission approval of a settlement offer. Moreover, when the Division offered to recommend a three-month suspension to the Commission, it had been told by Kelly that he had discarded the documents, not that he was purposely withholding them. The material misrepresentation to the Division by Kelly on this point would invalidate any agreement that might have been reached. For all these reasons, we find that there was no enforceable oral agreement.
Alleged Abuse of Process by the Division
The ALJ found sua sponte that the Division requested records to which it was not entitled, including customer correspondence, the names of all associated persons and managers of Kelly's organization who traded the AVCO system, contracts and agreements between Kelly and AVCO, and contracts, correspondence, or other documents reflecting communication between Kelly and AVCO. (Slip op. at 24-25 n.67.) The ALJ found that these records are not required to be kept under Commission rules and that production can be compelled only by subpoena. (Id. at 26 n.67.) Based on the ALJ's finding, Kelly argues thatthe initial request was not proper and that the first proper request for documents was not made until January. (Kelly Ap. Br. at 17.) Upon examination of our rules, we have concluded that the plain meaning of the language includes the requested documents.
CTAs are required to keep an acknowledgment by the customer that the customer received a disclosure document for the particular trading program the CTA will be trading (Commission Rule 4.31(b) and 4.33(a)(2)), the name and address of each customer, all powers of attorney, all other written agreements, copies of each confirmation, purchase and sale statement and each monthly statement, each report, letter, circular, memorandum, publication, writing, advertisement, or other literature or advice distributed to any existing or prospective customer (§ 4.33(a)(1)-(7)). Consequently, the plain language compels a finding that the request for customer correspondence was proper.
Section 4.33(b) requires CTAs to keep
(3)Books and records of all other transactions in all other business dealings in trading commodity interests and of all cash market transactions in which the commodity trading advisor and each principal thereof engages. Those books and records must include, as applicable, books and records of the type specified in paragraphs (a)(1) through (a)(7) of this section and in paragraphs (a)(1) through (a)(8) of § 4.23.
Rule 4.23(a)(8), 17 C.F.R. 4.23(a)(8) (1997) requires retention of "all other records, data, and memoranda prepared or received in connection with the commodity pool." Contracts and agreements between Kelly and AVCO, and correspondence or other documents reflecting communication between Kelly and AVCO, including purchase of a computer program, are records, data, andmemoranda specified by the rule. Consequently, we find that the Division's request for these items was proper. The names of all associated persons and managers of Kelly's organization who traded the AVCO system should be among the records, data, and memoranda of the type prepared or received in connection with a commodity pool. Therefore, we hold that this provision includes a requirement that the CTA keep them and, under Commission Rule 1.31, make them available to the Division.
Accordingly, we find that, under Section 4n(3)(A) of the Act and Commission Rule 1.31, Kelly was required to provide promptly all requested documents listed in the September 4, 1996 letter.
Registrants are strictly liable for recordkeeping violations, for which a showing of scienter is not required. See In re Mayer, 1998 WL 80513 at *20 (CFTC Feb. 25, 1998), In re Heitschmidt, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,263 at 42,206 (CFTC Nov. 9, 1994), and In re Buckwalter, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,995 at 37,687 (CFTC Jan. 25, 1991). It is clear from the record that Kelly did not provide the records requested by the Division until the Commission had filed a complaint charging him with violative conduct. Kelly does not dispute these facts. CTAs are required by Section 4n(3)(A) of the Act and Commission Rule 1.31 to provide the requested documents promptly. The Act and the Rules do not envision the necessity of filing a complaint or obtaining a subpoena. Failure by a registrant to provide requestedrecords promptly impedes the Commission's inspection and oversight abilities. Accordingly, we grant summary disposition and find that Kelly violated Section 4n(3)(A) of the Act and Commission Rule 1.31.
Kelly refused to produce requested records, thereby disregarding the obligations that he undertook as a Commission registrant. We take seriously a registrant's failure to comply with recordkeeping and inspection requirements. Our authority to inspect the operations and activities of Commission registrants goes to the heart of our ability to enforce the Act. In re New York Currency Research Corp., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,223 at 45,915 (CFTC Feb. 6, 1998).
In this case, the material facts are not in dispute. Kelly's written submissions and sworn testimony as well as the affidavits and other documentation reveal Kelly's state of mind. (Ans.; Spann Aff. at 2 (July 30, 1997); Little Aff. at 1-2 (Sept. 12, 1997); Kelly's Reply to Div. Statement of Undisputed Facts at ¶ 4; Kelly Aff. (Aug. 27, 1997); Kelly Mem. in Opposition to Div. Motion for Summary Disposition and in Support of Res. Cross Motion for Summary Disposition at Ex. A, Ex. B; Kelly Deposition at 54-69.) Kelly does not dispute the contents of these submissions, nor does he deny any of the statements attributed to him. Moreover, Kelly concedes that the material facts are in the record and does not suggest that the record needs to be supplemented.
Kelly's testimony is that he purposely did not respond to the request, that he discarded the letter from the Division, and that he did not want to help the Division. (Kelly Deposition at 61-62, 66-67, 69.) Kelly also testified that he had not read the sections of the Act and Commission Rules which set forth the legal requirements to provide records and that he did not know or care whether he had an obligation to do so. (Id. at 69.) In short, Kelly's refusal to provide the requested records was willful.
As a general proposition, cease and desist orders should be entered against those who have been adjudged to have violated the Act. In re Richardson Securities, [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,145 at 24,647 (CFTC Jan. 27, 1981). A cease and desist order is appropriate when there is a reasonable likelihood the conduct will be repeated. In re Mayer, 1998 WL 80513 at *29 (CFTC Feb. 25, 1998), citing In re GNP Commodities, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,360 at 39,223 (CFTC Aug. 11, 1992).
As discussed above, Kelly has been repeatedly dishonest in his dealings with the Division and willfully violated the Act and regulations. On this record, we believe that a cease and desist order is appropriate to assure that Kelly will not repeat his prior behavior. See, Precious Metals Assoc., Inc. v. CFTC, 620 F.2d 900, 912 (1st Cir. 1980), citing NLRB v. Beth Israel Hospital, 554 F.2d 477, 483 (1st Cir. 1977) (affirming a cease and desist order where respondents had shown no mitigation and a regulatory ban on their activities had not stopped them).
On the other hand, we believe that revocation of Kelly's registration is too harsh in this situation. Kelly had been registered for only a short time, and to some extent, his violations may be attributed to his lack of familiarity with the responsibilities attendant upon being a Commission registrant. Kelly's customers were not affected by his violations, and Kelly eventually did produce the documents after this proceeding had been instituted. On the other hand, we cannot regulate the markets effectively if our registrants do not obey the Act and Commission Rules or if they comply with recordkeeping requirements only after a complaint has been filed against them. We believe that a six-month suspension of Kelly's registration will convey the importance of keeping required records and providing them to Commission representatives when requested to do so.
For the same reasons, we find that the $25,000 civil monetary penalty imposed by the ALJ is too high. We have concluded that a $10,000 civil monetary penalty more accurately reflects the gravity of Kelly's violations.
In light of the foregoing, the ALJ's decision is affirmed in part and reversed in part. The cease and desist order, six-month suspension, and civil monetary penalty, as modified, shall become effective 30 days after this order is served.8
IT IS SO ORDERED.
By the Commission (Chairperson BORN and Commissioners TULL, HOLUM, SPEARS, and NEWSOME).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: November 19, 1998
1 The telephone message appears to have been in response to a Subpoena ad testificandum and duces tecum served upon Kelly on the same day. (Div. Mem. in Opposition to Res. Cross Motion for Summary Disposition at 2.) On January 7, 1997, Division staff told Kelly that "the Division was issuing him a subpoena in response to his declared intent not to talk to us unless we had a subpoena compelling him to do so." (Mem. to Files from Division staff attorney Brett Little (Jan. 7, 1997) attached as Ex. B to Kelly's Reply to Div. Statement of Undisputed Facts.)
2 Kelly attached an affidavit stating that he did not respond initially to the request for records because he cleared his trades for public customers through a third-party clearing agent which he believed could supply the records more easily than he could. (Kelly Aff. at ¶ 4.) Further, Kelly stated, "I also understood that this request for information was not really directed at me, but that the Commission was seeking information about AVCO and its computerized trading program. Since I had no relationship with AVCO other than buying their program, I did not believe that I was the target investigation [sic]." (Id.)
3 The ALJ denied summary disposition to the Division on its charge that Kelly violated Commission Rule 4.33. (Id. at 26-28.) The ALJ decided, however, that this finding did not lessen the gravity of Kelly's violation and had no impact on the level of sanctions. (Id. at 28.)
4 Anderson v. Sheppard, 856 F.2d 741, 747 (6th Cir. 1988). The right to an attorney in a criminal case comes from the Sixth Amendment to the Constitution and requires appointment of counsel at government expense when necessary. Potachnick v. Port City Construction Company, 609 F. 2d 1101, 1118 (5th Cir. 1980) cert. denied, 449 U.S. 820 (1980). On the other hand, in a civil case the right to counsel is rooted in the Fifth Amendment right to due process and does not require appointment of counsel. (Id.)
5 Kelly cites several cases for the proposition that due process requires that he be afforded a fair hearing and the right to counsel. (Kelly Ap. Br. at 16.) None of these cases supports Kelly's contention that he was deprived of counsel. In Hannah v. Larche, 363 U.S. 420, 441 (1960), the Court stated that "Whether the Constitution requires that a particular right obtain in a specific proceeding depends upon . . . [inter alia] . . . the nature of the proceeding . . . ." The Court in Goldberg v. Kelly, 397 U.S. 254, 269-270 (1970), stated that welfare recipients must be allowed to retain an attorney for pre-termination hearings, but that the government is not required to provide counsel. Citing Nees v. SEC, the Court stated in Sartain v. SEC, 601 F.2d 1366, 1375 (9th Cir. 1979), that the SEC was not obliged to provide respondent with counsel, nor was it "obligated to assure that the counsel he retained provided him with `reasonably competent and effective representation'. . . ." Kelly also cites to U.S. v. Scarpa, 897 F.2d 63 (2d Cir. 1990) and Brewer v. Williams, 430 U.S. 387 (1977) which are inapposite because they address the right to counsel in criminal cases. Hanly v. SEC, 415 F.2d 589 (2d Cir. 1969) does not address the right to counsel.
6 See Fustok v. Conticommodity Services, Inc., 577 F. Supp. 852, 858 (S.D.N.Y. 1984). See also, Reich v. Best Built Homes, Inc., 895 F. Supp. 47, 49-50 (W.D.N.Y. 1995) (courts only enforce completed agreements). The cases cited by Kelly are therefore inapposite. In Schneider v. Dumbarton Developers, Inc., 767 F.2d 1007 (D.C. Cir. 1985), there was a written settlement agreement to be enforced, and in Cruz v. Korean Air Lines Co., LTD., 838 F. Supp. 843, 846 (S.D.N.Y. 1993), the "uncontroverted facts" demonstrated that an enforceable agreement had been reached.
7 In opposing Kelly's cross-motion, the Division submitted an affidavit by Division staff attorney Brett Little stating that he explained to Kelly they were engaged in a preliminary discussion and any settlement would have to be approved by theCommission and that Kelly indicated that he understood. (Little Aff. at ¶ 2 (Sept. 12, 1997).) Little stated that, after Kelly testified, the Division re-evaluated the situation and decided that higher sanctions were warranted. (Id. at ¶ 4.) Little further stated that, during a telephone conference with the ALJ which took place after Kelly's deposition and in which settlement terms were proposed, Kelly did not claim that a settlement already had been reached. (Id. at ¶ 5.) Little denied that Kelly had been told that the preliminary suggestions were a settlement offer or that his testimony was in exchange for immunity. (Id. at ¶ 6.) Little also stated that Kelly never made a written offer of settlement. (Id.) Kelly did not dispute the contents of the affidavit.
8 Any 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).