UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
In the Matter of
CFTC DOCKET NO. 98-3
NEW YORK CURRENCY
RESEARCH CORPORATION OPINION AND ORDER
This case arises out of a complaint filed by the Commission against respondent New York Currency Research Group ("New York Currency"). The single-count complaint alleged violations of the Commission's record keeping and production requirements for commodity trading advisors ("CTAs") and commodity pool operators ("CPOs"). After conducting a one-day hearing, the Administrative Law Judge ("ALJ") issued an initial decision dismissing the complaint. The ALJ found that the Commodity Exchange Act ("CEA" or "Act") and the applicable regulations impose record keeping and production duties only upon an entity actually operating as a CTA and CPO. The ALJ held that the Division of Enforcement ("Division") did not prove that New York Currency had operated as a CTA or CPO even though it was registered as such, and accordingly that respondent had no duty to comply with either the Commission's record keeping requirements or the Division's production requests. The Division filed exceptions to the ALJ's decision, arguing that it is respondent's status as a registered CTA and CPO that required compliance with the Commission's bookkeeping and production requirements.
New York Currency was registered as a CPO and a CTA from January 16, 1996 until April 3, 1997.(1) On July 25, 1997, the Division sent a letter to the respondent asking for production of the following: (1) the name, address, and telephone number of each client, subscriber, or participant; (2) samples or copies of all reports, letters, circulars, memoranda, publications, writings, or other literature or advice distributed to clients, subscribers or participants, or prospective clients, subscribers, or participants; (3) any and all opening account documents, powers of attorney, financial and credit records, commission or fee agreements and any other documents accompanying or related thereto for each client, subscriber, or participant; (4) any and all trading records, confirmations, daily and monthly account statements for each client, subscriber, or participant; and (5) any and all records, notes, correspondence, and taped conversations relating to New York Currency, including but not limited to customer complaints, communications between New York Currency, Michael Matejka (the President of New York Currency), their agents, employees, or representatives and any third parties or any governmental agencies, bodies, or entities.
The Division's July 25th request was returned and stamped "Moved, unable to forward." Another letter was sent by the Division to respondent's new address on August 5, 1997. New York Currency, through counsel, responded that the Commission lacked jurisdiction over its activities and refused to comply with the request. On September 5, 1997, the Division sent a letter to respondent's counsel asserting that the Commission had the statutory right to inspect books and records and indicating that a failure to comply with the request could result in an enforcement action. Subsequently, on September 15, 1997, the Division sent another production request. On September 22, 1997, respondent again refused to produce the requested documents.
On December 17, 1997, the Commission filed a single count complaint alleging that the failure to produce the documents violated Section 4n(3)(A) of the CEA, 7 U.S.C. § 6n(3)(A) (1994), and Rules 1.31(a)(2), 4.23 and 4.33, 17 C.F.R. §§ 1.31(a)(2), 4.23, and 4.33 (1997). Pursuant to Section 10.3 of its Rules of Practice, the Commission waived its Rules of Practice and provided expedited procedures to resolve this matter.(2) The Complaint requested relief in the form of a cease and desist order and a civil monetary penalty of not more than the higher of $110,000 or triple the monetary gain to respondent. On December 24, 1997, respondent requested additional time to prepare for the hearing. This request was denied by the ALJ. On December 29, 1997, respondent filed a motion to dismiss the complaint, for summary judgment, and for additional time to prepare for the hearing . This motion was denied by the ALJ.
A one-day oral evidentiary hearing was held in New York on December 29, 1997. As an initial matter, respondent's counsel asserted that the expedited schedule constituted a violation of his client's due process rights. Counsel represented that respondent received a copy of the Complaint on December 22, 1997, retained counsel on December 24, 1997, and that, as a result of the holidays, the hearing was scheduled for the next business day after counsel was retained. Respondent's counsel contended that his client was not prepared "as a legal or factual matter" to proceed with the hearing.
In its opening statement, the Division asserted that the narrow issue before the Court was whether New York Currency was registered as a CTA and CPO, whether it was subject to a record keeping requirement as a result of this registration, and whether it failed to maintain and produce these records despite being required to do so. (Trans. at 48.) The Division presented its case in chief based on a number of documents introduced into evidence. (Trans. at 72-88.) These documents included: (1) a declaration from NFA's custodian of records attesting to respondent's registration and attaching, inter alia, copies of respondent's registration application; (2) the Division's July 25 and August 5, 1997 letters requesting production of documents; (3) respondent's August 22, 1997 letter refusing to comply with the request; (4) the Division's September 5, 1997 letter to respondent reasserting its jurisdiction to require production of the documents and suggesting that the failure to comply with the requests may result in an enforcement action; (5) the Division's final request for documents and attached "Statement to Registered Persons Directed to Provide Information or Access to Books and Records Other Than Pursuant to Commission Subpoena"; and (6) Respondent's September 22, 1997 letter to the Division stating that the Commission has no jurisdiction to request production of records because New York Currency is engaged in the off-exchange trading of foreign currency. After these documents were received into evidence, the Commission rested its case. (Trans. at 88.)
Respondent presented its case in chief through the testimony of New York Currency's president, Michael Matejka. Matejka conceded that respondent was registered with the Commission as a CTA and CPO for approximately one year beginning in January of 1996. (Trans. at 98.) Matejka also testified that during that time respondent did not function as a CPO or CTA in any capacity other than with respect to off-exchange foreign currency transactions in the spot market. (Trans. at 99.) On cross-examination, Matejka testified regarding his experience in the futures industry and the various addresses that respondent maintained while in business. (Trans. at 99-114.) Respondent stipulated that New York Currency applied for and received registration and was registered during the one-year time frame. (Trans. at 120.) Matejka further testified that New York Currency provided capital to individuals who wanted to purchase foreign currency from banking institutions and placed stops in order to minimize customer losses. (Trans. at 139, 141-144.) During cross-examination of Matejka with respect to the nature of respondent's business, the ALJ interrupted to prevent any significant cross-examination by the Division on the issue. Finding that the Division had not presented any evidence in its affirmative case regarding the nature of respondent's activities, the ALJ held that the Division had waived any right to do so in cross-examination. (Trans. at 173-174.)
Pursuant to the Commission's order, both parties filed post-hearing briefs containing proposed findings of fact and conclusions of law on January 5, 1998, and subsequently filed reply briefs on January 8, 1998. On January 12, 1998, the ALJ issued an initial decision dismissing the Complaint in its entirety. Based on his analysis of CEA Section 4n(3)(A) and Commission Rules 4.23 and 4.33, the judge found that these sections applied only to an entity actually operating as a CTA or CPO and that the Division had the burden to prove that respondent was so operating. Therefore, he held that respondent had no duty to maintain books and records. Moreover, the ALJ found that because Rules 4.23 and 4.33 did not require respondent to maintain books, there could be no violation of the production requirement of Rule 1.31.
The ALJ focused on the language in CEA Section 4(n)(3)(A), which provides that "[e]very commodity trading advisor and commodity pool operator registered under this Act shall maintain books and records and file such reports in such form and manner as may be prescribed by the Commission." Rejecting the Division's argument that mere registration brings one under CEA Section 4(n)(3)(A), the ALJ found that the Section applies only to those who are both registered and actually acting as a CTA or CPO within the definition of the Act. Because New York Currency was not proved to have operated as a CTA or CPO, the ALJ concluded that the Act's record keeping provisions did not apply to it.
Looking to the definition of a CPO as provided in Section 1a(4) of the Act, 7 U.S.C. § 1a(4) (1994), the ALJ found that the Division did not prove that New York Currency was "engaged in a business . . . for the purpose of trading in any commodity for future delivery on or subject to the rules of any contract market . . . ." Turning next to the definition of CTA as provided in Section 1a(5) of the Act, 7 U.S.C. § 1a(5) (1994), the ALJ found that the Division had not shown that New York Currency was a "person who . . . for compensation or profit, engages in the business of advising others . . . as to the value of or the advisability of trading in . . . any contract of sale of a commodity for future delivery . . . . made or subject to the rules of a contract market; . . . any commodity option . . . [or] . . . any leverage transaction . . . ." The ALJ determined that because the Division had failed to prove that respondent was operating as a CTA or CPO, there could be no violation of the record keeping and production requirements.
Turning next to Commission Regulations 4.23 and 4.33, the ALJ found that each rule similarly provides a record keeping obligation only for those registrants who in fact engage in activities that meet the Act's definition of CTA or CPO. Once again, since the Division failed to prove that respondent was acting as a CTA or CPO, the ALJ concluded that respondent could not be in violation of the Commission's record keeping rules.
On January 15, 1998, the Division filed its exceptions to the ALJ's initial decision. The Division essentially argues that it is the respondent's registered status as a CPO and CTA that obliged it to comply with the Commission record keeping and production duties. The Division also contends that the ALJ's interpretation of Section 4n(3)(A) and Regulations 4.23 and 4.33 would frustrate the purpose of the Act and Regulations because it would require the Commission to prove that persons registered as CTAs and CPOs were actually engaging in activities qualifying them as registrants before it could obtain records relating to those activities. Only by obtaining evidence independently by subpoena or otherwise that a registrant was, in fact, operating as a CTA or CPO could the Commission then seek access to a registrant's books and records through its inspection powers. The Division contends that this would seriously undermine the Commission's ability to carry out its important oversight responsibilities.
As an initial matter, it should be noted that the ALJ found that respondent registered voluntarily and that whether New York Currency was conducting business as a CTA or CPO was not proved by the Division at the hearing. The Division stresses that it does not need to prove conduct in order to gain compliance with the Commission's record keeping requirements. Nevertheless, the Division takes issue with the ALJ's determination that New York Currency was not obligated to register with the Commission and maintains that the record suggests that respondent was engaged in futures transactions conducted on a board of trade. In our view, the nature of respondent's activities is irrelevant to the offenses charged, and we find it unnecessary to reach this issue.
The ALJ relied on the "plain language" of the Act and Commission regulations in reaching the decision that a person must be engaging in CPO and CTA activities in order to be covered by the Commission's record keeping rules. However, it seems clear to us that CEA § 4n(3)(A) and Rules 4.23 and 4.33 were intended to define the record keeping and reporting obligations that would flow from registration, and not to distinguish between those registrants who are acting as CTAs or CPOs and those registrants who are not. The Act refers to "[e]very [CTA] and [CPO] registered under this Act." It is, in our view, a tortured and unduly restrictive interpretation of this language to read it as meaning that a CTA or CPO does not include all persons registered as such.
In determining the meaning of a statute, courts look not only to the particular statutory language, but to the statute as a whole, keeping in mind its purpose and policy. See Crandon v. U.S., 494 U.S. 152 (1990); Hsu v. Roslyn Union Free School District, 85 F.3d 839 (2nd Cir. 1996); Johnson v. U.S., 123 F.3d 700 (2nd Cir. 1997). The Commission's bookkeeping and inspection requirements for CTAs and CPOs were adopted to permit the Commission to perform its oversight and enforcement responsibilities and to protect the public interest in a registrant's activities. The ALJ's reading of the rules would undermine significantly these important objectives. A registrant could avoid or substantially delay its response to a production request by simply asserting that it was not operating as a CPO or CTA. The Commission then would be forced in most cases to authorize an order of formal investigation to permit the Division of Enforcement to subpoena documents sufficient to demonstrate the nature of the registrant's business. It is essential that the Commission must have a direct and immediate right to inspect the essential records relating to operations and activities of CPOs and CPAs and that these records be maintained by each registrant. We believe that requiring the Commission to delay review of registrant records would severely inhibit its ability to monitor registrants effectively and to protect customers and the markets.
It is respondent's status as a registrant that governs the applicability of the bookkeeping requirements. Cf., Commission Rules 4.13 and 4.14, 17 C.F.R. §§ 4.13 and 4.14 (1997) (providing that, if a person qualifies for an exemption from CPO or CTA registration under the Act, yet chooses to register anyway, that person must comply with the Commission's record keeping provisions as if that person were not exempt from registration). It is irrelevant whether respondent is currently engaging in any CPO and CTA activities. When New York Currency elected to register with the Commission, it agreed to comply with the obligations that such registration imposed in exchange for the right to hold itself out as a CPO and CTA. Having received the benefits that registration provides, respondent cannot now avoid its responsibilities under the Act. When New York Currency registered as a CTA, the public had the right to expect that it was complying with the record keeping and inspection obligations that accompany the statute.
Similarly, we have previously held that anyone registered as a FCM under the Act is required to comply with the Act's minimum capital requirements, regardless of the nature of their business activities. In In the Matter of Premex, [1982 -1984 Transfer Binder] Comm. Fut. L. Rep. CCH ¶ 21,992 at 28,354-57 (CFTC Feb. 1, 1984), respondents were charged with violating the Act by failing to comply with its minimum net capital requirements. Respondents argued that the FCM net capital requirements did not apply to them because, despite their registration as a FCM, they engaged exclusively in unregulated off-exchange leverage transactions. In rejecting Premex's argument, we held that, "because registered FCMs may engage in futures trading for customers at any time without further notice to the Commission, the investing public cannot be adequately protected unless all FCMs are held to the same financial standards." Id. at 28,357. Accordingly, once an entity elects to register with the Commission, it is subject to both the rights and responsibilities that stem from its status as a registrant. New York Currency was obliged under the Act to maintain and to produce the requested documents relating to the period of its registration, and it failed to do so. Accordingly, we reverse the ALJ's determination and find that by refusing to produce the requested documents, respondent violated Section 4n(3)(A) of the Act and Commission Regulations 1.31, 4.23, and 4.33.
Our assessment of the record and other relevant factors establishes that a cease and desist order and a civil money penalty in the amount of $110,000 are warranted. Respondent's decision to register with the Commission but to refuse to produce the records requested of such a registrant is a naked attempt to circumvent the regulatory obligations imposed under the Act. The ability to inspect the operations and activities of the Commission's registrants goes to the heart of the Commission's ability to enforce the commodities laws. In light of the serious nature of the violation, we conclude that a civil monetary penalty in the amount of $110,000 against respondent is warranted.
We reverse the decision of the ALJ and find that respondent has violated Section 4n(3)A) of the Act and Commission Regulations 1.31, 4.23, and 4.33. We order that respondent pay a civil penalty of $110,000 and cease and desist from violating the provisions of the Act and Regulations set forth above.(3)
IT IS SO ORDERED.
By the Commission (Chairperson BORN and Commissioners TULL, HOLUM and
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: February 6, 1998
1. Respondent's registration was terminated when it failed to file an Annual Renewal Form 7-R with the National Futures Association ("NFA"). In the complaint, the Commission stated that the request for production covered the period during which New York Currency was registered.
2. The complaint provided for the following: (1) respondent must serve an answer within five days after service of the complaint; (2) a hearing before an ALJ should be set for 10 days after service of the complaint; (3) both parties shall file post-hearing briefs five days after competition of the hearing; (4) both parties shall have three days thereafter to file reply briefs; (5) the ALJ shall have five days following the filing of reply briefs to issue an initial decision and the parties shall have three days after filing of the initial decision to lodge exceptions to the decision; and (6) the Commission shall have 21 days after transmission of the transcript and record in which to issue a final order.
3. A motion to stay the effect of the 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 (1998).