UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
KARL ALBERT CLEMONS
VERNON WESLEY McCABE, III, CERES
CFTC Docket No. 97-R053
Our review of the record and the parties' appellate submissions establishes that the findings and conclusions of the presiding officer with respect to respondents' liability are supported by the weight of the evidence; we therefore adopt them. We further conclude that the presiding officer committed no material error and that the parties have not raised important questions of law or policy with respect to the Judgment Officer's liability determination that merit discussion.1 Accordingly, we affirm the initial decision.2
While we summarily affirm the Judgment Officer's determination that Clemons failed to prove his case, we share the Judgment Officer's concern, expressed in dicta, that the indemnity requirement set forth in Iowa Grain Company's ("Iowa Grain") account agreement with Clemons is inconsistent with Iowa Grain's status as guarantor of Ceres Trading Group, Inc. ("Ceres Trading") under Rule 1.10(j), 17 C.F.R. § 1.10(j) (1998).
Iowa Grain, a registered futures commission merchant ("FCM"), and Ceres Trading, a registered introducing broker ("IB"), entered into a guarantee agreement in which Iowa Grain agreed that it would be jointly and severally liable for all of Ceres Trading's obligations under the Commodity Exchange Act ("Act") with respect to the solicitation of, and transactions involving, introduced customers. The agreement also contained the following language:
The futures commission merchant acknowledges that at the time of execution of this guarantee agreement there are not any conditions precedent, concurrent or subsequent affecting, impairing or modifying in any manner the obligations of the futures commission merchant hereunder, or the immediate taking effect of this agreement as the entire agreement of the futures commission merchant with respect to guaranteeing the introducing broker's obligations as set forth herein to the Commission and to the introducing broker's commodity customers . . . under the Commodity Exchange Act.3
When Clemons signed his customer account agreement with Iowa Grain, however, his agreement provided in pertinent part that:
[Clemons] acknowledges and agrees that Iowa Grain shall not be responsible to [Clemons] for any losses resulting from conduct or advice . . . on the part of [Ceres Trading]. [Clemons] specifically agrees that Iowa Grain shall have no obligation to supervise the activities of [Ceres Trading] and [Clemons] will indemnify Iowa Grain and hold Iowa Grain harmless from and against all losses, liabilities, and damages (including attorneys' fees) incurred by Iowa Grain as a result of any actions taken or not taken by [Ceres Trading].
The agreement also required Clemons to acknowledge "his unconditional obligation to pay to Iowa Grain the amount of any and all losses, costs and damages (including costs and attorneys' fees) sustained by Iowa Grain resulting in any way or arising out of . . . " his introduced account.
A guarantor FCM cannot require customers to indemnify it for liabilities arising under its guarantee agreement. Such a requirement undermines the protections provided by the guarantee agreement and violates Rule 1.10(j). This rule has worked well for more than 15 years. Accordingly, we take this opportunity to state clearly that an indemnification agreement that seeks to vitiate the FCM's obligations as a guarantor under Rule 1.10(j) is contrary to public policy, void and unenforceable.
IT IS SO ORDERED.
By the Commission (Chairperson BORN and Commissioners HOLUM, TULL, SPEARS, and NEWSOME).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: January 29, 1999
1 Respondents' request for oral argument is denied.
2 Under Sections 6(c) and 14(e) of the Commodity Exchange Act, 7 U.S.C. §§ 9 and 18(e)(1994), a party may appeal a reparation order of the Commission to the United States Court of Appeals for only the circuit in which a hearing was held; if no hearing was held, the appeal may be filed in any circuit in which the appellee is located. The statute also states that such an appeal must be filed within 15 days after notice of the order and that any appeal is not effective unless, within 30 days of the date of the Commission order, the appealing party files with the court a bond equal to double the amount of any reparation award.
A party who receives a reparation award may sue to enforce the award if payment is not made within 15 days of the date the order is served by the Proceedings Clerk. Pursuant to Section 14(d) of the Act, 7 U.S.C. § 18(d) (1994), such an action must be filed in the United States District Court. See also 17 C.F.R. § 12.407 (1997).
Pursuant to Section 14(f) of the Act, 7 U.S.C. § 18(f) (1994), a party against whom a reparation award has been made must provide to the Commission, within 15 days of the expiration of the period for compliance with the award, satisfactory evidence that (1) an appeal has been taken to the United States Court of Appeals pursuant to Sections 6(c) and 14(e) of the Act or (2) payment has been made of the full amount of the award (or any agreed settlement thereof). If the Commission does not receive satisfactory evidence within the appropriate period, such party automatically shall be suspended from registration under the Act and prohibited from trading on all contract markets. Such prohibition and suspension shall remain in effect until such party provides the Commission with satisfactory evidence that payment has been made of the full amount of the award plus interest thereon to the date of payment.
3 Iowa Grain and Ceres Trading also entered into an introducing broker agreement. Under the terms of that agreement, Iowa Grain and Ceres Trading agreed that:
Ceres Trading would clear and execute all customer trades through Iowa Grain; Ceres Trading would be responsible for opening and establishing customer accounts; Ceres Trading would immediately notify Iowa Grain of any customer complaint; Ceres Trading would not institute any legal action in reply to a customer complaint without the prior written consent of Iowa Grain; Iowa Grain had the exclusive right to respond to, adjust or settle any customer complaint; and Ceres Trading would indemnify and hold harmless Iowa Grain from and against all losses, liabilities, damages, expenses and costs suffered by Iowa Grain that resulted from or related to any violations by Ceres Trading of the Commodity Exchange Act.