UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
In the Matter of
GLOBAL LINK MIAMI CORPORATION,
CFTC Docket No. 98-1
AMENDED OPINION AND ORDER
The Division of Enforcement ("Division") appeals from an order of the Administrative Law Judge ("ALJ") dismissing its complaint against Global Link Miami Corporation ("Global Link") and others, who were charged with fraud and operating a foreign currency bucket shop to the detriment of customers. Although none of the respondents answered the complaint, the ALJ denied the Division's motion for a default judgment in its favor, ruling instead that the Commission lacked subject matter jurisdiction under the Commodity Exchange Act, 7 U.S.C. §§ 1, et seq. (1994) ("CEA" or "Act"), to entertain the complaint. The ALJ based his ruling on his interpretation of the term "board of trade," as used in section 2(a)(1)(A)(ii) of the Act, 7 U.S.C. § 2(ii) (1994), a section known as the "Treasury Amendment." The ALJ construed "board of trade" as used in the Treasury Amendment to include only organized futures exchanges and concluded that Global Link was not operating such an organized futures exchange.
On appeal, the Division argues (1) that the ALJ lacked authority to dismiss an enforcement complaint authorized by the Commission and (2) that the ALJ erred as a matter of law in applying an unduly restrictive interpretation of the scope of a "board of trade" in the context of the Treasury Amendment. No respondent has appeared to defend the decision below.
Contrary to the Division's assertions on appeal, we hold that the ALJ had authority to rule on subject matter jurisdiction while entertaining a default motion. However, we disagree with the ALJ's legal conclusions in the exercise of that authority in this case. For the reasons that follow, we vacate those portions of the ALJ's order dismissing the complaint's allegations of wrongdoing under Sections 4(a), 7 U.S.C. § 6(a) (trading futures on a board of trade not designated as a contract market); 4b(a)(iv), 7 U.S.C. § 6b(a)(iv) (bucketing customer orders); and 4b(a)(i), 7 U.S.C. § 6b(a)(i) (fraud). We find the respondents liable in default on those charges, on the basis of the Division's complaint as supplemented by other documents submitted by the Division as part of its motion for a default order. The Treasury Amendment exclusion does not deprive the Commission of jurisdiction to take appropriate enforcement action against foreign currency bucket shops, such as Global Link, offering a public marketplace for the purchase and sale of futures contracts.
We do not reach the remainder of the allegations of the complaint and therefore affirm the ALJ's dismissal of those charges. We also impose sanctions commensurate with the misconduct found.
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Global Link was established and incorporated in Florida in May 1996 by Leung Ka Shung ("Leung"), Grant Lawton ("Lawton") and King Keung Chan ("Chan"). Leung, Lawton and Chan had operated retail foreign currency trading shops in Canada before being shut down by Canadian authorities.1 The company, capitalized primarily by Leung and Chan and managed by Lawton as president, recruited "account executives" through newspaper advertisements, offering employment and investment opportunities. Individuals who joined Global Link in this capacity received a ten-day training course in foreign exchange trading, after which they were encouraged to open and trade their own accounts and to solicit others to trade.
While some 35 to 40 individuals attended at least past of the training course, only six who completed it remained with the company as "account executives." The six account executives solicited five customer accounts, and three of the six account executives opened personal trading accounts. The eight account holders remitted a total of approximately $64,000 to the company.
Global Link offered standardized contracts for the purchase or sale of British pounds, Japanese yen, Swiss francs and German marks, each having a face amount of approximately $100,000. Global Link's contracts were designed to match currency futures contracts offered on the Chicago Mercantile Exchange. Customers paid $1,000 initial margin and variation margin as needed if positions remained open overnight. While most transactions were day trades or overnight trades, Global Link allowed positions to remain open indefinitely. See generally Div. App. Br. (filed August 5, 1998) at 9-14; Initial Decision at 6-20; Division's Proposed Findings of Fact (Feb. 13, 1998) (citing to the investigative record).
Global Link's foreign currency contracts had the characteristics of futures contracts. Customers purchased or sold a specific quantity of a commodity for future delivery. Customers did not intend or expect delivery, and no delivery occurred; Global Link marketed the contracts solely as a vehicle for speculating on price changes. Some positions remained open for several days without offset and were carried as open interest without any recorded rollover. Division's Memorandum in Support of Motion for Default Judgment at 7-8 (Feb. 13, 1998).
Global Link's contracts also were marketed in a fraudulent manner. Global Link misrepresented to potential customers that they were likely to earn annual profits of 25 to 40 percent and that their downside risk was limited to five percent of the amount invested. Based on its experience with retail trading in Canada, Global Link knew these projections were unrealistic and false.
Global Link told its account executives that the buy and sell orders that they placed through the company's trading desk were executed by Addwealth, a foreign currency firm with offices in New Zealand and Hong Kong. All Global Link orders had to be placed through Chan, who supervised the "trading desk." Account executives would tell Chan when they wanted to make a trade for their own accounts or for the account of a customer. Chan would make a telephone call, purportedly to Addwealth, and then would tell the account executives the buy and sell prices purportedly quoted by Addwealth. If the account executive decided to trade, the executive would place a buy or sell order with Chan, and within the next day or so Global Link would provide a written confirmation of the trade, ostensibly from Addwealth. Div. App. Br. at 13, citing allegations of the complaint.
In fact the trading desk was a sham. Global Link's telephone records showed no calls to or from Addwealth on some days on which orders were supposedly transmitted for execution, and "Addwealth's" confirmation statements did not identify counterparties to Global Link orders. Moreover, Addwealth's owner gave sworn testimony to New Zealand authorities asserting that Addwealth ceased operating before Global Link opened for business in Miami. 2 Div. App. Br. at 13.
According to the Division:
The 'trading desk' activity was a ruse intended to create the impression that customer funds were being traded in a competitive market overseas. In actuality on certain days when Chan purportedly placed buy or sell orders with Addwealth for execution, Global Link's phone records reflected no calls from Global Link to Addwealth. Similarly, confirmation statements purportedly provided by Addwealth identify no counterparties to Global Link's customer trades. Indeed, there is no record of Addwealth ever having received Global Link customer funds for the purpose of executing currency trades.
From May through October of 1996, Global Link received a total of $64,045 in funds from its eight accounts. Of that amount, $56,545 was deposited into bank accounts controlled by Global Link where customer funds were commingled with the firm's own operating funds. At least $18,000 in customer funds were used by Leung for personal expenses. Only $6,130.88 of the funds invested by Global Link's customers has been returned to them, putatively as a return of equity or profit. Id. at 14. On the one occasion when Global Link transmitted customer funds directly to Addwealth, the funds were immediately removed from Addwealth's account and were not used for Global Link customer trading. When Lawton withdrew funds remaining in Global Link's bank account in November 1966, remaining account holders had $10,000 in equity which was not returned to them. Id.
While pretending to accept "margin" payments (set at $1,000, one percent of the contract price), Global Link apparently did not transact business that depended on the payment of customer margin monies. Instead, one or more Global Link principals pocketed the customer monies, and another individual purportedly acting on behalf of Addwealth either assisted in bucketing trades that Global Link placed or simply created phony confirmations using real pricing data to mislead the account executives and other customers into believing that trading was occurring. Division's Memorandum in Support of Motion for Default Judgment at 11-12 (Feb 13, 1998).
Other fraudulent acts committed by Global Link included misrepresentations in customer brochures that listed fictional business affiliations; predictions that account holders could achieve annual trading profits of 25-40 percent and that account executives could earn up to $150,000 a year; and the absence of written risk disclosure. Id. at 12.
Based on an investigation of Global Link and its operations, the Commission authorized a nine-count complaint against Global Link, Lawton, Leung and Chan. The complaint, filed on October 22, 1997, alleged that respondents committed fraud, bucketed customer orders, executed futures transactions away from a designated contract market, and otherwise violated the Act.3
Pursuant to Commission rules, the Office of Proceedings served all respondents by certified mail at their last known business and residence addresses. In addition, the Division effected personal service on Global Link's statutory agent in Florida in November 1997; on Lawton in Quebec in November 1997; and on Chan in Hong Kong in January 1998. The Division completed constructive service on Leung in Hong Kong in February 1998. On December 9, 1997, not having received answers from the respondents, the ALJ held them in default. (The ALJ, pursuant to Commission rules, found that legally sufficient service occurred when the respondents were served at their last known addresses.)
The ALJ refused, however, to treat the unanswered complaint's allegations as true and to find liability upon that basis. In this case, he said, given the presence of Treasury Amendment issues, "the Complaint raises certain mixed questions of law and fact that are material to the Commission's jurisdiction over the activities of respondents and are insufficiently addressed by simple reference to the Complaint." Order Establishing Procedures at 5 (Jan. 13, 1998). He directed that any motion for a default judgment filed by the Division be accompanied by documentary evidence and legal arguments showing why Global Link's operations were not excluded from the Commission's jurisdiction.
The Division subsequently submitted a Motion for Entry of Default Judgment (filed Feb. 13, 1998). The motion was supported by evidentiary material of the kind and volume usually filed in connection with a summary judgment motion, including excerpts from investigative testimony given by Lawton, Leung, Chan and several Global Link account holders; other investigative documents; and declarations of Commission staff members who participated in the probe of Global Link. The Division also filed a memorandum of law in which it argued, inter alia, that the ALJ should not look beyond the allegations of the complaint and that no precedent existed for his independent examination of subject matter jurisdiction. Nevertheless, the Division also stated its views concerning the scope of the Treasury Amendment. As discussed more fully hereafter, the Division emphasized the protective functions of the Act together with the primary purpose of the Treasury Amendment, as revealed in its legislative history, as a prophylactic measure against dual regulation of the informal network of banks and dealers that engaged in foreign currency trading under the supervision of bank regulatory agencies.
The ALJ rejected the Division's arguments and dismissed the complaint, holding that he was not relegated to a "ministerial role" in a default proceeding. He construed his authority as allowing him to "independently consider issues of jurisdiction or whether those acts alleged in a complaint actually amount to violations of the Act or Commission regulations." Initial Decision at 4-5. Contrary to the Division's argument, the ALJ held that a respondent in default is deemed to have admitted only the complaint's allegations of fact and is not bound by the complaint's conclusions of law. The validity of the complaint's conclusions of law is determined by the presiding officer, he stated, an inquiry that includes scrutiny of jurisdictional issues. See Initial Decision at 25-44.
Upon consideration of those jurisdictional issues, the ALJ concluded that the Treasury Amendment restricts the Commission's authority over foreign currency transactions to those conducted on organized exchanges. Id. at 45-61. The ALJ found that, but for the Treasury Amendment, Global Link would be in violation of Section 4(a)--in other words, its activities were such that, were any commodity involved other than a Treasury Amendment instrument such as foreign currency, it would be deemed a board of trade that had failed to obtain necessary designation as a contract market.
The ALJ also ruled that Global Link could not be liable under Section 4d(1) and 4d(2) (failing to register as a futures commission merchant and commingling customer and corporate funds) because the provisions of 4d govern only designated contract markets. The ALJ also found that the Division failed to allege facts establishing its other charges.
The Division appealed, challenging the ALJ's holdings and reiterating the arguments raised in its Motion for Entry of Default Judgment.
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A. The Scope of an ALJ's Authority When a Respondent Defaults.
Before turning to the merits of this matter, we address the Division's contention that the ALJ lacked authority to dismiss the complaint. The ALJ stated issues raised by the Division's position as follows:
[T]he Division's motion for a default order raises two threshold issues. First, the Court must consider the scope of what the respondents, by virtue of their default, are deemed to admit. Second, if the Court retains the authority to reach independent legal conclusions, the Court must also consider whether it can dismiss a complaint that fails to state a cause of action within Commission jurisdiction.
Initial Decision at 25.
In holding that the Court may consider legal conclusions such as the presence of subject matter jurisdiction when deciding a default motion, the ALJ relied on federal cases inviting such scrutiny of a complaint by a trial judge, e.g., Nishimatsu Constr. Co., Ltd. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975) ("a defendant's default does not in itself warrant the court in entering a default judgment. There must be a sufficient basis in the pleadings for the judgment . . . ."); accord, Chudasama v. Mazda Motor Corp., 123 F.3d 1353, 1370 n.41 (11th Cir. 1997) ("a default judgment cannot stand on a complaint that fails to state a claim"). See generally Initial Decision at 32 n.80 (collecting cases).
The Division acknowledges the substantial body of authority "supporting the principle that defaulting defendants are deemed to have admitted the facts, but not the legal sufficiency, of the complaint." Div. App. Br. at 18. However, the Division contends that the line of federal cases cited by the ALJ (chiefly between private parties) is inapplicable in an administrative context such as this, where the Commission, before authorizing a complaint to be issued, "evaluat[es] the law as it would apply to the facts being alleged." Id. at 19.
The Division argues that, when the ALJ dismissed the complaint that the respondents had failed to answer, he impermissibly substituted his views for the judgment exercised by the Commission when it authorized the complaint to be filed. When the Commission authorizes a complaint, it explicitly or impliedly decides that it has jurisdiction over the parties and the conduct at issue, the Division asserts. A respondent may raise jurisdictional defenses in answering a complaint, which the ALJ may address at an appropriate point in the proceedings, the Division continues. However, the Division concludes, when a respondent remains silent in the face of the Commission's allegations, the ALJ may not second-guess the Commission's legal judgment; he cannot interpose arguments or theories, however persuasive he may find them, that the respondents might have raised themselves to defeat the Commission's jurisdiction.
The Division's views respecting the limits of the ALJ's authority to dismiss an unanswered complaint were presented to the ALJ in proceedings below, when he signaled that he was considering dismissal. The ALJ rejected the argument that in the default context he was bound to accept the legal theories and conclusions of the complaint. He held that the Commission interprets the law solely in its opinions and orders and through rulemakings and characterized the Division's position as a misplaced "effort to repackage a complaint as an adjudication . . . ." Initial Decision at 35 n.83.
We think that the ALJ's view is consistent with separation of functions principles under which members of an administrative agency exercise both prosecutorial and adjudicatory functions, but not simultaneously. In accordance with the mandate of the Act, the Commission's enforcement complaints are issued under a "reason to believe" standard, see 7 U.S.C.§ 9; thus, while complaints are authorized in good faith and in compliance with the statutory standard, they do not, as a matter of law, constitute a binding determination by the agency that a claim exists. Under these circumstances, we believe that the ALJ has the inherent authority prior to entering a default judgment to consider issues of law posed by the complaint, including the existence of subject matter jurisdiction.4
In re Siegel Trading Co., Docket No. 77-1, 1978 WL 10811 (CFTC June 21, 1978), which the Division cites as supporting authority for its position, is not to the contrary. In Siegel, the Commission held that the ALJ may not dismiss counts of an authorized complaint prior to a hearing because the ALJ believes the counts to be superfluous. That case, however, did not involve the authority of the ALJ to consider issues of jurisdiction prior to entering a final judgment against a respondent and therefore is readily distinguishable from the present case.
B. The Scope of the Treasury Amendment.
The Treasury Amendment, section 2(a)(1)(A)(ii) of the CEA, provides an exclusion from the Act for futures and option transactions involving foreign currencies and certain other designated instruments unless the transactions are conducted on a "board of trade."5 In defining the scope of the Treasury Amendment, the ALJ ruled that a "board of trade" means an "organized exchange" and that because the foreign currency contracts sold by Global Link were not, in his view, traded on an organized exchange, the Commission was without jurisdiction to bring this action. Initial Decision at 58.
1. The Plain Language of the Act
The starting point for determining the meaning of "board of trade" in the Treasury Amendment is the definition contained in the Act. The Act defines "board of trade" to mean "any exchange or association, whether incorporated or unincorporated, of persons engaged in the business of buying or selling any commodity or receiving the same for sale on consignment." 7 U.S.C. § 1a(1). The "board of trade" definition was recodified without change in 1974, when the CEA was substantially revised and the Treasury Amendment was enacted,6 and the statutory definition had long been part of predecessor statutes.7 Accordingly, it is reasonable to assume that Congress, in enacting the Treasury Amendment, understood and intended to use the term in the Amendment as it is defined by the Act. Since Global Link consists of an "association . . . of persons engaged in the business of buying or selling" foreign currency, it constitutes a "board of trade" as defined by the Act and is therefore, under that definition, subject to the jurisdiction of the CEA.
2. The CEA and the History of the Treasury Amendment
We turn next to the legislative history as it relates to the use of the term board of trade in the Treasury Amendment. The 1974 amendments to the CEA, which included the Treasury Amendment, expanded exponentially the coverage of the Act, which theretofore had been confined to futures on enumerated agricultural products. The amendments had an avowedly remedial purpose. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 US. 353, 365-66 (1982). Exemptions from remedial legislation should be narrowly construed, see Idahoan Fresh v. Advantage Produce, Inc., 157 F.3d 197, 202 (3rd Cir. 1998), (citing cases), especially in circumstances such as these, where an expansive reading of the Treasury Amendment exclusion would frustrate a core purpose of the Act to protect the retail public from fraud and other trading abuses.
To understand the purpose of the Treasury Amendment, one must take into account the history of the CEA and its objectives. Modern federal regulation of commodity futures and options began with the Futures Trading Act of 1921 and its successor, the Grain Futures Act of 1922.8 These early statutes sought to address the excessive speculation and market manipulation schemes that roiled the early commodity markets and led to unrestrained price swings. These laws also sought to address the problem of bucket shops, places "where contracts for the purchase and sale of stocks or commodities are made which are entirely fictitious." Words and Phrases, "Bucket Shop," (West 1968) at 438. Bucket shops allowed speculators to bet on commodity prices away from a traditional exchange, with no expectation or possibility of delivery. The wagers were placed on the books of the bucket shop, and when the market moved against a shop's net position, it often closed its doors, leaving behind uncollectible debts. Bucket shops also drained liquidity from bona fide exchanges.
In order to address bucket shops and other perceived evils of futures trading, the CEA and its predecessors were structured to require that all futures trading be conducted on regulated futures exchanges. A futures exchange would be authorized by the government only if it met certain basic requirements, including having procedures in place to prevent manipulation, corners and other trading abuses. Although the Act has undergone numerous revisions since the 1920s, the CEA has always provided at its core that no person shall enter into or offer to enter into a futures contract unless it is conducted on a board of trade designated and regulated by the CFTC as a "contract market," absent an explicit exemption from that requirement. See Section 4(a) of the Act, 7 U.S.C. § 6(a). 9
To forestall gaps in regulatory jurisdiction, "a board of trade" or exchange was defined very broadly to capture all facilities open to the public for futures trading. In 1922, when only grain trading was at issue, the definition of board of trade captured terminal markets, country elevators, farmers cooperatives, urban bucket shops, and the established grain exchanges -- all the market mechanisms through which the underlying commodity was bought and sold. The particular kind of board of trade was immaterial because the only ones on which futures lawfully could be bought and sold were those that were designated as contract markets.
In 1974, Congress proposed a major expansion of the Act to include futures and options trading not only on the specified agricultural products, but on "all other goods and articles . . . and all services, rights and interests in which contracts for futures delivery are presently or in the future dealt in." See 7 U.S.C. § 1a(3). Congress saw that the general public had begun trading futures in growing numbers and that the emergence of futures trading on new commodities and instruments had created significant gaps in the 50-year-old regulatory structure. See generally S. Rep. No. 93-1131 (1974), reprinted in 1974 U.S.C.C.A.N. 5843, 5859-60 ("Senate Report"). As the Senate Report stated:
While the futures markets in a number of agricultural commodities have been regulated in varying degrees since 1922, many large and important futures markets are completely unregulated by the Federal Government. These include ... the highly sensitive silver market and markets in a number of foreign currencies. A person trading in one of these unregulated markets should receive the same protection afforded to those trading in the previously regulated markets.
Id. at 5859 (emphasis added).
The chairman of the Senate Committee on Agriculture and Forestry stated that "[i]t was the intent of the [Conference Committee] to fill all regulatory gaps -- to regulate trading in futures and in options relating to commodities or commodity futures because such trading is now poorly regulated, if it is regulated at all." Senate Comm. on Agric. and Forestry, 93d Cong., Commodity Futures Commission Act of 1974 at 6 (Comm. Pr. 1974) (statement of Chr. Talmadge) ("Comm. Pr."). When the Act was passed, Congress identified 21 commodities "currently traded which are not regulated under the Commodity Exchange Act," including eight foreign currencies, and three "nonregulated exchanges" (the Commodity Exchange, the New York Cocoa Exchange, Inc. and the New York Coffee & Sugar Exchange) that traded without the oversight imposed by the pre-1974 Act on the ten "active contract markets" then extant. Comm. Pr. at 132.
The expansion of the definition of commodity beyond agricultural products to include foreign currencies and other financial instruments caused some in the banking industry to express concern that an active market in trading by banks and other sophisticated institutions in foreign currencies would become subject to CEA regulation. This so-called "interbank market" involved primarily cash forward foreign currency contracts that were privately negotiated among major banks and dealers for their own and their customers' commercial and business needs.
During the hearings leading up to the 1974 CEA amendments, a representative of the banking industry alerted Congress that provisions of the 1974 legislation could be read as applying to the trading in foreign currency carried on among banks. Bank executive Donald O. Cameron outlined these concerns in a written submission to the Senate, in which he explained:
Approximately two years ago, foreign exchange trading was introduced to the general public through the establishment of the International Monetary Exchange [sic] in Chicago to permit the general public to trade in futures contracts relating to foreign currency similar to other commodity futures markets. The interbank foreign exchange market is quite a different situation. It is designated to service customers of the bank who have a commercial need to buy and sell foreign exchange and serves as an integral part of the mechanism which facilitates the international movement of trade and capital.
Hearings on S. 2485, S. 2578, S. 2837 and H.R. 13113 before the Senate Comm. on Agric. and Forestry, Appendix to Part 3 at 771-72, 93d Cong. (May 21-22, 1974) (letter from Donald O. Cameron, senior vice president of Chase Manhattan Bank).
Cameron, urging Congress to grant the relief that ultimately was provided in the form of the Treasury Amendment, said that various provisions of the bill under consideration to create the Commission would prove "troublesome and burdensome if they are construed as applying to foreign exchange transactions of the kind executed in the interbank market." (He noted in particular that sales and same-day or next-day repurchases opposite foreign partners would be burdensome to report and relatively meaningless "in terms of understanding or recording normal export or import transactions." Id. at 772.) Cameron urged that, "[b]ecause of the great differences between the interbank foreign exchange market and the commodity futures markets and exchanges, which appear to be the focus of the bill, we are hopeful that the Congress will clearly exclude the interbank foreign exchange market from the legislation." Id.
Cameron also pointed out that excluding interbank foreign currency transactions from Commission oversight would not be inconsistent with Congress' goal of closing regulatory gaps and bringing all commodity futures trading under federal supervision because foreign currency trading by banks already was substantially regulated. Cameron noted that:
As part of normal auditing procedures, federal and state banking examiners make a thorough investigation of the procedures, controls and positions in connection with their examination of United States banks active in foreign exchange trading. There are avenues available for this function to be supplemented on a more frequent basis by the banking authorities.
Id. Following the hearings, the Acting General Counsel of the Department of the Treasury sent a letter to Congress reiterating these concerns. The letter states in pertinent part:
Virtually all futures trading in foreign currencies in the United States is carried on by an informal network of banks and dealers. This dealer market, which consists primarily of large banks, has proved highly efficient in serving the needs of international business in hedging the risks that stem from foreign exchange rate movements. The participants in this market are sophisticated and informed institutions, unlike the participants on organized exchanges which, in some cases, include individuals and small traders who may need to be protected by some form of governmental regulation.
. . .
Where the need for regulation of transactions on other than organized exchanges exists, this should be done through strengthening existing regulatory responsibilities now lodged in the Comptroller of the Currency and the Federal Reserve. These agencies are currently taking action to achieve closer supervision of the trading risks involved in these activities. The Commodity Futures Trading Commission would clearly not have the expertise to regulate a complex banking function and would confuse an already highly regulated business sector. Moreover, in this context, new regulatory limitations and restrictions could have an adverse impact on the usefulness and efficiency of foreign exchange markets for traders and investors. . . .
. . .
S. 2837 could be construed to prohibit banks from engaging in futures trading in foreign currencies unless they registered as an exchange with the new Futures Exchange Commission and became subject to its regulation. We believe that this is a serious defect in the proposed legislation that would, if enacted, impair the usefulness and efficiency of our foreign exchange markets.
. . .
In view of the foregoing, we strongly urge the Committee to amend the proposed legislation to make clear that its provisions would not be applicable to futures trading in foreign currencies . . . other than on organized exchanges. This could be accomplished by inserting a new section at the appropriate place reading as follows: "Sec. ___. Nothing in this Act shall be deemed to govern or in any way be applicable to transactions in foreign currency, security warrants, security rights, resales of installment loan contracts, re-purchase options, government securities, mortgages and mortgage purchase commitments, or in puts and calls for securities, unless such transactions involve the sale thereof for future delivery conducted on a board of trade."10
Thus, while the Treasury Department seemed to suggest that the Act should be applicable only to foreign currency trading on organized exchanges, the language it proposed for the amendment extended CFTC jurisdiction to boards of trade. That language was adopted without material change by Congress.
The legislative history makes clear, however, that the purpose of, and sole policy rationale offered for, the Treasury Amendment was to insulate the network of bank and institutional trading in foreign currencies and certain other financial instruments from regulation under the Commodity Exchange Act. As the Joint Explanatory Statement of the Committee of Conference succinctly described its intent, the Amendment "provides that interbank trading of foreign currencies and specified financial instruments is not subject to Commission regulation." Comm. Pr. At 11.
The legislative history gives no indication that Congress sought to legalize bucket shops in any of the new commodities made subject to the Act including foreign currencies or that it intended to leave any public futures market unregulated by the new Commission. A central premise of the Act was that, in order to protect traders and the public at large, futures trading had to be conducted on an exchange regulated by the Commission; unregulated bucket shops and boiler rooms that preyed on the public were illegal. Had Congress intended to abandon that core principle of the Act with respect to all foreign currency futures trading -- and not just the interbank market -- one would expect to see some legislative intent to that effect. Yet, there is nothing in the legislative history evidencing an intent to permit the sale of currency futures contracts to public investors in a totally unregulated environment.
In short, the legislative history of the 1974 Act suggests that Congress intended that the term "board of trade" in the Treasury Amendment be used to distinguish between the interbank market of sophisticated institutions executing bilaterally-negotiated currency contracts and the public markets or exchanges trading currency futures and options.11
C. Global Link as a Board of Trade
We now turn to the question whether the activities of Global Link qualify it as a "board of trade" under the Treasury Amendment. The answer to this question depends in turn on whether Global Link was more like an unregulated exchange of the sort the Act was specifically created to address or whether it was part of the interbank market which was intended to be excluded from the Act's reach by the Treasury Amendment.
In essence, Global Link provided a centralized and public trading facility for buying and selling standardized foreign currency futures contracts. It held itself out to the public as a place to price, trade and settle currency futures contracts. The contracts were standardized units that were margined and marked to market daily. The contract terms mirrored the currency futures listed on the Chicago Mercantile Exchange.
Furthermore, the Global Link facility was clearly a "public" one. It advertised for "account executives" through newspapers and other media of general circulation, and these account executives in turn solicited customer accounts among acquaintances and the public at large. The "account executives" also were expected to trade themselves. The relatively small amounts of money required to open and maintain an account with Global Link put the trading facility within the reach of the public generally. There is no indication that the traders had a commercial purpose for trading, and Global Link was not regulated or supervised by any other regulatory agency.
Global Link's employees set the prices at which persons willing to trade could buy and sell currency contracts, accepted orders placed by the account executives based on what purported to be real-time market information, and purported to execute them by taking the opposite side of the orders. It provided publicly available prices and a marketplace for bringing together buyers and sellers of standardized foreign currency contracts. For all these reasons, we have little trouble concluding that Global Link was a "board of trade" for Treasury Amendment purposes.
The majority of courts have interpreted the Treasury Amendment consistently with our conclusion. In Salomon Forex, Inc. v. Tauber, 8 F.3d 966, 978 (4th Cir. 1993), the U.S. Court of Appeals for the Fourth Circuit held that large, customized, negotiated, bilateral transactions between sophisticated financial professionals are covered by the Treasury Amendment and outside the scope of the CEA. In distinguishing that trading, however, from the marketing of futures to the general public, the court observed that "[t]his case does not involve the mass marketing to small investors which would appear to require trading through an exchange, and our holding in no way implies that such marketing is exempt from the CEA." Id.
Similarly, in CFTC v. Standard Forex, Inc. [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,063 at 41,453 (E.D.N.Y. 1993) ("Standard Forex I"), after reviewing the history of the Treasury Amendment, the court found that the Amendment was intended to exempt only interbank transactions that were already regulated by the banking regulatory agencies. The court further observed that, in the context of the legislative history,
the term "formally organized futures exchange" refers to situations in which people create a formal structure for unsophisticated investors who need the assistance of such a formal organization in order to carry out their trading, as opposed to sophisticates who can deal among themselves pursuant to relatively informal understandings . . . . [The Treasury Department] letter referred to "organized exchanges" as including "individuals and small traders who may need to be protected by some form of governmental regulation," in order to contrast such trading contexts with sophisticated interbank transactions.
Thus, the court rejected the argument that a bucket shop selling foreign currency contracts to retail investors was not a board of trade and therefore outside the jurisdiction of the CFTC. See also, CFTC v. American Bd. of Trade, 803 F.2d 1242, 1249 (2d Cir. 1986) (noting that the Treasury Amendment exclusion was aimed at "sophisticated financial markets already subject to regulation");12 Board of Trade of the City of Chicago v. SEC, 677 F.2d 1137, 1154 (7th Cir.), vacated as moot, 459 U.S. 1026 (1982) (same); CFTC v. Standard Forex, Inc., No. CV-93-88 (CPS), 1998 WL 236923 (E.D.N.Y. Mar. 31, 1998) (Standard Forex II) (granting summary judgment to the Commission in an enforcement action against a New York boiler room and a Hong Kong currency dealer); Rosner v. Peregrine Finance Ltd., No. 95 Civ. 10904 (KTD), 1998 WL 249197 (S.D.N.Y. May 18, 1998) (finding the Treasury Amendment to apply only to interbank transactions already subject to government regulation). 13
Notwithstanding this authority, the ALJ in this case found that Global Link was not a board of trade because it did not bear the characteristics of an "organized exchange" as "normally understood." Specifically, the ALJ concluded that the Global Link trading facility did not provide (i) memberships with exclusive trading rights and a role in corporate governance; (ii) trading by the customers among themselves; (iii) a clearing mechanism to guarantee counterparty performance; and (iv) a mechanism for delivery of the actual commodity underlying the contract. Initial Decision at 61 n.130 and accompanying text.
We do not agree with the ALJ's unduly restrictive interpretation of a board of trade. A futures trading facility will not necessarily exhibit all, or indeed any, of the elements identified by the ALJ in order to be identified as a "board of trade" under the Treasury Amendment. The mature futures exchanges regulated by the Commission have developed as business entities for periods of up to 150 years and have operated as designated contract markets under the Act and its predecessors for periods of up to 75 years. While these regulated futures exchanges are undoubtedly "formally organized," their current characteristics do not constitute a set of minimum, mandatory requirements for a board of trade.14 The Act, for instance, does not dictate a particular exchange governance structure. Nor do cash-settled contracts provide a delivery mechanism tied to a terminal market. In addition, neither multilateral execution facilities nor clearing houses are necessary prerequisites to exchange activity.
In analyzing futures trading activity under the Treasury Amendment, we will look in cases such as this for a facility that provides order execution for the public. As noted above, Global Link provided a public marketplace for bringing together buyers and sellers of standardized futures contracts, the availability of price information and an execution and settlement mechanism. As such, it clearly constituted a board of trade and thus is subject to the jurisdiction of the Commission and the terms of the CEA.15
Conclusion and Sanctions. For the foregoing reasons, we find that we have subject matter jurisdiction to hear and decide this case. We hold that all of the respondents are liable on default for violating Section 4(a) of the Act (executing commodity futures transactions other than on a designated contract market); that respondents Global Link, Lawton and Leung are liable on default for violating Section 4b(a)(i) (fraud in connection with the offer and sale of commodity futures contracts); and that respondents Global Link, Leung and Chan are liable on default for violating Section 4b(a)(iv) (bucketing customer orders).
As to sanctions, we find that the nature of respondents' misconduct was exceedingly grave, in that they violated core provisions of the Act with a view to undermining the fundamental regulatory regime established by Congress for futures trading. The customers who were victims of respondents' misconduct lost most or all of their investments. Accordingly, each named respondent--Global Link, Leung, Lawton, and Chan--are hereby ordered to cease and desist from
further violations of the Act. They are permanently prohibited from trading on any contract market and are each ordered to pay a civil monetary penalty of $100,000.
IT IS SO ORDERED.16
By the Commission (Acting Chairman SPEARS and Commissioners HOLUM and NEWSOME).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: June 21, 1999
1 Global Link was wholly owned by shareholders Leung, Chan, Lawton, and a fourth individual, Terry Tsang, who was not charged.
2 Evidence compiled by the Division during its investigation of Global Link, some of which was appended to the Division's motion for a default order and proposed findings of fact, indicates, however, that various individuals in Hong Kong, Macao and New Zealand had various associations with Addwealth and/or Global Link and continued to use the Addwealth name for various purposes.
3 The complaint alleged violations of the following provisions: Section 4(a), 7 U.S.C.
§ 6(a) (executing commodity futures transactions other than on a designated contract market) (direct and derivative liability against all respondents); Section 4b(a)(i), 7 U.S.C. § 6b(a)(i) (fraud in connection with the offer and sale of commodity futures contracts) (direct and derivative liability against Global Link, Lawton and Leung); Section 4b(a)(iv), 7 U.S.C. § 6b(a)(iv) (bucketing customer orders) (direct and derivative liability against Global Link, Leung and Chan); Section 4d(1), 7 U.S.C. § 6d(1) (operating as an unregistered futures commission merchant) (direct liability against Global Link and derivative liability against Leung and Lawton); Section 4d(2), 7 U.S.C. § 6d(2), and Commission Rule 1.20, 17 C.F.R. § 1.20 (1998) (commingling customer funds with those of Global Link) (direct liability against Global Link and derivative liability against Leung and Lawton); and Section 9(a)(1), 7 U.S.C. § 13(a)(1) (unlawfully converting customer funds to personal use) (direct and derivative liability against Leung and Lawton; derivative liability against Global Link); Section 4k(1), 7 U.S.C. § 6k(1), and Commission Rule 3.12(a), 17 C.F.R. § 3.12(a) (failure of the individual respondents to register as associated persons of Global Link) (direct and derivative liability against all respondents); and Commission Rule 1.55, 17 C.F.R. § 1.55 (failure to provide risk disclosure statements to Global Link customers) (direct liability against Global Link, derivative liability against Lawton and Leung).
Finally, the complaint alleged that, in the event orders placed at Global Link were shown to have been executed on a foreign board of trade, then the respondents violated certain provisions of the Commission's Part 30 Rule, 17 C.F.R. Part 30, governing the sale of foreign futures contracts to customers in the United States.
4 See Ostroff v. Florida, 554 F. Supp. 347, 352 n.6 (M.D. Fla. 1983) (ALJ for the Social Security Administration "properly found" that he lacked subject matter jurisdiction to hear a private claim for damages against a state agency); see also United Mine Workers v. Mine Safety & Health Admin., 823 F.2d 608, 613 (D.C. Cir. 1987) (ALJ dismissed a claim seeking interim relief pending action by an agency administrator, ruling that he had no authority to order such relief).
5 Section 2(a)(1)(A)(ii) of the Act provides:
Nothing in this Act shall be deemed to govern or in any way be applicable to transactions in foreign currency, security warrants, security rights, resales of installment loan contracts, repurchase options, government securities, or mortgages and mortgage purchase commitments, unless such transactions involve the sale thereof for future delivery conducted on a board of trade.
7 U.S.C. § 2(ii).
6 Commodity Futures Trading Commission Act of 1974, Pub. L. No. 93-463, 88 Stat. 1389. (Oct. 23, 1974).
See, e.g., Grain Futures Act of 1922, Pub. L. No. 67-331, 42 Stat. 998 (Sept. 21, 1922) at Section 2(a) ("The words "board of trade" shall be held to include and mean any exchange or association, whether incorporated or unincorporated, or persons who shall be engaged in the business of buying or selling grain or receiving the same for sale on consignment.").
8 The Futures Trading Act of 1921, 42 Stat. 187 (Aug. 24, 1921), was enacted on the basis of the taxing power under the U.S. Constitution and subsequently was declared unconstitutional. This led to enactment of the Grain Futures Act of 1922 which was based on the interstate commerce clause and on that basis was declared constitutional.
9 "[T]he men who buy under the present bucket shop system will not have any place to buy unless they do business through a contract market"; the "bucket shop is wiped out in this bill because a bucket shop is not a contract market" Cong. Rec., 67th Cong. 1st Sess, May 11, 1921, p. 1318. See also Salomon Forex, Inc. v. Tauber, 8 F.3d 966, 970 (4th Cir. 1993) (describing the conditions that led Congress to regulate futures trading); see generally Markham, J. History of Commodity Futures Trading and Its Regulation, (Praeger 1987) at 9-10, 12 (summarizing the history of bucket shops).
10 Letter of July 30, 1974, from Donald L. E. Ritger, Acting General Counsel of the Department of the Treasury, to the Hon. Herman E. Talmadge, Chairman of the Senate Committee on Agriculture and Forestry, reprinted in S. Rep. 1131, reprinted in 1974 U.S.C.C.A.N. at 5887-89.
11 To conclude that "board of trade" in the Treasury Amendment was intended to refer to an "organized exchange," as the ALJ here did, does little to assist our analysis. Unlike "board of trade," an "exchange" is not a term defined in the Commodity Exchange Act. It has no fixed definition in law, but has been broadly defined as "a place where or means through which buyers and sellers, or their respective agents, meet to negotiate and consummate purchases." Words and Phrases, "Exchange" (West 1998 Supp.) The entry contains cross-references to "board of trade" and "market," and earlier editions of this authority cross-reference the term to "bucket shop."
12 The principal holding of the American Bd. of Trade case, regarding the interpretation of the "in or involving" clause of the Treasury Amendment, was rejected by the Supreme Court in CFTC v. Dunn, 519 U.S. 465 (1997). The Dunn opinion did not discuss the meaning of the term "board of trade" in the Treasury Amendment. The Court stated that "[t]he legislative history strongly suggests . . . that Congress' broad purpose in enacting the Treasury Amendment was to provide a general exemption from CFTC regulation for sophisticated off-exchange foreign currency trading," 519 U.S. at 473, and that "[w]e think the history of the Treasury Amendment suggests--contrary to the CFTC's view--that it was intended to take all transactions relating to foreign currency not conducted on a board of trade outside of the CEA's ambit." Id. at 475. We believe that our ruling in the current case is completely consistent with the Dunn opinion.
13 The Commission also has brought injunctive actions against abusive foreign currency firms in various federal district courts in which jurisdiction was found with little or no discussion of the Treasury Amendment. See, e.g., CFTC v. Pacific Bullion, No. 92-Misc-25 (E.D.N.Y. 1992); CFTC v. Grand Capital Commodity, No. 94-1162 (E.D. Va. 1994); CFTC v. Korbean Int'l Investment, No. 95-Civ-0919 (S.D.N.Y. 1995); CFTC v. Uni-Finex, No. 95-2668 (D.N.J. 1995); CFTC v. Titlis Int'l, No. 95-Civ-5416 (S.D.N.Y. 1995); CFTC v. AYM Financial , No. 96-Civ-2640 (E.D. Pa. 1996); and CFTC v. World Wide Currencies, No. 96-Civ-7814 (S.D.N.Y. 1996).
But see CFTC v. Frankwell Bullion Limited, 99 F.3d 299 (9th Cir. 1996). In Frankwell Bullion, the court found that based on the legislative history, the term "board of trade" in the Treasury Amendment means "on-exchange." 99 F.3d at 304. However, the court went on to conclude, without analysis, that the defendants' transactions with the general public in that case were not conducted on an "exchange" and that the CFTC's enforcement action, therefore, should be dismissed for lack of jurisdiction. See also Kwiatkowski v. Bear Stearns Co., Inc., 1997 WL 538819 (S.D.N.Y. 1997).
14 A board of trade can exist without the attributes of a designated contract market. A "designated contract market" is a regulatory classification -- a license -- conferred on a trading facility that applies for the designation and meets statutory qualifying criteria. An entity becomes a designated contract market by submitting itself to the Act's oversight and complying with the Act's regulatory requirements. The Commission's jurisdiction as a regulatory agency with oversight and enforcement powers does not depend upon the voluntary decisions of market participants to be regulated. In order to ensure that the Act's prohibition against unauthorized boards of trade is effectively enforced, any board of trade that has failed to obtain designation as a contract market is properly within our enforcement jurisdiction. And as described more fully above, to avoid circumvention of the Act by unscrupulous marketers of futures contracts, the definition of "board of trade" is necessarily broad.
15 Global Link was charged, not only under Section 4(a) (operating as an undesignated contract market), but also under Section 4d(1) (operating as an unregistered futures commission merchant). (Similarly, Lawton, Leung and Chan were charged under Section 4k and Rule 3.12(a) with failing to register as associated persons of Global Link.) The ALJ held that 4(a) and 4d are mutually exclusive. He ruled that, if Global Link were a "board of trade" under Section 4(a), he would on account of that finding have been prohibited from finding liability under Section 4d. See Initial Decision at 68. We decline to reach that issue here. Accordingly, we let stand the dismissal of the remaining counts without endorsing or rejecting the analysis of the initial decision on those allegations.
16 A motion to stay the effect of this decision pending reconsideration by the Commission or review by a court must be filed within 15 days of the date this order is served.