UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION
__________________________________________
:
:
In the Matter of:
:CFTC Docket No. 97-2
:
ROGER J. WRIGHT d/b/a:
AGRICULTURAL MARKETING SERVICE:COMPLAINT AND NOTICE OF
d/b/a MICAH I INVESTMENT CLUB,:HEARING PURSUANT TO
BUCKEYE COUNTRYMARK, INC.,:SECTIONS 6(c), 6(d), 8a(3) AND
PHILIP L. LUXENBURGER, and:8a(4) OF THE COMMODITY
A.G. EDWARDS & SONS, INC., :EXCHANGE ACT
:
Respondents.:
:
__________________________________________:
The Commodity Futures Trading Commission ("Commission") has received information from its staff which tends to show, and the Commission's Division of Enforcement ("Division") alleges:
I.
RESPONDENTS
Roger J. Wright ("Wright") is an individual who holds himself out to the public as a "market advisor," often transacting business in the name of Agricultural Marketing Service ("AMS"). His residence and principal place of business is 8472 State Route 161, Mechanicsburg, Ohio 43044. Between December 1981 and March 1984, Wright was registered with the Commission as an associated person ("AP") of Heinhold Commodities, Inc., but he has not been registered in any capacity since 1984.
Buckeye Countrymark, Inc. ("Buckeye") is an Ohio cooperative association, with its principal place of business located at 415 Bellbrook Avenue, Xenia, Ohio 45385. At all times relevant hereto, Buckeye operated grain elevators in Xenia, Jeffersonville and Washington Court House, Ohio. Grain elevators purchase grain from local grain producers and resell the grain they receive to larger grain elevators, processors and end-users. Buckeye has never been registered with the Commission in any capacity.
A.G. Edwards & Sons, Inc. ("Edwards") is a Delaware corporation, with its principal place of business located at One North Jefferson Avenue, St. Louis, Missouri 63103. Edwards maintains a branch office at The Huntington Center, 41 South High Street, Columbus, Ohio 43215. At all times relevant hereto, Edwards was registered with the Commission as a futures commission merchant ("FCM").
Philip L. Luxenburger ("Luxenburger") is an Associate Vice President of Edwards at the firm's Columbus, Ohio branch office. At all times relevant hereto, Luxenburger was registered with the Commission as an AP of Edwards.
II.
FACTUAL BACKGROUND
Wright's Advisory Services
Since at least 1991 (the "relevant period"), Wright has held himself out to the public as an agricultural marketing consultant, providing producers of corn, wheat, soybeans and other agricultural commodities with advice and analyses about exchange-traded and off- exchange commodity futures and option contracts, without being registered as a commodity trading advisor ("CTA").
During the relevant period, Wright provided three main categories of service: (1) for compensation, Wright permitted clients to attend periodic seminars, where he provided advice on the commodity markets and crop marketing strategies; (2) for $250 per year, clients received Wright's market letter, which provided detailed information concerning trends in the commodity markets, including specific trade recommendations, and offered other advice concerning marketing strategies; and (3) for a fee derived from the number of acres farmed by a client (averaging approximately $1,800 per year), Wright provided his market letter, along with individual advice concerning commodity futures and option contracts. As of May 30, 1996, approximately 140 clients received Wright's market letter, and 55 purchased Wright's individualized services. In providing these advisory services, Wright did not deliver or cause to be delivered to clients and prospective clients a disclosure document of the type required by the Commission's regulations.
Wright advised most of his clients to avoid using the established futures exchanges directly, instead recommending that they contract with elevators, such as Buckeye, that offered "hedge-to-arrive" or "flex hedge-to-arrive" contracts (referred to throughout as "hedge-to-arrive" contracts or "HTAs") which Wright stated would enable customers to speculate in the regulated futures and options markets without posting margin or paying option premiums in advance. (A complete description of Buckeye's HTA program is set forth in paragraphs 27 through 45 of this Complaint.) An integral component of Wright's marketing advice was the use of HTAs incorporating potentially infinite "rolling" of HTA positions, the sale of call options to the elevator, and cancellation of the contracts -- features Wright referred to as "marketing tools." (See paragraphs 33 through 45 of this Complaint).
Wright's Commodity Pool and Trading of Client's Commodity Accounts
During the relevant period, Wright also administered the Micah I Investment Club ("Micah Pool"), provided other services, and at times he also exercised de facto discretionary authority over clients' commodity trading accounts at Edwards.
With the assistance of Luxenburger, Wright created the Micah Pool, a commodity pool, to allow his clients to speculate in the regulated futures markets. Wright failed to file or deliver to each participant an exemption statement of the type required by the Commission's regulations, and Wright did not promptly furnish the monthly account statements to pool participants required under Commission regulations.
Wright exercised control over certain clients' individual commodity trading accounts at Edwards. On approximately 30 occasions, in at least four separate accounts, Luxenburger and Edwards effected transactions at Wright's request, without having received or maintained documents or records identifying Wright as a person exercising any trading control with respect to these accounts. By allowing Wright to make unauthorized transactions in these clients' accounts, Luxenburger generated commissions for Edwards.
Luxenburger's Role in Wright's Other CTA Activities
During the relevant period, Luxenburger knew that Wright operated a market advisory service concerning futures and options contracts, and that Wright was not registered as a CTA. In addition to facilitating Wright's exercise of control over accounts maintained by his clients at Edwards, Luxenburger facilitated Wright's other CTA activities. For example, operating as an intermediary between Wright and his clients during business hours while employed at Edwards' offices, Luxenburger relayed communications between the clients (even clients who had no accounts at Edwards) and Wright during the relevant period. Luxenburger knowingly associated himself with Wright's unregistered CTA activities, participated in them as something that he wished to bring about, and sought by his actions to make them succeed.
The Substitute HTAs
In the spring of 1995, approximately 12 farmers executed grain marketing agreements, under which they authorized Wright to market more than a million bushels of corn. Wright, after entering into these grain marketing agreements, entered into HTA agreements with Buckeye in his own name, ostensibly pledging more than 1.1 million bushels of corn. Wright wrote call options in conjunction with those HTAs, which were soon exercised, doubling Wright's Buckeye HTA position to 2.13 million bushels of corn.
By late summer of that year, farmers who had executed grain marketing agreements in favor of Wright informed him that they would not deliver grain pursuant to those agreements. Wright thereafter reneged on his obligations to Buckeye.
As of December 12, 1995, it would have cost Wright approximately $7,337,850.00 to purchase sufficient grain in the cash market to cover his HTA positions at Buckeye.
Buckeye's outside accountants qualified their report of the 1995 audit of the elevator, in part because of questions concerning Wright's Buckeye HTA position. During negotiations concerning that position, Wright convinced Buckeye to include an appendix to its standardized HTA form which emphasized the availability of indefinite rolling of positions, the ability to cancel HTAs without making delivery, and the purchase of options. The appendix did not materially alter the terms and conditions of Buckeye's standardized HTA program, which had previously incorporated such provisions as an integral part of the original HTA.
Wright assisted Buckeye in locating customers who would assume Wright's HTA position by entering into identical HTAs with Buckeye (the "Substitute HTAs"). Certain of those customers already faced substantial exposure in HTA programs with other elevators.
As with the other subject HTAs, the Substitute HTAs provided an opportunity for sellers to capture price moves in the futures market. However, the Substitute HTAs referenced a futures contract price that was approximately 75 cents per bushel lower than the trading range in the referenced contract on the CBT at the time the HTAs were entered. Neither Wright nor Buckeye disclosed the price difference to the customers who entered into the Substitute HTAs.
As compensation for procuring customers to enter into Substitute HTAs, Buckeye cancelled Wright's HTA obligations, waived Wright's HTA cancellation fee under the cancellation clause in his contracts (described in paragraphs 35 and 36), which would have totaled $213,000.00, and made payments to Wright totalling $5,750.00.
Wright's Fraud
Wright misrepresented and failed to disclose material facts while advising his clients to use HTAs and options, and while soliciting farmers to assume his 2.13 million bushel HTA position at Buckeye through the Substitute HTAs.
Misrepresentations and Omissions Concerning HTAs and Options
Wright's advice focused on the purported marketing potential of HTAs and the utility of writing call options to enhance the price of grain pledged under HTAs. Wright failed to inform clients adequately of the risks involved in entering into HTAs with and selling call options to Buckeye, repeatedly downplaying the risks of such transactions. Specifically Wright failed to disclose individual risks to his clients of increasing spreads in grain prices.
In his August 16, 1995 market letter, for example, Wright encouraged his clients to enter into or remain in HTAs by stating that the December 1995 corn futures contract would diminish in value -- "down to $2.30" per bushel -- and suggesting that such a price movement was a virtual certainty, although he knew that there was no guarantee that the market would move in that direction or to that extent. In actuality, the price of the December 1995 corn contract never dipped below $2.75 per bushel after August 16, 1995, and the clients who followed Wright's advice are now parties to HTAs calling for them to sell grain at prices far lower than those represented by Wright.
Similarly, in a market letter dated January 16, 1995, Wright assured his clients that they could not lose by entering into HTAs, and that they would receive top prices for their grain regardless of which direction the market moved. Wright stated that "if you use our market plan and corn prices go down, you will get a higher price (HTA) and, if prices go up, you will get a higher price (HTA)." Producers who followed Wright's market plans instead saw the value of their grain diminish after entering into HTAs.
By emphasizing the use of writing call options for enhancing the price of grain and failing to inform farmers of the risk, Wright created a false understanding of their potential market exposure. Wright did not inform certain clients that selling call options could result in additional pledges of grain in the form of new HTAs if the calls were exercised, and that the new HTAs would continue even if they delivered grain under the initial Buckeye HTAs. Many farmers followed Wright's advice, entered into HTAs with Buckeye that committed 100 percent, or more, of their anticipated grain production, wrote related call options for a like number of bushels, and were exposed to delivery requirements that far exceeded their single-year production capacity when the options were exercised.
Misrepresentations and Omissions Concerning the Substitute HTAs
Wright cheated and defrauded those of his clients that entered into Substitute HTAs by failing to disclose that they were assuming his HTA positions at Buckeye, and by failing to disclose that the futures contract price referenced in the Substitute HTA contracts was the price referenced in his Buckeye HTAs and not the current market price, which was substantially higher. Wright also failed to disclose that he was receiving compensation from Buckeye for soliciting the clients' participation in the Substitute HTAs.
Wright affirmatively misrepresented to at least one client the risks inherent in the Substitute HTAs in particular, assuring him without any basis in fact that the worst price he would receive for corn committed to Buckeye under his Substitute HTA was $2.50 per bushel. That client followed Wright's advice and entered into a Substitute HTA that is now priced at less than $1.00 per bushel.
Wright knew that he occupied a position of trust with his clients, having held himself out as their market advisor, and having accepted compensation from them for performing such services. Through self-dealing, misrepresentations and omissions, Wright breached that trust when he recommended that eleven clients enter into the Substitute HTAs.
Buckeye's HTA Program
From 1991 through at least December 1995, Buckeye, in connection with the marketing of certain "hedge-to-arrive" contracts, offered to enter into and entered into illegal off-exchange futures contracts. The persons with whom Buckeye contracted were generally, but not exclusively, local grain or livestock producers. Buckeye's illegal futures contracts were marketed as allowing persons to capture movements in the futures markets, at prices matched to the Chicago Board of Trade ("CBT"). The contracts themselves permitted offset and were marketed to some persons who had neither the intent nor the grain to deliver as "pledged."
Buckeye offered and entered into contracts it described as "hedge-to-arrive contracts" and "flex hedge to arrive contracts." Buckeye's HTAs included a price comprised of two elements: the "futures contract price" and "basis."
The hedge-to-arrive contracts purported to have customers pledge a stated number of bushels of corn, soybeans or wheat. Those quantities matched the quantities traded through futures contracts on the CBT. In fact, no binding delivery obligation was created by these contracts. They allowed for the potentially indefinite deferral of delivery through "rolling" the futures contract price, and for the extinguishment of the initial delivery pledge through the use of a "cancellation" provision in the contract.
To establish the futures contract price for their HTAs, customers contacted Buckeye grain origination staff to request a price for a specific futures contract month traded on the CBT; alternatively customers could, in effect, place a "market" order by requesting the then-current CBT market price.
Buckeye's main office then contacted the elevator's futures commission merchant to place a corresponding order on the CBT, which, once filled, set the hedge-to- arrive contract's initial futures contract price and put the contract into effect. Buckeye maintained an exchange-traded futures position in its own account that corresponded to the hedge-to-arrive contracts. Buckeye paid margin requirements related to the exchange-traded positions.
Basis, the second contract pricing element, was the difference between the futures contract price and the cash delivery price offered by Buckeye for the same month. Customers were given until the "first notice day" of the futures contract referenced in the hedge-to-arrive contract in order to set basis. Alternatively, customers were permitted to "roll" their contracts.
By "rolling" the hedge-to-arrive contract, delivery was postponed. A roll worked in the same manner as establishment of the initial futures contract price. In most cases Buckeye personnel placed an order on the CBT offsetting the exchange-traded contract (which had established the original futures contract price) and placed another order to sell futures in a later contract month to establish the new futures contract price. The gains or losses reflected in the spread between the old and new futures contract prices were credited or charged to accounts maintained for customers on Buckeye's books. Buckeye also charged customers a one cent per bushel transaction fee to effect rolls within the same crop year, and a five cent per bushel fee to roll into a subsequent crop year. (A "crop year" is defined as the 12-month period which begins with the availability of newly-harvested crops and concludes twelve months later.) The contracts did not limit the number of times or the period over which a contract could be "rolled." The prices customers received for any grain actually delivered under Buckeye's HTAs were equivalent to the original futures contract price in the HTA, less the value of basis and rolling fees, plus or minus gains or losses incurred in rolling.
Buckeye's hedge-to-arrive contracts permitted customers to offset their delivery obligations completely. The contracts permitted cancellation with a corresponding accounting for gains or losses resulting from the difference between the futures price in the contract and the current CBT futures price for that futures month, less the ten cents per bushel cancellation fee, and plus or minus gains and losses incurred in rolling the contract, less rolling fees. Such an accounting upon cancellation could be reconciled through a credit or debit to customers' accounts at the elevator.
In 1995, Buckeye's HTAs contained an express cancellation clause. The addition of this cancellation provision made explicit Buckeye's longstanding practice of permitting cancellation upon payment of a fee. Both the express cancellation clause and Buckeye's practices permitted cancellation of the customer's pledge to deliver bushels of grain under the original HTA. The terms of all Buckeye's HTAs therefore permitted customers to effect an offset of their HTAs.
Under Buckeye's contracts, it was not required that the deferment or avoidance of delivery be to accommodate commercial convenience or necessity.
Buckeye marketed hedge-to-arrive contracts to some persons who lacked the intent or capacity to make delivery of grain at all or in the quantities for which they were pledging.
Among the persons who entered into hedge-to-arrive contracts with Buckeye without the capacity or the intent to deliver grain were livestock producers, (who grew or purchased grain solely or primarily to feed their own hogs, dairy cows or other livestock). Under the same HTA contracts that Buckeye offered to grain producers, Buckeye permitted Wright and the livestock producers to capture movements in the futures markets. Any pledge of a number of bushels of grain by Wright or livestock producers could be satisfied by offsetting "paper transactions," represented by book entries in the customers' accounts with Buckeye. Without delivering grain to Buckeye, Wright and livestock producers could then pay or be paid the difference between the futures contract price in the HTA and the current CBT futures price for that futures month, plus or minus gains or losses incurred through rolling the contract, and less rolling fees and the cancellation fee of ten cents per bushel.
The parties to these hedge-to-arrive contracts included persons or entities that were not "eligible swap participants" as that term is defined in Part 35 of the Commission's Rules, 17 C.F.R. 35.1-35.2 (1996).
Buckeye's Options Program
A key component of Buckeye's HTA program was its practice of entering into option contracts with customers, enabling customers to enter into short call and long put transactions that constituted illegal off-exchange agricultural options. Buckeye permitted customers to sell call options and purchase put options from the elevator without any advance payment by the customers.
Buckeye allowed customers to sell call options as a tool for "enhancing" the prices of HTAs, with the option premiums credited to their Buckeye accounts and realized along with any profits or losses derived from their HTAs. Buckeye, as the purchaser of the calls, acquired contractual rights to enter additional HTAs with the customers selling the options. Buckeye compensated its customers for assuming this obligation by paying option premiums, which were credited to the prices of the customers' HTAs.
Upon entering into such transactions, Buckeye sold call options on the CBT corresponding in all material respects to the options entered into with its customers. If exercised by Buckeye (when its CBT options were exercised), customers' short call options would obligate them to enter into new HTA contracts with Buckeye referencing quantities of grain and futures contract prices corresponding to those of the CBT futures positions assumed by Buckeye upon the exercise of its exchange-traded options. If the elevator did not exercise its rights, no additional obligations were undertaken by the customer.
Buckeye also entered into put option transactions with customers, by which the elevator's customers acquired the right to sell the specified quantity of grain at the stated strike price prior to the expiration date. If customers exercised their contractual rights, they would be permitted to enter new HTAs with Buckeye. The option premium was deducted from the price ultimately paid to the customer on his HTA, either upon delivery or upon exercise of the cancellation provision. Similar to its practice with regard to the short calls, Buckeye hedged these long puts by purchasing corresponding exchange-traded puts in its own name.
With both the short calls and long puts, Buckeye did not issue option confirmation statements to its customers, nor were such options written into the terms of grain delivery contracts. Instead, the option contracts between Buckeye and the customers were based on oral agreements evidenced by profits and losses entered into customers' accounts.
Buckeye's short call and long put option contracts did not have the kind of relationship to actual delivery in normal marketing channels such that they were an integral part of a forward or spot contract. The long put and short call options were separately offered and were severed from initial HTAs. Moreover, Buckeye's HTAs were futures contracts, as described in paragraphs 27 through 39 of this Complaint, not exempt forward or spot contracts. Buckeye's short call options created obligations which, upon exercise, gave rise to additional HTAs. HTAs resulting from call exercise could and did exceed certain farmers' production capacities. Buckeye's long put options, in some circumstances, could result in the creation of new contracts. Producers could also allow their put options to expire and either purchase new puts with later expiration dates and different strike prices or sell the grain at higher spot prices.
III.
VIOLATIONS OF THE ACT AND REGULATIONS
COUNT I
(Against Wright & Buckeye)
VIOLATIONS OF SECTION 4(a) OF THE ACT:
ENTERING INTO OFF-EXCHANGE COMMODITY FUTURES CONTRACTS
Paragraphs 1 through 45 above are hereby realleged and incorporated by reference into this Count I.
Based upon the foregoing facts and circumstances, from 1991 through at least December 1995, in connection with the marketing, offer and sale of certain HTAs which conform to the facts described in Part II above, Buckeye and Wright offered to enter into, entered into, executed, confirmed the execution of, or conducted an office or business in the United States, its territories or possessions, for the purpose of soliciting, or accepting orders for, or otherwise dealing in, transactions in, or in connection with, contracts for the purchase and sale of a commodity for futures delivery (other than a contract which is made on or subject to the rules of a board of trade, exchange, or market located outside the United States, its territories or possessions), and such transactions and contracts were neither conducted on or subject to the rules of a board of trade which has been designated by the Commission as a "contract market" for such commodity nor executed or consummated by or through a member of a contract market, in violation of Section 4(a) of the Act, 7 U.S.C. 6(a) (1994).
In addition, Wright willfully aided, abetted, counseled, commanded, induced or procured certain of the violations by Buckeye described in this Count I, and he is therefore liable for such violations as a principal, pursuant to Section 13(a) of the Act, 7 U.S.C. 13c(a) (1994).
COUNT II
(Against Wright & Buckeye)
VIOLATIONS OF SECTION 4c(b) OF THE ACT AND REGULATION 32.2: ENTERING INTO OFF-EXCHANGE AGRICULTURAL OPTIONS
Paragraphs 1 through 48 above are hereby realleged and incorporated by reference into this Count II.
In connection with the marketing, offer and sale of certain options which conform to the facts described in Part II above, Buckeye offered to enter into, entered into, confirmed the execution of, and maintained positions in, transactions in interstate commerce involving wheat, corn, and soybeans which were or were held out to be of the character of, or were commonly known to the trade as, "options," "puts," and "calls," but which were not traded on or subject to the rules of a designated contract market, in violation of Regulation 32.2, 17 C.F.R. 32.2 (1996), and Section 4c(b) of the Act, 7 U.S.C. 6c(b) (1994).
Wright willfully aided, abetted, counseled, commanded, induced or procured certain of the violations by Buckeye described in this Count II, and he is therefore responsible for such violations as a principal, pursuant to Section 13(a) of the Act.
COUNT III
(Against Wright, Luxenburger & Edwards)
VIOLATIONS OF SECTION 4m(1) OF THE ACT:
ACTING AS A UNREGISTERED COMMODITY TRADING ADVISOR
Paragraphs 1 through 51 above are hereby realleged and incorporated by reference into this Count III.
Wright is a CTA, as that term is defined in Section 1a(5) of the Act, 7 U.S.C. 1a(5) (1994), because, for compensation or profit, he engages in the business of advising others, either directly or through publications, writings, or electronic media, as to the value of or the advisability of trading in contracts of sale of commodities for future delivery made or to be made on or subject to the rules of a contract market and commodity options authorized under Section 4c of the Act, 7 U.S.C. 6c (1994); and as part of a regular business, issues or promulgates analyses or reports concerning such contracts of sale of commodities for future delivery and commodity options.
While not registered under the Act, Wright made use of the mails and other means and instrumentalities of interstate commerce in connection with his business as a CTA, in violation of Section 4m(1) of the Act, 7 U.S.C. 6m(1) (1994).
Within the scope of his employment at Edwards, Luxenburger willfully aided, abetted, counseled, commanded, induced or procured the violations by Wright alleged in this Count III, and he is thus responsible for such violations as a principal, pursuant to Section 13(a) of the Act, 7 U.S.C. 13c(a) (1994).
Edwards is liable for Luxenburger's acts and omissions, pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. 4 (1994), and Section 1.2 of the Regulations, 17 C.F.R. 1.2 (1996).
COUNT IV
(Against Wright)
VIOLATIONS OF SECTION 4o(1) OF THE ACT:
FRAUD BY A COMMODITY TRADING ADVISOR
Paragraphs 1 through 56 above are hereby realleged and incorporated by reference into this Count IV.
As described more fully in Count III, supra, Wright is a CTA.
Wright violated Section 4o(1)(A)-(B) of the Act, 7 U.S.C. 6o(1)(A)-(B) (1994), by using the mails and other means and instrumentalities of interstate commerce, directly or indirectly, to employ devices, schemes, or artifices to defraud clients or prospective clients, and by engaging in a course of business which operated as a fraud or deceit upon clients or prospective clients.
COUNT V
(Against Wright)
VIOLATIONS OF SECTION 4b OF THE ACT:
FRAUD IN CONNECTION WITH FUTURES CONTRACTS
Paragraphs 1 through 59 above are hereby realleged and incorporated by reference into this Count V.
In or in connection with orders to make, or the making of, contracts of sale of commodities for future delivery, made, or to be made, for or on behalf of other persons Wright violated Section 4b of the Act, 7 U.S.C. 6b (1994), by cheating or defrauding or attempting to cheat or defraud such other persons and by willfully deceiving or attempting to deceive such other person in regard to such orders or contracts or in regard to acts of agency performed with respect to such order or contract for such person, where such contracts for future delivery were or could be used for hedging any transaction in interstate commerce in such commodity or the products or byproducts thereof, determining the price basis of any transaction in interstate commerce in such commodity, or delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof.
COUNT VI
(Against Wright)
VIOLATIONS OF SECTION 4c(b)
OF THE ACT AND REGULATION 33.10:
FRAUD IN CONNECTION WITH OPTIONS
Paragraphs 1 through 61 above are hereby realleged and incorporated by reference into this Count VI.
Wright violated Section 4c(b) of the Act, 7 U.S.C. 6c(b) (1994), and Section 33.10 of the Regulations, 17 C.F.R. 33.10 (1996), by cheating or defrauding or attempting to cheat or defraud other persons, and by deceiving or attempting to deceive other persons in or in connection with offers to enter into and the entry into commodity option transactions.
COUNT VII
(Against Wright)
VIOLATIONS OF REGULATION 4.13(b):
FAILURE TO FILE EXEMPTION STATEMENT OR TO DELIVER TO
POOL PARTICIPANTS DISCLOSURE DOCUMENTS OR ACCOUNT STATEMENTS
Paragraphs 1 through 63 above are hereby realleged and incorporated by reference into this Count VII.
Wright directly and indirectly solicited, accepted and received funds, securities or other property from prospective participants in the Micah Pool without first delivering or causing to be delivered to the prospective participants a disclosure document of the type specified in Section 4.13(b)(1) of the Regulations, 17 C.F.R. 4.13(b)(1) (1996).
Additionally, in violation of Section 4.13(b)(2) of the Regulations, 17 C.F.R. 4.13(b)(2) (1996), Wright did not provide monthly account statements to participants in the Micah I Pool.
COUNT VIII
(Against Wright)
VIOLATIONS OF REGULATION 4.31(a):
SOLICITATION OF AGREEMENTS TO GUIDE CLIENTS
COMMODITY INTEREST TRADING WITHOUT
DELIVERING REQUISITE DISCLOSURE DOCUMENTS
Paragraphs 1 through 66 above are hereby realleged and incorporated by reference into this Count VIII.
As described in Count I, supra, Wright is a CTA required to be registered with the Commission.
Wright solicited prospective clients, and entered into agreements with prospective clients to direct the clients' commodity interest accounts or to guide the clients' commodity interest trading by means of a systematic program that recommended specific transactions, but did not, at or before the time he engaged in the solicitations and entered into the agreements, delivered or caused to be delivered to the prospective clients a disclosure document for the trading program pursuant to which Wright sought to direct the clients' accounts or to guide the clients' trading, in the form specified by the Commission, in violation of Regulation 4.31(a), 17 C.F.R. 4.31(a) (1996).
COUNT IX
(Against Wright, Luxenburger & Edwards)
VIOLATIONS OF REGULATION 166.2:
EFFECTING TRANSACTIONS WITHOUT
PRIOR WRITTEN CUSTOMER AUTHORIZATION
Paragraphs 1 through 69 above are hereby realleged and incorporated by reference into this Count IX.
On between 20 and 50 occasions, within the scope of his employment at Edwards, Luxenburger directly or indirectly effected transactions in the accounts of certain customers of Wright, without prior written authorization from the customers to effectuate such transactions, in violation of Section 166.2 of the Regulations, 17 C.F.R. 166.2 (1996).
Wright willfully aided, abetted, counseled, commanded, induced or procured certain of the violations by Luxenburger described in this Count IX, and he is therefore liable for such violations as a principal, pursuant to Section 13(a) of the Act, 7 U.S.C. 13c(a) (1994).
Edwards is liable for Luxenburger's acts and omissions, pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. 4 (1994), and Section 1.2 of the Regulations, 17 C.F.R. 1.2 (1996).
IV.
By reason of the foregoing allegations, the Commission deems it necessary and appropriate, pursuant to its responsibilities under the Act, to institute public administrative proceedings to determine whether the allegations set forth in Parts I, II and III above are true and, if so, whether an appropriate order should be entered in accordance with Sections 6(c), 6(d), 8a(3) and 8a(4) of the Act, 7 U.S.C. 9, 13b, 12a(3), 12a(4) (1994):
(A)directing each Respondent to cease and desist from violating the Act and Regulations as specifically alleged in Parts I, II and III of the Complaint;
(B)prohibiting Wright from trading on or subject to the rules of any contract market and requiring all contract markets to refuse Wright all trading privileges thereupon;
(C)revoking, suspending or imposing conditions upon the registration of Luxenburger;
(D)assessing against each Respondent a civil penalty as provided in Section 6(c) of the Act, 7 U.S.C. 9; and
(E)requiring Wright to make restitution as deemed equitable and appropriate to specific customers of damages proximately caused by such violations.
V.
WHEREFORE IT IS HEREBY ORDERED that a public hearing for the purpose of taking evidence on the allegations set forth in Sections I, II and III above be held before an Administrative Law Judge in accordance with the Commission's Rules of Practice under the Act ("Rules"), 17 C.F.R. 10.1 et seq. (1996), at a time and place to be set as provided by Section 10.61, 17 C.F.R. 10.61 (1996), and that all post-hearing procedures shall be conducted pursuant to Sections 10.81 through 10.107, 17 C.F.R. 10.81-10.107 (1996).
IT IS FURTHER ORDERED that the Respondents shall file Answers to the allegations contained in this Complaint within twenty (20) days after service, pursuant to Section 10.23 of the Commission's Rules, 17 C.F.R. 10.23 (1996), and shall serve two copies of such Answer and of any documents filed in these proceedings upon William P. Corbett, Jr. and Nicholas C. Milano, Jr., Trial Attorneys, Division of Enforcement, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581. If any Respondent fails to file the required Answer, or fails to appear at a hearing after being duly notified, that Respondent shall be deemed in default and the proceedings may be determined against it upon consideration of the Complaint, the allegations of which shall be deemed to be true.
IT IS FURTHER ORDERED that this Complaint and Notice of Hearing shall be served on the Respondents personally or by registered or certified mail, pursuant to Section 10.22 of the Commission's Rules, 17 C.F.R. 10.22 (1996).
In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of investigative or prosecutorial functions in this or any factually related proceedings will be permitted to participate or advise the decision in this matter except as a witness or counsel in a proceeding held pursuant to notice.
By the Commission.
______________________________________
Jean A. Webb
Secretary to the
Commodity Futures Trading Commission
Dated: November 13, 1996