UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
________________________________ | In the Matter of: | | GARY GLASS and |CFTC Docket No. 93-4 ZOLTAN (LOU) GUTTMAN, | | Respondents. | ________________________________|
Lenel Hickson, Esq., Camille M. Arnold, Esq., and Michael F. Mongiovi on behalf of the Commodity Futures Trading Commission, Division of Enforcement;
Barry Bohrer, Esq. and Craig Isaacs, Esq. of Morvillo, Abramowitz, Grand, Iason, and Silverberg, New York, New York, on behalf of Respondent Zoltan Guttman;
Gary Glass, pro se.
PAINTER, Administrative Law Judge
On February 17, 1993, the Commodity Futures Trading Commission ("Commission") issued a seven-count Complaint against Gerald, Inc., Harold Jay Magid, Gary Glass, and Zoltan (Lou) Guttman.
The Commission charged Glass and Magid with direct violations of Section 4c(a)(A) of the Commodity Exchange Act ("Act") by executing wash sales, accommodation trades, and fictitious sales; Section 4c(a)(B) of the Act by reporting prices which were not true or bona fide; and Commission Regulation 1.38 by executing noncompetitive transactions. In addition, the Commission charged Glass with failure to keep records as required under Section 4g(1) of the Act, and Commission Regulations 1.31(a) and 1.35(a).
The Commission alleges that Guttman is vicariously liable for Magid's actions pursuant to Section 13(b) and Section 2(a)(1)(A)(iii) of the Act, and Commission Regulation 1.2. Under Section 13(b), Guttman is liable if he is the controlling person of Magid. Under Section 2(a)(1)(A)(iii) and Commission Regulation 1.2, Guttman is liable if Magid acted on his behalf.
Gerald settled with the Commission on February 17, 1993. Magid settled with the Commission on March 18, 1995. Accordingly, only the charges against Respondents Guttman and Glass are still at issue. These charges are based on transactions between Magid and Glass occurring from March 31 to October 2, 1989. During this period of time, Glass and Magid entered into Sugar No. 11 option trades on the last day of one month, then reversed the trades on the first trading day of the following month. The Commission contends that Magid, on behalf of himself and Guttman, executed these trades with Glass not for a competitive purpose, but to give the appearance that Magid and Guttman had eliminated a debit equity in their tenant-in-common accounts.
A hearing on the merits was held in New York City from October 24 to October 27, 1995. All parties have filed their post-hearing documents, and this matter is now ready for decision.
Findings of Fact
1.Throughout the relevant time period--March 1989 to October 1989--Respondent ZOLTAN (LOU) GUTTMAN ("Guttman") was a member of the New York Mercantile Exchange ("NYMEX") and a non- floor trading member of the Coffee, Sugar, and Cocoa Exchange ("CS&CE"). (Complaint3, 5; Guttman Answer ["Gut. A."]3,5; Transcript ["Tr."] 781.) Guttman was also the chairman of the NYMEX from August, 1988 to March, 1993. (Tr. 809, 817-18.)
2.Respondent GARY GLASS ("Glass") was registered with the Commission as a floor broker from January 1, 1981 until April 24, 1991, at which time the Commission revoked his registration. (NFA Registration Documents.) Throughout the relevant time period, he was a member of the CS&CE and NYMEX. (Tr. 320, 743.) Glass's futures commission merchant ("FCM") was Geldermann. (Tr. 746.)
3.In 1986, Guttman entered into an agreement with Gerald, Inc. ("Gerald") a New York corporation which is registered with the Commission as an FCM and is a clearing member of the CS&CE. (Complaint2; Gut. A.2; Tr. 784-85.) The agreement provided that Guttman would introduce floor traders to clear their trades through Gerald in return for a percentage of the clearing commissions charged to those traders. (Tr. 30, 470, 840; Division Exhibit ["DX"] 648, 649.)
4.Guttman was the introducing broker for Harold Jay Magid ("Magid") who began clearing as a floor trader at Gerald in early 1987. (Tr. 30, 786-87.)
5.In 1987, Guttman and Magid agreed to open joint accounts with the understanding that they were forming a partnership. (Tr. 32, 790-91.) From 1987 to 1990, Guttman and Magid owned from ten to fifteen tenant-in-common accounts carried by Gerald ("Magid/Guttman accounts"), the first and largest of which was Account No. 819-81900 ("Magid/Guttman Account"). (Complaint9-10; Gut. A9-10; Tr. 32, 701.) Guttman and Magid each contributed fifty percent of the funds deposited, and equally split the profits, losses and expenses of the tenant-in-common accounts. (Complaint9-10, Gut. A9-10; Tr. 32-33, 472, 797.)
6.Each Magid/Guttman account was identified on Gerald's computer system by one social security number. (Tr. 49.) Guttman's social security number appeared on the account in which funds from Brown Brothers and Harriman Bank were deposited. (Tr. 49-50.) Magid's social security number appeared on all of the other accounts. (Tr. 49.)
7.Magid engaged in all option trading for the accounts. (Tr. 32, 33, 172, 791-92, 801, 838.) Magid was reputed to be a "genius" in options trading. (Tr. 569, 586.) Guttman, although an expert in futures trading, (DX 787, 789), never understood the "finer points or specific points of options trading," and Magid's attempts at teaching him the fundamentals of options trading were unsuccessful. (Tr. 177, 801-02, 822.) Accordingly, Guttman never traded options for the Magid/Guttman accounts.
8.Guttman contributed income earned both through his agreement with Gerald and as Chairman of the NYMEX. (Tr. 58, 789; DX 624, 625, 626.) In addition, Guttman leased NYMEX seats to Magid at a below-market price. (Tr. 35, 838.) Guttman also examined the general size of the positions, maintained the books and prepared financial statements regarding the accounts' performance. (Tr. 55, 172, 791-92, 819; DX 628, 629, 630, 631, 645.)
9.In early 1988, Guttman and Magid formed Harley Futures, Inc. ("Harley"), a New York-based corporation, which served as the administrative and paying agent for the Magid/Guttman accounts. ( Complaint6; Gut. A.6; Tr. 35.) Guttman served as President and Magid served as Secretary. (Complaint6; Gut. A.6; Tr. 36.) Harley registered with the Commission as an independent introducing broker ("IB") on January 21, 1988. Gerald and Harley shared office space. (Complaint7; Gut. A.7; Tr. 37-38, 416.)
10.Magid trained the traders that he and Guttman had hired to trade for the Magid/Guttman accounts. (Tr. 34; DX 587.) Magid and the traders received a salary from Harley. (Tr. 53-55, 408-09, 413, 419-20.)
11.Guttman's duties at Harley were to maintain the books and records, and assist the accountant with the preparation of tax returns. (Tr. 55-57.)
12.Both Magid and Guttman had access to the daily statements for their tenant-in-common accounts at the Harley office. (Tr. 38, 416, 421.)
13.Magid's trading strategy for the Magid/Guttman accounts consisted of long trading positions, which required extensive financing. (Tr. 63, 803, 805.) Guttman and Magid secured an initial $2 million in outside financing through Brown Brothers and Harriman Bank, which they deposited into Account No. 81970. (Tr. 50, 58-59, 806-08.) From late 1988 into 1989, Gerald extended a $3 million credit to the Magid/Guttman accounts, which Gerald tracked through records of the accounts' equity. (Tr. 60- 62, 231-32, 550, 803, 805.) By February, 1989, Magid and Guttman had exhausted all of financing for their accounts, (Tr. 60, 805, 809), and henceforth, the Magid/Guttman accounts were continually in debit equity status. (Tr. 40, 232, 550.)
14.Gerald could not afford to cover Magid's long positions beyond the $3 million credit. (Tr. 235, 553.) Accordingly, in March, 1989, Julian Raber ("Raber"), the Senior Vice President and Chief Operating Officer at Gerald, (Tr. 469), met with Magid and Guttman to discuss alternate financing methods. (Tr. 63-65, 554-55, 809-13.) Raber informed Magid and Guttman that Gerald would finance the Magid/Guttman accounts intra-month only; at each month-end, however, Magid and Guttman had to secure other financing for their accounts. (Tr. 63-64, 66, 553-55.) Magid suggested that he and Guttman finance their accounts through option trades in lieu of securing outside financing or liquidating their positions. (Tr. 63-65, 551, 554- 55, 809-13.)
15.Magid knew that Glass previously had executed box financing trades for Republic National Bank at no charge on the COMEX. (Tr. 65-68, 554-55, 742-43, 813.) Guttman agreed with Magid that Guttman would make the initial contact with Glass to determine Glass's interest in executing deep-in-the-money options to raise equity in their accounts. (Tr. 63-66, 68, 811-13.) Once Glass manifested his willingness to trade with Guttman and Magid, Magid and Glass met to discuss the details of the trades. (Tr. 69, 71.) Later, Magid decided and informed Guttman that, in the interest of saving money for himself and Guttman, he would execute strangles instead of box transactions. (Tr. 72-73.)
16.In each of the charged transactions, Glass traded for accounts he owned or controlled at Geldermann. (DX 596, 597, 598, 1A6, 1A7, 1A10, 2A6, 2A7, 2A10, 3A4, 3A5, 3A8, 4A16, 5A21, 6A6, 6A7, 6A10, 7A6, 7A7, 7A10, 8A3, 8A4, 8A7, 9A9, 9A10, 10A9, 10A10, 10A16, 11A10, 11A16, 11A17, 11A18, 11A19, 12A6, 12A7, 12A10, 13A6, 13A7, 13A10.) Glass testified that he procured a line of credit from Geldermann with which to trade, and that he entered these positions openly and competitively to make money. (Tr. 746, 749-52.) This Court does not find Glass's testimony credible. No documents reflect a line of credit from Geldermann. (Tr. 754.) This Court finds that Glass never intended for money to exchange hands between him and Magid, and that Glass agreed to trade with Magid on the CS&CE, provided that they reverse the trade on the next business day and that Magid compensate Glass for his costs and commissions. (Tr. 69, 71, 75, 557, 599, 746, 754.)
17.Magid, Glass, Guttman, and Raber understood at all times that each month-end transaction was to be reversed on the first trading day of the following month. (Tr. 69, 71, 75, 501, 557, 599.)
18.From March to September, 1989, Guttman, in response to Raber's pleadings, asked Magid to eliminate the debit margin in the Magid/Guttman accounts for at least the last trading day of the month. (Tr. 39-40, 62-64, 422-23, 552-53, 566-67.) Magid entered into a series of transactions involving the purchase and sale of deep-in-the-money options on CS&CE Sugar No. 11 futures contracts ("Sugar options") with Glass. (Tr. 79-82.) For all of the month-end transactions, there was little or no open interest by competing floor traders or brokers in Sugar No. 11 options at the chosen strike price. (DX 592.)
19. This Court finds that, before each of the transactions in dispute, Magid and Glass communicated with each other and agreed to the number of options to be traded, the months, the premiums, and the spread in the strike prices. (Tr. 79-82.) After this calculation, Magid called Glass, who normally stood in the coffee and cocoa rings, to the Sugar option ring. (Tr. 79.)
20.On March 30, 1989, the Magid/Guttman accounts had a debit equity of $253,675.42. (DX 584(1), 585.) On March 31, 1989, the last trading day of the month, Magid sold Glass 125 May Sugar option calls at a seven-cent strike price and a premium of 4.8 cents, and 125 May Sugar option puts at a strike price of 14 cents and a premium of 2.28 cents. (DX 1A8, 1A9, 1A10.) As a result of these transactions, Magid raised $991,200 of equity for the Magid/Guttman accounts.
21.On April 3, the first trading day of the month, Magid reversed the March 31 trade by buying 125 seven-cent May Sugar option calls from Glass, 60 for a premium of 5.57 and 65 for a premium of 5.58. (DX 2A8, 2A10.) Magid also bought back the 125 14-cent May Sugar option puts for a premium of 1.51. (DX 2A9, 2A10.) This transaction resulted in a debit of $991,928 to the Magid/Guttman accounts and a corresponding credit to Glass's account. (DX 2A8, 2A9, 2A10.) Glass earned $728 through the March 30 and April 3 transactions, $500 in commissions and the balance in net profits. (DX 1A10, 591.)
22.On April 27, 1989, there was a $2,147,386.76 debit equity in the Magid/Guttman accounts. (DX 584(4), 585.) On April 28, the last trading day of the month, Magid raised $2,429,280 by selling July Sugar options to Glass. (DX 3A6, 3A7, 3A8.) Magid sold Glass 300 seven-cent calls for a premium of 4.82 cents, and 300 fourteen-cent puts for a premium of 2.41 cents. (DX 3A6, 3A7, 3A8.)
23.On May 1, 1989, the first trading day of the month, Magid and Glass offset the July Sugar option calls and puts by mechanically cancelling the transaction from the previous day. (DX 4A15, 4A16, 5A21.) It is undisputed that the seven-cent strike price was not listed in the CS&CE and therefore did not exist on April 28, 1989. (Tr. 86-87, 757-58.) Glass earned nothing from this transaction. This transaction consisting of non-existent options seemed to satisfy Gerald's need for month- end financing of the Magid/Guttman accounts. (Tr. 87.)
24.On May 30, 1989, the Magid/Guttman accounts had a debit equity of $4,481,638.81. (DX 584(8), 585.) On May 31, 1989, the last trading day of that month, Magid raised $3,531,920 by selling July Sugar options to Glass. (DX 6A8, 6A9, 6A10.) Magid sold 530 eight-cent calls to Glass at a 3.05 cent premium, (DX 6A8, 6A10), and 530 fourteen-cent puts for a 2.9 cent premium. (DX 3A9, 3A10.)
25.On June 1, the first trading day of the month, Magid reversed the May 31 trade by buying back 530 eight-cent July Sugar option calls from Glass at a premium of 3.03 cents, and 530 fourteen-cent July Sugar option puts, split into 70 puts at a premium of 2.97 cents, and 460 puts at a premium of 2.98 cents. (DX 7A8, 7A9, 7A10.) This transaction resulted in a debit of $3,566,752 to the Magid/Guttman accounts and a corresponding credit to Glass's account. (DX 7A8, 7A9, 7A10.) Glass earned $5,252 from this transaction, less $2,200 in commissions and $311 in NFA fees. (DX 6A10, 7A10, 592.)
26.Raber provided credible testimony explaining that there was no transaction on the last trading day of June because there was no debit equity in the Magid/Guttman accounts. (Tr. 138-39; DX 584(11), (12), (13), 585.)
27.On July 28, 1989, the Magid/Guttman accounts had a debit equity of $5,164,020.19. (DX 584(14), 585.) On July 31, 1989, the last trading day in the month of July, Magid raised $3,808,000 of equity by selling to Glass 400 eight-cent October Sugar option calls at a premium of 6.40 cents per pound, and 400 sixteen-cent October Sugar option puts at a premium of 2.1 cents. (DX 8A5, 8A6, 8A7.)
28.On August 1, the first trading day of the month, Magid reversed the July 31 trade by buying back the same number of Sugar options from Glass at a similar price. Magid bought 400 eight-cent calls, at a premium of 6.32 cents. (DX 9A7, 9A9.) Magid also bought 400 fourteen-cent puts, split into 71 puts at a premium of 2.18 cents, and 329 puts at a premium of 2.19 cents. (DX 9A8, 9A9.) This transaction resulted in a debit of $3,811,684.80 to the Magid/Guttman accounts and a corresponding credit to Glass's account. (DX 9A7, 9A8.) Glass earned $3,684 from the July 31 and August 1 transactions less $1,600 in commissions and $158 in NFA fees. (DX 8A7, 9A10, 594.)
29.On August 30, 1989, the Magid/Guttman accounts had a debit equity of $5,395,832.54 (DX 584(17), 585.) On August 31, 1989, the last trading day of the month, Magid raised $4,402,944 of equity by selling October Sugar options to Glass. (DX 10A13, 10A14, 10A16.) Magid sold Glass 500 nine-cent calls at a premium of 4.22 cents. (DX 10A13, 10A16.) He also sold Glass 500 sixteen-cent puts at a premium of 2.8 cents. (DX 10A14, 10A16.) Magid then sold 60 nine-cent calls at a 4.22 cent premium to Glass and 60 sixteen-cent puts at a 2.8 cent premium. (DX 10A13, 10A14.) Magid noted on his trading card "not in comp.," signifying that he did not want the trades to be entered into the computer. (Tr. 83-84, 118-19, 122.) The sale of the 60 calls and puts was recorded on Daniel DeRose's account at Gerald. (DX 10A15; Tr. 121-23.)
30.On September 1, the first trading day of the month, Magid reversed the August 31 trade by buying the same number of October Sugar options from Glass at substantially the same price. Magid bought 560 nine-cent calls from Glass, split into 122 calls at a premium of 4.36 cents, and 438 calls at a premium of 4.37 cents. (DX 11A1, 11A13, 11A15.) Magid also bought 560 sixteen- cent puts at a premium of 2.66 cents. (DX 11A14, 11A15.) This transaction debited the Magid/Guttman accounts by $3,935,433.60, and Daniel DeRose's account by $471,916. (DX 11A13, 11A14, 11A15, 11A17.) Glass earned $4,905 from the August 31 and September 1 transactions less $3,162.50 in commissions and $281 in NFA fees. (DX 10A16, 11A17, 11A18, 591.)
31.On September 28, 1989, the Magid/Guttman accounts had a debit equity of $5,236,114.93. (DX 584(20), 585). On September 29, 1989, the last trading day of the month, Magid raised $3,845,520 of equity by selling March 1990 Sugar options to Glass. (DX 12A8, 12A9, 12A10.) Magid sold Glass 450 nine-cent calls at a 4.93 cent premium and 450 sixteen-cent puts at a premium of 2.7 cents. (DX 12A8, 12A9, 12A10.)
32.On October 2, the first trading day of the month, Magid and Glass reversed the September 29 trade. Magid bought back 450 nine-cent calls, split into 87 calls at a 5.03-cent premium, and 363 calls at a 5.04-cent premium. (DX 13A1, 13A10.) Magid also bought back 450 sixteen-cent puts at a 2.6-cent premium. (DX 13A9, 13A10.) This transaction resulted in a debit of $3,849,585.60 to the Magid/Guttman accounts and a corresponding credit to Glass's account. (DX 13A8, 13A9, 13A10.) Glass earned $4,065 from the September 29 and October 2 trades, $1,800 in commissions and the balance in profits. (DX 12A10, 13A10.)
33.This pattern of transactions ceased in October, 1989. (Tr. 139-41.) At that time, Magid and Guttman secured financing from Phillip Brothers. (Tr. 139-41.)
34.In June, 1990, Guttman and Magid liquidated their tenant-in-common accounts after a major loss. (Tr. 183, 237, 609-10, 827-31.) Both Magid and Guttman participated in the liquidation of their accounts. (Tr. 429, 831-34.)
35.The Commission subpoenaed Glass for his trading cards on May 14, 1991, and requested them again on June 26, 1991. Glass never produced the cards. (Tr. 346-47, 594, 770.)
Discussion and Sanctions
The Commission charges Glass with direct violations of Sections 4c(a)(A), 4c(a)(B), and 4g(1) of the Act and Regulations 1.31(a), 1.35(a), and 1.38(a). It charges Guttman with vicarious liability both under Section 13(b) of the Act as the controlling person of the Magid/Guttman accounts and under Section 2(a)(1)(A)(iii) of the Act and Regulation 1.2 for the direct violations of his agent, Magid.
Magid's credible testimony combined with the unvarying pattern of trades leave no doubt that all of the month-end trades entered into by Magid and Glass were patently fictitious, noncompetitive wash sales and accommodation trades which caused the reporting of non-bona fide prices. The record in this case does not prove that Guttman controlled Magid. However, under Section 2(a)(1)(A)(iii) of the Act, Guttman, as the equal partner in the enterprise, is vicariously liable for the misconduct of Magid.
Glass engaged in wash sales, fictitious sales, accommodation trades, noncompetitive transactions, and caused the reporting of non bona fide prices
The central characteristic of fictitious sales is the use of trading techniques that give the appearance of submitting trades to the open market while negating the risk or price competition incident to such a market. In re Gimbel [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH)24,213 at 35,003 n.7 (CFTC April 14, 1988) (citing In re Collins [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH)22,982 at 31,902 (CFTC April 4, 1986)). A wash sale is a type of fictitious sale. To prove a wash sale violation, the Division must show that the Respondents knowingly intended to avoid a bona fide market transaction. Stoller v. CFTC, 834 F.2d 262, 265 (2d Cir. 1987).
Magid structured these trades with Glass to eliminate or reduce the debit equity within the Magid/Guttman accounts for one business day. The procedure was simple: if the Magid/Guttman accounts had a debit equity at the end of the month, Magid calculated how many deep-in-the-money calls and puts he had to sell to eliminate the debit. Magid then called Glass over to the Sugar pit and sold him the calls and puts. (Tr. 79.) The Magid/Guttman accounts were thus credited with the high premiums generated from the deep-in-the-money calls and puts. This credit is utterly artificial. The accompanying liability incurred by selling these deep-in-the-money options, which is approximately equal to the premium charged, was never attributed to the Magid/Guttman accounts.
On the next business day, Magid and Glass reversed the previous day's transaction. Magid bought back the same number of calls and puts from Glass at substantially the same prices. Invariably, the slight difference in price on the reverse trade benefitted Glass. He sometimes raised up to $5,000 a day, in addition to currying favor with Magid and Guttman, big players in futures and options. Since neither Magid nor Glass intended to compete in the market when they executed the month-end trades, they engaged in wash sales.
By prearranging these trades, Magid and Glass executed noncompetitive transactions in violation of Regulation 1.38. See Gimbel24,213 at 35,003 (finding that prearranged trading negates the risk and price competition incident to an open market, and violates Regulation 1.38).
In addition, each time Glass reported the month-end transactions which he knew were noncompetitive, he knowingly caused a price to be reported that was not bona fide in violation of Section 4c(a)(B) of the Act. See In re Gilchrist, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH)24,993 at 37,653 (CFTC Jan. 25, 1991).
Finally, because Glass entered into these wash trades to "assist another with illegal trades," he engaged in accommodation trading in violation of Section 4c(a)(A). Sundheimer v. CFTC, 688 F.2d 150, 152 (2d Cir. 1982) cert. denied 460 U.S. 1022 (1983).
Guttman, Magid, Glass and Raber knew that these transactions were made solely for the purpose of creating artificial equity in the Magid/Guttman accounts. That Guttman, the chairman of a major exchange during the relevant time period, would engage in such a smoke-and-mirrors operation is nothing short of shocking. If there is a saving grace to be found, it is that Guttman elected to pull off this scheme on the CS&CE and not on the NYMEX, of which he was chairman. It is equally puzzling that Raber, a high official of Gerald, Inc., would go along with such a scheme and place his employer at great risk.
Guttman was not the controlling person of Magid
Under Section 13(b) of the Act, "[a]ny person who, directly or indirectly, controls any person who has violated any provision of this Act or any of the . . . regulations issued pursuant to this Act may be held liable for such violation . . . to the same extent as such controlled person." In order to find Guttman liable under this section, the Division must first prove that he controlled Magid, then prove that Guttman either knowingly induced Magid to violate the Act or acted in bad faith. See In re First National Trading Corp., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH)26,142 at 41,787 (CFTC July 20, 1994) appeal docketed, No. 95-3761 (6th Cir. Sept. 28, 1995).
The Division has failed to prove by a preponderance of the evidence that Guttman controlled Magid. Control is "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise." In re Spiegel [1987-1990 Transfer Binder]24,103 at 34,765 n.4 (CFTC Jan. 12, 1988); see also In re GNP [1990- 1992 Transfer Binder] Comm. Fut. L. Rep. (CCH)25,360 at 39,216 (CFTC Aug. 11, 1992). The record reveals that Guttman never possessed the power to direct Magid's trades. To the contrary, the record reveals that Guttman did not understand options trading while Magid was considered to be a genius in this field.
The Division points to several facts as evidence of Guttman's control. However, these facts only prove that Guttman and Magid were partners, sharing the profits, losses and responsibilities of their joint accounts. It is true that Guttman was the passive President of Harley; he contributed the income stream with which Magid traded; he leased his seat to Magid; and he used his social security number on the Brown Brothers and Harriman line of credit. But these factors are simply consistent with Guttman's role as an equal joint tenant, and do not prove that he possessed the power to direct Magid's trades.
The salient point is that Guttman never traded for the accounts, nor interfered with Magid's trading strategies. While Guttman did put Magid in touch with Glass, the trading scheme was the brainchild of Magid, and was implemented by Magid and Glass. It is this fact--that Magid was the sole decisionmaker over all trading--that makes it impossible for Guttman to be the controlling person of Magid regarding these trades. Accordingly, this Court finds that Guttman did not control Magid and is not vicariously liable for Magid's acts pursuant to Section 13(b) of the Act.
Magid acted as Guttman's agent when executing the fictitious, noncompetitive wash sales and accommodation trades which caused the reporting of non bona fide prices
Under Section 2(a)(1)(A)(iii), "the act . . . of any . . . agent or other person acting for any individual . . . within the scope of his employment or office shall be deemed the act . . . of such individual . . . as well as of such . . . agent or other person." There is no legislative history for Section 2(a)(1)(A)(iii). It is generally known that this section is grounded in the theory of common law respondeat superior, yet intended to reach a wider range of relationships. Lobb v. J.T. McKerr & Co., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH)22,623 at 36,441 (CFTC Dec. 14, 1989). In this case, Magid and Guttman were partners, a group not traditionally covered by respondeat superior theory. The plain language of this section, however, allows the inclusion of co-partner liability, provided the Division successfully proves that Magid was acting for Guttman.
In order to successfully impose liability under Section 2(a)(1)(A)(iii), the Division must demonstrate that (1) Magid was acting for Guttman when executing the charged trades; and (2) Magid's acts were within the scope of his employment. The Commission has not identified any essential criteria that proves that one is acting for another. Wirth v. T & S Commodities, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH)25,271 at 38,875 (CFTC Apr. 6, 1992). Instead, "whether one person is acting for another turns . . . on an overall assessment of the totality of the circumstances in each case." Berisko v. Eastern Capital Corp., [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH)22,772 at 31,223 (CFTC 1984). Importantly, control is not required to establish whether one is acting for another. Dohmen-Ramirez v. CFTC, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH)24,101 at 34,757 (9th Cir. Jan. 20, 1988) (citing Rosenthal and Co. v. CFTC, 802 F.2d 963, 966 (7th Cir. 1986)).
If the Division can establish that Magid was acting for Guttman, it must then prove that Magid's misconduct was within the scope of his employment, i.e. Magid's misconduct was in furtherance of the agency. Rosenthal, at 966. In order to show that the misconduct was in furtherance of the agency, the Court must again look at the totality of the circumstances, and in particular, should examine the nature of the business entrusted to Magid's care. Lobb, at 36,441.
In this case, Magid was acting for Guttman when executing the charged trades. As joint owners of the Magid/Guttman accounts, Magid and Guttman had an equal interest in eliminating any debit equity in those accounts. Once the debit equity problem emerged, Guttman and Magid agreed that Magid would eliminate the debit equity for his and Guttman's benefit through trading. With this agreement, Guttman gave Magid the authority to act on his behalf, and even reminded Magid at the end of the month to take care of the debit equity.
The charged trades were also within the scope of Magid's employment. The trading at issue was exclusively entrusted to Magid by agreement between the two. Moreover, trading was Magid's sole responsibility in the partnership. Hence, Magid's misconduct was in furtherance of the partnership and within the scope of his employment.
Under the totality of the circumstances, Magid was acting for Guttman when executing the violative trades, and Guttman is liable for Magid's misconduct under Section 2(a)(1)(A)(iii) of the Act.
The requirements of Regulations 1.31 and 1.35 are straightforward. Glass must keep hard copies or microfilm copies of all transactions relating to his business in commodity futures and options for five years, and produce them on the Commission's request. See In re First National Trading Corp., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH)26,080, at 41,580 (CFTC May 12, 1994). Glass failed to produce the copies requested by the Commission, and therefore violated Regulations 1.31(a) and 1.35(a).
Sanctions are based on a consideration of the nature and frequency of a violator's wrongdoing. In re Reddy, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH)26, 544 at 43,428 (CFTC Nov. 2, 1995). As the chairman of the NYMEX throughout the relevant time period, Guttman was bound by the highest ethical standards, yet permitted his partner to subvert the free market system through prearranged transactions. Guttman's gross violations of the Act over a period of six months, especially in light of the fact that he was the chairman of the NYMEX, directly taint the integrity of the futures market and warrant serious sanctions.
Respondent Glass readily agreed to accommodate Magid by executing prearranged wash sales over a six-month period for a profit of up to $5,000 a day. He failed to keep records of any of these transactions. Presumably, he would have continued accommodating Magid if Magid had not found an alternate means of eliminating the debit in the Magid/Guttman accounts. Indeed, Glass has a tendency to violate the Act. The Commission has already revoked Glass's registration after finding that he engaged in noncompetitive, prearranged trading. (See In re Buckwalter, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH)24,995 (CFTC Jan. 25, 1991), and In re Bear Stearns, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH)24,994 (CFTC Jan. 25, 1991)). Respondent Glass's continuous pattern of serious violations of the Act and Regulations also directly taint the integrity of the futures market, and accordingly, warrant severe sanctions.
The Division requests the following sanctions against Guttman and Glass: (1) an order for Guttman and Glass to cease and desist from violating the Act and Regulations; (2) an order for a permanent trading ban for Guttman and Glass; (3) a $500,000 monetary penalty for Guttman and a $300,000 monetary penalty for Glass; and (4) revocation of Guttman's registration.
A cease and desist order is an appropriate sanction when there is a reasonable possibility that a Respondent will repeat wrongful conduct. In re Gordon, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH)25,667 at 40,182 (CFTC Mar. 16, 1993). If holding the position of chairman of the NYMEX did not stop Guttman from condoning Magid's violations, there is certainly a reasonable possibility that Guttman would repeat the violation when he is no longer the chairman. Thus, Guttman's actions warrant a cease and desist order. Glass's past actions manifest a pattern of unlawful conduct, which similarly warrants a cease and desist order. See In re Fritts, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH)26,255 at 42,132 (CFTC Nov. 2, 1994); see also In re GNP Commodities, Inc., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH)25,360 at 39,223 (CFTC Aug. 11, 1992).
In addition, Respondents Guttman and Glass's participation in fictitious trading, wash sales, accommodation trades, noncompetitive trading, and reporting of non-bona fide prices, which directly undermines the integrity of the futures market, was intentional and egregious, warranting a serious trading ban. See In re Citadel Trading Co., [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH)23,082 at 32,191 (CFTC May 23, 1986); In re Fritts,26,255 at 42,132; In re Miller, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH)26,440 at 42,914 (CFTC June 16, 1995).
Guttman and Glass's consistent violations of the prohibition against noncompetitive trading, fictitious trading, and wash sales warrant severe civil monetary penalties. Section 6(e)(1) directs this Court to determine the amount of the monetary penalty by considering the gravity of the violation, which is based on a number of factors, the most important of which is the Respondent's wrongful gain. See In re Fritts,26,255 at 42,132-42,133. An egregious or flagrant violation justifies a substantial monetary penalty up to the ceiling provided in Section 6(c): the greater of $100,000 per violation or triple the monetary gain to the Respondent.
It is not possible to determine Guttman's gain from the violative transactions. He gained a total of $19 million in fictional equity from the six transactions at issue. Although this amount is fictional, the flagrant violation of the Act and the frequency of such violations are certainly grave. In order to discourage Guttman and potential violators from future illegal conduct, this Court will assess the $500,000 civil monetary penalty proposed by the Division.
Glass wrongfully gained $8,621.50 from the six transactions. In proposing a $300,000 civil monetary penalty, the Division urges this Court to consider the $19 million of equity reflected in the Magid/Guttman accounts through Glass's fictitious trading. However, Glass entered these trades with Magid not with the intention to create $19 million in equity, but to acquire additional income. Based on his previous conduct, tripling Glass's $9,000 gain, however, would not deter Glass from further violating the Act. Hence, this Court assesses a $150,000 civil monetary penalty on Glass.
Finally, Guttman's registration should be revoked pursuant to Section 8a(2)(E) of the Act, 7 U.S.C.12a, which authorizes the Commission to suspend, condition or revoke the registration of brokers or traders who have violated any provision of the Act. Guttman is vicariously liable under Section 2a(1)(A)(iii) of the Act, for Magid's violations of Sections 4c(a)(A), and 4c(a)(B) and Regulation 1.38(a). Proof of these violations raises a presumption that Guttman is unfit for registration. Revocation of Guttman's registration is necessary in order to discourage other commodity professionals from violating the Act. Guttman failed to rebut the presumption of unfitness and failed to submit evidence demonstrating that continued registration will not pose a substantial risk to the public. In re Antonacci, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH)24,835 at 36,930 (CFTC Apr. 18, 1990). Hence, Guttman's registration is hereby revoked.
Conclusions of Law
Based on the findings of fact set forth above, the Court concludes that:
1.Glass violated Section 4c(a)(A) of the Act by engaging in wash sales, accommodation trades, and fictitious sales.
2.Glass violated Regulation 1.38 by executing noncompetitive transactions.
3.Glass violated Section 4c(a)(B) of the Act by causing a price to be reported which is not true or bona fide.
4.Glass violated Section 4(g)(1) of the Act and Regulations 1.35 and 1.38 by failing to produce his trading cards to the Commission.
5.The evidence fails to show that Respondent Guttman was the controlling person of Magid and therefore, he is not liable for Magid's violations pursuant to Section 13(b) of the Act.
6.Pursuant to Section 2(a)(1)(A)(iii) of the Act and Regulation 1.2, Respondent Guttman is liable for Glass's and Magid's violations of Sections 4c(a)(A) and 4c(a)(B) of the Act, and Regulation 1.38, as described in the findings above.
1.Respondent Glass: The Division of Enforcement has proven by a preponderance of the evidence that Respondent Glass violated Sections 4c(a)(A), 4c(a)(B), and 4g(1) of the Act, and Commission Regulations 1.31(a), 1.35(a), and 1.38(a). Accordingly:
a.Gary Glass is hereby ORDERED to cease and desist from violating the Commodity Exchange Act and Commission Regulations as found above;
b.Gary Glass is hereby PROHIBITED from trading on or subject to the rules of any contract market permanently commencing the day this decision becomes final;
c.a civil monetary penalty of $150,000 is ASSESSED upon Gary Glass.
a.The weight of the evidence fails to establish that Guttman was the controlling person of Magid, and such charges are hereby DISMISSED.
b.The Division of Enforcement has proven by a preponderance of the evidence that Magid acted as the agent of Guttman pursuant to Section 2a(1)(A). Accordingly:
(1) Respondent Guttman is hereby ORDERED to cease and desist from violating the Commodity Exchange Act and Commission Regulations as found above;
(2) Respondent Guttman is hereby PROHIBITED from trading on or subject to the rules of any contract market for a period of 5 years commencing the day this decision becomes final;
(3) a civil monetary penalty of $500,000 is ASSESSED upon Respondent Guttman;
(4) Commission registration of Respondent Guttman is hereby REVOKED, effective the day this decision becomes final.
Issued this 11th day of September, 1996,
George H. Painter
Administrative Law Judge