UNITED STATES OF
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||CFTC Docket No. 98-4|
|COMPETITIVE STRATEGIES FOR AGRICULTURE, LTD.,||ORDER MAKING FINDINGS|
|CSA INVESTOR SERVICES, INC.,||AND IMPOSING|
|LEE DONALD AMUNDSON, TERRY ALLAN DIRKSEN,||REMEDIAL SANCTIONS|
|JEFFREY JAMES WICHMANN,||AS TO RESPONDENTS|
|WILLIAM EUGENE ARNOLD, GREAT PLAINS CO-OP, and||COMPETITIVE STRATEGIES|
|HERMAN GERDES,||FOR AGRICULTURE, LTD.,|
|Respondents.||CSA INVESTOR SERVICES, INC., AND|
|LEE DONALD AMUNDSON|
On December 22, 1997, the Commodity Futures Trading Commission ("Commission") filed a Complaint and Notice of Hearing ("Complaint") against Competitive Strategies for Agriculture, Ltd. ("CSA-Iowa"), CSA Investor Services, Inc. ("CSA-IB"), and Lee Donald Amundson ("Amundson"), among others. The six-count Complaint charges, inter alia, that Amundson violated and aided and abetted violations of, and that CSA-Iowa and CSA-IB are liable for violations of, the antifraud provisions of Sections 4b(a), 4o(1)(A), and 4o(1)(B) of the Commodity Exchange Act, as amended ("Act"), 7 U.S.C. §§ 6b(a), 6o(1)(A), and 6o(1)(B) (1994), and that Amundson also is liable for the fraud violations of CSA-Iowa and CSA-IB as a controlling person of those companies. The Complaint also alleges that Amundson violated and aided and abetted violations of, and that CSA-Iowa and CSA-IB are liable for violations of, Section 4(a) of the Act, 7 U.S.C. § 6(a) (1994), by selling, confirming the execution of, conducting an office or business for the purpose of soliciting or accepting any order for, or otherwise dealing in, off-exchange futures contracts. Finally, the Complaint charges that CSA-IB violated Section 166.3 of the Commission's Regulations ("Regulations"), 17 C.F.R. § 166.3 (1997), by failing to supervise diligently its branch office, and that CSA-IB is liable for the failure of its branch office to hold itself out to the public under the name of CSA-IB as required by Section 166.4 of the Regulations, 17 C.F.R. § 166.4 (1997).
In order to dispose of the allegations and issues raised in the Complaint, CSA-Iowa, CSA-IB, and Amundson ("CSA Respondents") have submitted a Joint Offer of Settlement ("Offer") which the Commission has determined to accept. Without admitting or denying any of the allegations of the Complaint or the findings herein, and prior to any adjudication on the merits, the CSA Respondents acknowledge service of this Order Making Findings and Imposing Remedial Sanctions as to the CSA Respondents ("Order"). The CSA Respondents consent to the use of the findings contained in this Order in this proceeding and in any other proceeding brought by the Commission or to which the Commission is a party.1
The Commission finds the following:
From mid-1993 through mid-1995, CSA-Iowa and CSA-IB, operating together with CSA-IB's Nebraska branch office, provided agricultural market consulting and advisory services to agricultural producers in Nebraska. The CSA Respondents recommended that Nebraska clients use so-called hedge-to-arrive contracts ("HTAs") that permitted rolling between crop years and fraudulently represented to Nebraska clients that their strategies concerning such contracts were risk-free. The CSA Respondents failed to explain the market risk inherent in rolling forward an HTA, particularly between crop years (i.e., the risk of adverse price movements associated with the HTA's futures reference price) and the credit risk associated with such rolling (i.e., the risk that the counter-party to the HTA, the elevator, might be unable or unwilling to bear the margin stress associated with their inter-crop year rolling strategy).
The CSA Respondents thereby violated Section 4b(a)of the Act. Amundson also violated Sections 4o(1)(A) and 4o(1)(B) of the Act, and CSA-Iowa and CSA-IB are liable for violations of Sections 4o(1)(A) and 4o(1)(B) of the Act. In addition, Amundson aided and abetted fraud violations pursuant to Section 13(a) of the Act, 7 U.S.C. § 13c(a) (1994), and Amundson also is liable for CSA-Iowa's and CSA-IB's fraud violations as a controlling person of those entities pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b) (1994).
As part of this conduct, the CSA Respondents solicited Nebraska clients to enter into a type of HTA offered by Great Plains Co-op ("Great Plains"), a central Nebraska elevator, which was an off-exchange futures contract. The CSA Respondents thereby violated Section 4(a) of the Act. By explaining and recommending this HTA to Nebraska clients and prospective clients, including his brother, Amundson also aided and abetted the offer and execution of this off-exchange futures contract pursuant to Section 13(a) of the Act.
Finally, CSA-IB violated Section 166.3 of the Regulations by failing to supervise diligently the activities of its Nebraska branch office and its branch office associated persons ("APs") relating to CSA-IB's business as a Commission registrant. CSA-IB also failed to use the name of CSA-IB at the branch office for all purposes and failed to hold the office out to the public as a branch office under the name of CSA-IB, as required by Section 166.4 of the Regulations.
Competitive Strategies for Agriculture, Ltd., ("CSA-Iowa") is a closely-held Iowa corporation located at 544 193rd Street, Ames, Iowa 50010. CSA-Iowa consults and advises clients concerning marketing their grain, including the use of HTAs and exchange-traded futures contracts and options on futures contracts. CSA-Iowa has never been registered with the Commission.
CSA Investor Services, Inc., ("CSA-IB") is a closely-held Iowa corporation located at 544 193rd Street, Ames, Iowa 50010. CSA-IB has been registered as an introducing broker ("IB") since January 10, 1990.
Lee Donald Amundson resides at 544 193rd Street, Ames, Iowa 50010. Until October 8, 1996, when he bought out his co-owner Terry Allan Dirksen ("Dirksen"), Amundson was co-owner, Vice President, Treasurer, Secretary and "Senior Grain Analyst" of both CSA-Iowa and CSA-IB. He is now the sole owner and officer of both companies. Amundson was registered with the Commission as an AP of Farmers Cooperative Elevator Company, a registered IB, from June 21, 1988 until December 1, 1989. He was a principal and registered AP of CSA-IB from December 6, 1989 until March 18, 1998.
The CSA Respondents Provided
Agricultural Marketing Advice and
Commodity Brokerage Services to Nebraska Clients and Prospective Clients
In November 1989, Amundson and Dirksen purchased an agricultural marketing business from an Iowa cooperative elevator and began doing business as CSA-Iowa. CSA-Iowa specialized in providing agricultural marketing and futures exchange trading advice (primarily concerning options on exchange-traded futures contracts) to Iowa producers in return for an annual fee derived from the size of the client's farming operation. Concurrent with CSA-Iowa's formation, Amundson and Dirksen also formed a second corporation, CSA-IB, to provide commodity futures and options brokerage services for CSA-Iowa clients.2
Amundson was an owner of CSA-Iowa and CSA-IB and served as an officer and director of each company. As a co-owner, Amundson shared responsibility for hiring and firing decisions, check signing, setting commission rates, and controlling the corporations' finances. Amundson was the Senior Grain Analyst and researched, developed, and updated grain marketing recommendations, including recommendations about HTAs, for CSA. Amundson was primarily responsible for preparing the introductory and quarterly seminars held in Iowa and Nebraska.
Pursuant to a written agreement executed in mid-1993, CSA-Iowa provided the consultants operating out of the Nebraska office with support, training, and assistance, including assistance with marketing and promotional seminars conducted in their trade area of central Nebraska, in return for $4,000 annually plus 15% of all client fees collected. The contract also contained a schedule of brokerage commissions that CSA-IB would charge Nebraska clients, as well as a provision for splitting those commissions between CSA-IB and the consultants in that office, who were registered as APs of CSA-IB.
In conducting seminars for Nebraska clients and prospective clients, and in daily conversations with consultants in the Nebraska office, the CSA Respondents provided information that Nebraska consultants used in advising Nebraska clients about HTAs, agricultural marketing, and commodities trading. The CSA Respondents presented their business to the public as a single entity, typically without distinguishing between CSA-IB, CSA-Iowa and the Nebraska office.
CSA Promoted "Enhanced HTAs" to Nebraska Clients and Prospective Clients
Most Nebraska clients signed up with CSA to receive its marketing and trading advice after attending seminars at which Amundson and other consultants for whom CSA is responsible discussed HTAs and the commodity futures and options markets. During some CSA seminars, Amundson and the other consultants promoted (and distributed written materials promoting) a strategy of using HTAs in combination with exchange-traded instruments to maximize profits. Amundson was primarily responsible for developing the written seminar materials, and the seminars were largely uniform in their content and recommendations.
The seminars compared HTAs favorably to the sale of grain by forward contracts. The seminar materials, distributed to clients and prospective clients, also presented examples and graphs demonstrating that recommended HTA strategies purportedly had outperformed available cash prices.
The linchpin of the marketing strategy, promoted at the seminars and in personalized consultations with clients and prospective clients, were HTAs that could be rolled, which CSA termed "Enhanced HTAs." The CSA Respondents strongly urged clients and prospective clients to locate an elevator (even a distant elevator) that offered an Enhanced HTA. They often recommended a rolling strategy by which clients would enter into Enhanced HTAs for July corn and would later roll these Enhanced HTAs to the following December. The CSA Respondents told clients and prospective clients that this inter-crop year rolling strategy would allow them to profit from a purportedly historically favorable July-December futures price spread.
The seminar materials, however, illustrated only the potentially favorable results of the inter-crop year rolling strategy, using the most favorable market assumptions from the producer's perspective: a narrowing spread in a period of declining prices. The CSA Respondents failed to disclose that in rolling an Enhanced HTA between crop years (as in a July-December roll for corn) they confronted a risk of rolling into a widening spread, a period of rising prices, or both.3 Instead, the CSA Respondents assured Nebraska clients and prospective clients that an Enhanced HTA was risk-free purportedly because, if prices were unfavorable when the Enhanced HTA's reference month arrived, the producer could roll the contract until market conditions improved. These assurances that Enhanced HTAs were risk-free due to the ability to roll failed to disclose the material market risk that the futures market might move so adversely that, even if the contracting elevator allowed a Nebraska client to roll indefinitely, the client would still be unable to roll out of his losing HTA position. They also failed to disclose the material counter-party risk that, in a period of rising prices, the contracting elevator would not be willing - or financially able - to permit Nebraska clients to roll indefinitely.
From mid-1993 through mid-1995, at least 64 Nebraska clients entered into a type of Enhanced HTA offered by Great Plains and referred to as a "Cross Country HTA."4 Consistent with its advice concerning Enhanced HTAs generally, the CSA Respondents assured Nebraska clients and prospective clients that the Great Plains Cross Country HTA was risk-free purportedly due to the ability to roll out of a losing position during unfavorable market conditions.
D. Legal Discussion
Amundson Acted as a Commodity Trading Advisor
Section 1a(5)(A) of the Act, 7 U.S.C. § 1 (1994), defines a commodity trading advisor ("CTA") to be any person who, for compensation or profit: 1) engages in the business of advising others, either directly or through publications or writings, as to the value or the advisability of trading in futures contracts or options on futures contracts; or 2) as part of a regular business, issues analyses or reports concerning these activities. Persons who, like Amundson, provide commodity futures trading recommendations to the public, and offer personal consultations about futures contracts or options on futures contracts, give commodity futures trading advice. See generally, In re Armstrong, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,657 at 40,148-49 (CFTC Feb. 8, 1993), remanded on other grounds sub nom., Armstrong v. CFTC, 12 F.3d 401 (3d Cir. 1993); on remand, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,332 (CFTC Mar. 13, 1995), aff'd., 77 F.3d 461 (3rd Cir. 1996) (publisher of commodity advisory newsletters, which also offered recorded telephone newsline services, provided specific commodity futures and options trading recommendations to the public, and therefore was a CTA); CFTC v. American Commodity Options Corp., 560 F.2d 135, 141 (2d Cir. 1977) (firm that "offer[ed] opinions and advice, and issued analyses and reports concerning the value of commodities" to customers, was a CTA); CFTC v. AVCO Financial Corp., 979 F. Supp. 232 (S.D.N.Y. 1997).
Amundson engaged in the business of personally advising clients, for a fee, as to the advisability of trading particular futures contracts and options on futures contracts. The seminars and client newsletters constituted analyses or reports concerning these activities. Thus, Amundson acted as a CTA.
The CSA Respondents Committed Fraud
Section 4b(a) of the Act provides that it shall be unlawful, in or in connection with a futures contract for or on behalf of any other person, to willfully cheat or defraud, or attempt to cheat or defraud, such other person. Section 4o(1)(A) of the Act prohibits a CTA from employing "any device, scheme, or artifice to defraud any client . . . or prospective client . . . ." Section 4o(1)(B) of the Act provides that it shall be unlawful for a CTA "to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant." Liability under Sections 4b(a) and 4o(1)(A) of the Act requires proof of scienter, i.e., proof that the respondent committed the alleged wrongful acts "intentionally or with reckless disregard for [his] duties under the Act."5 Hammond v. Smith Barney, Harris Upham & Co., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,617 at 36,659 n.21 (CFTC March 1, 1990); CFTC v. Savage, 611 F.2d 270, 283 (9th Cir. 1979) (finding of scienter supported by proof of recklessness).
In seminars and personalized consultations with Nebraska clients and prospective clients described above, the CSA Respondents committed fraud. The crux of the seminars and personalized consultations, based on favorable (and frequently hypothetical) market assumptions, was that Enhanced HTAs would achieve better price results than were available through forward contracts or sales on the spot market, yet were risk-free purportedly due to the ability to roll out of unfavorable market conditions.
The CSA Respondents particularly emphasized the importance of rolling Enhanced HTAs between crop years to capture gains on futures price movements. Their examples of the benefits purportedly available from inter-crop year rolling were premised upon the most advantageous market circumstances from a producer's perspective: a narrowing spread in a period of declining prices. CSA's overly optimistic seminars and personalized consultations failed to disclose the risk inherent in speculating on the inter-crop year spread. Their unmistakable message was that the Enhanced HTA was risk-free due to the ability to roll out of a losing HTA position during unfavorable market conditions. CSA's seminars and personalized consultations thus failed to disclose either the market risk or the counter-party risk associated with its strategies involving rolling Enhanced HTAs between crop years.
Amundson and other persons for whom CSA is responsible acted with scienter. As CSA's Senior Grain Analyst, Amundson had tracked commodities markets for a number of years and frequently reviewed historical price data for the grain markets. Amundson and the others were market professionals - they were consultants of the agricultural marketing firm CSA-Iowa as well as APs of the commodity brokerage firm CSA-IB - and were aware of the unpredictable nature of, and the risks inherent in, futures trading. Periods of rising prices and inverted markets, which increased the likelihood of a loss when rolling an Enhanced HTA and the attendant counter-party risk, were readily foreseeable. Yet, Amundson and the others for whom CSA is responsible, in their seminars and personalized consultations, knowingly failed to disclose, or recklessly disregarded, the material market and counter-party risks associated with rolling Enhanced HTAs, especially between crop years.
Misrepresentations concerning risk of loss violate the antifraud provisions of the Act. See, e.g., CFTC v. Commonwealth Fin. Group, Inc., 874 F. Supp. 1345, 1352-1354 (S.D. Fla. 1994), aff'd in part, rev'd in part on other grounds, 795 F.3d 1159 (11th Cir. 1996); Kelley v. Carr, 442 F. Supp. 346, 351-354 (W.D. Mich. 1977), aff'd in part, rev'd in part on other grounds, 691 F.2d 800 (6th Cir. 1980). The "risk inherent in trading is a material fact," Clayton Brokerage Co. of St. Louis, Inc. v. CFTC, 794 F.2d 573, 578 (11th Cir. 1986), and a failure to disclose material facts "operates as a fraud or deceit," Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) (interpreting Investment Advisors Act of 1940); Armstrong, supra, ¶ 26,332 at 42,611. Moreover, statements that the risks of an investment in futures trading are limited are inherently fraudulent "[i]n light of the uncertainties of the market place," Munnell v. Paine Webber Jackson & Curtis, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,313 at 32,863 (CFTC Oct. 8, 1986), as are statements that lead to the conclusion that futures trading will result in a profit. Levine v. Refco, Inc., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,488 at 36,115 (CFTC July 11, 1989) ("bold predictions of significant profit coupled with claims that risks are subject to specific limitations" amount to fraudulent guarantees of profit).
Because the fraudulent conduct was committed in connection with an HTA which was a futures contract (as set forth in greater detail below), the CSA Respondents violated Section 4b(a) of the Act. Amundson also committed fraud as a CTA in violation of Sections 4o(1)(A) and 4o(1)(B) of the Act. Pursuant to Section 2(a)(1)(A) of the Act, 7 U.S.C. § 2 (1994), and Section 1.2 (and for CSA-IB also Section 166.4) of the Regulations, 17 C.F.R. §§ 1.2, 166.4 (1997), CSA-Iowa and CSA-IB are liable for violations of Sections 4o(1)(A) and 4o(1)(B) of the Act by Amundson and other consultants.
Amundson Aided and Abetted Fraud Violations
To be liable for aiding and abetting pursuant to Section 13(a) of the Act, a person "must knowingly associate himself with an unlawful venture, participate in it as something that he wishes to bring about and seek by his actions to make it succeed." In re Richardson Securities, Inc., [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,145 at 24,646 (CFTC Jan. 21, 1981). Amundson was intimately involved with the sales efforts of CSA consultants. He prepared CSA's written seminar materials and frequently lectured at the Nebraska seminars. As CSA's Senior Grain Analyst, Amundson talked to CSA consultants in Nebraska by phone on a daily basis, and he developed the marketing strategies that they promoted.
By conducting the Nebraska seminars, Amundson taught other consultants, who had little experience with HTAs before they began working with CSA, about Enhanced HTAs and CSA's strategies and recommendations. These consultants then presented CSA's strategies and recommendations in seminars and personalized consultations with Nebraska clients and prospective clients, using the misleading message that rolling Enhanced HTAs (including the Great Plains Cross Country HTA) between crop years would enable Nebraska clients to obtain a better price for their crop without risk.
Amundson participated in the fraudulent solicitations of Nebraska clients and prospective clients as something he wished to bring about, and he benefited financially from the successful Nebraska sales efforts. Richardson, supra; In re Commodities International Corp., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,943 at 44,564 (CFTC March 18, 1997). By virtue of Amundson's actions, he aided and abetted these fraud violations.
Amundson Is Liable for the Fraud
CSA-Iowa and CSA-IB as a Controlling Person
To be liable as a controlling person pursuant to Section 13(b) of the Act, a person must possess the requisite degree of control and either: 1) knowingly induce, directly or indirectly, the acts constituting the violation; or 2) fail to act in good faith. In re Apache Trading Corp., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,251 at 38,794 (CFTC March 11, 1992).
Amundson jointly founded, owned, and managed all aspects of CSA-Iowa and CSA-IB. Amundson's control over CSA-Iowa and CSA-IB included hiring and firing decisions, check signing authority, monitoring consultants' recommendations, serving as an officer and director, and handling corporate accounting. These factors establish his control for purposes of Section 13(b). 6
Knowing inducement requires a showing that "the controlling person had actual or constructive knowledge of the core activities that constitute the violation at issue and allowed them to continue." Spiegel, ¶ 24,103 at 34,767 (footnote omitted). Amundson wrote the CSA seminar materials and frequently taught at the Nebraska seminars himself. He also knew that consultants in Nebraska for whom CSA is responsible would repeat the message of those seminars during personalized consultations with clients and prospective clients. Yet, he allowed them to continue misleading Nebraska clients and prospective clients by failing to disclose the material risks of rolling Enhanced HTAs (especially speculative inter-crop year rolling) and by suggesting that producers using Enhanced HTAs could not lose because they could always roll out of adverse market conditions.
Amundson controlled CSA-Iowa and CSA-IB, and he knowingly induced the fraudulent misrepresentations and omissions respecting Enhanced HTAs that were made to Nebraska clients and prospective clients for which CSA-Iowa and CSA-IB are responsible. He is, therefore, liable for the fraud violations of CSA-Iowa and CSA-IB as a controlling person pursuant to Section 13(b) of the Act.
The CSA Respondents Promoted and Marketed Off-Exchange Futures Contracts
Section 4(a) of the Act makes it unlawful for any person to offer to enter into, enter into, execute, confirm the execution of, or conduct any business for the purpose of soliciting, accepting orders for, or otherwise dealing in, off-exchange futures contracts. There is no definitive list of factors that will identify when a contract is a futures contract and when it is not. The transaction must be viewed as a whole with a critical eye toward its underlying purpose, CFTC v. Co Petro Marketing Group, Inc., 680 F.2d 573, 581 (9th Cir. 1982), without regard to whatever self-serving labels the instrument might bear, CFTC v. American Metal Exchange Corp., 693 F. Supp. 168, 192 (D.N.J. 1988). See also, CFTC v. National Coal Exchange, Inc., [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,424 at 26,055 (W.D. Tenn. 1982) ("Substance rather than mere form must be accorded full legal significance" in evaluating whether contract is a futures contract). In general, futures contracts are contracts for the purchase or sale of a commodity for delivery in the future at a price or pricing formula that is agreed upon when the contract is initiated. In addition, futures contracts are undertaken principally to assume or shift price risk without transferring the underlying commodity. As a result, futures contracts providing for delivery may be satisfied by delivery, offset, or cash settlement.
The contract at issue here had all these characteristics. Perhaps most significantly, the contract provided an effective means of discharge or offset that was, in practice, used routinely to liquidate the contract for cash with no delivery of grain required. Co Petro, 680 F.2d at 579-81; American Metals Exchange, 693 F. Supp. at 192. In addition, the contract was marketed, entered into and structured as a means of capturing price movements in the futures markets, not as a vehicle for delivery. See, CFTC v. Noble Metals International, Inc., 67 F.3d 766, 772 (9th Cir. 1995); In re Stovall, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,941 at 23,777-23,779 (CFTC Dec. 6, 1979). Indeed, the contract even was offered to parties with no practical ability to deliver.
Nor did the contract qualify for exclusion from the requirements of Section 4(a) as a "sale of any cash commodity for deferred shipment or delivery" pursuant to the exclusion in Section 1(a)(11) of the Act for "cash forward contracts." "The exemption . . . is a narrow one. It originated in the 1921 Act . . . to meet a particular need: it allowed a farmer to sell part of the next season's harvests at a set price to a grain elevator or miller. . . . The exemption clearly encompassed only those contracts which promised the actual delivery of grain at a specified time in the future." NRT Metals, Inc. v. Manhattan Metals (Non-Ferrous) Ltd., 576 F. Supp. 1046, 1050 (S.D.N.Y. 1983) (citations omitted). As the Commission stated in its 1990 Statutory Interpretation Concerning Forward Transactions, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,925 at 37,367 (CFTC Sept. 25, 1990), "[t]he underlying postulate of the exclusion is that the Act's regulatory scheme for futures trading simply should not apply to private commercial merchandising transactions which create enforceable obligations to deliver but in which delivery is deferred for reasons of commercial convenience or necessity."
The contract here did not meet these standards for exclusion. Delivery was neither deferred nor avoided in order to accommodate commercial convenience or necessity. The ability to offset routinely, and simply capture the price movements in the futures markets, set the contract apart from forward contracts under which producers are obligated to deliver certain quantities of grain to the elevator at certain times. See Co Petro, 680 F.2d at 580; American Metal Exchange Corp., 693 F. Supp. at 192; Office of General Counsel Interpretative Statement, "Characteristics Distinguishing Cash and Forward Contracts and 'Trade' Options," 50 F.R. 39656 (Sept. 30, 1985).
As described above, the CSA Respondents promoted and marketed the contract to Nebraska clients and prospective clients, and thus the CSA Respondents violated Section 4(a) of the Act. In addition, Amundson joined in personal consultations or solicitations with certain Nebraska clients concerning the contract, and he recommended it to his brother, an Iowa producer whose farm was approximately 250 miles from Great Plains' facilities. Amundson thus aided and abetted violations of Section 4(a) of the Act, pursuant to Section 13(a) of the Act.
CSA-IB Violated Requirements Imposed by
the Part 166
Regulations With Respect to the Operation of its Branch Office in Nebraska
Section 166.3 of the Regulations requires, among other things, that every Commission registrant (except an AP who has no supervisory duties) diligently supervise the handling, by its partners, employees and agents, of all activities relating to its business as a registrant. Regulation 166.3 was intended "to provide some protection to customers by requiring that APs - who directly solicit the public - be supervised by an entity registered with the Commission." CFTC v. Commodities Fluctuation Systems, Inc., 583 F. Supp. 1382, 1384-85 (S.D.N.Y. 1984).
CSA-IB failed to fulfill its supervisory responsibilities with respect to its branch office and APs in Nebraska. CSA-IB had no system in place to monitor or review the promotional materials or HTA-related activities of its branch office in Nebraska. In practice, no such supervision occurred. Indeed, Amundson, in his contacts with the Nebraska branch and the sales presentations at the seminars in Nebraska, went so far as to aid and abet fraudulent conduct with respect to Nebraska clients and prospective clients. CSA-IB thereby failed to exercise the diligent supervision mandated by Section 166.3 of the Regulations.
Section 166.4 of the Regulations mandates that each branch office of a Commission registrant "must use the name of the firm of which it is a branch for all purposes, and must hold itself out to the public under such name." The rule ensures that customers know when they are dealing with a branch office of a registrant and thus, in the words of the Commission in adopting the rule, "serve[s] as a customer protection." Introducing Brokers and Associated Persons of Introducing Brokers, Commodity Trading Advisors and Commodity Pool Operators; Registration and Other Regulatory Requirements, 48 Fed. Reg. 35,248 at 35,275 (CFTC Aug. 3, 1983). The Nebraska branch office of CSA-IB did not use the name of CSA-IB for all purposes and did not hold itself out to the public as a branch office under the name of CSA-IB. CSA-IB thereby violated Section 166.4 of the Regulations.
FINDINGS OF VIOLATIONS
Solely on the basis of the consent evidenced by the Offer, and prior to any adjudication on the merits, the Commission finds that:
1. The CSA Respondents violated Section 4(a) of the Act; and, pursuant to Section 13(a) of the Act, Amundson aided and abetted violations of Section 4(a) of the Act;
2. The CSA Respondents violated Section 4b(a) of the Act; pursuant to Section 13(a) of the Act, Amundson aided and abetted violations of Section 4b(a) of the Act; and, pursuant to Section 13(b) of the Act, Amundson is liable as a controlling person for violations of Section 4b(a) of the Act;
3. Amundson violated Sections 4o(1)(A) and 4o(1)(B) of the Act; CSA-Iowa and CSA-IB are liable for violations of Sections 4o(1)(A) and 4o(1)(B) of the Act; pursuant to Section 13(a) of the Act, Amundson aided and abetted violations of Sections 4o(1)(A) and 4o(1)(B) of the Act; and, pursuant to Section 13(b) of the Act, Amundson is liable as a controlling person for violations of Sections 4o(1)(A) and 4o(1)(B) of the Act; and
4. CSA-IB violated Sections 166.3 and 166.4 of the Regulations.
JOINT OFFER OF SETTLEMENT
The CSA Respondents have submitted an Offer in which, without admitting or denying the findings herein, they:
1. Admit the jurisdiction of the Commission with respect to all matters set forth in the Complaint and this Order;
2. Waive a hearing; all post-hearing procedures; judicial review by any court; any objection to the staff's participation in the Commission's consideration of their Offer; any claim of Double Jeopardy based upon the institution of this proceeding or the entry in this proceeding of any order imposing a civil monetary penalty or any other relief; and all claims which they may possess under the Equal Access to Justice Act, 5 U.S.C. § 504 (1994) and 28 U.S.C. § 2412 (1994), as amended by Pub. L. No. 104-121, §§ 231-232, 110 Stat. 862-863, and Part 148 of the Regulations, 17 C.F.R. §§ 148.1 et seq. (1997), relating to, or arising from, this action, and they shall not assert any right under the Equal Access to Justice Act to seek costs, fees, or other expenses relating to, or arising from, this proceeding;
3. Stipulate that the record basis on which this Order is entered consists solely of this Order and findings to which they have consented in the Offer, which is incorporated in this Order; and
4. Consent to the Commission's issuance of this Order, which makes findings and:
a. orders the CSA Respondents to cease and desist from violating the provisions of the Act and Regulations that they are found to have violated;
b. revokes the registration of CSA-IB as an IB;
c. orders the CSA Respondents to comply with their undertakings set forth in the Offer; and
d. orders the CSA Respondents to pay a civil monetary penalty in the amount of twenty thousand dollars ($20,000.00), for which they shall be jointly and severally liable.
Accordingly, it is hereby ordered that:
1. The CSA Respondents shall cease and desist from violating Sections 4(a), 4b(a), 4o(1)(A) and 4o(1)(B) of the Act, 7 U.S.C. §§ 6(a), 6b(a), 6o(1)(A) and 6o(1)(B) (1994);
2. CSA-IB shall cease and desist from violating Sections 166.3 and 166.4 of the Regulations, 17 C.F.R. §§ 166.3 and 166.4 (1997);
3. The CSA Respondents shall pay a civil monetary penalty in the amount of Twenty Thousand Dollars ($20,000) and shall be jointly and severally liable for this payment obligation. Such penalty shall be paid in total by the CSA Respondents within fifteen (15) days of the date of this Order, and such payment shall be made by U.S. postal money order, certified check, bank cashier's check, or bank money order, made payable to the Commodity Futures Trading Commission, and addressed to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581, under cover of a letter that identifies each of the CSA Respondents and the name and docket number of the proceeding. A copy of the cover letter and of the form of payment shall be simultaneously transmitted to Geoffrey Aronow, Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581. Pursuant to Section 6(e)(2) of the Act, 7 U.S.C. § 9a(2) (1994), if the CSA Respondents fail to pay the full amount of this penalty within fifteen (15) days of the due date, the CSA Respondents shall be automatically prohibited from trading on all contract markets until they show to the satisfaction of the Commission that payment of the full amount of the penalty with interest thereon to the date of payment has been made;
4. The registration of CSA-IB as an IB is revoked; and
5. The CSA Respondents shall immediately comply with the following undertakings:
a. For a period of six (6) years from the date of this Order, Amundson shall not apply for registration with the Commission in any capacity and shall not engage in any activity requiring such registration or act as an agent or officer of any person registered or required to be registered with the Commission;
b. The CSA Respondents shall cooperate fully with the Division of Enforcement ("Division") in this proceeding, and in the ongoing investigation that led to the filing of the Complaint by, among other things: 1) responding promptly, completely, and truthfully to any inquiries or requests for information; 2) providing authentication of documents; 3) testifying completely, truthfully, and consistently with any prior sworn statements provided to the Division; and 4) with respect to Amundson, not asserting privileges under the Fifth Amendment of the United States Constitution; and
c. The CSA Respondents shall not take any action or make any public statement denying, directly or indirectly, any allegation in the Order or creating, or tending to create, the impression that the Order is without a factual basis; provided, however, that nothing in this provision affects the testimonial obligations, or right to take contrary factual or legal positions, of the CSA Respondents in other proceedings to which the Commission is not a party. The CSA Respondents will undertake all steps necessary to assure that all of their agents and employees understand and comply with this agreement.
By the Commission
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: August 24, 1998
1 Amundson does not consent to the use of the Offer or this Order, or the findings consented to in this Order, as the sole basis for any other proceeding brought by the Commission other than in a proceeding to enforce the terms of this Order. The CSA Respondents do not consent to the use of the Offer or this Order, or the findings consented to in this Order, by any other person or entity in this or any other proceeding. The findings made in this Order are not binding on any other person or entity named as a defendant or respondent in this or any other proceeding.
2 Unless otherwise indicated, the term "CSA" shall hereafter encompass CSA-Iowa and CSA-IB.
3 It is not uncommon for prices of futures contracts in different crop years to move independently of each other, especially in times of crop shortage. In connection with spread exemptions from speculative position limits, the Commission previously has expressed its "concern that, depending upon conditions in the underlying cash market, the separate legs of inter-crop year spreads may act more like separate outright positions than a spread within the same crop year." 58 Fed. Reg. 17,973 at 17,981 (CFTC April 7, 1993).
4 All the revenues of CSA-Iowa and CSA-IB, after expenses, flowed to Amundson and Dirksen as co-owners of these closely-held companies. Amundson earned approximately $10,000.00 in fees from Nebraska clients who entered into Great Plains Cross Country HTAs.
5 Section 4o(1)(B) of the Act, by contrast, does not require proof of an intent to defraud. Messer v. E.F. Hutton, 833 F.2d 909 (11th Cir. 1987); First Nat'l Monetary Corp. v. Weinberger and CFTC, 819 F.2d 1334 (6th Cir. 1987); Savage v. CFTC, 611 F.2d 270 (9th Cir. 1979).
6 See, e.g., In re Spiegel, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,103 at 34,768 (CFTC Jan. 12, 1988) (respondent was the founder, president, sole shareholder and sole authorized signatory, and possessed the ultimate authority to hire and fire); In re GNP Commodities, Inc., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,360 (CFTC Aug. 11, 1992) (respondent was founder, co-owner, chairman of the board and majority shareholder, had day-to-day control including hiring and firing decisions, set salary levels, resolved disputes regarding commissions, and supervised and gave instructions to top managers).