#4377-00 (5th Circuit Appeal No. 99-60182) (CFTC Docket No.
For Release: March 9, 2000
UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT AFFIRMS LIABILITY FINDINGS OF THE CFTC THAT R&W TECHNICAL SERVICES LTD. AND GREGORY M. REAGAN FRAUDULENTLY SOLICITED CUSTOMERS, IN VIOLATION OF SECTIONS 4b(a)(i), 4b(a)(iii), and 4o OF THE COMMODITY EXCHANGE ACT AND CFTC RULE 4.41(a)
WASHINGTON--The Commodity Futures Trading Commission (CFTC or Commission) announced today that on February 24, 2000, the United States Court of Appeals for the Fifth Circuit issued a decision affirming the CFTC's findings in its March 16, 1999 opinion and order that R&W Technical Services, Ltd. (R&W) and Gregory M. Reagan (Reagan), sellers of a computerized trading system, violated antifraud provisions of the Commodity Exchange Act (CEA or Act) and the Commission's regulations.
The matter arose out of a four-count administrative enforcement complaint
filed by the Commission on March 19, 1996, against R&W, Reagan and
Marshall L. Worsham (Worsham), who died in 1996. The complaint alleged,
among other things, that R&W, Reagan and Worsham (respondents), the
sellers of a computerized futures trading system, fraudulently solicited
customers and used fraudulent sales practices and fraudulent advertising
while acting as commodity trading advisors (CTAs). The complaint alleged
that respondents included in advertisements claims of enormous profits
made during their seven years of trading with the system, but neglected
to disclose that those trading results were hypothetical.
The Commission issued an opinion and order on March 16, 1999, which held that the administrative respondents violated antifraud provisions of the Act and the Commission's regulations, sections 4b(a) and 4o of the CEA, and CFTC rule 4.41(a). The Commission ordered R&W and Reagan to cease and desist from their violations of the CEA and imposed on them a penalty, jointly and severally, of $2.375 million. R&W and Reagan petitioned for review of the Commission's order.
On petition for review, the United States Court of Appeals for the Fifth Circuit in R&W Technical Services Ltd. v. CFTC, No. 99-60182 (Feb. 24, 2000), affirmed the Commission's findings that R&W and Reagan were liable for fraud. Specifically, the court of appeals affirmed the Commission's opinion that R&W and Reagan made material misrepresentations of the fundamental risks of trading futures contracts by misrepresenting hypothetical trading results as actual trading results. Furthermore, the court affirmed the Commission's opinion that the misrepresentations made by R&W and Reagan, who executed no trades for customers, were "in or in connection with" commodity futures contracts, in violation of section 4b(a) of the CEA.
Furthermore, the court affirmed the Commission's opinion that R&W and Reagan used fraudulent sales practices and fraudulent advertising while acting as CTAs, in violation of section 4o of the CEA and CFTC rule 4.41(a). In affirming the Commission, the court of appeals rejected R&W's and Reagan's argument that they fell within the "publisher exception" to the definition of CTA.
The court of appeals reversed the Commission's decision not to reopen the record to consider evidence of customer satisfaction and its decision to impose $2.375 million in civil monetary penalties. The court remanded the matter to the Commission to consider mitigating evidence of customer satisfaction and to make a new assessment of the civil monetary penalty.