Before the

                 CHARLOTTE D. BISHOP :
                                     : CFTC Docket No. 94-R156
                                  v. :
                                     : OPINION AND ORDER
                              STARYK :
____________________________________ :

Respondents First Investors Group of Palm Beaches, Inc. ('First Investors"), an introducing broker, and its associated person, Michael F. Staryk, appeal from the Judgment Officer's decision finding that they had fraudulently solicited Charlotte Bishop's commodity options account in violation of Section 4c(b) of the Act, 7 U.S.C. 6c(b)(1994), and Commission Rule 33.10, 17 C.F.R. 33.10 (1996), and awarding complainant $10,744.52, plus prejudgment interest and costs. They contend that the Judgment Officer's conduct denied them a fair hearing and that the factual analysis is unsupported by the record.

For the reasons that follow, based upon our independent assessment of the factual record, we affirm the Judgment Officer's opinion with modifications.


Complainant is a 53-year-old sales representative for a furniture manufacturer. (Answer Ex. C. at 4). She holds an A.A. Degree. (Id.). At the time she opened her non-discretionary account, she earned $50,000-$75,000 a year, had a net worth of $100,000-$250,000, and had $50,000 in risk capital. (Id.). Bishop had not traded commodity options or futures prior to her involvement with respondents. (Id.). However, she had traded securities for the past 25 years, maintained several mutual funds and regularly read Money magazine and The Wall Street Journal..

On August 1, 1994, Bishop filed a pro se complaint against First Investors and Staryk. In her complaint, Bishop alleged that "I was misled and . . . [I believe that ] . . . there was a misrepresentation of facts and that my account was churned and I was taken advantage of. The damages I am claiming is for the full amount I lost, $10,776." (Compl. at 1).

Essentially, the complaint narrates the events surrounding the opening and trading of Bishop's account. According to the complaint, Bishop heard a radio program about trading in heating oil options. Bishop stated that "the program made it sound as though substantial profits could be made in heating oil without much risk." (Id.). After hearing the program a second time, Bishop called the telephone number given to get additional information. (Id.). Sometime after that, Bishop recounted that she was contacted by Staryk on behalf of First Investors.

Bishop explained that "in a conversation that lasted nearly two hours, Mr. Staryk overcame my skepticism and got me to invest $10,000 in heating oil options." (Id.). Among the statements that Bishop credited to Staryk was an assertion that, based on the history of the heating oil market for the past 12 years, "I could make a lot of money in heating oil." (Id.). Moreover, Bishop claimed that Staryk had told her that "people had made a lot of money by buying before prices rose and selling after they had risen." (Id.). According to Bishop, Staryk stated that "prices had already risen four cents that year and during an average year prices rose

. . . 10 to 20 cents a gallon . . ." and that "he and/or his company expected a 9 cent per gallon increase." (Id.). Bishop also claimed Staryk had assured her that, if the market did not go as expected, she would be protected by a stop loss order at 50 percent, which would limit her losses to half of her equity. Bishop further explained that she both liked and trusted Staryk and that:

I decided that although I could lose whatever I invested, with Mr. Staryk's help, I was unlikely to lose and stood a good chance of making a lot of money. He spoke about making a lot of money. He spoke about making something like $42,000 on my investment.

(Compl. at 2). Moreover, as far as losing money was concerned, Bishop inferred from what Staryk said "that the chance of a complete loss on any position would be limited, and that I likeley [sic] could make back any losses with profitable trades." (Id.).

According to the complaint, around the time she opened her account, Bishop had contacted both the Commission and the National Futures Association to inquire whether any complaints had been filed against the respondents. (Id.). As a result of her inquiries, Bishop learned that First Investors had been in business less than a year and had no complaints against it. Bishop also discovered that three reparation complaints alleging misrepresentation had been brought against Staryk. She also learned that, in at least one of those cases, Staryk had been found "guilty." (Ans. to Interrog. Addendum D). When she asked Staryk about the complaints, he told her that they had been filed by customers who had a "gripe" because they had lost their money. (Compl. at 2).

In her complaint, Bishop stated that she made approximately $550 on her initial purchase of call options in September 1993. Otherwise, her account suffered almost continual losses. In December, although she was losing money, she decided to send more money to trade after a long conversation with Staryk. According to Bishop, Staryk had said that oil inventories were down "so that prices HAD to go up. Trust me. You will be so grateful to me in March you will call me up and thank me." Id. at 3. (Emphasis in original).

Bishop further alleged that, in mid-January 1994, Staryk convinced her to trade gasoline options. Bishop stated that:

Mr. Staryk recommended getting out of heating oil and into unleaded gasoline options. He said that unleaded gasoline would be a terrific investment. He was sure it would go up as vacation season approached, peaking in July or August. This had happened for the last nine years and current prices, he said, were as low as they had been in seven years. Mr. Staryk said he saw prices going to the mid $.60's or low $.70's.

Compl. at 3. However, these trades were also unprofitable. Bishop closed her account in March, after losing a total of $10,766. (Id.). In sum, Bishop stated that "this was a very different scenario that [sic] the one portrayed on the radio program that started the whole thing."

On September 26, 1994, First Investors and Staryk filed a joint answer denying all allegations of wrongdoing. They were represented by counsel throughout the proceedings. In response to Bishop's allegations as to what she was told about the heating oil market, respondents stressed that not only was Bishop given accurate market history, but she was also informed that events such as a drop in Russian production, weather forecasts, and OPEC meetings could have an effect on the price of heating oil. Moreover, as to Bishop's claims pertaining to her decision to trade gasoline options, respondents answered that Bishop was simply told that there was a "seasonal trend for prices to increase from January through July or August." (Id. at 2). Finally, respondents stated that "[t]he market history Bishop claims to have received . . . is accurate and verifiable." (Id.).

In their answer, respondents asserted Bishop was not misled as to the nature of options trading, but that in fact she was given thorough and accurate information. They insisted that the "fact that Bishop was able to coherently and succinctly summarize in her complaint the basics of options trading and the actual trades made for her account, is powerful evidence of the time and effort Respondents invested in educating Bishop." (Ans. at 3).

As for Bishop's allegations relating to risk, respondents contended that Bishop was fully informed as to the risk of loss and given the appropriate disclosure forms. They claimed Bishop admitted this in her complaint by stating, "I understood that there was no guarantee I would make money, and it was possible to lose the money I was investing." (Id. at 3). They also emphasized that, if Bishop had initially misunderstood the risks involved, by October 1993 Bishop had realized a sizable loss of over $6,000 and could have stopped trading at that point.


Bishop did not conduct discovery against respondents. On November 7, 1994, respondents filed Interrogatories and Requests for Documents. On or about December 7, 1994, complainant answered some of the interrogatories and produced her account statements and handwritten notes.

On February 7, 1995, respondents filed a Motion for Summary Disposition arguing that Bishop admitted she understood there was no guarantee she would make money and that her notes showed that Staryk had informed her about the "true" nature of stop-loss orders. Complainant did not oppose respondents' motion. On August 3, 1995, the Judgment Officer denied the motion, stating that the issues to be resolved required a credibility determination. The Judgment Officer scheduled a telephonic hearing for September 14, 1995.

Shortly before the scheduled telephonic hearing, respondents filed a number of motions. On September 5, 1995, respondents moved to compel production of Bishop's securities account documents. Respondents next filed a motion to dismiss First Investors as a party on the grounds that no misconduct against the firm had been alleged. They also moved to dismiss the churning claim. On September 6, 1995, respondents submitted another motion asking the Judgment Officer to reconsider his denial of summary disposition. Complainant did not file a response to any of these motions.

At this juncture, Bishop's involvement in an on-going enforcement action against Staryk, CFTC Docket No. 95-5, became an issue in the instant case. In satisfaction of its obligations under Commission Rule 10.42(b), 17 C.F.R. 10.42(b)(1996), to release investigatory materials in CFTC Docket No. 95-5, the Commission's Division of Enforcement provided Staryk with numerous documents. These included a questionnaire Bishop had provided to the Division dated April 4, 1994, and a declaration she had signed under penalty of perjury dated May 27, 1994.

The declaration is virtually identical to Bishop's complaint described above.

On September 11, 1995, respondents cited the questionnaire and the declaration as the basis for filing their Amended Motion for Reconsideration of the Order Denying Summary Disposition. Respondents claimed that language found in the documents supported their motion for summary disposition, because it indicated that complainant knew she could lose money and would not have brought her case if she had made any money.

In their motion, respondents also raised a discovery point related to the questionnaire and declaration. They explained that in November 1994, they had sought production from Bishop of all written statements and declarations relating to the allegations she made in her reparations complaint. They noted that both the questionnaire and declaration had been prepared prior to Bishop's filing of her complaint, but that Bishop had failed to produce them during the discovery period.

On September 14, 1995, a telephonic hearing was held. Both Bishop and Staryk testified.

Throughout the hearing, the Judgment Officer played a major role in the questioning of both witnesses. The Judgment Officer's questions focused primarily on two allegations that Bishop confirmed as being her principal allegations -- the misrepresentations as to the likelihood of profit and the misrepresentations concerning the ability of stop-loss orders to limit losses. The Judgment Officer inquired about the questionnaire that Bishop completed for the Division, but not about the May 27, 1994 declaration. (Tr. at 18-24; see also Tr. at 199-206).

With respect to her misrepresentation claim, Bishop testified that as far as risk was concerned, "the way it was explained to me was that it [risk] was highly unlikely. . . ." (Tr. at 142). Moreover, Bishop testified that Staryk had told her the history of heating oil that "[a] particular season would probably be lucrative." Id. When the Judgment Officer inquired why she continued to trade despite her mounting losses, Bishop responded that, following discussions with Staryk, "I felt that there was a possibility of recouping until it got down to almost nothing . . . ." (Tr. at 114).

Respondents' counsel cross-examined Bishop and presented an affirmative case, which rested primarily on the testimony of Staryk. During Bishop's cross-examination, counsel examined her on her declaration. (Tr. at 193). According to Staryk, Bishop was extremely eager to trade when he first contacted her. He testified that he explained to Bishop all risks associated with options trading and denied ever making false representations to Bishop. As for the placement of stop loss orders, Staryk testified that the orders were placed at Bishop's request and that they were triggered when Bishop's account had lost half of the amount initially invested. He further claimed that at that point he asked her whether she wanted to continue to trade. Staryk stated that, after several days, Bishop instructed him to continue trading. (Tr. at 172).


The Judgment Officer issued his initial decision in February, 1996. In so doing, the Judgment Officer acknowledged that both Bishop and Staryk gave testimony that was marked "by significant weaknesses." (Initial Decision at 2). He found that Staryk's testimony suffered from "repeated failures to directly answer questions asked" as well as a "highly supercilious tone and style. . . ." (Id.). Although the Judgment Officer acknowledged that there were inconsistencies in Bishop's testimony, he found that her inability to recall certain events demonstrated that Bishop had not been coached or prepared in advance. (Id. at 2-3). On the whole, the Judgment Officer concluded that Bishop was the more credible and reliable witness.

In light of this credibility determination and the documentary evidence, the Judgment Officer endorsed Bishop's claim that she was fraudulently induced into opening her account and then lulled into submitting additional funds and maintaining the account with deceptive assurances. The Judgment Officer acknowledged that the general risks of futures-related investments were disclosed, id. at 6, but found that Staryk had manipulated Bishop into opening her account by overstating the likelihood of profits and promising to use stop loss orders to protect complainant from losing more than 50 percent of her money. He based his finding of fraudulent inducement on the contents of Bishop's discussions with Staryk, the radio advertisements heard by complainant, and the "Special Report on Heating Oil" respondents mailed to Bishop. As to Bishop's continued trading in the face of losses, the Judgment Officer noted that Staryk recommended that Bishop continue trading as a way to recover losses and emphasized that Staryk , "always the glib self-assured advisor, gave Bishop no reason to believe that she most likely faced further losses if she continued to trade." (Id. at 15 (emphasis in original)).

In light of these findings, the Judgment Officer concluded that respondents had violated Section 4c(b) of the Act and Commission Rule 33.10. He ordered respondents to pay damages of $10,744.52 plus prejudgment interest and costs.



Respondents' broadest challenge to the Judgment Officer's decision is their claim that they were denied due process. They argue that the Judgment Officer conducted the hearing improperly and interfered with respondents' cross examination. (Resp. App. Br. at 32). They also assert that the Judgment Officer failed to consider properly respondents' prehearing motions. (Id. at 33).

We find no merit to respondents' claims that the Judgment Officer committed reversible error by failing to rule on their prehearing motions. We also find no basis to the contention that the Judgment Officer deprived respondents of due process by his conduct of the telephonic hearing. We now turn to a discussion of the merits.


Section 4c(b) of the Act and Commission Rule 33.10 prohibit any person from engaging in fraud in connection with commodity option transactions. Rule 33.10 explicitly states that it is unlawful for any person to cheat or defraud or attempt to cheat or defraud any other person in connection with a commodity transaction. Generally, in determining whether or not a customer was defrauded, analysis must be made of the overall message conveyed by a solicitation from the perspective of a reasonable customer to determine if a misrepresentation has been made. Hammond v. Smith Barney, Harris Upham & Co., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,617 at 36,657 (CFTC Mar. 1, 1990).

In the instant case, the Judgment Officer determined that the respondents had fraudulently induced Bishop to open a commodity options account by portraying profits as likely and promising to use stop loss orders to protect her from losing more than 50 percent of her investment. (Initial Decision at 8-9). He based these findings on complainant's discussions with Staryk and her reliance on the firm's advertisements and the Special Report on Heating Oil. (Id. at 7 n.4). In so doing, the Judgment Officer credited Bishop's version of the disputed events over Staryk's.

Respondents assert that the Judgment Officer committed clear error by failing to assess the sufficiency and reliability of the complainant's testimony in light of the record viewed in its entirety. According to respondents, the portions of complainant's testimony that support the Judgment Officer liability findings are fundamentally inconsistent with other aspects of her testimony and the documentary evidence in the record. They contend that, although Bishop's testimony may have been found credible at times, it was unreliable and therefore insufficient to establish her claims by the weight of the evidence. (Resp. App. Br. at 28-29).

As a general rule, the Commission defers to a Judgment Officer's credibility determinations. Steen v. Monex, Ltd., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,245 at 38,723 (CFTC May 18, 1992). Respondents have not established the type of error that warrants an exception to our policy of deference.

The question, therefore, is simply whether the preponderance of the evidence establishes that respondents' solicitation misrepresented either the likelihood that Bishop would earn a profit or the likelihood that she would suffer a loss if she agreed to trade options through First Investors. We have recognized that a customer may be deceived about the likelihood of profits or the degree of risk, despite the disclosure of some information relating to risk. Furthermore, the customer may be deceived even where certain of the challenged statements are literally true. In re First National Trading Corp., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,142 at 41,788 n.20 (CFTC July 20,1994) ("[T]he [statement] . . . that options offered a 'predefined limited risk with unlimited profit potential"-- is literally true. However, when recited repeatedly as a sales inducement . . . the representation inflates the likelihood of profit while minimizing the risk of loss, although the amount of risk was fixed.") (emphasis in original); Swickard v. A.G. Edwards & Sons, [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) 22,522 at 30,275 (CFTC Mar. 7, 1985)("[H]alf the truth may obviously amount to a lie if it is understood to be the whole."). Thus, analysis must be made of the overall message conveyed by a solicitation to determine if a reasonable customer would have been misled.

Complainant claims that she was induced into opening an account as a result of Staryk's statements that profits, based on the history of the heating oil market, were probable. Furthermore, she claims that, although she was aware that trading options was a risky investment, she was led to believe that such a loss was unlikely. Our review of the record shows

that the weight of the evidence supports this claim. At the hearing, Bishop stated that Staryk had represented to her that the heating oil market would probably be lucrative and that the actual risk of losing money was "highly unlikely based on the history and so forth . . . ." (Tr. at 142). The full details of what Staryk said is spelled out in Bishop's declaration. According to the declaration, Staryk had told her that, based on the history of the heating oil market for the past 12 years, "I could make a lot of money in heating oil." (Addendum B at 1). Bishop states that Staryk said that "people had made a lot of money buying before prices rose and selling after they had risen." Id. at 2. Bishop further recounts that Staryk had explained that a price move of just one penny would earn $420 on just one option and that she could make "something like $42,000" on her investment. (Id. at 2, 3).

These types of representations made by Staryk provide the deceptive message that the predictable nature of the seasonal demand and price trends essentially assured the likelihood of dramatic profits and far outweighed the risk of loss generally associated with trading commodity options. Moreover, the statements misrepresented the profit potential of such a seasonal strategy by representing that a penny move in the underlying market would translate into a $420 profit per option and that a lot of people make a lot of money by following such a strategy. However, what is most deceptive about the representations made by Staryk is not simply what was said but what was omitted. For example, Staryk failed to disclose that a seasonal increase in the demand for heating oil would not necessarily result in the increased value of a heating oil option, because the market had already factored seasonal demand into the price of an option. Staryk's statements were misleading half-truths and thus violate Section 4c(b) of the Act and Regulation 33.10. See Swickard, Id.; In re JCC, Inc., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,080 at 41,576 (CFTC May 12, 1994).

Respondents contend that if Bishop had initially misunderstood the risks involved she nevertheless continued to trade despite knowing that she was losing money. However, the record establishes that Bishop continued to trade because of lulling conduct on the part of respondents. As Bishop testified and stated in her declaration, Staryk had said that oil inventories were down "so that prices had to go up. Trust me. You will be so grateful to me in March you will call me up and thank me." (Addendum B at 4; Tr. at 164). Additionally, Bishop stated that, in mid-January 1994, Staryk convinced her to trade gasoline options. As she explained:

Mr. Staryk recommended getting out of heating oil and into unleaded gasoline options. He said that unleaded gasoline would be a terrific investment. He was sure it would go up because gasoline prices go up as vacation season approaches, peaking in July or August. This happened for the last nine years and current prices, he said, were as low as they had been in seven years. Mr. Staryk said he saw prices going to the mid $.60's or low $.70's.

Id. at 6. (Tr. at 161). While Bishop may have known by December that her options trading was not risk free, the overall impression continually conveyed by the respondents was that the losses were temporary and indeed would be reversed in the end. Thus, we are persuaded that the complainant did not understand that her chances of recovering her losses were minimal and her continuing to trade was only the result of respondents' lulling conduct. See O'Hey v. Drexel Burnham Lambert, Inc., [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) 22,754 at 31,142 (CFTC Sept. 23, 1985).

We, therefore, find Staryk directly liable for the fraudulent conduct under Section 4c(b) of the Act and Commission Rule 33.10. We also hold First Investors liable for Staryk's actions as principal under Section 2(a)(1)(A) of the Act, 7 U.S.C. 4.

For the reasons explained above, we affirm the Judgment Officer's award of $10,744.52 in damages plus prejudgment interest and costs and deny respondents' appeal.


By the Commission (Chairperson BORN and Commissioners DIAL, HOLUM and SPEARS)(Commissioner TULL concurring in part and dissenting in part).


Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission

Dated: March 26, 1997