Before the

LANCE HUMAN CFTC Docket No. 95-R019

On October 24, 1997, respondent Alaron Trading Corp. filed a notice of appeal from the October 8, 1997 initial decision.1 Rule 12.401(b), 17 C.F.R. 12.401(b) (1998), requires appellants to file and serve their appeal briefs within 30 days of the filing date of the notice of appeal. In this proceeding, the 30-day period expired on November 24, 1997. Alaron failed to perfect its appeal because it did not file its brief until November 26, 1997. Alaron also has failed to show good cause to excuse its tardy filing. Accordingly, this appeal is dismissed.2


By the Commission (Chairperson BORN and Commissioners TULL and HOLUM; Commissioners SPEARS and NEWSOME concurring in result with opinion).

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

Dated: November 19, 1998

1 On November 10, 1997, Dr. Human filed a letter addressed to the Commission with a number of attachments. Even if we considered this filing as a notice of appeal, it was untimely, and Dr. Human has failed to show good cause excusing its tardiness. With his November 10, 1997 letter, Dr. Human also submitted an amended claim for damages. Dr. Human has failed to show good cause for allowing such an untimely amendment. Accordingly, his motion to amend his complaint is denied.

Alaron and Dr. Human have moved to adduce additional evidence pursuant to Rule 12.405, 17 C.F.R. 12.405 (1998). Alaron seeks to present additional evidence "from its employees regarding the increase in the margin rates for rough rice contracts," while Dr. Human's request concerns additional evidence of the damages he claims to have suffered as a consequence of respondents' alleged wrongdoing. The evidence as described by the parties is cumulative at best. In any event, the parties have not shown good cause to excuse their failure to present such additional evidence at hearing or in response to the ALJ's post-hearing orders concerning the submission of additional evidence. Accordingly, the motions to adduce additional evidence are denied. We also deny Alaron's request to present oral argument pursuant to Rule 12.401(e), 17 C.F.R. 12.401(e)(1998).

2 Under Sections 6(c) and 14(e) of the Commodity Exchange Act (7 U.S.C. 9 and 18(e)(1994)), a party may appeal a reparation order of the Commission to the United States Court of Appeals for only the circuit in which a hearing was held; if no hearing was held, the appeal may be filed in any circuit in which the appellee is located. The statute also states that such an appeal must be filed within 15 days after notice of the order and that any appeal is not effective unless, within 30 days of the date of the Commission order, the appealing party files with the court a bond equal to double the amount of any reparation award.

A party who receives a reparation award may sue to enforce the award if payment is not made within 15 days of the date the order is served by the Proceedings Clerk. Pursuant to Section 14(d) of the Act, 7 U.S.C. 18(d) (1994), such an action must be filed in the United States District Court. See also 17 C.F.R. 12.407 (1998).

Pursuant to Section 14(f) of the Act, 7 U.S.C. 18(f) (1994), a party against whom a reparation award has been made must provide to the Commission, within 15 days of the expiration of the period for compliance with the award, satisfactory evidence that (1) an appeal has been taken to the United States Court of Appeals pursuant to Sections 6(c) and 14(e) of the Act or (2) payment has been made of the full amount of the award (or any agreed settlement thereof). If the Commission does not receive satisfactory evidence within the appropriate period, such party automatically shall be suspended from registration under the Act and prohibited from trading on all contract markets. Such prohibition and suspension shall remain in effect until such party provides the Commission with satisfactory evidence that payment has been made of the full amount of the award plus interest thereon to the date of payment.

Human v. Alaron Trading Corporation, CFTC Docket No. 95-R019

Concurring Opinion of Commissioners Spears and Newsome

We concur in the result of the majority opinion and order in this matter; however, we respectfully differ with the rationale employed by the majority in reaching its final disposition.

The Commission has previously stated that "[g]enerally a decision on the merits based on full participation by all parties is the preferred outcome of a reparations proceeding." Levine V. Stotler & Co., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,164 (CFTC Nov. 6, 1991)(citing Matthews v. Paine Webber Jackson & Curtis, Inc., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) 23,946 at 34,319 (CFTC Sept. 22, 1987)). Indeed, the Commission has made it clear that it favors resolving decisions on the merits, as opposed to purely procedural resolutions. See In re Buckwalter, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,995 (CFTC Jan. 25, 1991). Accordingly, we would resolve this matter based on the merits of the issues, as described below.

The ALJ originally dismissed this suit on April 27, 1995, on the basis that the complaint failed to state a cognizable claim and on grounds of res judicata. 1 On October 18, 1996, the Commission vacated the dismissal of the complaint, finding that the ALJ erred by dismissing Human's complaint on the grounds of res judicata. Following the remand, the ALJ held an oral hearing on March 4, 1997, at which respondents introduced a number of exhibits, one of which indicated that on December 3, 1993, the exchange increased the margin requirement for rough rice contracts by 50% for three business days, effective, December 6, 1993.

After reviewing this exhibit, on July 25, 1997, the ALJ notified the parties that this evidence raised an inference that Alaron and Linnco were aware of the increase on December 3, 1993, and that nothing in the record showed that Human had been informed of the increase at a time when he had insufficient funds in his account to margin 20 additional contracts. The ALJ noted, while it is not a violation of the Act to permit an undermargined account to be traded, that FCMs and IBs have a duty to inform customers of material facts, and that a margin increase constituted such a fact.

On August, 12, 1997, the ALJ notified the parties that the complaint was amended to include the following issues: 1) whether Alaron and Linnco violated the Act by failing to disclose the 50% increase in the applicable margin requirement, and 2) whether Alaron violated the Act by accepting Human's orders for 20 additional contracts on December 6, 1993. The ALJ also stated that, in the absence of a request by a party, he would resolve the Amended Complaint issues on the basis of written evidence submitted by September 15, 1997. The parties were further notified that any request for oral hearing on these issues had to be filed by September 1, 1997.

No party moved for an additional oral hearing or submitted additional written evidence.2 The ALJ issued his Initial Decision on Remand on October 8, 1997, in which he observed that Human had "demonstrated a proclivity for being obstinate, evasive, and deliberately obfuscatory" throughout the course of the proceedings. After reviewing the evidence, the ALJ concluded that Dr. Human was not a credible witness, and ruled that Human failed to prove any of the allegations set forth in the complaint.

However, the ALJ ruled that Alaron recklessly violated Section 4b of the Act by failing to inform Human of the material fact that the margin requirements for rough rice contracts increased by 50% effective December 6, 1993, and by accepting orders from Human for 20 additional short contracts at a time when Human had no knowledge of the margin increase, and lacked sufficient margin to cover the 20 contracts sold on that date. Although he found that Human was "not liable" for the losses accrued as a result of the liquidation of these contracts, the ALJ did not enter an order against respondents with respect to those losses.

We believe that the ALJ has sufficient authority to amend or supplement pleadings in reparations cases. Although such authority is not explicitly granted to the ALJ, we believe that the ALJ has implied authority under Commission Regulations and Commission case law to take such action. See generally Reg. 12.307(c), 17 C.F.R. 12.307 (1998); Williams v. Lind-Waldock & Company, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) 27,111 at 45,237 n. 7 (CFTC July 10, 1997). Accordingly, we do not believe it was an abuse of discretion for the ALJ in this matter to amend the complaint and to consider the additional issues therein on remand.

We believe that the ALJ provided the parties with proper notice that he believed Alaron's exhibit proffered at the hearing on remand raised new, potentially dispositive issues. The ALJ provided notice of this not only in his August 12, 1997 order, but also in orders dated July 25, 1997 and September 4, 1997. The parties were advised that, in the absence of any request for oral hearing, the decision on the Amended Complaint issues would be made on the basis of written submissions filed by September 15, 1997. Under the circumstances, we believe that the parties had ample notice of the new issues, and had ample opportunity to respond to those issues.

We agree with the ALJ that Commission registrants have a duty to provide customers with notice of material facts concerning their market positions, and that failure to do so may constitute a violation of the Act. In the instant matter, the ALJ correctly identified such a duty, i.e., to notify Human of a 50% increase in margin rates at a time when his account was already undermargined, and found a breach of that duty. 3 We also agree with the ALJ that Human failed to prove the allegations he set forth in his complaint. Given this set of findings, the indeterminacy of the ALJ's decision, and the complication of an extant state court judgment, we believe that a clarification of liability and damages issues is warranted.

We agree with the ALJ that Human failed to prove the allegations put forth in his complaint, and therefore no damages should be awarded to him. Moreover, we agree that the debit balance in Human's account was caused by the fraudulent activity of Alaron, and accordingly, Alaron may not recover the amount of the debit balance from Human. Therefore, we would issue a Commission opinion and order on the merits in accordance with the above-stated reasoning.

Commissioner David D. Spears, November 16, 1998

Commissioner James E. Newsome, November 6, 1998

1 The res judicata ruling was based on the fact that Alaron had obtained a judgment of $23,180.20 in the Circuit Court of Cook County, Illinois, in December 1993 in a suit for the debit balance in this account.

2 On September 15, 1997, respondents requested additional time to submit evidence based upon counsel's inattention to this matter. The ALJ did not rule upon this request, and respondents have renewed the request on appeal.

3 We are not persuaded that inclusion in the customer agreement of language stating that margin amounts may change is sufficient to overcome a duty of notification of a material fact of this magnitude.