The Office of the General Counsel (OGC) is the Commission's legal advisor. OGC attorneys represent the Commission in appellate litigation and in certain trial-level cases, including bankruptcy proceedings that involve futures industry professionals. Through its Opinions Program, OGC staff assist the Commission in performing its adjudicatory functions. As legal advisor, OGC reviews all substantive regulatory, legislative, and administrative matters presented to the Commission. OGC also advises the Commission on the application and interpretation of the Commodity Exchange Act (CEA) and other administrative statutes.
Litigation
OGC represents the Commission before the U.S. Circuit Courts of Appeals in appeals of enforcement actions brought by the Commission, appeals from decisions by the Commission in cases brought under the agency's reparations program, and in other litigation, including constitutional challenges to Commission actions. During FY 1998, 52 Commission cases were pending before U.S. Circuit Courts of Appeals. Significant cases are described below.
Appellate Cases Involving the Commission's Enforcement Program
Much of OGC's appellate work involves defense of the Commission's decisions in administrative enforcement matters. Cases are heard and decided by ALJs and then may be appealed to the Commission. Following a decision by the Commission, parties may appeal to a U.S. Circuit Court of Appeals. Because many cases involve activities on the Chicago and New York exchanges, many of the appeals are taken to the Seventh or Second Circuits.
Seventh Circuit Cases Arising from the "Chicago Sting"
Under Section 9(b) of the Commodity Exchange Act (CEA or Act), the Commission may impose sanctions on persons convicted of felonies under the Act. During FY 1998, OGC successfully defended the Commission's use of Section 9(b) in several appeals to the U.S. Court of Appeals for the Seventh Circuit. These appeals stemmed from an undercover operation conducted jointly by the Commission and the FBI on Chicago exchanges, generally referred to as the "Chicago sting." FBI agents posing as futures traders found that certain traders on the Chicago Board of Trade (CBT) and the Chicago Mercantile Exchange (CME) had engaged in a variety of fraudulent practicesincluding bucketing orders, trading ahead of customers, and creating fictitious trades to hide profits from the Internal Revenue Service. Following the felony convictions in these cases, the Commission imposed sanctions under Section 9(b), including cease and desist orders, revocation of registration, and trading prohibitions. Several of these respondents appealed the Commission's actions alleging, among other things, that the Commission violated the double jeopardy clause of the Constitution by subjecting them to double punishment for the same crime. In four cases, LaCrosse v. CFTC, 137 F.3d 925 (7th Cir. 1998),Cox v. CFTC,138 F.3d 268 (7th Cir. 1998),
Ryan v. CFTC, 145 F.3d 910 (7th Cir. 1998), and Vercillo v. CFTC, 147 F.3d 548 (7th Cir. 1998), the U.S. Court of Appeals for the Seventh Circuit rejected appellants' claims that the Commission's use of Section 9(b) to impose sanctions violated the double jeopardy clause. These cases also affirmed the Commission's decisions concerning a variety of other issues, including its decision to review de novo the ALJ's choices with respect to appropriate sanctions.
Cases Involving Sanctions Arising from Trade Practice Violations in New York
At about the same time as the Chicago sting, a similar investigative effort was undertaken by the Commission at the New York exchanges. As a result, the Commission charged a number of traders and brokers with fraud, noncompetitive trading and other violations of the CEA. In four of the cases in which an ALJ found that the respondents had, in fact, violated the CEA, the respondents appealed, first to the Commission, then to the U.S. Court of Appeals for the Second Circuit.
In Rousso, et al. v. CFTC, Nos. 97-4232, 97-4234, 97-4236 and 97-4238 (2d Cir. 1998), the four respondents were charged with operating a noncompetitive trading network in the New York Mercantile Exchange (NYMEX) crude oil contract for their own profit at the expense of customers. Based upon its independent assessment of the record, the Commission affirmed the ALJ's liability findings as well as the civil penalties that he imposed. The Commission concluded that these findings warranted revocation of respondents' registrations and imposition of ten-year trading bans on each respondent. The U.S. Court of Appeals for the Second Circuit affirmed the Commission's decision by summary order.
Three other cases stemming from the New York investigations have been briefed and argued, but the Second Circuit has not yet issued an opinion. In all of these cases, Guttman v. CFTC, No. 98-4178 (2d Cir. 1998), Mayer and Gelbstein v. CFTC, Nos. 98-4099 and 98-4100 (2d Cir. 1998), andReddy and Sorkvist v. CFTC, Nos. 98-4070 and 98-4071 (2d Cir. 1998), the Commission found that respondents had violated the CEA. The Commission imposed sanctions on the respondents, including cease and desist orders, revocation of registration, civil monetary penalties and trading bans. The appellants put forth a variety of challenges on appeal, including arguments that the ALJ made procedural errors, that the Commission abused its discretion in imposing sanctions, and that the Commission's liability findings are not supported by the weight of the evidence.
Other Commission Enforcement Actions
The Commission also defended numerous appeals from Commission decisions regarding other enforcement matters as described below.
In Castellano v. CFTC, 139 F.3d 901 (7th Cir. 1998), the Seventh Circuit upheld a Commission order denying Castellano's application for registration as a floor broker or floor trader. The enforcement action arose from respondent's admitted statutory disqualification from registration. The Seventh Circuit held that the Commission properly found that Castellano had not established that he had rehabilitated himself and that the Commission's denial of his registration application did not violate the double jeopardy clause.
Another petition for review involving statutory disqualification, Clark v. CFTC, No. 97-4228 (2d Cir. 1997), arose from an administrative enforcement complaint which alleged that Clark's history of being disciplined repeatedly by both the New York Mercantile Exchange and the Commodity Exchange, Inc., rendered him statutorily disqualified from registration as a floor broker. The Commission revoked Clark's floor broker registration, finding that Clark's conduct was sufficiently grave to constitute "good cause" for revocation under Section 8a(3)(M) of the CEA. The Commission also held that "proof of a pattern of disciplinary actions filed against [a] respondent which alleged serious rule violations and resulted in the imposition of significant sanctions establishes "other good cause" for revoking [a registrant's] registration under Section 8a(3)(M) of the Act." On appeal, Clark argues that he was denied due process and that the evidence does not support the Commission's liability determinations. The case has been fully briefed and is awaiting the scheduling of oral argument.
CFTC v. Dunn, et al., No. 98-6117 (2d Cir. 1998), is an appeal from a March 20, 1998, order in which the United States District Court for the Southern District of New York denied the defendants' application for an award of attorneys' fees and costs pursuant to the Equal Access to Justice Act (EAJA). The underlying case began when the Commission brought an enforcement action against Dunn and others for allegedly defrauding the general public in connection with the sale of foreign currency options. The EAJA claim was filed following the decision in Dunn, et al. v. CFTC, 519 U.S. 465 (1997), in which the United States Supreme Court found that, under the CEA, currency options represent transactions in foreign currency and are excluded under Section 2(a)(1)(A)(ii) of the Act, 7 U.S.C. � 2(ii) (1994), commonly referred to as the Treasury Amendment, unless traded on a board of trade. In light of the Supreme Court's ruling, the Commission's case was dismissed. The district court denied the defendant's EAJA claim, holding that the CFTC had a reasonable basis in both law and fact for pursuing its enforcement action. On appeal, the defendants-appellants argue that the Commission was not substantially justified in bringing its lawsuit and therefore that they are entitled to an EAJA award in excess of $600,000. The case has been fully briefed and is awaiting the scheduling of oral argument.
Another petition for review, Elliott, et al. v. CFTC, No. 98-1305 (7th Cir.), arose from an administrative enforcement complaint brought by the Commission against four large volume wheat traders. The complaint alleged that the respondents had prearranged a series of trades in order to limit market risk while freshening their positions. In dismissing all charges against the traders, a Commission ALJ relied on their testimony denying prearrangement and discounted, without analysis, the body of circumstantial evidence offered by the Division. Based on its independent review of the record, the Commission concluded that deference to the ALJ's inferences would be misplaced, reversed the initial decision, and imposed appropriate sanctions. On appeal to the Seventh Circuit, the petitioners contend that the Commission erred by inferring noncompetitive trading from circumstantial evidence, by failing to defer to the inferences drawn by the ALJ, and by allegedly shifting the burden of proof to petitioners. The appeal was argued on September 28, 1998, and is awaiting decision.
In Grossfeld, et al. v. CFTC, 137 F.3d 1300 (11th Cir. 1998), the Commission imposed a $1.8 million civil penalty on a commodities broker notwithstanding the fact that the broker previously had agreed to pay about $85,000 in fines in settlement of charges brought by the National Futures Association. The Eleventh Circuit affirmed the Commission's decision, holding that the civil penalties imposed under Section 6(c) of the CEA did not, as a matter of law, constitute a form of criminal punishment and, therefore, were not subject to the Double Jeopardy Clause of the Fifth Amendment.
In another Eleventh Circuit case, CFTC v. Midland Rare Coin Exchange, Inc., 148 F.3d 1071 (11th Cir. 1998), the Commission sued several businesses and individuals in Federal district court, alleging participation in a fraudulent investment scheme involving the telemarketing of illegal futures contracts. The Commission moved for a preliminary injunction, to which all but one of the defendants consented. The remaining defendant, Global Asset Management, Inc., asserted that the Commission lacked jurisdiction over its activities because these activities involved either off-exchange foreign currency transactions or transactions in precious metals that were cash forward or spot transactions rather than futures transactions. The district court agreed with Global and denied the Commission's motion as to that defendant. On appeal, the Eleventh Circuit, per curiam, held that the district court did not abuse its discretion in denying a preliminary injunction.
The petition for review in New York Currency Research Corporation v. CFTC,No. 98-4159 (2d Cir. 1998), arose from a Commission order issued in an administrative proceeding finding the petitioner liable for violating record production provisions of the CEA and the Commission's Regulations by refusing to produce requested documents. Based upon these findings, the Commission imposed a cease and desist order and a $110,000 civil monetary penalty. On appeal, the petitioner contends that it was not acting in the capacity of a CTA or a CPO during the relevant time frame and, thus, was not subject to the Commission's jurisdiction. The appeal has been fully briefed and is scheduled to be argued in FY 1999.
On August 18, 1998, the Seventh Circuit Court of Appeals affirmed a district court order enforcing an administrative subpoena issued by the Commission to Richard W. Tokheim, a provider of allegedly "impersonal" commodity trading advice. CFTC v. Richard W. Tokheim, 153 F.3d 474 (7th Cir. 1998). The court of appeals rejected Tokheim's argument that the Commission must prove that his activities were covered by the CEA before the district court could order enforcement of the subpoena. The court also rejected Tokheim's argument that the Commission must prove probable cause in order to enforce its subpoena.
Other Appellate Litigation
In Arnold v. CFTC, No. 97-5922 (11th Cir. 1998), the respondents in a pending Commission enforcement proceeding filed suit in Federal district court seeking to enjoin the proceeding on jurisdictional and First Amendment grounds. The district court held that it lacked jurisdiction and that, under Section 6(c) of the CEA, the proper forum for the respondents' claims was the United States Court of Appeals on review of a final agency order. The Commission is defending the district court decision on appeal. The case has been fully briefed and is awaiting the scheduling of oral argument.
Another appeal before the Eleventh Circuit, CFTC v. Trinity Financial Group, et al., No. 97-5757 (11th Cir. 1998), arose from a complaint filed by the Commission in the United States District Court for the Southern District of Florida charging that the defendants had made fraudulent misrepresentations to existing and prospective customers concerning the likelihood of profits and risk of loss associated with trading commodity options. On September 29, 1997, the district court issued findings of fact and conclusions of law in favor of the Commission. It enjoined Carrington Financial Corporation, A. Francis Sidoti and Marc Stephen Wuensch from further violating the antifraud, supervisory and registration provisions of the CEA and the Commission's regulations and ordered disgorgement of ill-gotten gains. On appeal, the defendants challenge several of the district court's findings of fact and argue that the court abused its discretion in ordering injunctive relief and disgorgement. The matter has been fully briefed before the Eleventh Circuit and is awaiting scheduling of argument.
In November 1996, the Commission filed three complaints arising out of an investigation into certain hedge-to-arrive contracts (HTAs) involving grain elevators, producers, and marketers of grain. In re Southern Thumb Co-op, Inc., No. 97-4155 (6th Cir. Dec. 11, 1997), In re A.G. Edwards & Sons, Inc., No. 97-3658 (8th Cir. Oct. 21, 1997), and In re Grain Land Coop., No. 97-3655 (8th Cir. Oct. 16, 1997). In Grain Land, the Commission charged that Grain Land, a grain elevator, offered and sold HTAs that constituted illegal, off-exchange futures contracts. In A.G. Edwards, the Commission alleged that Wright acted as an unregistered CTA and committed fraud in connection with his promoting and entering into illegal, off-exchange futures and option contracts. In Southern Thumb, the Commission charged Southern Thumb, a cooperative grain elevator, with selling illegal, off-exchange options and engaging in fraud in connection with its marketing of the illegal instruments. The respondents in each case pursued interlocutory appeals to the Commission, arguing that dismissal was warranted insofar as respondents claimed that certain communications between the Commission and its Division of Enforcement constituted prohibited ex parte communications and violated separation-of-functions rules. The Commission rejected these arguments, ruling that the communications at issue did not violate either the Commission's rules or the Administrative Procedure Act. The respondents then filed three mandamus actions in the Sixth and Eighth Circuit Courts of Appeals. In late 1997, both appeals courts dismissed the mandamus actions.
Alleging violations of the First Amendment's guarantees of freedom of speech and freedom of the press, Commodity Trend Service, Inc. (CTS), an unregistered publisher of allegedly "impersonal" commodity trading advice, brought an as-applied and a facial overbreadth challenge to the constitutionality of the CEA's requirement that such publishers register with the Commission as commodity trading advisors (CTAs). Commodity Trend Service, Inc. v. CFTC, 149 F.3d 679 (7th Cir. 1998). Pending the conclusion of an ongoing Commission investigation of CTS's activities to determine whether it was covered by the registration requirement, the district court dismissed CTS's as-applied claim as unripe for adjudication. Since allegedly unconstitutional restrictions on commercial speech may be redressed only by an as-applied challenge, which already had been judged nonjusticiable, the lower court dismissed CTS's facial claim as well. On appeal, the Seventh Circuit reversed and remanded. With respect to the facial challenge, the appellate court found that, based upon the record before it, CTS's publications, as distinguished from its advertisements for those publications, do not constitute commercial speech because they do not propose commercial transactions between CTS and its customers. The court then found that the facial challenge was ripe for review because CTS alleged an intention to engage in constitutionally protected publishing activity and made the minimum showing of a credible threat of prosecution for its violation of the CEA. CTS's as-applied claim also presented a ripe dispute (1) because, in the court's view, CTS fell within the definition of a CTA and thus was subject to the registration requirement, and (2) because it alleged sufficient hardship to warrant judicial intervention. The case is now before the district court for further proceedings.
The consolidated appeals in Commonwealth Financial Group, Inc., et al. v. CFTC, Nos. 97-4506 and 98-4569 (11th Cir. 1998), arose from two final orders of the Commission entered on March 18, 1997 (CFTC Docket No. CRAA-95-3) and on March 18, 1998 (CFTC Docket No. CRAA-97-1 through 97-7). The first order affirmed a member responsibility action taken by the National Futures Association (NFA) against Commonwealth Financial Group (CFG) and its president, Charles Hoffecker. In that action, NFA imposed certain interim restrictions on the advertising and customer sales solicitations of CFG pending the resolution of the related disciplinary action. The Commission's second order summarily affirmed a final disciplinary action by NFA against CFG, Hoffecker and certain brokers associated with CFG. In that action, NFA found that CFG and its associated persons, at Hoffecker's direction, had defrauded and deceived customers in violation of NFA Compliance Rules. NFA fined CFG $100,000 and expelled it from NFA membership. NFA fined Hoffecker $250,000 and barred him from association with any member for five years. The associated persons were fined and suspended from registration. On appeal, CFG, Hoffecker and associated person Everton John Buchanan argue that they were denied due process during the underlying proceedings. CFG and Hoffecker also assert that NFA's actions were barred by the doctrines of collateral estoppel and res judicata. Buchanan claims that the evidence does not support NFA's liability findings and that the sanctions imposed are excessive and unjustified. The case has been fully briefed and is awaiting the scheduling of oral argument.
Appellate Cases Involving the Commission's Reparations Program
Under the Commission's reparations program, customers of current or former registrants may bring cases alleging violations of the Act or Commission regulations before an ALJ or Judgment Officer. Decisions in reparations cases, except decisions made under the voluntary decisional procedure, may be appealed to the Commission and then to a U.S. Court of Appeals. OGC represents the Commission in appeals of these reparations cases. For example, the Commission held that an independent introducing broker (IB), Trinity Financial, Inc., and its associated person (AP), Daniel Stuart, had fraudulently solicited trades by the complainant in heating oil options. The Commission awarded $111,052 in damages. The complainant is appealing the Commission's additional finding that the record did not support a finding of liability for fraud by the IB's carrying futures commission merchant, Gerald, Inc., on the theory that the IB was Gerald, Inc.'s de facto agent or was an aider and abettor. The case has been fully briefed and is awaiting decision.Scheufler v. CFTC, No. 98-70403 (9th Cir. 1998).
Other Litigation
District Court Cases
OGC defends the Commission's use of its authority under the CEA in cases brought at the district court level. In Board of Trade of the City of Chicago, et al. v. CFTC, No. 98-CV-5631 (N.D. Ill. 1998), the Board of Trade of the City of Chicago, the Kansas City Board of Trade and the Minneapolis Grain Exchange filed a complaint against the Commission seeking judicial review of the Commission's approval of the Cantor Financial Futures Exchange (CFFE) contract market designation application. The complaint alleges that the Commission's action was arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with the law. The complaint seeks an order setting aside the designation of the CFFE application, declaring that the designation is invalid and holding that all CFFE transactions are illegal and unenforceable. Both sides in the case have indicated an intention to file motions for summary judgment in the near future.
In another case, Grain Land Coop v. CFTC, 97-2410/RHK/FLN (D. Minn. Jan. 7, 1998), Grain Land filed an action asking the U.S. District Court for the District of Minnesota to stop a Commission enforcement action. Grain Land argued that the enforcement action should be barred by a prior decision in private litigation between Grain Land and its producers. In that ruling, Grain Land's HTA contracts were found to be forward contracts rather than illegal off-exchange futures contracts, as the Commission alleged. The district court rejected Grain Land's argument. Citing U.S. v. Mendoza, 464 U.S. 154 (1984), the court ruled that the Commission could not be bound by the prior ruling.
OGC also defends the Commission in constitutional challenges to its authority. In Taucher, et al. v. Born, et al., Civil Action No. 97-1711(RMU) (D.D.C., filed July 30, 1997), plaintiffs, alleged publishers and recipients of "impersonal" commodity trading advice, argued that the commodity trading advisor registration requirement of the CEA, as applied to such publishers, unconstitutionally infringes upon their First Amendment rights of free speech and of the press. Finding that plaintiffs' complaint stated a claim upon which relief could be granted, the district court denied the Commission's motion which sought dismissal of the complaint on the grounds that plaintiffs lacked standing to bring suit and that their action was unripe for judicial review. Discovery in the case was recently completed, and the plaintiff has filed a motion for summary judgment.
Cases Involving the Freedom of Information Act
The Freedom of Information Act (FOIA) gives any person a right of access to Federal agency records, enforceable in court, except to the extent that the records, or portions of the records, are protected from disclosure by one of nine exemptions or by one of three special law enforcement record exclusions. When an individual seeks to enforce FOIA rights against the Commission, OGC assists the U.S. Attorney in defending the action on the Commission's behalf.
FutureCom Commodities Exchange, Ltd. v. CFTC,No. 2:98CV0215J (N.D. Texas), was a "reverse FOIA" action. In a "reverse FOIA" case, the submitter of information tries to prevent the agency that collected the information from revealing it to a third party in response to the third party's FOIA request. In this case, FutureCom filed an application with the Commission for designation as a contract market in live cattle. In the course of its application, FutureCom submitted documents to the Commission for which it subsequently claimed confidential treatment under Exemption 4 of FOIA, 5 U.S.C. � 552(b)(4), on the grounds that the documents constitute trade secrets and other confidential commercial information. After reviewing the documents and FutureCom's detailed written justification of its request for confidential treatment, the Commission determined that FOIA required disclosure of the majority of the documents at issue.
In Shumaker, Loop & Kendrick v. CFTC, Case No. 97-CV-7139 (N.D. Ohio), the Commission successfully defended the withholding of records responsive to three separate FOIA requests of Shumaker, Loop & Kendrick. On two separate occasions, the Commission filed with the district court Vaughn indices which correlate each withheld document, or a portion thereof, with a specific FOIA exemption and the relevant part of the agency's nondisclosure justification. At the same time, the agency submitted the withheld records, or portion thereof, for inspection by the court. In a memorandum and judgment entered on November 5, 1997, the district court found that the Commission properly withheld portions of seven records responsive to FOIA Request No. 97-0069. On February 27, 1998, the district court entered judgment that the Commission properly withheld 101 of 102 documents responsive to FOIA Request Nos. 97-0342 and 97-0387.
Bankruptcy Proceedings
OGC monitors bankruptcy proceedings involving futures industry professionals and, in some cases, assists courts, trustees, and customers in carrying out the special Bankruptcy Code provisions pertaining to commodity firms. During FY 1998, OGC monitored 29 bankruptcy cases.
In one significant case, In re Jay Lee Blevins, No. 96-08571-6B3, Adversary Proceeding No. 97-179 (Bankr. M.D. Fla. 1996), Blevins, an AP of an unregistered CPO, filed a petition for relief under Chapter 7 of the Bankruptcy Code. The Commission asked the court to find that the disgorgement judgment of $315,859 plus $61,758 in prejudgment interest awarded against Blevins in a Commission civil injunctive action was nondischargeable under the Bankruptcy Code. The court denied Blevins's motion to dismiss the Commission's proceeding. The court also denied cross-motions for summary judgment. Due to the debtor's limited assets, the Commission settled its claim against Blevins.
In another case, In re Buckeye Countrymark, Inc., No. 97-34911 (S.D. Ohio), the Bankruptcy Court, after a contested hearing, agreed with the Commission that the Federal bankruptcy trustee should not be granted a stay of ongoing Commission enforcement proceedings on hedge-to-arrive contracts. The Court agreed that it was without authority to interfere with the Commission's exercise of regulatory and police powers. In an order issued October 6, 1998, the Bankruptcy Court sought further briefing from the parties on whether the Bankruptcy Court should abstain from further Federal court proceedings on the legal status of the hedge-to-arrive contracts in light of the ongoing Commission proceedings.
Amicus Briefs
Under legal principles established by the U.S. Supreme Court, the courts defer to the Commission on questions concerning the interpretation of the CEA. When such questions arise in litigation to which the Commission is not a party, the Commission sometimes submits an amicus curiae brief to the court to assist the court in interpreting the CEA. The Commission submitted one amicus brief during FY 1998, in Damato v. Merrill Lynch, et al., 153 F.3d 464 (7th Cir. 1998). On August 17, 1998, the U.S. Court of Appeals for the Seventh Circuit, endorsing an interpretation of the CEA advocated by the Commission as amicus curiae, issued a decision regarding the persons against whom a private cause of action is available under Section 22(a) of the CEA. The Court held that there is a private cause of action against a person who aids and abets a principal in undertaking one of the specifically enumerated transactions in Section 22(a) even if the aider and abettor does not satisfy those subsections independently. In reaching this decision, the Court stated that it gave due consideration to the views of the CFTC because the views of the agency charged with the administration of the statute carry "considerable weight."
Opinions
OGC drafts opinions and orders in matters appealed to the Commission. The Commission's jurisdiction in adjudicatory matters includes:
administrative cases prosecuted by the Division of Enforcement against alleged violators of the CEA or related regulations;
reparations cases brought by futures customers to recover money damages from industry registrants; and
adjudicatory actions by industry self-regulatory organizations.
The Commission's principal decisions during FY 1998 in each of these categories follow.
Commission Decisions Involving Civil Prosecutions by the Commission's
Enforcement Division
The CFTC Division of Enforcement prosecutes cases before ALJs to enforce the CEA and Commission regulations. Respondents can appeal a decision in an administrative enforcement action to the Commission.
During FY 1998, significant appeals to the Commission included In re Ashman, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,336 (CFTC Apr. 22, 1998). In a case arising out of the FBI sting operation in the soybean futures pit of the CBOT, the Commission held that a floor broker convicted of 14 felonies under the Act had failed to prove that he no longer posed a threat to the markets in order to rebut the presumption that he should be permanently barred from trading. The floor broker had appealed an ALJ's order permanently barring him from trading on any market regulated by the Commission. In its decision, the Commission found that Ashman had not shown sufficient evidence of rehabilitation to overcome the presumption and that the Division's enforcement proceeding, which took place subsequent to Ashman's criminal proceeding, did not violate the Double Jeopardy Clause of the U.S. Constitution. Finally, the Commission held that a requirement that Ashman bear the burden of proving his fitness conformed with the requirements of the Administrative Procedure Act.
In another Chicago sting case, In re Fetchenhier, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,175 (CFTC Oct. 31, 1997), the Commission denied Fetchenhier's application for registration in light of his conviction of four felonies. The Commission ordered Fetchenhier to show cause why the Commission should not impose a ten-year trading prohibition on him. In his response, Fetchenhier argued that he was entitled to a new hearing because he might have presented different evidence had he known that the length of the trading ban could have been increased. The Commission found it significant that Fetchenhier neither indicated what evidence he would have submitted initially had he known that he was subject to a ten-year trading ban nor presented any evidence that this was an inappropriate sanction. Accordingly, the Commission imposed a ten-year trading ban.
In addition to the Chicago sting cases, the Commission considered appeals and issued opinions in several other major trade practice cases. In In re Glass, et al., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,337 (CFTC Apr. 27, 1998), the Commission charged four individuals with trade practice, recordkeeping, reporting, and financial reporting violations in a seven-count complaint relating to a series of 12 noncompetitive option transactions. On appeal, the Commission found that respondents Gary Glass and Harold Magid used trading techniques that gave the appearance of submitting trades to the open market while negating risk and price competition (i.e., noncompetitive trading, wash and fictitious sales) and that Glass accommodated Magid by helping him to attain his unlawful purpose. The Commission concluded that respondent Zoltan Guttman, who was Magid's partner in the trading account, was involved in determining how to meet the partnership's financial needs and in the decision to do the prearranged trading and had the power to control the trading activity in the joint account by providing cash and financing. The Commission therefore found that Guttman was a controlling person of the joint account under Section 13(b) of the CEA. The Commission also found that Guttman's knowledge of and control over Magid's violations established that Magid was acting for Guttman and that Magid's misconduct was within the scope of his employment. Accordingly, the Commission found Guttman liable as a principal under Section 2(a)(1) of the CEA. The Commission imposed cease and desist orders, revoked respondents' registrations, imposed permanent trading bans, and assessed civil monetary penalties of $500,000 on Guttman and $300,000 on Glass.
In another trade practice case, the Commission found that three members of the Coffee Sugar & Cocoa Exchange engaged in numerous noncompetitive futures transactions in the exchange's sugar pit during five months in 1988 and in March 1989. In re Reddy, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,271 (CFTC Feb. 4, 1998). The Commission revoked the respondents' floor broker registrations and ordered them to cease and desist from further unlawful conduct. Respondents Stephen F. Reddy and Nicholas DeSalvo received ten-year trading bans and civil penalties of $300,000 each. John W. Sorkvist was fined $150,000 and banned from trading for five years.
In In re Elliott, et al., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,243 (CFTC Feb. 3, 1998), the Division of Enforcement appealed an ALJ's decision concluding that the evidence adduced by the Division was insufficient to sustain the trade practice violations charged in the complaint. The respondents, large volume wheat traders, were charged with prearranging trades in order to limit market risk while freshening their positions. Based on the totality of evidence in the record, the Commission concluded that it was unlikely that the traders could have anticipated one another's precise trading needs without some meeting of the minds or could have achieved such trading symmetry in a volatile market by competitive execution. In these circumstances, the Commission found that the ALJ erred in discounting the probative value of the Division's body of circumstantial evidence and relying instead on the traders' assertions that the trades were competitively executed.
On appeal, the Commission has the authority to increase penalties based on its review of the record. In In re Miller, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,297 (CFTC Mar. 12, 1998), respondent Howard Miller appealed an ALJ decision imposing a civil penalty of $50,000 on him for fraud in connection with solicitations to customers to buy and sell commodity options in violation of the CEA and the Commission's Regulations. Reviewing the imposition of sanctions de novo, the Commission found that Miller's misconduct in fraudulently inducing his customers to trade in commodity options constituted a grave violation of a core provision of the Act and assessed a civil monetary penalty of $600,000 against Miller.
Similarly in In re Mayer, 1998 WL 80513 (CFTC Feb. 25, 1998), an ALJ found five of the respondents liable on 22 of the 23 counts of recordkeeping, supervision, registration, and trade practice violations and assessed sanctions. On appeal, respondents claimed that they had been denied a fair hearing, that the evidence did not support the ALJ's findings, and that the sanctions were excessive. Concluding that respondents committed hundreds of violations during two years demonstrating a profound disregard for regulatory and statutory obligations, the Commission increased the civil monetary penalties assessed by the ALJ. It assessed one respondent $500,000, two respondents $250,000 each, and two respondents $150,000 each. The Commission also affirmed the ALJ's imposition of cease and desist orders, trading bans, and registration revocations.
The Commission also can remand a case to an ALJ for further fact finding. In In re Staryk, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,206 (CFTC Dec. 18, 1997), the respondent appealed an ALJ's decision finding him liable for options fraud. On appeal, the Commission vacated both the ALJ's liability determination and the sanctions he imposed and remanded for further fact finding. The Commission agreed with the ALJ that "a reasonable listener could not fail to understand Staryk's [deceptive] message to be that energy options trading presented opportunities for substantial and near-certain profits at very little risk." However, after concluding that scienter must be established as an element of options fraud, the Commission found that Staryk's affidavit was sufficient to create a genuine issue as to his state of mind. The Commission also held that further fact finding was needed to determine the scope of Staryk's misrepresentations. In remanding the case for purposes of an evidentiary hearing, the Commission instructed the ALJ to consider whether the Division's request for restitution was warranted and provided guidance concerning the propriety of a restitution award.
Cases Involving the Commission's Reparations Program
Decisions made by ALJs or Judgment Officers in formal or summary proceedings under the Commission's reparations program can be appealed to the Commission by any party. Significant opinions issued this year include Fager v. Nadell, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,351 (CFTC May 7, 1998), in which a Judgment Officer awarded damages to the complainant on his fraudulent solicitation claim based on an out-of-pocket loss calculation. In rendering this determination, the Judgment Officer reduced the amount of complainant's later losses by the amount of his earlier gains. On appeal, the Commission found that, following the complainant's initial profitable trade, his broker made additional fraudulent representations regarding anticipated profitable market moves that were the proximate cause of the complainant's later losses. The Commission held that these later statements represented an independent basis of liability. The Commission found no basis for offsetting the complainant's initial profits against his subsequent losses and determined that the complainant's damage award should be increased.
Cases Involving Adjudicatory Actions by the Self-Regulatory Organizations
The Commission has authority to review any disciplinary action, membership denial action, registration action or member responsibility action taken by the NFA. In In re Commonwealth Financial Group, Inc., et al. [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,299 (CFTC Mar. 18, 1998), the Commission summarily affirmed an NFA disciplinary action against Commonwealth, its president, and eight associated persons. NFA concluded that the respondents had engaged in fraudulent and deceptive sales solicitations in violation of NFA Compliance Rules in connection with the company's advertising, infomercials and promotional material and in connection with its AP's telephone sales solicitations. Commonwealth was expelled from membership and fined $100,000. Its president, Charles Paul Hoffecker, was permanently barred from association with an NFA member and fined $250,000. The AP respondents were fined and suspended.
The Commission may also review sua sponte disciplinary actions taken by an exchange against its members. In the six consolidated matters in In re CBOT's Settlement of Disciplinary Charges against Donald W. Scheck, et al., 1997 WL 690460 (CFTC Nov. 6, 1997), the Commission took sua sponte review of disciplinary actions taken by the Chicago Board of Trade (CBT) against six exchange members arising from irregularities during the expiration of the March 20, 1996, wheat contract. During the last minutes of trading, the contract price rose more than two dollars, an extraordinary price shift. In addition, trading occurred after the close. After this disorderly liquidation, the exchange undertook an internal review that resulted in the disciplinary proceedings, among other measures. The exchange reprimanded its members under settlement agreements. The Commission held that the reprimands did not sufficiently reflect the gravity of the conduct. Accordingly, it set aside the CBT's decisions accepting the settlement and ordered the exchange to reopen the disciplinary proceedings and take action reflecting the gravity of the violations charged.
Legal Advice
Significant Regulatory Activities
As the Commission's legal advisor, OGC drafts or reviews the following:
legal memoranda to the Commission
proposed regulations
enforcement actions
special reports to Congress
legislative proposals
responses to requests from other Federal agencies
proposed interpretive and no-action letters
applications to trade futures and option contracts
proposals to amend exchange bylaws or rules.
In FY 1998, OGC reviewed more than 100 matters related to enforcement actions, investigations of illegal activity, and complaints in administrative or judicial actions; over 30 applications to trade futures or option contracts; and approximately 140 exchange rule amendments.
OGC worked closely with the Division of Trading and Markets (T&M) in drafting a number of significant rulemakings and regulatory initiatives including:
the placement of foreign terminals in the United States
over-the-counter derivatives
non-competitive transactions
futures-style margining of commodity options
segregated funds held offshore or in foreign currencies
end-of-day allocation of trades
expanded early warning requirements for FCMs
notional funds
agricultural trade options
In addition, OGC provided legal assistance to T&M in approving the electronic futures exchange, CFFE, and in the continued processing of contract market dual trading exemptive petitions. OGC monitored the Securities and Exchange Commission proceeding respecting the CBT's application to trade the Dow Jones Utility and Transportation Stock Indices.
The growing international nature of futures and option markets continued to impact OGC's work. Through the review of numerous interpretive letters and Commission orders, OGC assisted T&M in implementing rules governing the offer and sale of foreign futures and option contracts in the United States. During FY 1998, OGC issued and processed no-action letters regarding the offer or sale within the United States of foreign futures contracts based on foreign stock indices. OGC also worked closely with the Division of Enforcement to establish information-sharing agreements with foreign financial market regulators and with T&M, Enforcement and the Office of International Affairs in their activities involving the International Organization of Securities Commissions (IOSCO).
Pursuant to exemptive authority granted to the Commission by the Futures Trading Practices Act of 1992, OGC has helped the Commission analyze requests for exemptions from various requirements of the CEA and Commission regulations for certain exchange-traded futures and option contracts.
OGC helps to prepare, and comments on, proposed legislation that would affect the Commission. OGC also reviews all Commission congressional testimony. During FY 1998, OGC provided assistance with respect to the Financial Derivatives Supervisory Improvement Act of 1998 (H.R. 4062), the Business Bankruptcy Reform Act of 1998 (S. 1914), and the Financial Services Competitiveness Act of 1997 (H.R. 10).
Administrative Matters
During FY 1998, OGC advised the Commission on issues raised under the Freedom of Information Act (FOIA), the Privacy Act, and the Government in the Sunshine Act and responded to approximately 36 FOIA and Privacy Act appeals. In addition, OGC developed and implemented procedures to assure timely review and response to requests for information under the FOIA and to administrative appeals under the FOIA and Privacy Act. Through the United States Department of Justice, the Commission also offered Commission-wide training for FOIA coordinators.
OGC is responsible for all matters relating to the Commission's ethics standards and compliance with its Code of Conduct and the Office of Government Ethics (OGE) government-wide ethics regulations, including the provision of annual ethics training for CFTC employees as required by OGE regulations.
OGC also advises the Commission on personnel and labor and employment law matters. In conjunction with the Office of Human Resources and Support Services, OGC handles Equal Employment Opportunity cases arising under Title VII of the Civil Rights Act of 1964 and Merit Systems Protection Board cases arising under the Civil Service Reform Act of 1978. During FY 1998, OGC handled 11 Equal Employment Opportunity complaints and two matters arising before the Merit Systems Protection Board.
OGC continued to advise the Commissioners who chair the Commission's advisory committees on procedural and substantive matters. During FY 1998, the Commission formed the Global Markets Advisory Committee to obtain advice on international market issues that affect the integrity and competitiveness of U.S. markets and firms engaged in global business. The Agricultural Advisory Committee provides advice on issues affecting agricultural producers, processors, lenders, and others interested in or affected by the agricultural markets. The Financial Products Advisory Committee provides advice on issues concerning financial futures and option markets regulated by the Commission.
The litigation and opinions cases for FY 1997 and FY 1998 are as follows:
| Litigation Docket | FY 1997 | FY 1998 |
|
Appellate cases involving the CFTC's enforcement program |
31 |
41 |
|
Appellate cases involving the CFTC's reparations program |
9 |
9 |
|
Appellate cases involving the CFTC's review of registered futures association and exchange review cases |
4 |
2 |
|
District Court cases |
17 |
13 |
|
Administrative cases |
3 |
2 |
|
Subpoenas |
11 |
10 |
|
Bankruptcy cases monitored |
32 |
29 |
|
Amicus cases monitored |
7 |
1 |
|
Opinions Docket |
FY 1997 |
FY 1998 |
|
Total cases beginning of fiscal year |
53(a) |
47 |
|
Cases received |
66 |
59 |
|
Cases completed |
72 |
63 |
|
Cases pending end of fiscal year: |
||
|
DSRO disciplinary actions |
17 |
8 |
|
Reparations cases |
19 |
26 |
|
Enforcement cases |
11 |
9 |
|
Total |
47 |
43 |
(a) Decreased by one to reflect inadvertent overcount of reparations cases in September 1996.