I respectfully dissent from the Commission’s enforcement action charging, and settling with, Powerline Petroleum, LLC (“Powerline”) and its current principals, Darren Dohme and Adam Wright.  As a matter of law, I do not believe that all the charges are backed by the facts.  I also believe that some aspects of the settlement are inconsistent with the Commission’s prior treatment of similar cases and fundamentally unfair.

I agree that we need to be strong on enforcement and, at the CFTC, we are.  But what can be much harder for regulators – yet just as vital to the long-term success of our mission – is to exercise our enforcement powers in a fair and even-handed manner, consistent in the charges we bring and the sanctions we impose.  It is here that I believe the Commission has fallen short in this case.

The Powerline Story

There is more to tell about the Powerline story than is set out in the Commission’s settlement Order.  Powerline is a small business, historically employing somewhere between 2-10 employees.  Its clients are primarily retail gas station operators that regularly hedge their exposure to fluctuating energy prices using fuel-related futures. 

Powerline has been doing business for nearly 20 years, and has been registered with the Commission as an Introducing Broker (“IB”) since its founding (except for a relatively brief period during which a registered Futures Commission Merchant (“FCM”), with which Powerline maintained a long-standing relationship, owned and operated the business). Pursuant to the Commodity Exchange Act (“CEA”), an IB engages in soliciting or in accepting orders for certain derivatives transactions, and does not accept money or property to margin any trades or contracts that result therefrom.[1]  Darren Dohme, a founder of Powerline and Adam Wright, his co-owner, are both registered as Associated Persons (“APs”)[2] subject to the regulatory rules and responsibilities associated with this registration.

Importantly, Powerline has enjoyed a clean history as a registered IB and its employees as registered APs.  The Commission has found no fault with Powerline’s conduct of its IB business at any time, and the Commission’s settlement Order does not contain any finding of wrongdoing with respect to Powerline’s IB activities.

The Case Against Powerline

At times, though, Powerline undertook activities that extended beyond those of an IB and into those that characterize a commodity trading advisor (“CTA”) under the CEA.  That is, Powerline acted as a CTA by advising others, for compensation or profit, as to the value of or the advisability of trading in certain derivatives contracts.[3]  But while it remained registered as an IB, Powerline did not also register as a CTA, nor did it provide certain disclosures to clients that CTAs (and firms that are required to register as a CTA) must provide.  And when the Chicago Mercantile Exchange (“CME”) initiated an investigation in 2019 regarding Powerline’s activities, Powerline (through Dohme and Wright) produced to CME a backdated letter suggesting that Powerline provided a written disclosure to its clients earlier than was actually the case – a fact that Powerline brought to the attention of our Division of Enforcement in its cooperation with the investigation (which the Commission recognizes in the settlement Order).

The Commission’s settlement Order finds, among other things, that:  1) Powerline unlawfully acted as an unregistered CTA,[4] and also violated disclosure requirements for CTAs (including firms required to register as a CTA) in the Commission’s rules (collectively referred to herein as the “CTA Violations”);[5] and 2) Powerline, Dohme, and Wright made a false statement that violated the CEA when they produced the backdated letter to CME.[6] 

I have no question that Powerline, Dohme, and Wright made a false statement to CME with the backdated letter.  In fact, they disclosed this violation themselves, and I support any and all penalties associated with this violation. 

However, I am not sure the record justifies the Commission’s findings that Powerline committed the CTA Violations.  After all, our rules provide that a registered IB need not also register as a CTA if its trading advice is “solely in connection with its business as an introducing broker” (the “IB Exemption”).[7]  Based on the information available to me, it appears that:  1) on trades resulting from Powerline’s CTA services, Powerline acted as an IB by introducing the trades to an FCM for execution; 2) much (though not all) of the revenue that Powerline earned from its markups occurred on two dates, one in 2016 and one in 2017; and 3) even in those years, Powerline’s revenues from its CTA activities did not account for more than 50% of its total revenues, and in other years it was minimal (e.g., under 1% in 2015 and under 5% in 2018). 

Equally concerning to me is the fact that throughout Powerline’s history as an IB, it was subject to examination by the National Futures Association (“NFA”) – the registered futures association for the derivatives industry – but the record contains no indication that NFA ever suggested that Powerline might also have to register as a CTA.  Nor did the registered FCM that owned and operated the Powerline business for a few years ever suggest that it might be necessary for Powerline to register as a CTA.  Under these circumstances, whether Powerline qualified for the IB Exemption to the requirement to register as a CTA certainly warrants more than the cursory, and conclusory, statement in the Commission’s settlement Order that Powerline’s “advisory business was not solely in connection with its brokerage business.”[8] 

We Have Seen This Case Before

I recognize, though, that the Commission has previously found the CTA Violations to have occurred in a case with facts strikingly similar to those present here.  In a 2016 settlement Order involving a company called Angus Energy (“Angus”), the Commission found that Angus had unlawfully acted as an unregistered CTA and violated the same CTA disclosure rules that the Commission now finds Powerline to have violated.[9] 

Comparing the settlement Orders regarding Powerline and Angus reveals that:  1) the clients of the advisory services provided by both companies were retailers of fuel products; 2) both companies advised clients on hedging programs for energy markets; 3) both companies acted as counterparty to their clients in certain derivatives contracts, but did not clearly disclose that to their clients; 4) both companies charged and retained a markup embedded in the price charged to clients, but did not disclose the existence or amount of the markup; and 5) the wrongdoing identified by the Commission in both cases occurred during an overlapping 4-year period.[10] 

Given these parallel facts and the Commission’s findings of CTA Violations by Angus, I can understand the Commission’s findings that Powerline committed the CTA Violations, too.  But what I can neither understand nor accept is the Commission’s determination to treat Powerline more harshly than it did Angus.[11]  In particular, the Commission:

• Dresses up Powerline’s disclosure failures as fraud, whereas no fraud charge was brought in the Angus case despite the similarity of its facts;
• Charges Dohme with individual liability for the CTA Violations, whereas no individuals at Angus were charged;
• Imposes disgorgement of $500,000 against Powerline, whereas no disgorgement was ordered against Angus; and
• Imposes registration and trading bans of 3 and 6 months, respectively, on Powerline, Dohme, and Wright, whereas no registration or trading bans were imposed on Angus.

Fundamental Fairness

Similar cases should be treated similarly.[12]  The settlement Order regarding Powerline does not even mention the Angus case, let alone explain the disparities in the settlement terms in the two cases.  It is neither fair nor just for the charges brought, and the sanctions imposed, by the Commission in similar cases to fluctuate as we see demonstrated here. 

Powerline, Dohme, and Wright would hardly be getting off “scot-free” if the Commission treated their settlement the same way it treated its settlement with Angus with respect to the CTA Violations.  The Commission is holding them accountable by imposing a civil monetary penalty (“CMP”) of $375,000, with the joint and several liability of Dohme and Wright capped at $150,000 each.  In comparison to the $250,000 CMP imposed on Angus, this is appropriate given the additional false statement violation here. 

Further, Dohme and Wright will have their names – as well as their company’s name – publicly identified in a Commission press release distributed in the national media, leaving a permanent mark on their reputations.  The Commission’s findings of their misconduct also will be flagged (as they should) in the registration database maintained by the NFA, so that potential future customers can consider the information when making their trading decisions (as they should).  At a small company, reputation is everything. 

But to treat the Powerline settlement so differently than the Angus settlement is fundamentally unfair.  This is best illustrated by the 3-month registration ban imposed on Powerline.  Not only does the ban prevent Powerline from registering as a CTA (which is appropriate, since that is where its infractions occurred), but it is imposed on Powerline’s existing IB registration, too – notwithstanding that Powerline has run a clean IB business for nearly 20 years, and the settlement Order makes no finding of any wrongdoing with respect to that IB business. 

Of course, three months doesn’t seem very long, and is shorter than the registration bans the Commission often imposes on wrongdoers.  But by applying that ban to Powerline’s IB registration, the impact may very well last much longer than three months.  In fact, the Commission risks shutting down Powerline’s business entirely.  Powerline’s retail gas station customers will still need IB services during the term of Powerline’s registration ban, and can be expected to find them elsewhere.  How many are likely to return after the ban expires? 

I also want to be sure to mention Powerline’s other employees who may be directly and adversely impacted by the Commission’s ban on Powerline’s IB registration.  These employees, whom the Commission is not charging with any wrongdoing, rely on the pay and benefits offered by Powerline.  If Powerline is not able to do business as an IB for even three months, its status as an employer is surely at risk. 

To me, this is inherently unfair, and on principle, I cannot support this settlement, even when entered into voluntarily.  This may strike some as a small case compared to the actions against major Wall Street banks and global commodity trading firms that can be a steady part of our enforcement program.  But in my view, it is precisely when our enforcement actions involve smaller registrants – where our actions can threaten livelihoods, the survival of a business, and the jobs of taxpayers – that we should proceed with extreme caution.  I respectfully dissent from the Commission’s failure to do so here.

[1] CEA Section 1a(31), 7 U.S.C. § 1a(31).

[2] The CEA defines an AP, among other things, as an employee associated with an IB in a capacity that involves the solicitation or acceptance of customers’ orders (other than in a clerical capacity).  CEA Section 4k(1), 7 U.S.C. § 6k(1).

[3] CEA Section 1a(12), 7 U.S.C. § 1a(12).

[4] See CEA Section 4m(1), 7 U.S.C. § 6m(1).

[5] Specifically, the Commission’s settlement Order finds that Powerline recommended hedging programs to its clients without disclosing that Powerline would be the counterparty to the clients’ trades, and without disclosing the markup that Powerline received on those transactions.  It further finds that these failures violated the requirements in the Commission’s rules that a CTA (including firms required to register as a CTA) disclose a “complete description of each fee which the commodity trading advisor will charge the client” and a “full description of any actual or potential conflicts of interest regarding any aspect of the trading program . . .”  See CFTC Rules 4.31 and 4.34, 17 C.F.R. §§ 4.31, 4.34. 

[6] See CEA Section 9(a)(4), 7 U.S.C. §13(a)(4).

[7] CFTC Rule 4.14(a)(6), 17 C.F.R. § 4.14(a)(6). 

[8] Settlement Order at 2, 5, 7.

[9] In re Angus Partners, LLC, D/B/A Angus Energy, CFTC Docket No. 16-36 (September 29, 2016). 

[10] See Angus Settlement Order at 2-3; Powerline Settlement Order at 2-5.  The settlement Order in the Angus case is equally unenlightening as to why Angus did not qualify for an exemption from CTA registration, saying only that “Angus’s commodity trading advice was not solely incidental to its business” (which was the standard for exemption applicable to Angus’ cash commodity business pursuant to CFTC Rule 4.14(a)(1), 17 C.F.R. § 4.14(a)(1)).  See Angus Settlement Order at 2. 

[11] Treating Powerline more harshly than Angus is particularly hard to comprehend when it is considered that unlike Powerline, which subjected itself to regulation and examinations as a registered IB, Angus had not been registered with the Commission. 

[12] Public guidance published by our Division of Enforcement (“DOE”) provides that monetary and non-monetary relief in analogous cases is a factor to be considered in determining an appropriate civil monetary penalty.  See Civil Monetary Penalty Guidance at 4 (DOE May 20, 2020), available at CFTC Division of Enforcement Issues Civil Monetary Penalty Guidance | CFTC.  It should be considered by the Commission in all its charging and sanctions determinations.