2000 Annual Report

Office of the General Counsel

The Office of the General Counsel (OGC) is the Commission’s legal advisor.  OGC attorneys represent the Commission in court, appearing regularly before the U.S. courts of appeals and district courts in proceedings that involve futures industry professionals.  Through its opinions program, OGC staff assists 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 or Act) and other administrative statutes.


During FY 2000, 39 Commission cases were pending before the courts of appeals.  The majority of these appeals involved matters arising from the Commission’s enforcement program.  Other appellate cases stemmed from the Commission’s review of actions taken by the National Futures Association (NFA) and from the Commission’s reparations program, which resolves customer-broker disputes.

In addition, OGC defends the Commission’s interests in actions filed against the Commission in U.S. courts of appeals and district courts.  Such actions may seek to preclude enforcement proceedings or to challenge the Commission’s exercise of its regulatory authority.

Cases Involving the Commission’s Enforcement Program.  Litigation conducted by the OGC involving the Commission’s enforcement program arises from three main sources: defense of Commission decisions rendered in cases prosecuted administratively by the Commission’s Division of Enforcement; defense of decisions rendered by the district courts in cases prosecuted by the Division of Enforcement; and defense of decisions rendered by the district courts in cases filed against the Commission by individuals seeking to avoid enforcement by the Commission of commodity futures laws.

Appeals from Enforcement Decisions Issued by the Commission. During FY 2000, OGC appeared before the courts of appeals and successfully defended enforcement decisions rendered by the Commission in the following noteworthy cases:

Elliott et al v. CFTC, 202 F.3d 926 (7th Cir. 2000).  In this action, the Commission determined that four large volume wheat traders executed a series of noncompetitive, prearranged trades on the floor of the Chicago Board of Trade.   In so doing, the Commission distinguished the trades at issue from lawful “freshening,” the practice of liquidating an old position in a near delivery month and buying an equivalent volume in a later delivery month, because the circumstances surrounding the trades’ execution demonstrated that they had been prearranged.  The U.S. Court of Appeals for the Seventh Circuit affirmed the Commission's opinion and order, observing that "[d]eciding whether a particular set of circumstances supports an inference of non-competitive trading on the futures markets is an issue peculiarly within the Commission's area of expertise."  202 F.3d at 932.    A petition for rehearing before the Seventh Circuit was denied on May 11, 2000.  The U.S. Supreme Court declined to review the case.

R&W Technical Services, Ltd. v. CFTC, 205 F.3d 165 (5th Cir.  2000).  The Commission held that sellers of computerized trading software fraudulently solicited customers by misrepresenting hypothetical trading results as actual trading results in violation of the CEA and the Commission's rules.  Following briefing and argument by OGC, the U.S. Court of Appeals for the Fifth Circuit affirmed the Commission's findings that the sellers made material misrepresentations "in or in connection with" commodity futures contracts, in violation of Section 4b of the Act, 7 U.S.C. § 6b and published fraudulent advertising as CTAs in violation of Section 4o of the Act, 7 U.S.C. § 6o, and Commission Rule 4.41(a), 17 C.F.R. § 4.41(a). The court of appeals reversed the Commission’s imposition of a civil monetary penalty of $2.375 million, the amount of petitioners’ estimated gross revenues from the fraudulent activity, and remanded the case to the Commission for further proceedings.  The U.S. Supreme Court denied the sellers' petition for a writ of certiorari.

Slusser v. CFTC, 210 F.3d 783 (7th Cir. 2000).  The Commission determined that an individual and the entities he controlled committed fraud in accumulating $29 million from German investors for trading in American financial markets.  The U.S. Court of Appeals for the Seventh Circuit affirmed the Commission’s findings of fraud and failure to register with the Commission as a commodity pool operator.  The court of appeals disagreed with the Commission's imposition of a $10 million fine as a penalty for these actions and remanded the case to the Commission for further proceedings.

Appeals from Enforcement Decisions Rendered by U.S. District Courts.  During FY 2000, OGC defended decisions rendered by district courts in actions brought by the Commission through its Division of Enforcement to enforce the CEA in the following noteworthy cases:

CFTC v. Vartuli, 228 F.3d 94 (2nd Cir. 2000).  The district court found that Anthony Vartuli and AVCO Financial Corp. (collectively “AVCO”) acted as commodity trading advisors (CTAs) in the sale of a computer software program that generated buy and sell instructions for users based upon real time market data.  The court further held that AVCO committed fraud in the sale of the software, failed to properly present results based upon hypothetical trading and failed to register with the Commission.

On appeal, the U.S. Court of Appeals for the Second Circuit affirmed the finding that AVCO acted as an unregistered CTA and committed fraud in violation of the CEA.  The court of appeals held that the statements made in advertising were properly subject to regulation under the CEA.  In affirming the propriety of the issuance of an injunction barring the conduct at issue, the court of appeals remanded the case with instructions that the district court narrow the scope of the injunction to avoid imposing a “prior restraint” upon future speech.  The court of appeals also affirmed the district court’s order that AVCO disgorge all profits obtained as a result of the proscribed activity.

CFTC v. Richard E. Maseri, No. 98-5791 (11th Cir.).  In this case, the district court found that the Commission, through its Division of Enforcement, proved that Mr. Maseri had fraudulently marketed a computerized commodity trading program, which signaled the user when to trade commodity futures contracts, and converted funds that customers had entrusted to him to trade commodities on their behalf.  Mr. Maseri was found to have knowingly misrepresented his trading credentials and success, the profitability of his trading program, and his registration status with the Commission.  The district court permanently enjoined Mr. Maseri and his companies from violating the antifraud provisions of the CEA, acting as unregistered commodity trading advisors (CTAs) and futures commission merchants (FCMs), failing to disclose to customers the risks of futures trading, and converting customer funds.  Mr. Maseri also was ordered to disgorge over $550,000 in ill-gotten gains and to make restitution to defrauded customers.

Before the U.S. Court of Appeals for the Eleventh Circuit, Mr. Maseri contends that his activities do not make him subject to Commission regulation.  In defense of the findings of the district court, on behalf of the Commission, OGC contends that Mr. Maseri’s activities made him subject to registration as a CTA.  Moreover, Mr. Maseri was not exempt from registration pursuant to Commission Rule 4.14(a)(9) because the record demonstrates that he consulted with individual customers and solicited, accepted, and directed the trading of customer funds.

CFTC v. Baragosh, No. 00-1488 (4th Cir.).  In this case, the district court found that the Commission, through its Division of Enforcement, proved that Esfand Baragosh and his affiliated companies, notably Noble Wealth, committed fraud in the promotion and sale of foreign exchange currency contracts traded from Nobel Wealth’s offices, rather than on a designated futures market.  On appeal before the U.S. Court of Appeals for the Fourth Circuit, OGC, on behalf of the Commission, contends that the products sold by Mr. Baragosh through Noble Wealth are futures contracts which are not exempt from regulation pursuant to the so-called “Treasury Amendment,” 7 U.S.C. 2(a)(1)(A)(ii).  In addition, OGC contends that Mr. Baragosh committed fraud as found by the district court.

CFTC v. Richard E. Busch, No. 00-12312, 00-15016-B (11th Cir.).   In response to the Commission’s commencement of an action that alleged that he had committed fraud in the solicitation of funds to trade futures contracts, Mr. Busch declined to defend the merits of his conduct and sought to avoid the jurisdiction of the court.  The district court found that Mr. Busch had committed fraud in soliciting customer funds to trade futures contracts and ordered him to make restitution to the victims of his fraud in the amount of $10,849,000.   Mr. Busch refused to comply with the district court order, and a bench warrant was issued for his arrest.   On behalf of the Commission, the OGC moved to bar Mr. Busch’s first appeal as premature and it was withdrawn.  OGC has similarly moved to bar Mr. Busch’s second appeal while he remains a fugitive from the district court’s bench warrant.

In re Armstrong, Nos. 00-6156, 00-6092 (2nd Cir.).  OGC has defended orders entered by a district court conducting proceedings to determine whether Martin Armstrong committed fraud in the solicitation of millions of dollars in funds for trading futures contracts.  In these appeals, OGC has defended an order of civil contempt pursuant to which Mr. Armstrong has been incarcerated for failure to provide information regarding missing assets.  In addition, OGC sought and obtained dismissal of Mr. Armstrong’s attempt to appeal discovery orders entered by the district court.

Other Litigation Involving the Enforcement Program.  OGC defends the Commission’s interests in a variety of other actions commenced in the U.S. courts of appeals and district courts.   As described below, during FY 2000 these cases involved actions initiated to bar pending Commission administrative proceedings and actions challenging Commission regulations on constitutional grounds.

Great Plains Coop. v. CFTC, 205 F.3d 353 (8th Cir. 2000).  Great Plains Coop. filed a complaint against the Commission seeking injunctive and declaratory relief to halt Commission administrative proceedings against it.  Great Plains is a cooperative that purchases grain from producers using “hedge-to-arrive” (HTA) contracts.  In the midst of proceedings pending before a Commission administrative law judge, Great Plains filed an action in district court seeking a declaration that its HTA contracts were not futures contracts within the meaning of the CEA. 7 U.S.C. § 2.

The district court dismissed the complaint by Great Plains, which then filed an appeal.  After full briefing and oral argument, the U.S. Court of Appeals for the Eighth Circuit affirmed the district court’s dismissal of the complaint, reasoning that judicial review of ongoing Commission proceedings would “short-circuit the administrative review process and the development of a detailed factual record by the agency.”  Id.   The court of appeals concluded that judicial review of Commission actions, including issues upon which the Commission’s exercise of jurisdiction may hinge, must await final agency action.

Commodity Trend Service, Inc. v. CFTC, Comm. Fut. L. Rep.  (CCH) ¶ 27,777 (N.D. Ill.   1999), appeal docketed, No. 99-4142 (7th Cir.).  Commodity Trend Services (“CTS”), a publisher of advice on futures trading that maintains an Internet website, brought an action in the U.S. District Court for the Northern District of Illinois alleging that the registration requirement for CTAs as applied to it was an unconstitutional infringement of free speech. The district court agreed with CTS with regard to the registration issue, and also held that CTS was subject to Commission jurisdiction for enforcement of violations of the antifraud provisions of the CEA.  CTS’s appeal of the latter ruling remains pending.  In a related case, OGC has defended an appeal involving the district court’s enforcement of administrative investigatory subpoenas issued to CTS’s principals.  CFTC v. Blitz, No. 99-4143 (7th Cir.)

Taucher v. Born, 53 F.Supp. 2d 464 (D.D.C. 1999). This case involved a constitutional challenge brought against the Commission to invalidate a requirement that individuals who provide futures trading advice through newsletters, websites, and similar means register as CTAs.  The district court found against the Commission.  On behalf of the Commission, OGC has defended plaintiffs’ request for payment of attorney fees pursuant to the Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412(d) upon the grounds that plaintiffs’ claim of EAJA eligibility is based solely upon the “public interest” status of its law firm, without regard to EAJA’s financial requirements for eligibility, and on the grounds that the Commission’s legal position was substantially justified.

Appellate Cases Involving the Commission’s Reparations Program.  OGC also represents the Commission before the courts of appeals in challenges involving Commission decisions issued in customer-broker disputes pursuant to the Commission’s reparations program.  In FY 2000, the following noteworthy cases were decided.

First American Discount Corp. v. CFTC, 222 F.3d 1008 (D.C. Cir. 2000).  In this case, OGC defended, and the court of appeals sustained, the validity of the Commission’s regulation, adopted in 1983, that permits an FCM and an introducing broker (IB) voluntarily to enter into a "guarantee agreement."   Through such an agreement, an IB is relieved of the requirement to maintain a specific minimum net capital amount if an FCM agrees to be jointly and severally liable for the IB’s obligations regarding the solicitation of customer accounts.  The court of appeals also held that a guaranteeing FCM may not shield itself from liability under the guarantee agreement by means of a "waiver" in a standardized customer agreement.

Haekal v. Refco, et al., 198 F.2d 37 (2d Cir. 1999).  This reparation case involved the criteria by which a nonresident of the U.S. may file a claim for reparations.  Dr. Hussein M. Haekal, a resident of Germany, challenged the Commission’s decision to dismiss his reparations claim for failure to file a timely bond pursuant to the CEA.  The court of appeals upheld the Commission's determination that the CEA requires a bond unless a nonresident complainant demonstrates that the country of his residence permits the filing of a complaint by a U.S. resident without a bond (i.e., the "reciprocity requirement").  The court also affirmed the Commission's finding that Dr. Haekal had not made such a showing.  On the particular facts of this case, the court disagreed with the Commission’s conclusion that Dr. Haekal’s submission of a bond was untimely and remanded the case to the Commission for further proceedings.

Scheufler v. CFTC, No. 98-70403 (9th Cir. 1998).  In this case, the court of appeals affirmed the Commission’s holding that an independent introducing broker, Trinity Financial, Inc., and Daniel Stuart had fraudulently solicited trades by the complainant in heating oil options and awarded $111,052 in damages.

Other Appellate Litigation.  In addition to appeals involving its own enforcement program and appeals from reparations decisions, OGC also defends the Commission before the U.S. courts of appeals in matters arising from the Commission’s review of disciplinary action taken by the NFA or an exchange.  During FY 2000, two cases were filed in appellate courts seeking judicial review of the Commission’s affirmance of actions taken by the NFA.   One of these cases is summarized below.

Perk v. CFTC, No. 99-4084(L) (2nd Cir.). George J. Perk, Jr., has appealed from a Commission order affirming a final decision of the NFA that held Mr. Perk and others liable for violating NFA's customer protection and financial rules.  Mr. Perk had been president of American Futures Group, Inc. (AFG), a registered FCM that had been an NFA member.  Following an evidentiary hearing, Mr. Perk was held liable for AFG's failure to maintain adequate books and financial records and to comply with the terms of a settlement of earlier charges of NFA rules violations. Mr. Perk also was held directly liable for his own failure to supervise AFG's activities, including those of an AFG employee who taught brokers to use high-pressure, misleading, and deceptive techniques to market futures contracts to the public.  Based upon a finding that these violations established a pattern of deficiencies in AFG's compliance with NFA rules, AFG was expelled from NFA membership and Mr. Perk was barred from associating with, or acting as a principal of, an NFA member.  Mr. Perk sought and obtained Commission review of NFA’s expulsion order.  The Commission affirmed the action of NFA.  On appeal to the U.S. Court of Appeals for the Second Circuit, Mr. Perk has argued, as he did before the Commission, that NFA decisionmakers were biased, conducted an unfair hearing, and failed to consider evidence mitigating his penalty.

Other Litigation

District Court Cases.   OGC defends the Commission’s interests in a variety of trial-level litigation as well. OGC represented the Commission in two employment matters filed during FY 2000.  In addition, OGC defends the Commission’s interests when it is served a subpoena or other demand for discovery in a third party lawsuit, that is, a private suit in which the Commission is not a named party.  OGC handled five third party subpoena matters during FY 2000.

Cases Involving the Freedom of Information Act.   OGC represents the Commission in cases involving the Freedom of Information Act (FOIA).  During FY 2000, the Commission was the subject of one such suit, Huber v. CFTC, No. 99-CV2707 (D. D.C.).  In this case, the petitioner seeks access to the records of the Commission’s investigation of the activities of the Sumitomo Corp. and others in the copper market.  The action has been stayed by agreement pending processing of a successor FOIA request by the Commission.

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.  The Commission participates actively in individual bankruptcies to protect the non-dischargeability of civil monetary penalties or restitution awards it has obtained.  During FY 2000, OGC monitored 10 bankruptcy cases, the most significant one of which is In re Griffin Trading Company, No. 98-41742  (Bankr. N.D. Ill.).  In this case, the bankruptcy court agreed with a challenge to the Commission’s longstanding bankruptcy rules and invalidated a rule that effectively subjects all assets of an FCM to the customers’ priority in payment out of the estate.  The bankruptcy court held that the rule was inconsistent with the provisions of the Bankruptcy Code.  The Commission has filed an appeal with the U.S. District Court for the Northern District of Illinois, which is pending.


OGC assists the Commission in resolving appeals from a variety of adjudicatory decisions.  The appeals may arise out of decisions issued by:

Administrative law judges resolving administrative cases that the Division of Enforcement prosecutes to deter violators of the CEA or Commission regulations and protect the public from such violators;

Commission presiding officers resolving futures customers’ claims to recover money damages from industry registrants who have allegedly violated the CEA or Commission regulations; and

Self-regulatory organizations disciplining members for alleged rule violations, denying applications for membership, or exercising delegated authority to resolve applications for Commission registration.

OGC reviews the records of cases subject to appeal, identifies decisional options for the Commission, and prepares draft opinions consistent with the Commission's instructions.  As a result of these activities, the Commission issued a number of important decisions in FY 2000, including those outlined below.

Decisions Resolving Appeals in Cases Prosecuted by the Commission’s Division of Enforcement.  During FY 2000, the Commission resolved several significant appeals from decisions in administrative enforcement actions.

In re ADM Investor Services, Inc., CFTC Docket No. SD 97-5 (September 13, 2000). In this appeal, the Commission adopted a new standard for evaluating motions for post-judgment relief from forward-looking sanctions such as registration restrictions and trading prohibitions.  The Commission indicated that its new approach would be more flexible and focus on evidence indicating that it was no longer equitable that the sanction at issue continues to apply to the petitioner.  In the registration context, the Commission said it would focus on whether the petitioner made a reliable showing that its registration no longer posed a substantial risk to the public. The Commission also noted that if the registration restriction at issue were the result of a settlement agreement, it would consider whether the record showed that an unforeseeable change in circumstances had undermined the basis for the bargain petitioner struck with the Commission.  Applying its new approach to the circumstances presented, the Commission denied the petition.

In re Global Minerals & Metals Corp., CFTC Docket No. 99-11 (July 13, 2000).  In this appeal, the Commission considered the appropriate standards and procedures for determining whether counsel to a party should be debarred from further participation in a proceeding.  The Commission ruled that its regulation authorizing debarment should be interpreted in light of the requirements included in the Federal statute authorizing courts to sanction criminal contempt.  In this context, the Commission noted that debarment was only appropriate when clear and convincing evidence showed that counsel’s misbehavior was willful and that the misbehavior actually obstructed the administration of justice.  The Commission also indicated that debarment was only appropriate when the misbehavior is such an open, serious threat to orderly procedure that an instant and summary sanction is necessary.  Applying its new approach to the circumstances presented, the Commission concluded that the record did not establish that the conduct at issue actually obstructed the administration of justice.  Consequently, the Commission vacated the presiding officer’s debarment order.

In re LaCrosse, CFTC Docket Nos. 90-20, SD 91-6 (August 28, 2000).  The Commission, in this appeal, considered the appropriate standards and procedures for determining whether to reduce or eliminate a trading prohibition it had previously imposed under Section 9(b) of the Act.  The Commission indicated that it would focus on whether the weight of the evidence showed that petitioner’s access to the markets regulated by the Commission would pose no substantial threat to their integrity.  The Commission noted that, except in extraordinary circumstances, it would not consider evidence that was presented or could have been presented at the time it imposed the trading prohibition at issue. Consequently, in most cases the record would only need to be developed on circumstances arising after the close of the hearing record in the earlier proceeding.  The Commission anticipated that material factual disputes would usually involve the significance of the passage of time without repeated wrongdoing, the credibility and reliability of third-party assessments of the change in petitioner’s character or conduct, or the credibility of petitioner’s claim to a changed attitude about the importance of compliance.  It indicated that a hearing would normally be the best way to resolve these disputes reliably.  Applying these principles to the petition at issue, the Commission remanded for a hearing to develop the record and a decision by a presiding officer resolving material factual disputes.

In re Nikkhah, CFTC Docket No. 95-13 (May 12, 2000; September 26, 2000).  In this case, the Commission considered an appeal from a presiding officer’s ruling that respondent Nikkhah violated Section 4b of the Act and Commission Rule 33.10, as well as Commission recordkeeping requirements, through a course of conduct focused on the fraudulent allocation of trades for respondent’s discretionary account customers.  The Commission noted that the record showed that Nikkhah entered orders for several discretionary account customers on a single order ticket and did not determine either the participating customers or how the total order would be divided among the participating customers until after he learned that the order had been executed.  The Commission ruled that in such circumstances, only an equal division of the total order among the participating customers would fulfill respondent’s duty to each customer.  Because the record showed that Nikkhah did not distribute the total order among participating customers in this manner, the Commission affirmed the presiding officer’s conclusion that respondent fraudulently allocated his customers’ trades.  The Commission also affirmed related conclusions involving deceptive conduct, unauthorized trading, noncompetitive transfer of positions, and failure to comply with applicable recordkeeping requirements.  As to sanctions, the Commission concluded that the record supported imposition of a cease and desist order and trading prohibition.  The Commission indicated that a civil money penalty of $200,000 was appropriate in light of the gravity of respondent’s violations, but concluded that there was an insufficient record on the mandatory factors for imposing such a sanction under former Section 6(d) of the Act.  Consequently, the Commission remanded for supplementary proceedings to develop the record on these factors.  In this regard, the Commission overruled prior precedent and held that the Division of Enforcement had both the burden of production and persuasion on the mandatory factors in former Section 6(d).  The Commission mandated new rules for the supplementary proceedings designed both to permit the Division to fulfill these burdens and to limit the delay in the final resolution of the case attendant on the requirement for supplementary proceedings.

In re Piasio, CFTC Docket No. 97-9 (September 29, 2000).  The Commission considered an appeal from a presiding officer’s dismissal of allegations that respondents knowingly participated in a series of wash sales.  The Commission ruled that de novo review of witness credibility was appropriate because the presiding officer limited himself to conclusory findings that did not assess the recollection of witnesses in light of information reflected on the written records that were prepared at the time of the challenged transactions.  In light of its independent review of the record, the Commission found that the challenged transactions were not only designed to achieve wash results, but were also structured in a manner to negate market risk.  Because the record also showed that respondents were aware of these characteristics when they chose to participate in the challenged transactions, the Commission held that the record supported a finding that both respondents knowingly participated in wash sales.  As to sanctions, the Commission concluded that the record supported imposition of cease and desist orders and registration suspensions.  The Commission also found that civil penalties were appropriate based on the evidence relating to the gravity of respondents’ conduct, but remanded for supplementary proceedings to develop the record on the mandatory factors in former Section 6(d) of the Act.

Decisions Resolving Appeals from Customer Claims Seeking Money Damages from Industry Registrants in the Reparations Forum. During FY 2000, the Commission resolved several significant appeals from decisions in reparation actions.

Ferriola v. Kearse-McNeill, CFTC Docket No. 98-R114 (June 30, 2000).  The Commission considered an appeal from a decision awarding complainant over $50,000.  The Commission found that the record supported the presiding officer’s conclusion that respondent fraudulently induced complainant to open an options account and then churned the account by trading to generate commissions.  In reviewing the presiding officer’s churning analysis, the Commission noted that respondent’s trades typically involved the purchase of large positions in out-of-the-money options and that commissions were based on the number of contracts traded rather than the overall value of the position purchased.  The Commission emphasized that respondent could have achieved a comparable risk/reward posture by purchasing fewer in-the-money options and did not have a good explanation for favoring out-of-the-money positions that generated higher commissions.  The Commission concluded that these circumstances were a strong indication that respondent’s trading was designed to serve his interests rather than the interests of his customer.

Gray v. LFG, LLC, CFTC Docket No. 99-R108 (Sept. 12, 2000).  The Commission considered an appeal from a presiding officer’s dismissal of a complaint as untimely under the two-year statute of limitations in Section 14(a)(1) of the Act.  The presiding officer concluded that the complaint was untimely because Gray failed to submit a verified statement describing the facts underlying his complaint until August 1999.  The Commission reversed and remanded for further proceedings, holding that documents Gray submitted in April 1999 were sufficient to meet the requirements of Section 14(a)(1).  In this regard, the Commission ruled that the minimal requirements for an effective complaint included (1) a description of the core set of facts underlying the claims raised; (2) a description of the applicable theories of liability; and (3) evidence that complainant made a good faith attempt to meet the formal requirements for a complaint established in the Commission’s reparation rules.

Haekal v. Refco, Inc., CFTC Docket No. 93-R109 (Sept. 29, 2000).  The Commission considered an appeal from a presiding officer’s dismissal of a complaint for a lack of jurisdiction.  The presiding officer determined that a hearing was not necessary to determine whether the foreign currency transactions underlying the complaint were futures contracts because the documentary record did not suggest that Haekal either traded or intended to trade futures contracts or commodity options.  The Commission vacated and remanded for further development of the factual record.  On the jurisdictional issue, the Commission emphasized that the labels parties attached to transactions with futures-like characteristics in either oral discussions or written agreements were not controlling and must be evaluated in the context of the parties’ actual conduct.  The Commission also reiterated its view that any facility that provided order execution to the public was a “board of trade” for purposes of Section 2(a)(1)(a)(ii) of the Act.

Lee v. Lind-Waldock & Co., CFTC Docket No. 99-R018 (June 29, 2000).   The Commission considered an appeal from a presiding officer’s dismissal of a complaint for a failure of proof.  The presiding officer found that complainant had not produced sufficient evidence to sustain his claim that respondent had breached its obligations under the Act in taking steps to close his account.  The Commission affirmed the result of the presiding officer’s decision, but articulated a different rationale that involved issues of first impression.  The Commission ruled that the Act did not limit a FCM’s right to select its customers, but did impose obligations when the FCM decided to close the account of an existing customer.  The Commission held that these obligations include:  (1) providing the customer with prompt notice of its decision to close his account or limit his trading; (2) providing a prompt response to the customer’s instruction to return excess funds and transfer open positions; and (3) taking reasonable steps to protect the customer’s interests until the transfer process is completed.  On the record before it, the Commission found that respondent had failed to give complainant prompt notice of the limitations imposed on his trading, but that complainant had failed to show that respondent’s delay in providing notice was a proximate cause of his damages.

McGough v. Bradford, CFTC Docket Nos. 97-R116 and R117 (Sept. 28, 2000).  The Commission considered appeals from a decision awarding over $180,000 in damages.  The presiding officer relied on complainant’s testimony in concluding that respondents had fraudulently induced him to open two accounts and enter trades based on another customer’s successful trading system.  The Commission concluded that complainant’s testimony was not credible because the record showed that he had made deceptive statements regarding an unauthorized trading claim that the presiding officer had dismissed.  Nevertheless, the Commission concluded that the record supported a conclusion that respondents fraudulently induced complainant to open one of his accounts by failing to disclose that the track record for the successful trading system that they touted was partially based on hypothetical trades.  In light of this analysis, the Commission reduced complainant’s damage award to about $94,000.  In concluding that an award was appropriate, the Commission ruled that a provision in one of the respondents’ account-opening agreement that waived the two-year limitations period in Section 14(a)(1) of the Act was not enforceable.  In this regard, the Commission emphasized that Commission Rule 12.13(a) gave customers two years to file reparation complaints and that application of a one-year limit would likely deprive many customers of their right to adjudicate their claims in the reparations forum.  The Commission noted that it had consistently found that contractual provisions that waived a customer’s right to submit claims to the reparations forum were void.

Decisions Resolving Appeals from Cases Decided by Self-Regulatory Organizations.  In MBH Commodity Advisors, Inc. v. National Futures Association, CFTC Docket No. CRAA 99-3 (March 31, 2000), the Commission considered an appeal from an NFA disciplinary action imposing membership suspensions and a civil money penalty. NFA imposed these sanctions in light of its conclusion that appellants had used misleading promotional materials and referred to hypothetical trading results without the required disclaimer about their limitations.  The Commission determined that NFA’s findings and conclusions were supported by the weight of the evidence and that its decision did not include any error material to the outcome of the proceeding.  On this basis, it summarily affirmed NFA’s decision.

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; and

proposals to amend exchange by-laws or rules.

In FY 2000, OGC reviewed more than 115 matters related to enforcement actions, investigations of illegal activity, and complaints in administrative or judicial actions; more than 29 applications to trade futures or option contracts; and over 120 exchange rule amendments.

OGC worked closely with the Division of Trading and Markets (T&M) and the Division of Economic Analysis in drafting a number of significant rulemakings and regulatory initiatives including:

a proposed new regulatory framework;

use of electronic signatures by customers;

revised procedures for listing of new futures contracts;

revised procedures for review of contract market rules;

rules permitting trade options on agricultural commodities;

amendments to insider trading rules;

an advisory on average price calculations by FCMs;

amendments to FCM and IB minimum capital rules;

amendments to rules excluding otherwise regulated persons from the definition of  commodity pool operator (CPO);

exemptions for CPOs with respect to offerings to Qualified Eligible Participants;

changes in reporting levels for large trader reports;

amendments to rules regarding subordination agreement for FCMs/IBs;

revision of no-action relief for the listing of new futures contract by foreign exchanges who have been allowed to place their trading terminals in the U.S.;

over-the-counter derivatives;

amendments to foreign futures and option rules;

revision of speculation position limit rules;

conflicts of interest;

electronic submission of various reports to the Commission; and

electronic trading.

Of particular note during FY 2000, OGC provided legal assistance to T&M in processing the designation requests of two electronic exchanges, FutureCom (an Internet-based exchange) and Merchants Exchange of St. Louis.  Because these are the first all electronic contract markets designated by the Commission, they presented a number of unique legal issues.  OGC also continued its representation on the CFTC-NFA registration review committee, which serves as both a liaison for and oversight venue of industry registration.

International Issues.  The growing international nature of futures and option markets was reflected in OGC’s work. Through the review of numerous interpretive letters and Commission orders, OGC assisted T&M in implementing and revising rules governing the offer and sale of foreign futures and option contracts in the United States.  During FY 2000, OGC issued a record number of no-action letters regarding the offer or sale within the U.S. of foreign futures contracts based on foreign stock indices.  OGC also worked closely with the Division of Enforcement and the Office of International Affairs to establish information-sharing arrangements with foreign financial market regulators, and with T&M and the Division of Enforcement, as well as the Office of International Affairs, in their activities involving the International Organization of Securities Commissions.  OGC continues to be an active participant in discussions and negotiations regarding international trade agreements like the GATS, NAFTA, MAI and FTAA.

Rulemaking.  On March 3, 2000, the Commission promulgated a final rule designed to create an exemption from the registration requirement set forth in Section 4m(1) of the CEA for CTAs that provide standardized advice by means such as newsletters, prerecorded telephone newslines, Internet websites, and non-customized computer software. 17 C.F.R. Part 4, Exemption from Registration as a Commodity Trading Advisor, 65 Fed. Reg. 12938 (March 10, 2000) (to be codified at 17 C.F.R. § 4.14(a)(9)).  OGC performed the primary staff work on the rule.  The rule applies to all CTAs that neither direct client accounts nor provide commodity trading advice based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients. The preamble to the rule noted that the Commission had become involved in a number of lawsuits in which parties had argued that the First Amendment barred Congress from requiring CTAs of the sort covered by the rule to register.  The preamble stated that the purpose of the rule was to reduce legal uncertainly and continued expenditure of litigation resources in this area.  The preamble also stated that, whatever the courts might determine to be the precise limits of congressional authority to require registration, the Commission felt that minimizing impact on non-deceptive speech was a relevant policy consideration in determining the Commission’s regulatory approach to CTAs within the scope of the rule.

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, including the London Clearing House proposal to clear swap transactions.

Regulatory and Legislative Matters.  As the Commission’s chief legal advisor, OGC advises the Commission concerning legislative and regulatory matters, including proposed legislation to reauthorize the CFTC. During FY 2000, OGC engaged in negotiations with other Federal financial regulators, including the Securities and Exchange Commission (SEC), the Department of Treasury, and the Federal Reserve Board, as well as members of Congress and their staffs, to develop legislative proposals to promote legal certainty in the over-the-counter derivatives markets, to provide regulatory reform for domestic futures exchanges, and to amend the Shad-Johnson Accord.

OGC staff provided to the Commission’s oversight committees legislative language that would codify the Commission’s regulatory reform efforts for domestic futures exchanges.  In addition, a CFTC/SEC staff agreement was presented to Congress that provided for joint jurisdiction over security futures products. On December 21, 2000, the President signed into law the Commodity Futures Modernization Act of 2000.  This significant legislative effort reauthorizes the CFTC for five years, and amends the CEA in several important ways by providing legal certainty for over-the-counter derivatives transactions, decreasing regulatory burdens on domestic futures and options exchanges, repealing the ban on security futures products, and clarifying regulatory responsibility for banking products.

The reauthorization process generated numerous requests from members of Congress to testify before Congress and to provide written responses to questions regarding the Commodity Futures Modernization Act of 2000.  In FY 2000, the General Counsel testified at six hearings conducted by the Senate Committee on Agriculture and the House Committees on Agriculture, Banking and Financial Services, and Commerce.  OGC also provided written responses to numerous congressional requests for information.

Administrative Matters.  During FY 2000, OGC advised the Commission on issues raised under FOIA, the Privacy Act, and the Government in the Sunshine Act and responded to approximately 12 FOIA and Privacy Act appeals.  In addition, OGC continued to develop and implement procedures to assure timely review and response to requests for information under the FOIA and to administrative appeals under FOIA and the Privacy Act.

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.

OGC also advises the Commission on labor and employment law matters.  In conjunction with the Office of Human Resources and the Office of Equal Employment Opportunity, OGC handles equal employment opportunity cases arising under Title VII of the Civil Rights Act of 1964 and the Rehabilitation Act of 1973, and Merit Systems Protection Board cases arising under the Civil Service Reform Act of 1978.  During FY 2000, OGC handled nine equal employment opportunity complaints.

OGC continued to advise the Commissioners who chair the Commission’s advisory committees on procedural and substantive matters.  During FY 2000, the Commission formed the Technology Advisory Committee to obtain advice and recommendations on issues arising out of technological innovation in the financial services marketplace.  Two other Commission advisory committees remained active during FY 2000.  The Global Markets Advisory Committee provides 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 litigation and opinions cases for FY 1999 and FY 2000 are as follows:

Litigation Docket

FY 1999

FY 2000

Appellate cases involving the CFTC’s enforcement program



Appellate cases involving the CFTC’s reparations program



Appellate cases involving the CFTC’s review of registered futures association and exchange review cases



District Court cases



Administrative cases






Bankruptcy cases monitored



Amicus cases monitored




Opinions Docket

FY 1999

FY 2000

Total cases beginning of fiscal year



Cases received



Cases completed



Cases pending end of fiscal year:

       SRO disciplinary actions



       Reparations cases



       Enforcement cases