Commodity Futures Trading Com'n v. Heffernan

• Decision Date: 18 February 2003
• Docket Number: No. CV 101-141.,CV 101-141.
• Citation: 245 F.Supp.2d 1276
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. George HEFFERNAN, Defendant.
• Court: U.S. District Court — Southern District of Georgia

245 F.Supp.2d 1276

COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. George HEFFERNAN, Defendant.

No. CV 101-141.

United States District Court, S.D. Georgia, Augusta Division.

February 18, 2003.

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Kenneth D. Crowder, U.S. Attorney's Office, Augusta, GA, Theodore J. Dowd, U.S. Commodity Futures Trading Commission, Division of Enforcement, Washington, DC, for plaintiff.

Stephen E. Curry, Curry Law Firm, Augusta, GA, for defendant.

ORDER

BOWEN, District Judge.

Plaintiff Commodity Futures Trading Commission ("the CFTC") alleges that Defendant George Heffernan ("Heffernan") violated (1) the Commodity Exchange Act ("CEA"), as amended, (2) various CFTC regulations, and (3) a September 6, 2000 CFTC consent order.¹ The CFTC now moves for summary judgment on all of its claims. For reasons stated more fully below, the Court GRANTS IN PART and DENIES IN PART the CFTC's motion for summary judgment. (Doc. No. 21.)

I. BACKGROUND

Defendant Heffernan devised his own system for trading commodities futures contracts,² and then created a Web site for marketing the system to the public. The CFTC initiated an investigation of Heffernan's activities, which led to a settlement and a CFTC consent order finding Heffernan in violation of various sections of the CEA and certain CFTC regulations. After the consent order was issued, the CFTC alleges Heffernan continued to commit violations of the CEA, CFTC regulations, and the September 6 order. As a result of Heffernan's alleged continuing violations, the CFTC filed this action on September 11, 2001.

A. The Accutrader Web Site

1. Products and Services Sold on the Web Site

Defendant Heffernan has been and is the sole proprietor of an Internet business located at www.accutrader.com ("the Accutrader Web site"). (Pl.'s Ex. B ³ ¶¶1, 3, 9, 13.) As the owner, Heffernan controls both the operations of the Accutrader Web site and its content. (Id. ¶¶9 & 13.) On the Web site Heffernan attempts to sell three products or services to the public:

a. The Accutrader Day Trading Technique for the S & P⁴ and NYFE⁵ Futures ("the Accutrader Technique"): The Accutrader Technique is a commodity futures day trading technique used to purchase futures contracts. The Accutrader Technique provides its users with buy and sell signals for trading commodity futures contracts. (SMF ¶¶7 & 12.)⁶

b. The Accutrader Day Trading School: The Accutrader Day Trading School is an instructional course intended to teach participants how to apply the Accutrader Technique. (Id. ¶7.)

c. The Live Trading Room: The Live Trading Room is a subscription service to an Internet voice-streaming program, which enables subscribers to listen to Heffernan apply the Accutrader Technique to recent commodity futures market data. (Id.) Based upon his application of the Accutrader Technique to market data, Heffernan identifies or recommends trades to Live Trading Room subscribers.⁷ (Id. ¶16.) Heffernan can also utilize other non-Accutrader trading techniques in the Live Trading Room, such as the "open trade"⁸ or "trend trade,"⁹ to recommend or identify trades to subscribers of the Live Trading Room.¹⁰ (Id. ¶18.) The Live Trading Room was offered for a $500 monthly subscription between March 2000 and September 11, 2001, and there was at least one subscriber during each month of this time period. (Id.¶21.)

Heffernan accepted credit card payments for Accutrader products and services. (Heffernan Depo. (March 11, 2002) at 106-07.)

2. Heffernan's Trading History

In addition to selling Accutrader products and services, Heffernan also traded futures contracts for certain clients and on his own behalf.

Heffernan managed two accounts for Lind Waldock & Company. From March 1, 1999 through April 30, 1999, Heffernan exercised trading authority over Lind Waldock & Company account 91NAA 705895. (SMF ¶¶30-31.) During March 1999, the account netted a loss of $1,446.60. (Id. ¶¶32.) Heffernan also managed account number 711585, another Lind Waldock & Company account, which opened on August 12, 1999. The last activity on this account occurred on May 12, 2000. (Id. ¶¶33.) In six of the nine months in which account 711585 was actively traded, the net result was a loss. (Id. ¶¶34.) Over the life of the account, net losses totaled $4,027.46. (Id. ¶¶35.)¹¹

In addition, Heffernan exercised exclusive control over account number E15-14710, for the Peregrin Financial Group, from May 8, 2000 through September 11, 2001. (Id. ¶36.) In six of the eight months in which trading activity occurred for account E15-14710, the net result was a loss. (Id. ¶37.) The net result from May 8, 2000 through September 11, 2000 was a loss of $17,432.50. (Id. ¶38.)

Finally, from September 1999 to January 2001, Heffernan traded futures contracts on his own account and lost over $20,000. (Id. ¶39.) Heffernan did not inform prospective clients of his personal trading losses (id. ¶40.), and over any four-month period of time, Heffernan's futures trading in any commodity futures trading account failed to produce a net profit (id. ¶43).

B. The CFTC's September 6, 2000 Order

On September 6, 2000, the CFTC determined that Heffernan's Accutrader Web site contained several misleading representations. Specifically, the following information allegedly posted on the Accutrader Web site formed the basis for a CFTC "cease and desist" order:

a. A statement that the Accutrader Technique was 85% accurate. The CFTC contended Heffernan did not have a basis for such a claim. (Pl.'s Ex. C at 2.)

b. A table purporting to display successful results of trading using the Accutrader Technique. (Id) The CFTC maintained that Heffernan had done little or no actual trading using the Accutrader Technique. (SMF ¶8(2).)¹²

c. A claim that trading profits based on the use of the Accutrader Technique were $12,570 per contract. The CFTC alleged that Heffernan had no actual trading history to support the claim. (Id. ¶8(3).)

The CFTC's cease-and-desist order instructed Heffernan to refrain from posting these and any other misrepresentations on the Accutrader Web site.¹³ (Pl.'s Ex. C.) The order specifically found that Heffernan had (1) violated 7 U.S.C. § 6b(a)(i) & (a)(iii) by making material misrepresentations in connection with futures transactions, (2) violated 7 U.S.C. § 6o (1)(A) & (B) by employing a scheme to defraud a client and engaging in a practice or course of business that operated as a fraud upon a client, while acting as a Commodity Trade Advisor ("CTA"), and (3) violated 17 C.F.R. § 4.41(a) (2000), by advertising in a manner that employed a device, scheme, or artifice to defraud clients or prospective clients, or involved a transaction, practice, or course of business that operated as a fraud upon a client or prospective client, while acting as a CTA. In its Order, the CFTC sought to strike information it found misleading and demanded that Heffernan comply with certain instructions. (Pl.'s Ex. C at 7-8.) Shortly before the issuance of the CFTC's cease-and-desist order, the CFTC contends "Heffernan took down his web site, and gave the appearance of being in compliance with the Order, as well as the Act and Regulations." (Doc. No. 11118.)

C. Alleged Violations Following the September 6, 2000 Order

Despite the September 6 order, the CFTC alleges that "[beginning no later than October 2000, [Heffernan] restored his Internet web site www.accutrader.com, which, along with his letters to customers, promotional materials and advertisements, again contained several misrepresentations and omissions." (Id. ¶19.) The CFTC alleges that Heffernan's actions violate the CEA, CFTC regulations, and the express terms of the September 6 order.

1. The Accutrader Web Site

At various times after September 6, 2000, the Accutrader Web site contained the following statements relating to Heffernan's trading of futures contracts:

a. "This service [the Live Trading Room] gives you the ability to look over an experienced day trader's shoulder as he trades real time...." (SMF ¶22(3); Pl.'s Ex. G at 1 (Accutrader Web site on October 30, 2000); at 9 (Accutrader Web site on February 20, 2001); at 24 (Accutrader Web site on March 23, 2001); at 36 (Accutrader Web site on March 28, 2001).)¹⁴

b. "With a pass word, you can enter this service [the Live Trading Room] and hear George Heffernan think out loud as he day trades." (SMF ¶22(4); Pl.'s Ex. G, at 1 (Accutrader Web site on October 30, 2000); at 9 (Accutrader Web site on February 20, 2001); at 24 (Accutrader Web site on March 23, 2001); at 36 (Accutrader Web site on March 28, 2001).)¹⁵

c. "[Heffernan] will give the actual entry price, profit targets and stop losses that he will be placing electronically with his broker." (SMF ¶22(5); Pl.'s Ex. G at 3 (Accutrader Web site on October 30, 2000); at 11 (Acccutrader Web site on February 20, 2001); at 28 (Accutrader Web site on March 23, 2001); at 38 (Accutrader Web site on March 28, 2001).)¹⁶

2. Communications with Gregory Comstock

Heffernan sold the Accutrader Technique, the Accutrader Day Trading School, and a subscription to the Live Trading Room to a customer, Gregory Comstock ("Comstock"), in November 2000. (SMF ¶84.) In a November 24, 2000 letter, Heffernan wrote to Comstock stating that a particular trade was "90% accurate approximately 1 trade per day" (Pl.'s Ex. L at 1), "80% to 85% accurate approximately 8 trades per day" (id. at 2), and "60% to 70% accurate approximately 12 trades per day ..." (id.; see also SMF ¶46). The letter did not contain any type of disclaimer. (SMF 1147.) The CFTC asserts that Heffernan's exclusive basis for the percentage-accuracy figures was his Live Trading Room log. (Id. ¶48.)

After reviewing this letter, Comstock informed Heffernan that some of his representations regarding the Accutrader Technique and Live Trading Room were "misleading," and he requested a refund. (Pl.'s Ex. P; SMF ¶85.) A dispute...