COMMODITY FUTURES TRADING v. AM. BD. OF TRADE

• Decision Date: 13 July 1979
• Docket Number: 79 Civ. 2134 (VLB).
• Citation: 473 F. Supp. 1177
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. The AMERICAN BOARD OF TRADE, INC., Arthur N. Economou, Phyllis H. Economou, the American Board of Trade Clearing Corporation, Inc., the American Board of Trade Service Corporation, Inc., and Arthur N. Economou and Company, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

473 F. Supp. 1177

COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. The AMERICAN BOARD OF TRADE, INC., Arthur N. Economou, Phyllis H. Economou, the American Board of Trade Clearing Corporation, Inc., the American Board of Trade Service Corporation, Inc., and Arthur N. Economou and Company, Inc., Defendants.

79 Civ. 2134 (VLB).

United States District Court, S. D. New York.

July 13, 1979.

Thomas Goodbody, Jane F. Henley, Commodity Futures Trading Commission, Washington, D. C., for plaintiff.

Lewis M. Steele, Eisner, Levy, Steele & Bellman, New York City, for defendants.

Arthur N. Economou, pro se.

MEMORANDUM ORDER

VINCENT L. BRODERICK, District Judge.

I. Introduction

Plaintiff, the Commodity Futures Trading Commission ("the Commission"), seeks various forms of relief based on defendants' alleged violations of Sections 4c(b) and 4c(c) of the Commodity Exchange Act, as amended ("the Act"),¹ and Sections 32.7 and 32.11 of the regulations promulgated under the Act.² The case is now before me on the Commission's motion for a preliminary injunction.

II. Conclusion

For the reasons that follow, I grant the Commission's motion.³ Defendants are preliminarily enjoined (a) from accepting money, securities, or property (or extending credit in lieu thereof) from any person in connection with the purchase or sale of any commodity option; (b) from soliciting and accepting orders for the purchase or sale of commodity options and from supervising persons so engaged, and (c) from refusing to produce for inspection by authorized representatives of the Commission records that Commission regulations require be kept. Defendants may continue to service accounts of existing customers in connection with commodity option transactions that were entered into prior to April 24, 1979.⁴

III. Discussion

The Commission is a duly constituted independent regulatory agency of the United States. Since April 21, 1975, the Commission has been charged with the responsibility for administering and enforcing the provisions of the Act and the regulations promulgated under the Act, including those provisions and regulations that pertain to commodity options.⁵

Defendant the American Board of Trade, Inc. ("the Board"), a Delaware corporation with its principal place of business in New York City, is a membership organization that provides, inter alia, an exchange and marketplace for certain commodity options transactions. The other defendants are corporations affiliated with the Board and Arthur N. and Phyllis H. Economou, individuals who are officers of the Board and its corporate affiliates. None of the defendants is presently registered with the Commission in any capacity.⁶

A. Violations of 7 U.S.C. § 6c(b) and Regulation 32.11, and of 7 U.S.C. § 6c(c)

The complaint alleges that defendants, by engaging in commodity option transactions, violate 7 U.S.C. § 6c(b) and Regulation 32.11, and 7 U.S.C. § 6c(c).

7 U.S.C. § 6c(a), which is referred to in 7 U.S.C. § 6c(b), provides in pertinent part:

Prohibited transactions—Commodities specifically listed

(a) It shall be unlawful for any person to offer to enter into, enter into, or confirm the execution of, any transaction involving any commodity, which is or may be used for (1) hedging any transaction in interstate commerce in such commodity or the products or byproducts thereof, or (2) determining the price basis of any such transaction in interstate commerce in such commodity, or (3) delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof—

* * * * * *

(B) if such transaction involves any commodity specifically set forth in section 2 of this title, prior to the enactment of the Commodity Futures Trading Commission Act of 1974, and if such transaction is of the character of, or is commonly known to the trade as, an "option", . . .⁷

Thus 7 U.S.C. § 6c(a) flatly prohibits option transactions with respect to certain designated commodities,⁸ not including those commodities to which defendants' options pertain.

7 U.S.C. § 6c(b) provides in pertinent part:

Commodities regulated but not specifically listed

(b) No person shall offer to enter into, enter into, or confirm the execution of, any transaction subject to the provisions of subsection (a) of this section involving any commodity regulated under this chapter, but not specifically set forth in section 2 of this title, prior to the enactment of the Commodity Futures Trading Commission Act of 1974, which is of the character of, or is commonly known to the trade as, an "option", . . ., contrary to any rule, regulation, or order of the Commission prohibiting any such transaction . . ..⁹

Thus 7 U.S.C. § 6c(b) authorizes the Commission to promulgate regulations prohibiting options with respect to all commodities regulated under the Act other than those to which 7 U.S.C. § 6c(a) pertains.

Under the Act the word "commodity" is defined to mean not only certain enumerated goods and articles such as "wheat, cotton," etc., but also "all other goods and articles, except onions . . .," and "all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in."¹⁰ The options dealt in on the Board pertain to silver bullion, silver coins, gold bullion, platinum, copper, and plywood, and to foreign currencies such as the Swiss franc and the German mark, all of which are commodities encompassed within the statutory definition.¹¹

Regulation 32.11, promulgated by the Commission pursuant to 7 U.S.C. § 6c(b), prohibits the purchase and sale of most commodity options in the United States. It provides in pertinent part:

Notwithstanding any other provision of this Part 32, it shall be unlawful on and after June 1, 1978, until further rule, regulation or order of the Commission, for any person to solicit or accept orders for, or to accept money, securities or property in connection with, the purchase or sale of any commodity option, or to supervise any person or persons so engaged.

7 U.S.C. § 6c(c), which was enacted as a part of the "Futures Trading Act of 1978,"¹² confirmed the prohibition that had been effected by Regulation 32.11. 7 U.S.C. § 6c(c) reads in pertinent part:

Commodity option transaction; conditions ending prohibition; excepted persons

(c) Notwithstanding the provisions of subsection (b) of this section, no person may, after the enactment of the Futures Trading Act of 1978, offer to enter into, enter into, or confirm the execution of any commodity option transaction involving any commodity regulated under this chapter but not specifically set forth in section 2 of this title prior to the enactment of the Commodity Futures Trading Commission Act of 1974 . . ..¹³

Defendants concede that they engage in commodity option transactions; that they are not registered with the Commission; and that they have not applied for an exemption from the Act's prohibition of options transactions. They take the position that, on two bases, some or all of the transactions in which they engage are not within the scope of the statutory and regulatory prohibition. They argue that the Act does not apply to options unless those options pertain to commodity futures contracts; and they also argue that the Act does not apply to options pertaining to foreign currency.

Both contentions by defendants are grounded in certain language contained in Section 2(a) of the Act, 7 U.S.C. § 2, an analysis of portions of which becomes necessary.

7 U.S.C. § 2 is entitled "Definitions".

It defines "contract of sale" to include "sales, agreements of sale, and agreements to sell."

It defines "commodity" as meaning various specified products such as wheat, cotton, rice, livestock products, frozen concentrated orange juice "and all other goods and articles, except onions . . ., and all services, rights and interests in which contracts for future delivery are presently or in the future dealt in: . . ."

It provides exclusive jurisdiction to the Commission with respect to accounts, agreements and transactions involving contracts of sale of a commodity for future delivery, including, under "agreements," "any transaction which is of the character of, or is commonly known to the trade as, an `option.'"

Chapter 1 of U.S.C. Title 7, which includes 7 U.S.C. § 2, pertains to "Commodity Exchanges." 7 U.S.C. § 2 also provides that nothing in Chapter 1 "shall be deemed to govern or in any way be applicable to transactions in foreign currency, . . ., unless such transactions involve the sale thereof for future delivery conducted on a board of trade."

Defendant Arthur N. Economou apparently relies on certain of this language in 7 U.S.C. § 2 as support for his contention that the Act pertains only to options and other transactions involving commodity futures. He notes that defendants' options transactions are based on spot and cash markets and are not options transactions based on commodity futures contracts, and he urges the conclusion that defendants' options transactions are outside the scope of the Act.

This argument apparently stems from a misapprehension of the definition of "commodity" in 7 U.S.C. § 2. That definition is broad indeed—in addition to specified products it includes "all other goods and articles" and "all services, rights and interests in which contracts for future delivery are presently or in the future dealt in: . ." The reference to futures contracts in the statutory definition of "commodity" is descriptive and not limiting. The definition of "commodity" contained in 7 U.S.C. § 2 is applicable for purposes of 7 U.S.C. § 6c, and there is nothing in either 7 U.S.C. § 2 or 7 U.S.C. § 6c that limits the applicability of any part of 7 U.S.C. § 6c to options that pertain to contracts of sale of a commodity for future delivery. Every one of the options bought and sold on the Board pertains to a commodity with respect to which contracts for future delivery are traded on a contract market. Se...