Precious Metals Associates, Inc. v. Commodity Futures Trading Commission

• Decision Date: 17 April 1980
• Docket Number: No. 79-1449,79-1449
• Citation: 620 F.2d 900
• Parties: PRECIOUS METALS ASSOCIATES, INC., et al., Petitioners, Appellants, v. COMMODITY FUTURES TRADING COMMISSION, Respondent, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 900

620 F.2d 900

PRECIOUS METALS ASSOCIATES, INC., et al., Petitioners, Appellants, v. COMMODITY FUTURES TRADING COMMISSION, Respondent, Appellee.

No. 79-1449.

United States Court of Appeals,

First Circuit.

Argued Jan. 10, 1980.

Decided April 17, 1980.

Lloyd Kadish, with whom Robert A. W. Boraks, Peter Berman, Kadish & Boraks, Washington, D. C., Davis Franklin, and Franklin, Pearlstein & Passalacqua, Boston, Mass., were on brief, for petitioners, appellants.

John P. Connolly, Atty., Commodity Futures Trading Commission, Washington, D. C., with whom John G. Gaine, Gen. Counsel, Pat G. Nicolette, Deputy Gen. Counsel, Gregory C. Glynn, Associate Gen. Counsel, Nancy A. Petranto and Nancy E. Yanofsky, Attys., Commodity Futures Trading Commission, Washington, D. C., were on brief, for respondent, appellee.

Before ALDRICH, CAMPBELL and BOWNES, Circuit Judges.

BOWNES, Circuit Judge.

This case is before us on the petition of Precious Metals Associates, Inc. (PMA) and John W. Carter to review an order of the Commodity Futures Trading Commission (Commission) requiring appellants to cease and desist from the sale of options in violation of the Commodity Exchange Act (Act), as amended in 1976, Pub.L. 95-405, 92 Stat. 867, 7 U.S.C. §§ 1 et seq., and regulations promulgated thereunder. Our jurisdiction over this direct appeal is based upon 7 U.S.C. §§ 9 and 13b. ¹

PROCEDURAL HISTORY

On November 22, 1978, the Division of Enforcement (Division) of the Commission issued a seven-count complaint alleging that appellants, from June 13 through October, 1978, engaged in the offer and sale of.$1.2 million in investment vehicles known as limited risk forward contracts, LRFs, to approximately two hundred clients and that, because LRFs were options, such solicitations and sales violated the agency-imposed ban on the sale of options which went into effect on June 1, 1978.

Arguing that the Commission and the public would be best served by a speedy resolution of the issues of license revocation and imposition of a cease and desist order, the Division urged that Counts I, II, III, and VII, charging the illegal sale of options and futures, be severed and hearings on those counts expedited. ² The administrative Upon receipt of the complaint on November 27, 1978, PMA moved, in the United States District Court for the District of Massachusetts, for a temporary order restraining the December 4th public hearing. The district court ordered a ten-day stay of proceedings and granted an additional ten-day extension upon the expiration of the initial order. It declined to issue a preliminary injunction, finding that a waiver of the requirement of exhaustion of administrative remedies was not warranted. The hearing was held on February 21, 1978. The ALJ's findings and recommendations were that: (1) appellants did not violate section 4h (7 U.S.C. § 6h) (illegal futures trading); (2) they did violate sections 4c(b) and 4c(c) (7 U.S.C. § 6c(b) and 6c(c)) (illegal option trading); (3) the facts warranted the imposition of a cease and desist order; and (4) PMA's registration as a futures commission merchant and a commodity trading adviser, and the registration of Carter as an associated person should be suspended for six months pursuant to 7 U.S.C. § 6(b). The Commission adopted the ALJ's findings of fact; issued the cease and desist order; but, with two commissioners dissenting, declined to suspend the registration of PMA and Carter. ⁴ This appeal ensued.

                law judge to whom the case was assigned approved the severance and scheduled a public hearing for December 4, 1978.  3 Adjudication of the fraud and misrepresentation charges and resolution of the issues of revocation of trading privileges and civil money damages are being held in abeyance pending the outcome of this case
                

The issues are: (1) whether the regulatory scheme under which appellants are charged is void for vagueness; (2) whether the doctrines of equitable estoppel and/or laches should be applied; (3) whether the procedures invoked by the Commission comported with fundamental fairness; and (4) whether the sanctions imposed by the Commission are to be sustained.

The Commodity Futures Trading Act provides that "the findings of the Commission as to the facts, if supported by the weight of the evidence, shall . . . be conclusive." 7 U.S.C. § 9. Thus, our function on appeal is "to review the record with the purpose of determining whether the finder of fact was justified, i. e., acted reasonably, in concluding that the evidence, including the demeanor of the witnesses, the reasonable inferences drawn therefrom and other pertinent circumstances, supported (its) findings." Great Western Food Distributors, Inc. v. Brannan, 201 F.2d 476, 479-80 (7th Cir.), cert. denied, 345 U.S. 997, 73 S.Ct. 1140, 97 L.Ed. 1404 (1953).

THE FACTS

PMA is a Delaware corporation with its sole office located in Boston, Massachusetts. It is registered with the Commission as a futures commission merchant, commodity trading adviser, and commodity pool operator. Appellant Carter, an associated person within the meaning of 7 U.S.C. § 6k, purchased PMA in June of 1978, after serving as the firm's vice-president of sales and marketing. Carter was a real estate salesperson before entering the commodities field.

PMA engaged in the sale of London commodity options prior to June 1, 1978, the effective date of Commission Rule 32.11 prohibiting traffic in most commodity options. When the ban went into effect, PMA ceased selling options and sought to In late June, 1978, Carter instituted, in his words, an "experimental" LRF program. Shortly thereafter, appellants became engaged in the extensive nationwide offer and sale of LRFs for sugar, coffee, copper, and silver.

find an investment vehicle to offer in place of the banned options. It decided that LRF was that vehicle. Carter's efforts to determine whether LRFs came within the option-ban are the basis of appellants' equitable estoppel and laches claims. He consulted with corporate counsel regarding the legality of LRFs under the Commission's interim rules. Counsel "examined the Act, regulations and interpretive opinions of the CFTC and could find nothing defining LRFs or giving any insight into the definitional elements of commodity options or commodity futures." Appellants' Brief at 11. The attorney then called the office of the Commission's general counsel to inquire about the status of LRFs. The staff attorney to whom PMA's lawyer spoke said that she "personally viewed them as options," but declined to render a formal opinion. PMA's attorney advised Carter by letter of the fruits of his research, concluding that LRFs are option-futures "hybrids." At Carter's request, counsel wrote to the Commission seeking an advisory opinion on the status of LRFs. No reply was made to this letter or to subsequent correspondence of another attorney retained by PMA seeking the same thing.

PMA, prior to Carter's ascendancy, had been plagued by legal problems not relevant to this appeal. During the LRF sales campaign, PMA was embroiled in litigation focusing on prior operating procedures. The Commission attorney handling PMA's other legal problems was aware that PMA was selling LRFs, but did not comment on the program or start proceedings against appellants on LRF grounds at that time.

PMA's sales literature described the LRF as a "hedged contract to buy or sell a specific commodity for a specific price on or before a specific date." The brochure then gave an explanation of the risks involved in an LRF transaction. ⁵ The literature disseminated by PMA prior to June 1, 1978, utilized the same language to describe the risks inherent in option investments. The later brochures merely substituted "LRF" for "option."

The mechanics of "LRFs" and "options" are almost identical. In exchange for a nonrefundable fee, the purchase price, PMA sold a client the right to buy or sell a specified amount of a particular commodity at a fixed (strike) price on or before the predetermined "declaration date." If the commodity's selling price on the "declaration date" exceeded the purchase price of the LRF (or option) plus the "strike price," there would be a profit. ⁶ Loss was limited to the amount of the purchase price. After selling an LRF, PMA, through a Geneva, Switzerland, firm, would buy or sell a commodity futures contract on the appropriate London exchange, hedging its futures position with an off-setting commodity option. The terms of the PMA contract on the London exchange paralleled the terms of the PMA-client contract. PMA, not the individual customer, was the owner of record of the London option contract.

While the LRF program was in effect, the Commission and appellants attempted to work out a settlement prior to institution

of enforcement proceedings. When negotiations broke down, the Commission filed its complaint. At that point, PMA discontinued the LRF campaign which in fact had proved to be less than a smashing financial success.

THE REGULATORY SCHEME

The business of trading contracts for specified amounts of commodities to be sold or bought in the future is an integral component of the American investment scheme. Essentially, two distinct contract forms are involved. A commodity futures contract is an agreement to buy or sell a specified quantum of a specified commodity for a pre-determined price at a specified future date. A commodity option contract, on the other hand, gives a right to buy or sell a specified quantum of a specified commodity for a predetermined price (strike price) at a specified future date. A contract entitling its owner to purchase a commodity is referred to within the industry as a "put"; one authorizing a sale is a "call."

From the beginning, the inherent speculativeness of commodity trading and the absence of government regulation spawned a breeding ground for unscrupulous tactics, manipulation, and irresponsible trading. See S.Rep.No. 93-1131,...