67 F.3d 766 (9th Cir. 1995), 93-16961, Commodity Futures Trading Com'n v. Noble Metals Intern., Inc.

Docket Nº:93-16961, 93-17285, 93-17291 and 93-17361.
Citation:67 F.3d 766
Party Name:95 Cal. Daily Op. Serv. 7490, 95 Daily Journal D.A.R. 12,869 COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. NOBLE METALS INTERNATIONAL, INC., Moorgate Ltd., et al., Defendants-Appellants. COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. NOBLE METALS INTERNATIONAL, INC., Defendant, and Richard Schulze, Defendant-Appellant.
Case Date:September 26, 1995
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 766

67 F.3d 766 (9th Cir. 1995)

95 Cal. Daily Op. Serv. 7490,

95 Daily Journal D.A.R. 12,869

COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee,

v.

NOBLE METALS INTERNATIONAL, INC., Moorgate Ltd., et al.,

Defendants-Appellants.

COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee,

v.

NOBLE METALS INTERNATIONAL, INC., Defendant,

and

Richard Schulze, Defendant-Appellant.

COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee,

v.

NOBLE METALS INTERNATIONAL, INC., Defendant,

and

Richard D. Portaro, Jr., Defendant-Appellant.

COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee,

v.

NOBLE METALS INTERNATIONAL, INC., Defendant,

and

Moorgate Ltd., Defendant-Appellant.

Nos. 93-16961, 93-17285, 93-17291 and 93-17361.

United States Court of Appeals, Ninth Circuit

September 26, 1995

Argued and Submitted Feb. 14, 1995.

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[Copyrighted Material Omitted]

Page 768

Richard Schulze, Chicago, Illinois, pro se.

Richard Portaro, Jr., Washington, DC, pro se.

John A. Field III, McLean, Virginia, for appellants.

Jeffrey S. Holik, Assistant General Counsel, Washington, DC, for appellees.

Appeals from the United States District Court for the District of Nevada.

Before: REINHARDT, THOMPSON and KLEINFELD, Circuit Judges.

Opinion by Judge THOMPSON; Partial Dissent by Judge REINHARDT.

DAVID R. THOMPSON, Circuit Judge:

Noble Metals International, Inc.; Moorgate Ltd.; Richard Schulze, a principal of Moorgate and assistant secretary of Noble; and Richard Portaro, Jr., Moorgate's former sales manager, (collectively defendants) appeal the district court's grant of summary judgment in favor of the Commodity Futures Trading Commission (the CFTC or the Commission). The district court held that the defendants violated section 4(a) of the Commodity Exchange Act (the CEA or the Act), 7 U.S.C. Sec. 6(a) (1988), by offering and selling to the public illegal "off-exchange" futures contracts. The district court also held the defendants committed fraud in connection with such sales, in violation of section 4b of the Act, 7 U.S.C. Sec. 6b (1988).

The defendants contend the contracts which were sold to the public were not futures contracts, but rather cash forward contracts, which are excluded from the CFTC's jurisdiction. Noble and Moorgate further contend the district court erred in prohibiting payment of attorney fees from their frozen assets. 1

In addition to joining in Noble's and Moorgate's arguments, the individual defendants, Schulze and Portaro, offer additional arguments of their own. Schulze argues he is entitled to the defenses of estoppel, laches and statute of limitations. We have examined Schulze's individual arguments and conclude they are meritless.

Portaro argues the district court erred in granting summary judgment against him under section 4(a) of the Act, because he neither created nor maintained the contracts, and relied in good faith on legal opinions that the contracts complied with the Act. He also argues the district court erred in granting

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summary judgment against him under section 4b of the Act, because genuine issues of material fact exist as to whether he had the necessary intent to defraud.

We affirm the district court's grant of summary judgment against all of the defendants on the section 4(a) count, and against all of the defendants except Portaro on the section 4b count. We also affirm the district court's denial of the request for payment of attorney fees from Noble's and Moorgate's frozen assets, and the district court's permanent injunction.

FACTS

Beginning in November 1989, Noble and Moorgate offered and sold contracts for the purchase and sale of precious metals to members of the general public under a program known as the "Forward Delivery Program." For a 15% "administrative fee," Forward Delivery Program customers obtained the right and the obligation to make or take delivery of specified quantities of precious metals at a price agreed upon at the time of formation of the Forward Delivery Program contract. After contacting a customer, Noble's and Moorgate's salespeople would send out a package of documents, including "Confirmation of Purchase/Sale" and "Terms and Conditions of Purchase and Sale." These documents described the program in pertinent part:

The administrative fee covers a two year period commencing on the date the order is placed. Customer at his election and upon providing notice to NOBLE may take or make delivery at anytime during said period. If Customer does not elect to take or make delivery within the initial two year period, Customer, upon payment of ... additional administrative fee[s] [may extend the delivery obligation by three years].... ALL CUSTOMERS ARE REQUIRED TO TAKE OR MAKE DELIVERY OF THE MERCHANDISE CONTRACTED. Delivery and transfer of title in return for payment are of the essence in the Extended Delivery Program. Prior to the delivery date, Customer must provide payment in full of the entire purchase price due to NOBLE or deliver acceptable hallmarked bullion as specified, as the case may be. This transaction cannot be liquidated through an offset.

Noble and Moorgate arranged for certain companies to act as "third-party agents" for the receipt and delivery of metals on behalf of their customers. Under this arrangement, a customer would receive legal title in the form of an invoice when he remitted the full purchase price. Instead of taking physical delivery, however, the customer would contract for the third party to receive, and then to sell, the metal. As a practical matter no actual metal would change hands; the third party would simply sell the metal back to Noble in a paper transaction. The third party would then receive a percentage fee, and the customer would receive the proceeds from the sale.

Noble and Moorgate continued to offer their Forward Delivery Program to customers until September 1991. In January 1992, the CFTC filed its complaint in this case. The CFTC sought injunctive and ancillary equitable relief, including a temporary restraining order, preliminary and permanent injunctions, a freeze of the defendants' assets, an accounting, disgorgement, restitution, and the appointment of a receiver.

On May 11, 1993, the district court issued an order adopting a report and recommendation of the magistrate judge that sanctions be imposed on Noble and Moorgate for failure to comply with certain discovery orders. The Commission had served Noble and Moorgate with notices of depositions pursuant to Federal Rule of Civil Procedure (Rule) 30(b)(6), scheduling depositions for July 8, 1992. On the deposition date, only defense counsel appeared because Noble and Moorgate had failed to designate any deposition representative. Their counsel assured the CFTC that appropriate designations would be made, and the depositions were rescheduled. At the next scheduled deposition date, Schulze, a principal officer of Noble, appeared on behalf of Noble and Moorgate. He invoked his Fifth Amendment privilege against self-incrimination, and refused to answer any relevant questions.

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In ruling on the Commission's subsequent motion to compel, the magistrate judge found Noble and Moorgate had representatives available to them who would not invoke their Fifth Amendment privilege and that Noble and Moorgate had not made a good faith effort to locate a suitable representative. The magistrate judge then imposed a $500 sanction, and ordered the corporations to "designate a person to represent them, pursuant to Fed.R.Civ.P. 30(b)(6), who will not invoke the fifth amendment privilege." (emphasis added).

The sanction was never paid. Rather than designate an appropriate representative, seek reconsideration of the order, or seek a protective order, Noble and Moorgate merely provided a list of persons who, for various reasons, would not testify. They then designated Schulze as their representative, knowing he would invoke the privilege against self-incrimination.

The Commission moved for sanctions in January 1993. In response, Noble and Moorgate for the first time sought a protective order. After receiving the pleadings, the magistrate judge ordered the corporations to explain "how responding to the area of inquiry would place either Defendant in danger of self-incrimination." Neither Noble nor Moorgate responded. 2 Based on its adoption of the magistrate judge's findings, and pursuant to Rule 37(b)(2)(A), the district court ruled that all allegations of the complaint would be established as true against Noble and Moorgate.

The court granted a temporary restraining order and later issued a preliminary injunction. Both sides moved for summary judgment. The district court granted summary judgment in favor of the CFTC, and denied the defendants' motion for summary judgment. The district court also issued a permanent injunction against Noble and Schulze, appointed a permanent receiver over Noble's and Moorgate's already-frozen assets, and ordered the individual defendants to disgorge profits made from the sale of the Forward Delivery Program contracts. This appeal by Noble, Moorgate, Portaro and Schulze followed. 3

DISCUSSION

  1. Summary Judgment

    1. Against Noble and Moorgate

    In granting summary judgment against Noble and Moorgate, the district court relied on the allegations of the complaint which it accepted as established. It did this pursuant to the sanction it had imposed for violation of the court's discovery order. On appeal, Noble and Moorgate contend the district court abused its discretion by imposing such a harsh sanction.

    Rule 37(b)(2) provides in pertinent part:

    (2) Sanctions by Court in Which Action is Pending.

    If a...

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