Myron v. Hauser

• Decision Date: 17 March 1982
• Docket Number: No. 80-1954,80-1954
• Citation: 673 F.2d 994
• Parties: Robert MYRON, Alan Freeman, Leslie Rosenthal and Richard Mortell, co-partners doing business as Rosenthal & Company, Petitioners, v. Alfred HAUSER, Respondent, Commodity Futures Trading Commission, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 994

673 F.2d 994

Robert MYRON, Alan Freeman, Leslie Rosenthal and Richard Mortell, co-partners doing business as Rosenthal &amp Company, Petitioners, v. Alfred HAUSER, Respondent Commodity Futures Trading Commission, Respondent.

No. 80-1954.

United States Court of Appeals Eighth Circuit.

Submitted June 18, 1981.

Decided March 17, 1982.

Ronald L. Simon, Minneapolis, Minn., for respondent Hauser.

John G. Gaine, Gen. Counsel, Pat G. Nicolette, Deputy Gen. Counsel, Gregory C. Glynn, Associate Gen. Counsel, Mark D. Young, Sp. Counsel, Charles R. Mills, Atty., Commodity Futures Trading Com'n, Washington, D.C., for respondent Commodity Futures Trading Com'n.

L. Clinton Burr, Rosenthal & Co., Chicago, Ill., for petitioners.

Ralph Mantynband, Chicago, Ill., for respondents; Arvey, Hodes, Costello & Burman, Chicago, Ill., of counsel.

Before HENLEY and McMILLIAN, Circuit Judges, and COLLINSON, ^* Senior District Judge.

McMILLIAN, Circuit Judge.

Petitioners Robert Myron, Alan Freeman, Leslie Rosenthal, and Richard Mortell, who do business as partners under the name Rosenthal & Co. (hereinafter collectively referred to as Rosenthal), seek judicial review of a final order of the Commodity Futures Trading Commission (CFTC) pursuant to § 14(g) of the Commodity Futures Trading Commission Act of 1974 (the 1974 Act), 7 U.S.C. § 18(g). The CFTC found that Rosenthal committed fraud in connection with the sale of six London sugar options to Alfred Hauser in 1976 in violation of § 4c(b) of the 1974 Act, 7 U.S.C. § 6c(b), ¹ and CFTC Rule 32.9, 17 C.F.R. § 32.9, ² and awarded Hauser reparations in the amount of $24,592.40 ³ plus interest and $25.00 in filing fees. Hauser v. Rosenthal & Co., CFTC Docket No. R 77-122 (Sept. 26, 1980).

For reversal Rosenthal argues that (1) the reparations procedure established in § 14 of the 1974 Act, 7 U.S.C. § 18, violates the jury trial guarantee of the seventh amendment, (2) the findings of the CFTC are not supported by substantial evidence, (3) the CFTC erroneously failed to give effect to the customer agreement, and (4) violation of the CFTC's antifraud rule requires proof of scienter. ⁴

For the reasons discussed below, we deny the petition for review.

Facts

Rosenthal is registered with the CFTC as a futures commission merchant, § 4d of the 1974 Act, 7 U.S.C. § 6d. In mid-March 1976, Nicholas Nutter, a Rosenthal sales representative, made an unsolicited telephone call to Hauser and urged Hauser to purchase London sugar options. According to the CFTC's findings of fact, Nutter told Hauser that Rosenthal analysts predicted a sharp rise in sugar prices in the immediate future, that sugar prices had risen sharply in 1974, and that London options were a good way to invest in sugar. Nutter did not, however, properly explain the risks or mechanics of commodity options trading, that an option does not represent a true equity position in the commodity, or that Hauser could lose his entire investment if the price of sugar did not reach a certain level (enough to cover the premium and any broker commissions). Nutter's sales pitch was nevertheless successful and in March 1976 Hauser purchased two October 1976 London sugar call options for $7,622.40. At this time Rosenthal sent Hauser a customer agreement form, a customer information form, and a commodity account letter. Hauser signed the forms and mailed them back to Rosenthal.

In late May 1976 Nutter again telephoned Hauser and told him that a slight rise in the price of sugar had resulted in a "credit" of about $1,700 in his account. Nutter did not explain that the $1,700 figure did not represent a profit. In early June 1976 Hauser purchased two December 1976 London sugar options for $8,437.84.

In mid-June 1976 Nutter met with Hauser and again referred to the $1,700 credit in Hauser's account. Nutter also stated that the sugar market was going to rise, that his commission per sale was only $80 or $85, and that great profits could be made with little or no risk by trading options.

In early July 1976 Rosenthal mailed Hauser its brochure explaining the risks and mechanics of trading London commodity options. Hauser apparently did not receive the brochure until sometime in August. The date of Hauser's receipt of the brochure was the subject of some dispute. Rosenthal argued that Hauser had received the brochure before he purchased a third pair of London sugar call options in mid-August. In early August 1976 Nutter again telephoned Hauser and told him that the price of sugar had declined and that his four options were accordingly showing no gain. Nutter urged Hauser to recoup his losses by making another investment. Hauser purchased two October 1977 London sugar call options in late August 1976 for $8,530.16. Hauser testified that he did not receive Rosenthal's commodity options brochure until after he bought the October 1977 options and that it was only after reading the brochure that he realized that he had lost his investment. The options were worthless when they expired.

Hauser filed a reparation complaint with the CFTC on February 11, 1977. § 14 of the 1974 Act, 7 U.S.C. § 18; see generally Rosen, Reparation Proceedings Under the Commodity Exchange Act, 27 Emory L.J. 1006 (1978). Administrative hearings were held before an administrative law judge (ALJ) in June 1978. On January 4, 1979, the ALJ issued an initial decision finding Rosenthal committed fraud in connection with the sale of the six London sugar call options to Hauser in violation of § 4c(b) of the 1974 Act, 7 U.S.C. § 6c(b), and CFTC Rule 32.9, 17 C.F.R. § 32.9, by failing to fully disclose the mechanics, costs and risks of commodity options, by misrepresenting the commissions and fees charged, and by making false and misleading statements about the profit potential and risks involved in trading in London commodity options. The ALJ awarded Hauser reparations in the amount of $24,592.40 plus interest (out-of-pocket loss) and $25.00 in filing fees.

Rosenthal sought CFTC review. On September 26, 1980, the CFTC denied the application for review but modified the award of interest. This petition for review followed.

Commodity Options

The commodities business operates as a marketplace of contracts. The contracts traded are for the purchase, or sale, of specific amounts of a commodity either that have already been produced, or that will be produced in the future and delivered by a specific date. This latter group of contracts are known as "commodity futures." A "commodity option" is a contractual right to buy, or sell, a commodity or commodity future by some specific date at a specified, fixed price, known as the "striking price." ⁵ A contract entitling its owner to purchase the commodity is known as a "call," and a contract entitling its owner to sell is called a "put." In the plainest case, an option is created or "written," by the owner of a commodity or commodity futures contract, who commits himself to sell his goods or contract.

British American Commodity Options Corp. v. Bagley, 552 F.2d 482, 484-85 (2d Cir.) (footnotes omitted), cert. denied, 434 U.S. 938, 98 S.Ct. 427, 54 L.Ed.2d 297 (1977). See generally Lower, The Regulation of Commodity Options, 1978 Duke L.J. 1095 (hereinafter Lower); Symposium: Regulation of Commodity Futures Trading, 27 Emory L.J. 847 (1978); Note, Recent Developments in Commodities Law, 37 Wash. & Lee L.Rev. 986 (1980) (hereinafter Recent Developments).

The purchaser of a commodity option pays a "premium" to acquire the option; the amount of this charge will vary depending on the duration of the option, market conditions at the time of the purchase and mark-ups in price by intermediary dealers. Brokers or dealers commissions and fees are also paid on both the purchase and exercise of the option. A call option can yield a profit to the investor if the underlying commodity's price rises sufficiently to offset the investor's expenditures on the premium and commissions. When such a point is reached, the investor can exercise the option at the strike price (, the price at which the option purchaser is entitled to buy or sell the underlying commodity or commodity futures contract,) and simultaneously sell at the higher market price the commodity or futures contract that has been acquired. Any proceeds realized beyond the amount of the premium and commissions are the investor's profits. Similarly, a put option can be exercised profitably if the price of the underlying commodity has declined enough to offset expenditures when the commodity or a futures contract covering it is purchased at the market price and simultaneously sold at the higher strike price. If price fluctuations in the underlying commodity are only partially sufficient to offset an investor's expenditures, he may nevertheless recoup a portion of his expenses by exercising his option before the expiration date. Of course, if the option is not exercised before it expires, the investor sacrifices his premium and cannot recoup commissions.

CFTC v. Crown Colony Commodity Options, Ltd., 434 F.Supp. 911, 914 n.6 (S.D.N.Y.1977). Due to the size of the premium and commissions charged, considerable favorable market price movement is required in order to produce any profit for the customer. "Since the premium paid is a separate payment and does not constitute a credit against the striking price, an option holder will not break even on his investment unless the price of the underlying commodity or futures contract moves favorably by at least the amount of the premium plus commissions." Lower, 1978 Duke L.J. at 1096 n.3. Conversely,

(i)f adverse price changes occur, the option holder merely fails to exercise his option. Unlike the holder of a futures contract, the option holder bears a risk of loss limited to the amount paid as option premium. This limitation of risk, in fact, is the factor that ... made options very popular with small investors in the 1970s.

Id. at 1097 n.3.

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