Commodity Futures Trading Comm'n v. Worth Bullion Grp., Inc.

• Decision Date: 29 May 2013
• Docket Number: No. 12–3372.,12–3372.
• Citation: 717 F.3d 545
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff–Appellee, v. WORTH BULLION GROUP, INC., Mintco LLC, and Diamond State Depository LLC, Defendants–Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

717 F.3d 545

COMMODITY FUTURES TRADING COMMISSION, Plaintiff–Appellee,

v.WORTH BULLION GROUP, INC., Mintco LLC, and Diamond State Depository LLC, Defendants–Appellants.

No. 12–3372.

United States Court of Appeals,Seventh Circuit.

Argued Jan. 22, 2013.

Decided May 29, 2013.

Lawrence Demille–Wagman (argued), Attorney, Commodity Futures Trading Commission Office of the General Counsel, Washington, DC, Diane Romaniuk, Attorney, Commodity Futures Trading Commission, Chicago, IL, for Plaintiff–Appellee.

Steven M. Malina, Attorney, Gregory E. Ostfeld (argued), Attorney, Greenberg Traurig, LLP, Peter B. Shaeffer, Attorney, Chicago, IL, Allan Michael Lerner, Attorney, Allan M. Lerner, P.A., Fort Lauderdale, FL, Steven M. Malina, Attorney, for Defendants–Appellants.

Before RIPPLE and ROVNER, Circuit Judges, and BARKER, District Judge. ^*

BARKER, District Judge.

This appeal arises from an action filed by the United States Commodity Futures Trading Commission (“CFTC”) to enforce several administrative subpoenas served on Worth Bullion Group, Inc. (“Worth”), Mintco LLC (“Mintco”), and Diamond State Depository LLC (“DSD”) in connection with the CFTC's investigation into whether appellants are in violation of various sections of the Commodity Exchange Act. 7 U.S.C. § 1 et seq. Worth, Mintco and DSD all conduct business in the precious metals market. Worth is a precious metal wholesaler; Mintco is a precious metals dealer and retailer; and DSD is a depository for storing precious metals. The subpoenas seek documents relating to purchases or sales of precious metals in which appellants were involved.

Appellants handed over the documents requested by the CFTC, but redacted the names and contact information of the individual customers, retailers, and intermediaries, asserting that they (the appellants) are covered by the Right to Financial Privacy Act (“RFPA”), which requires that customers of a “financial institution” be given notice and the opportunity to object before any disclosures are made.¹See12 U.S.C. §§ 3401, 3402(2), 3405. The district court rejected this argument, finding that the RFPA does not apply to appellants, and ordered Worth, Mintco, and DSD to comply in full with the subpoenas. The district court's order is currently stayed pending appeal. On appeal, we consider whether appellants are covered “financial institutions” under the RFPA. For the reasons explained below, we hold that they are not and thus affirm the district court's holding.

I. BACKGROUND

Worth's business is the purchase of precious metals on world markets which it sells to retailers, such as Mintco, who sell the metal(s) to retail customers, who are generally individuals. Worth uses a form agreement with each of its retailers and requires its retailers to use similar agreements with each of their customers in connection with sales made by them. In a typical transaction, after a retailer makes a sale, it submits the order to Worth so that the metal can be transferred from Worth to the customer.

When Worth purchases precious metals, it arranges for the metals to be delivered to DSD, an independent, secure depository. Upon receipt, DSD initially holds the metals in a master account that it maintains for Worth. Worth claims that when one of its retailers makes a sale, delivery to that customer is effected by Worth's instructions to DSD to transfer the amount of metal(s) purchased by the customer from the master account into a subaccount that DSD creates for that customer. DSD then prepares and transmits to the customer a non-negotiable warehouse receipt, which reflects the creation of the customer's subaccount. Under the terms of the agreements Worth maintains with its retailers as well as the terms of the retailers' agreements with their customers, delivery occurs at the point when the metals are transferred to DSD with Worth's instructions to allocate the metals to the customer's account. According to Worth, it always makes delivery to its customers within 28 days.

Most of these precious metals sales are financed, meaning that the customer pays only a portion of the price and borrows the remainder. A significant portion of Worth's business includes financing customers' purchases of precious metals. When it makes a loan to a customer, Worth charges interest on the unpaid balance and takes a security interest in the metals as collateral. Worth also provides monthly account statements to its customers, which include the financing fees payable to Worth. Mintco reportedly arranges financing through Worth's financing program both for customers who purchase Worth's precious metals as well as for customers who purchase other metals. Financing generates approximately 80% of Worth's and 90% of Mintco's business and revenues.

The CFTC is an independent regulatory agency charged by law with the administration and enforcement of the Commodity Exchange Act, as amended, 7 U.S.C. § 1 et seq. (“CEA”). The CEA authorizes the CFTC to bring an enforcement action in federal court against any person who is violating or is about to violate any of the CEA's antifraud provisions. 7 U.S.C. § 13a–1. On November 15, 2011, the CFTC issued a formal order of investigation to determine whether any person, firm, or entity has violated the CEA in connection with retail commodity transactions, including those in which appellants are engaged. In particular, the CFTC investigation is focused on: “whether any person has violated 7 U.S.C. § 6(a), which prohibits, inter alia, the sale of any commodity futures contract unless that sale is conducted on a contract market registered by the [CFTC]; 7 U.S.C. § 6b, which prohibits, inter alia, the use of deception in connection with the sale of any commodity futures contract; and 7 U.S.C. § 15, which prohibits any person from using deception in connection with the sale of any commodity in interstate commerce.” ²

Pursuant to its investigation, the CFTC issued subpoenas to Worth, Mintco, and DSD, seeking documents relating to the time period from July 16, 2011 to the present. The subpoena directed to Worth, issued on November 16, 2011, sought documents and information relating, inter alia, to the opening of accounts for customers; deliveries of metal from Worth to any customer; payments between Worth and any customer; sales or purchases of metals made by Worth for or on behalf of any customer; and Worth's precious metal financing. On December 7, 2011, the CFTC issued a subpoena to Mintco, seeking similar documents and information, including, inter alia, transaction history reports for all of Mintco's customers; documents related to the actual delivery of metal to Mintco's customers; documents related to the storage of metal by anyone on behalf of Mintco's customers; and documents related to loans, credit, or financing provided by Mintco to any customer. The CFTC issued two subpoenas to DSD, one on December 21, 2011, and the other on January 6, 2012. These subpoenas sought information concerning Worth, its retailers, and its customers, including, inter alia, documents regarding Worth's inventory of precious metals; documents related to the storage and physical delivery of precious metals for Worth, any affiliated dealers, and Worth's customers; and documents relating to sales or purchases of precious metals by Worth, its affiliated dealers, and its customers.

Worth, Mintco, and DSD each reportedly produced thousands of pages of responsive documents to the subpoenas, but failed to fully comply with the subpoenas by redacting the names and identifying information of their customers, independent retailers, and delivery intermediaries from the documents.³ The identities of Worth's own suppliers and depositories were not redacted, however, nor were any dates, transaction data financial data, account numbers for customers, or retailers' identification numbers. Worth and Mintco based their decision to redact the identifying information on the relinquished materials on the grounds that, because financing consumers' purchases of metals was an essential part of their businesses, they were “financial institutions” under the RFPA and, as such, the CFTC was required to notify their customers before appellants were permitted to make any disclosures of personal information, and so informed the CFTC. DSD, although not claiming to be a covered financial institution, redacted information on its subpoenaed documents based on its contention that, as an agent of Worth, it is subject to the same restrictions under the RFPA.

The district court held that the RFPA does not apply to appellants because they do not fall within the statute's definition of “financial institution.” Applying the doctrine of noscitur a sociis,⁴ the district court determined that appellants' business was not sufficiently similar to the other entities listed in the RFPA's definition of “financial institution,” and thus, ordered appellants to comply in full with the subpoenas. The district court subsequently stayed its ruling pending appeal, based on appellants' claim that compliance with the subpoenas would cause them irreparable harm.

II. DISCUSSION

The RFPA expressly prohibits “financial institutions” from providing a government agency with access to any customer's financial records unless the customer is first given notice and the opportunity to object. 12 U.S.C. §§ 3402, 3405. The RFPA defines “financial institution” as “any office of a bank, savings bank, card issuer ..., industrial loan company, trust company, savings association, building and loan, or homestead association (including cooperative banks), credit union, or consumer finance institution.” 12 U.S.C. § 3401. Appellants contend that Worth and Mintco qualify as “consumer finance institutions” under this definition. The question of who qualifies as a “consumer finance institution” under the RFPA is a matter of first impression in this circuit.⁵ As an issue of statutory construction, it is a legal question that we con...