Morris v. Commodity Futures Trading Com'n

• Decision Date: 04 December 1992
• Docket Number: No. 91-70427,91-70427
• Citation: 980 F.2d 1289
• Parties: Robert D. MORRIS, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, Respondent, Stotler and Company; S. Bruce Pattison; Stephen Greenfield, Intervenors.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1289

980 F.2d 1289

Robert D. MORRIS, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, Respondent Stotler and Company; S. Bruce Pattison; Stephen Greenfield, Intervenors.

No. 91-70427.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 3, 1992.

Decided Dec. 4, 1992.

Frank N. Masino, Morris, Taylor, Hays & Higaki, San Francisco, Cal., for petitioner.

Kathleen A. McDonough, Attorney, Commodity Futures Trading Com'n, Washington, D.C., for respondent.

Jeffry M. Henderson, Henderson & Becker, Chicago, Ill., for intervenors.

Appeal from the Commodity Futures Trading Commission.

Before: GOODWIN, FARRIS, and PREGERSON, Circuit Judges.

GOODWIN, Circuit Judge:

Petitioner Robert D. Morris ("Morris") appeals the ruling of the Commodity Futures Trading Commission ("CFTC") reversing the initial decision of an Administrative Law Judge ("ALJ") which had awarded Morris $185,500.00 in damages for his reparations complaint against Respondents Stotler & Co., Stephen D. Greenfield, and Bruce Pattison (collectively "Respondents") for fraudulent inducement, unauthorized trading, churning and failure to supervise. Morris challenges the validity of the CFTC's ruling under the Administrative Procedures Act (A.P.A.), and the CFTC's findings that he failed to sustain his fraudulent inducement and churning claims. We affirm the CFTC's ruling.

I. BACKGROUND

In 1983, Morris, a physician, was solicited by Respondent Stephen D. Greenfield, an employee of Respondent Bruce Pattison's investment company, to open a commodity futures account with Respondent Stotler & Co. Even though he had previously lost approximately $200,000.00 trading precious metals, Morris agreed to open a non-discretionary futures trading account at Stotler & Co., with Greenfield acting as his account executive and Pattison supervising Greenfield's handling of the account. The activity in Morris' account involved trades in silver, gold and S & P stock index futures contracts. Morris lost more than $185,500.00, approximately $140,500.00 in trading losses and $45,000.00 in commissions over an eight month period. A few months after closing the account, Morris filed a reparations complaint with the CFTC alleging that Respondents fraudulently induced him into opening the account and then engaged in unauthorized trading, churning and failure to supervise the account.

ALJ George A. Painter issued an initial decision finding in favor of Morris and awarding damages of $185,500.00 plus interest. On appeal, the CFTC reversed the ALJ's findings of liability and dismissed Morris' complaint. Criticizing the "overall soundness" of the ALJ's factual determinations due to the nature and frequency of his errors, the CFTC decided to set aside its normal policy of deference in reviewing the decision of the ALJ. The CFTC found that the ALJ's misplaced preoccupation "with suspicious circumstances tangential to the dispute raised by the parties materially skewed his assessment of the parties' credibility." In explaining its decision to engage in an independent review of the record, the CFTC wrote:

The ALJ's abuse of discretion in considering legal issues that were either never raised or were raised and subsequently dropped mandates vacation of findings related to these issues. Moreover, the ALJ's assessment of the facts material to Dr. Morris' claims is so intertwined with his consideration of irrelevant issues that we cannot say with confidence that he weighed the evidence in a reliable manner. Our skepticism is compounded by the judge's decision to venture significantly beyond the record, drawing inferences based on pure conjecture.

In the portions of its ruling relevant to this appeal, the CFTC concluded that (1) Morris' fraudulent inducement claim was not supported by the evidence, primarily because he had waived his right to challenge Greenfield's registration status, ¹ and (2) Morris' churning claim could not be sustained because he failed to establish that Greenfield had de facto control over the trading in his account.

II. STANDARD OF REVIEW

On appeal to this court, the factual findings of the CFTC are conclusive "if supported by the weight of evidence." 7 U.S.C. § 9. This circuit interprets the "weight of the evidence" standard to be equivalent to a preponderance of the evidence test. Dohmen-Ramirez v. CFTC, 837 F.2d 847, 856 (9th Cir.1988). We do not mechanically reweigh the evidence to ascertain which way it "preponderates," however, but instead " 'review the record with the purpose of determining whether the finder of the 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 his findings.' " Haltmier v. CFTC, 554 F.2d 556, 560 (2d Cir.1977) (quoting Great Western Food Distribs., Inc. v. Brannan, 201 F.2d 476, 479-80 (7th Cir.1953); Cargill, Inc. v. Hardin, 452 F.2d 1154, 1163-64 (8th Cir.1971), cert. denied, 406 U.S. 932, 92 S.Ct. 1770, 32 L.Ed.2d 135 (1972)); see also Dohmen-Ramirez, 837 F.2d at 856.

It is "the decision of the Commission, not that of the ALJ, that is subject to judicial review." Drexel Burnham Lambert v. CFTC, 850 F.2d 742, 747 (D.C.Cir.1988). "[W]hen, as in the instant case, the Commission and an ALJ disagree on factual inferences to be drawn from the record, the Supreme Court has told us that the question to be decided is not whether the agency has 'erred' in 'overruling' the ALJ's findings, but whether its own findings are reasonably supported on the entire record." Id. Still, while we review the decision of the CFTC, the ALJ's decision is not to be ignored; this court may review the ALJ's findings as part of the record to determine if the CFTC's decision is supported by the weight of the evidence. See Bosma v. Department of Agric., 754 F.2d 804, 808 (9th Cir.1984). Agency findings which run counter to those of the ALJ "are given less weight than they would otherwise receive." Saavedra v. Donovan, 700 F.2d 496, 498 (9th Cir.1983); Bosma, 754 F.2d at 808 (agency's findings will be scrutinized more critically if they contradict those of the ALJ). This is especially true when the issue involves the determination of witness credibility, since the ALJ has the opportunity to observe the witnesses' demeanors, and is in a better position to judge certain facts. Id.; see also Dohmen-Ramirez, 837 F.2d at 856.

As to the CFTC's application of law to the facts, two standards appear to coexist: one involving great deference to the agency's conclusions under a reasonableness or rational basis standard of review, and the other involving far less deference and more probing judicial scrutiny under a type of de novo review. See Maloley v. R.J. O'Brien & Assocs., Inc., 819 F.2d 1435, 1440-41 (8th Cir.1987). In determining which of the two levels of scrutiny should be applied, courts generally look to (a) the nature of the question to be decided, and (b) a comparison of the respective qualifications and competence of the decisionmakers at issue. Id. Where the question to be decided involves matters of particular expertise of the agency, the deferential standard should be applied. See CFTC v. P.I.E., Inc., 853 F.2d 721, 724 (9th Cir.1988) (great deference applied regarding CFTC's definition of a "leverage contract"). But judicial deference is not necessarily warranted where courts have experience in the area and are fully competent to decide the issue. See Maloley, 819 F.2d at 1441 (no reason for judicial deference where question falls outside the area generally entrusted to the agency); Hi-Craft Clothing Co. v. NLRB, 660 F.2d 910, 915 (3d Cir.1981) (judicial deference not required in areas where "the courts have special competence, i.e., the common law or the constitutional law"). In those situations, the more probing de novo standard is appropriate.

III. VALIDITY OF THE CFTC's RULING UNDER THE A.P.A.

At the outset, we reject Morris' argument that the CFTC's order was invalid under Section 557(c) of the A.P.A. Essentially, Morris claims that because only four of the five CFTC commissioners participated in the decision in his case, and because Commissioner Hinemann, one of the three commissioners in the majority, concurred only in the result without providing a written statement of his position, only two of the five-person CFTC articulated their rationale for reversing the decision and voted to reverse.

Section 557(c) provides in relevant part: "All decisions ... shall include a statement of (A) findings and conclusions, and the reasons or basis therefor, on all the material issues of fact, law, or discretion presented on the record...." 5 U.S.C. § 557(c). Despite Morris' broad citation to section 557, the A.P.A. does not require that each member of an agency articulate his particular view on each matter. See Public Serv. Comm'n v. Federal Power Comm'n, 543 F.2d 757, 777 (D.C.Cir.1974) ("[I]n each instance, what counted in the definition of agency action was the vote rather than the individual view."). Here, all that was required was that three of the four members of the CFTC participate in the case and agree to reverse the decision of the ALJ. See FTC v. Flotill Prods., Inc., 389 U.S. 179, 183-84, 88 S.Ct. 401, 404, 19 L.Ed.2d 398 (1967) (stating the general rule that "a majority of a quorum constituted of a simple majority of a collective body is empowered to act for the body."). That is precisely what occurred: Chairman Gramm, and Commissioners Albrecht and Hinemann agreed to reverse, while Commissioner West dissented and Commissioner Bair did not participate. Morris ignores the fact that Commissioner Hinemann did vote to "concur in the result"--that result being reversal of the ALJ's ruling.

The majority opinion sufficiently articulated the reasons for the CFTC's reversal of the ALJ's initial decision. The mere fact that Commissioner Hinemann chose to concur separately does...