Cftc v. Sterling Trading Group, Inc., Case No. 04-21346-CIV.
| Decision Date | 20 March 2009 |
| Docket Number | Case No. 04-21346-CIV. |
| Citation | 605 F.Supp.2d 1245 |
| Parties | COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. STERLING TRADING GROUP, INC., Universal FX, Inc., QIX, Inc., STG Global Trading, Inc., Graystone Browne Financial, Inc., Joseph Arsenault, and Andrew Stern, Defendants. |
| Court | U.S. District Court — Southern District of Florida |
Christine M. Ryall, Eugene Smith, Ghassan Hitti, Peter M. Haas, Commodity Futures Trading Commission, Office of General Counsel, Washington, DC, for Plaintiff.
Christopher John King, Robert Lawrence Bonner, Homer Bonner, P.A., Miami, FL, Jeffrey S. Rosen, Cozen O'Connor, Washington, DC, David J. Stagman, Michael J. Tiffany, Ted S. Helwig, Katten Muchin Rosenman LLP, Chicago, IL, for Defendants.
ORDER ADOPTING REPORTS OF MAGISTRATE JUDGE (dkt # 270, 271, 273); DENYING PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION (dkt # 3); GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS (dkt # 159); GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT (dkt # 202)
THIS CAUSE came before the Court on the Magistrate Judge's Report and Recommendation on Plaintiff Commodity Futures Trading Commission's ("CFTC") Motion for Preliminary Injunction (dkt # 270) filed on July 23, 2007; Report and Recommendation on Defendants' Motion to Dismiss (dkt # 271) filed on July 24, 2007; and Report and Recommendation on the CFTC's Motion for Summary Judgment (dkt # 273) filed on July 30, 2007. The CFTC filed its Objections to the Magistrate Judge's Reports (dkt # 279) on August 22, 2007 and the Defendants filed their Response to the CFTC's Objections (dkt # 284) on September 25, 2007. The Defendants filed their Objections to the Magistrate Judge's Reports (dkt # 278) on August 22, 2007, the CFTC filed its Response to the Defendants' Objections (dkt # 283) on September 24, 2007, and Defendants filed a Reply (dkt # 285) on October 4, 2007.
UPON CONSIDERATION of Magistrate Judge Simonton's Reports and Recommendations, after a de novo review of the record, and being otherwise fully advised in the premises, the Court enters the following Order.
In the interests of brevity, the Court adopts by reference the factual background laid out by the Magistrate Judge in her Report on the CFTC's Motion for Preliminary Injunction (dkt # 270 at 1270-90) except as objected to by the Parties as noted herein.
On June 7, 2004, the CFTC filed a fourcount Complaint alleging violations of the Commodities Exchange Act ("CEA"), as amended by the Commodities Futures Modernization Act of 2000 ("CFMA"), against Defendants Sterling Trading Group, Inc. ("Sterling"), Universal FX, Inc. ("UFX"), STG Global Trading, Inc. ("STG"), QIX, Inc. ("QIX"), Graystone Browne Financial, Inc. ("Graystone"), Joseph Arsenault and Andrew Stern (collectively, "Defendants"). (dkt # 1.) On the same day, the CFTC filed a Motion for Preliminary Injunction seeking injunctive relief stemming from Defendants alleged violations of the CEA. (dkt # 3.) The Motion for Preliminary Injunction was referred to Magistrate Judge Simonton. (dkt # 14.) The Motion for Preliminary Injunction was fully briefed, an evidentiary hearing was held, and the Magistrate Judge wrote a Report recommending that the Motion be denied. (dkt # 270.)
On April 15, 2005 the CFTC filed a five-count Amended Complaint against Defendants.1 (dkt # 151.) The Amended Complaint concerns allegedly fraudulent foreign currency ("forex") transactions involving Defendants. The Amended Complaint divides the allegedly fraudulent and illegal activity into two "phases," based on the time period of the forex transactions and the Defendants involved. The CFTC alleges that during Phase I of the operations, which occurred between July of 2002 and August of 2003, Sterling, controlled by Arsenault, used misleading radio advertisements; high-pressure, misleading telemarketing sales tactics; false and misleading account-opening documents; and other deceptive practices to fraudulently solicit retail customers to engage in foreign currency futures transactions with UFX, which was controlled by Stern. The Amended Complaint also alleges that these transactions were illegal since UFX was not a proper counterparty to the transactions. (Amended Complaint ¶¶ 20-77.)
The Amended Complaint also alleges that during Phase II of the operations, which occurred between August of 2003 and June 7, 2004, Graystone and STG, under the control of Arsenault, solicited retail customers to enter into foreign currency options transactions with QIX, which was controlled by Stern. The Amended Complaint alleges that Graystone and STG used false and misleading sales solicitation materials, high-pressure and deceptive sales tactics, and failed to provide access to account information regarding these transactions. The Amended Complaint also alleges that these transactions were illegal since QIX was not a proper counter-party to the transactions (Amended Complaint ¶¶ 77-108).
Defendants filed a joint Motion to Dismiss the Amended Complaint on May 13, 2005. (dkt # 159.) The Motion to Dismiss was referred to Magistrate Judge Simonton. (dkt # 257.) The Motion to Dismiss was fully briefed, and the Magistrate Judge wrote a Report recommending that the Motion be granted as to Counts I, III, and part of Count IV of the Amended Complaint, and otherwise denied. (dkt # 271.) The CFTC filed a Motion for Summary Judgment on January 3, 2006. (dkt # 202.) The Motion for Summary Judgment was referred to Magistrate Judge Simon. (dkt # 257.) The Motion for Summary Judgment was fully briefed, and the Magistrate Judge wrote a Report recommending that summary judgment be granted as to liability on Count V of the Amended Complaint, and otherwise denied. (dkt # 273.) Prior to writing her Reports, the Magistrate Judge held five days of evidentiary hearings.
In her Report on the CFTC's Motion for Preliminary Injunction, the Magistrate Judge began by discussing the CFTC's jurisdiction under the CEA. The Magistrate Judge found that UFX and QIX are not statutorily exempt as counterparties under the CEA. Accordingly, UFX and QIX are subject to the CFTC's jurisdiction with respect to all provisions of the CEA. The Magistrate Judge also found that the CFTC has the authority to enforce all regulations existing at the time of the CFMA's enactment, including regulations prohibiting off-exchange transactions and those governing principal/agent and control person liability.
The Magistrate Judge also found that the Seventh Circuit's opinion in CFTC v. Zelener, 373 F.3d 861 (7th Cir.2004), provides the proper standard for determining whether the Phase I transactions were futures contracts (over which the CFTC has jurisdiction) or spot transactions (over which the CFTC does not have jurisdiction). The Magistrate Judge found that under Zelener, the key consideration in identifying a futures contract is its fungibility. The Magistrate Judge also noted that the Zelener Court had expressly rejected the CFTC's argument that its interpretation of the term "futures contract" deserves deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Applying the Zelener standard to the Phase I transactions, the Magistrate Judge determined that the Phase I transactions were spot transactions not subject to the CFTC's jurisdiction. Accordingly, the Magistrate Judge held that Counts I and II of the Complaint, as well as that part of Count III which relates to UFX, cannot support injunctive relief.
Next, the Magistrate Judge rejected the CFTC's argument that QIX falsely represented that it was a registrant under the Act, and falsely represented, in connection with the handling of orders for foreign currency options, that the options would be executed by or through a member of a registered entity. The Magistrate Judge found that to the extent that QIX made initial misrepresentations, the misrepresentations were promptly corrected. In addition, QIX has ceased doing business, and there is no likelihood that it will resume business. Therefore, to the extent that the CFTC has not abandoned its argument by failing to present it in its posthearing brief, the Magistrate Judge found injunctive relief is not necessary with respect to this alleged violation.
Finally, the Magistrate Judge found that, although 17 C.F.R. § 32.11, the regulation that prohibits off-exchange transactions, applies to QIX's transactions, the totality of the circumstances2 demonstrated that preliminary injunctive relief was not warranted.
In her Report on Defendants' Motion to Dismiss, the Magistrate Judge began by rejecting the CFTC's argument that the Defendants' jurisdictional challenge directly implicates the merits of their claim, and therefore the Court should apply the summary judgment standard in evaluating its jurisdiction. Next, the Magistrate Judge repeated her finding from the Report on the CFTC's Motion for Preliminary Injunction regarding use of the Zelener standard for determining whether the Phase I transactions were futures contracts or spot transactions. As the Magistrate Judge determined that the transactions in Phase I do not fall within the jurisdiction of the CFTC, she recommended that Counts I and III of the Complaint, as well as that part of Count IV which relates to UFX, be dismissed. This would result in the dismissal of Defendants Sterling and UFX from this case, but Defendants Arsenault and Stern would remain subject to other counts alleged in the Complaint.
Next, consistent with her finding in the Report on CFTC's Motion for Preliminary Injunction, the Magistrate Judge found that UFX and...
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