Commodity Futures Trading Com'n. v. Baragosh
| Decision Date | 22 January 2002 |
| Docket Number | No. 00-1488.,00-1488. |
| Citation | 278 F.3d 319 |
| Parties | COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. Esfand BARAGOSH, a/k/a Esfandiar Baragosh, Defendant-Appellant, and Noble Wealth Data Information Services, Incorporated, a/k/a Noble Wealth, Incorporated, a/k/a Nobel Wealth, Incorporated; International Advanced Investment(s), Incorporated; Noble Wealth Development, Ltd.; Bull & Bears, Ltd., a/k/a Bull & Bears International Investment, Ltd.; Currex International Corporation, Defendants, v. EBC Fulton Enterprises, Incorporated; Ralph S. Tyler, Parties in Interest. |
| Court | U.S. Court of Appeals — Fourth Circuit |
ARGUED: Matthew G. Kaiser, Student, Appellate Litigation Program, Georgetown University Law Center, Washington, D.C., for Appellant. C. Maria Dill Godel, Office of the General, Commodity Futures Trading Commission, Washington, D.C., for Appellee. ON BRIEF: Steven H. Goldblatt, Director, Wendy M. Marantz, Supervising Attorney, Rita Graham, Student, Darren P. Nicholson, Student, Erin Roth Bohannon, Student, Appellate Litigation Program, Georgetown University Law Center, Washington, D.C., for Appellant. Kirk T. Manhardt, Deputy General, Office of the General, Commodity Futures Trading Commission, Washington, D.C., for Appellee.
Before WILKINSON, Chief Judge, and WILLIAMS and MOTZ, Circuit Judges.
Affirmed in part and vacated and remanded in part by published opinion. Judge MOTZ wrote the opinion, in which Judge WILKINSON joined. Judge WILLIAMS wrote an opinion concurring in part and concurring in the judgment.
In 1998, the Commodity Futures Trading Commission filed a complaint alleging that Esfand Baragosh was a controlling person of Noble Wealth Data Information Services and several related companies (collectively "Noble Wealth"), which operated as a sham futures exchange in violation of the Commodity Exchange Act. See 7 U.S.C.A. § 1 et seq. (West 1999), amended by Commodity Futures Modernization Act (CFMA), Pub.L. No. 106-554, 114 Stat. 2763 (2000).1 The district court entered a default judgment against the companies and subsequently granted summary judgment to the Commission against Baragosh. The court ordered Baragosh to make restitution of $5,264,251 plus pre-and post-judgment interest, and assessed a civil penalty of $1,211,058 plus post-judgment interest against him. CFTC v. Noble Wealth Data Info. Sys., 90 F.Supp.2d 676 (D.Md.2000). The court also issued several injunctions against Baragosh. On appeal, Baragosh argues that the Commission lacked jurisdiction to regulate Noble Wealth's activities, and, in any event, that he was not a controlling person of Noble Wealth and therefore is not liable for Noble Wealth's illegal activities. We affirm in part, and vacate and remand in part.
Noble Wealth, which was incorporated in California in 1993, has never been designated as a contract market for the trading of foreign currency futures contracts nor ever registered with the Commission in any capacity. In 1994, the company opened an office in Atlanta, Georgia, and began to operate the foreign currency trading scam at issue in this suit. In 1996, it expanded the scam by opening an office in Bethesda, Maryland; and it expanded again in 1998, to a third office in Duluth, Georgia.
To lure its victims, Noble Wealth placed "help wanted" ads in general circulation newspapers, claiming that it was "looking for [persons] to be trained to become consultants." Those who replied were invited to visit Noble Wealth, and ultimately encouraged to attend a training program. The program consisted of four sessions, each no longer than two hours, during which videotapes describing investment strategies and the mechanics of trading currency through Noble Wealth were shown. Trainees were told that they could become traders by opening an account of $10,000 or more with Noble Wealth, and were urged to solicit their families and friends to open accounts and become "customers" of Noble Wealth.
To whet the trainees' appetites, Noble Wealth distributed brochures informing them that its traders had earned returns as high as 31.15% in a few days, 192.5% in one month, 906% in three months, and 532% in six months. The brochures explained that these exceptional returns were possible because Noble Wealth had well-placed contacts in the interbank market, allowing it to offer the "best buy-sell quotation for clients all over the world." Assertedly, trades would be placed through Noble Wealth's Hong Kong subsidiary ("Noble Wealth HK"), which the brochures described as a "licensed Financial Brokerage House with daily turnovers in excess of 100 million dollars." Finally, the brochures promised that customer accounts would be overseen by "highly trained investment consultants."
Those who opened an account were entitled to use Noble Wealth's "trading floor," where rows of computer monitors were set up to display current prices of various foreign currencies. When a trader saw a desirable price, he or she completed a Noble Wealth order ticket describing the number of contracts to be bought or sold, the foreign currency to be traded, and the price reflected on the computer monitor. The trader brought the ticket to a Noble Wealth employee (called a "dealer"), who assertedly called Noble Wealth HK for a price quote and then relayed the quote to the trader. If the trader accepted the price, the dealer completed the order ticket by filling in the execution price for the trade. Periodically, Noble Wealth issued detailed account statements, which purported to track commissions, fees, and movements in the value of customer contracts.
This was all an elaborate hoax. Noble Wealth HK was not a licensed brokerage house, and there is no evidence that Noble Wealth actually purchased any foreign currency contracts that corresponded to customer orders. Rather, as Baragosh testified at the hearing in which the Commission sought a preliminary injunction, Noble Wealth's Maryland office passed its traders' currency contract orders to a "head dealer" at Noble Wealth HK who attempted to match customer buy and sell orders every half hour. In other words, Noble Wealth operated a bucket shop, taking the opposite side of a customer's order rather than openly and competitively executing the order on an exchange. Noble Wealth's customers lost the bulk of the funds they invested, which were diverted to pay operating expenses, salaries and commissions, and the personal expenses of Noble Wealth employees.
Baragosh oversaw training and recruitment at the Georgia and Maryland offices. He placed Noble Wealth's "help wanted ads," appeared in its training videos, walked the floor advising the traders on strategy, and exhorted traders to "trade, trade, trade." In return, Baragosh received a personal commission of two dollars for every trade executed at Noble Wealth.
The Commission charged and the district court found that Baragosh and the companies had: (1) misappropriated customer funds and committed fraud in violation of 7 U.S.C. § 6b(a)(i)-(iii); (2) bucketed customer orders in violation of 7 U.S.C. § 6b(a)(iv); and (3) offered to sell commodity futures contracts other than on a board of trade designated as a contract market in violation of 7 U.S.C. § 6(a). Only Baragosh appeals.
Baragosh's principal contention on appeal is that Congress did not intend Noble Wealth's admittedly fraudulent activities to be regulated by the Commodity Exchange Act ("CEA" or "the Act"). Resolving this question requires an understanding of the CEA's history and purpose.
From its enactment in 1936 through all periods material to this case, the CEA required futures contracts on certain commodities to be traded only on government-approved public exchanges, termed "contract markets." See Commodity Exchange Act, Pub.L. No. 74-675, § 4, 49 Stat. 1491, 1492 (1936), amending Grain Futures Act, Pub.L. No. 67-331, § 4, 42 Stat. 998 (1922); compare 7 U.S.C.A. § 6(a) (West 1999) (same). See also Lynn A. Stout, Why the Law Hates Speculators: Regulation and Private Ordering in the Market for OTC Derivatives, 48 Duke L.J. 701, 722 (1999). Contract markets, in turn, were required to conduct business according to standards set forth in the Act. Two of those standards are important in this case.
First, the CEA contained anti-fraud measures designed to protect both small investors and the market as a whole. See CEA § 4b, 49 Stat. at 1493 (). These measures complemented and strengthened existing provisions that already applied to futures trading in grain markets. See Grain Futures Act, § 5(c), 42 Stat. at 1000 ().
Second, the CEA made it unlawful for any member of a contract market to "bucket" an order. See CEA § 4b(D), 49 Stat. at 1493. "Bucketing" is commonly done by a so-called "bucket shop": a business that allows customers to speculate on movements in commodity prices by entering into contracts with the shop rather than by finding a trading partner on the floor of an exchange. See Armando T. Belly, The Derivative Market in Foreign Currencies and the Commodity Exchange Act — The Status of Over-the-Counter Futures Contracts, 71 Tul. L.Rev. 1455, 1473 (1997). In effect, a bucket shop "assumes the risk of the transaction that would be assumed by the market in an exchange transaction." Id. Such shops are viable only so long as they maintain a rough balance...
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