Commodity Futures Trading Com'n v. P.I.E., Inc., s. 86-6374
| Decision Date | 08 June 1988 |
| Docket Number | 87-5581,Nos. 86-6374,s. 86-6374 |
| Citation | 853 F.2d 721 |
| Parties | COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. P.I.E., INC. dba: Paragon Investments; Marvin D. Brandon, Defendants- Appellants, and Jack L. Christian, Jr., Defendant. COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. P.I.E., INC. dba: Paragon Investments; Jack L. Christian, Jr., Defendants, and Marvin D. Brandon, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Lee Allen Johnson, Phoenix, Ariz., for defendants-appellants.
Edward S. Geldermann, Asst. Gen. Counsel, Washington, D.C., for plaintiff-appellee.
Appeal from the United States District Court for the Central District of California.
Before TANG, FARRIS and KOZINSKI, Circuit Judges.
BACKGROUND
From January 1985 until July 1986, Paragon Investments offered and sold contracts for the future delivery of precious metals. Paragon solicited orders through advertisements in nationally circulated newspapers, the mails, and phone calls. In doing so, Paragon engaged in various deceptive and fraudulent practices that allowed it to bilk investors out of nearly $500,000 over an eighteen-month span.
After learning of Paragon's activities, the Commodity Futures Trading Commission initiated this action against Paragon and its sole shareholder, Marvin Brandon. The Commission alleged that Paragon was selling commodity futures contracts that could only be sold on or subject to the rules of a Commission-designated market. See 7 U.S.C. Sec. 6 (1982). The Commission also alleged that Paragon had engaged in numerous deceptive and fraudulent practices that were prohibited by the Commodity Exchange Act. See id., Sec. 6b. The district court agreed with the Commission and 1) permanently enjoined Paragon and Brandon from marketing off-exchange futures contracts 2) appointed a permanent equity receiver of all of Paragon's property 3) permanently enjoined Paragon and Brandon from deceiving or defrauding the public in the sale of futures contracts, and 4) ordered Brandon to disgorge $496,495.39 in illegal profits.
On appeal, Paragon and Brandon contend that they were not selling futures contracts, but leverage contracts that could be sold directly to the public. Brandon also contends that even if Paragon had sold futures contracts, the Commodity Exchange Act's prohibition against deceptive and fraudulent practices applied only to sales made on or subject to the rules of a designated market, and not to sales made directly to the public. Finally, Brandon contends that the disgorgement order is improper because it essentially awards a money judgment to the Commission and does not allow Brandon to spend any of his resources for necessary living expenses. We affirm in part and modify the disgorgement order so that Brandon may petition the district court from time to time for ordinary and necessary living expenses.
The Paragon contracts provided a means for investors to speculate in the precious metals market. Customers dealt directly with Paragon, choosing a type and quantity of metal and then deciding whether delivery would be deferred for 90, 180, or 360 days. Paragon set the price by reference to the current market price of the metal for immediate delivery, plus a 3% commission and a surcharge. Customers paid a 15% deposit up front and made margin payments at Paragon's behest if the price of the metal declined during the term of the contract. Customers rarely took delivery of the metal. Instead they sold their rights to the metal back to Paragon, which then settled the customers' respective accounts.
The Paragon contracts can only be classified in one of two ways: they are either futures contracts or leverage contracts. The two are not readily distinguishable. In 1982, for example, the Chairman of the Commodity Futures Trading Commission stated that "differing opinions exist over the nature of leverage contracts and their distinction, if any, from futures contracts even though they are off-exchange instruments." H.R.Rep. No. 565, 97th Cong., 2d Sess., reprinted in 1982 U.S.Code Cong. & Ad.News 3871, 3963. Despite the difficulty in distinguishing the two, Congress amended the Commodity Exchange Act in 1982 to ensure that the Commission would regulate leverage contracts as a separate class of transactions. See H.R.Conf.Rep. No. 964 97th Cong., 2d Sess. 51, reprinted in 1982 U.S.Code Cong. & Ad.News 4055, 4068-69 ().
In amending the Act, however, Congress recognized "the Commission's authority under existing law to define the term[ ] ... leverage contract...." Id. at 4069. In 1984, the Commission determined that one definitional requirement of a leverage contract was that the contract must be for a duration of ten or more years. 49 Fed.Reg. 5498 (1984); 17 C.F.R. Sec. 31.4(w)(1) (1987). Paragon and Brandon agree that the contracts which they sold did not meet this requirement because the contracts provided for delivery of the metals either 90, 180, or 360 days after the contract was executed. They argue, however, that the definition is invalid because it ignores Congress's directive that the definition should be based on ordinary trade usage. We reject the argument.
In June 1983, the Commission solicited comments on its proposed definition of "leverage contract." The proposal included the ten-year durational requirement. 48 Fed.Reg. 28668 (1983). Some commentators objected to the requirement, claiming that it was "inconsistent with the customary practices of the leverage industry and with the legislative history underlying the Commission's authority over leverage contracts." 49 Fed.Reg. 5499 (1984). The Commission disagreed, stating that
as the legislative history and other evidence indicates, leverage contracts as commonly known to the trade have traditionally been long-term contracts of at least [ten years] duration. This view is supported by congressional testimony which emphasized the long-term nature of leverage contracts presented by persons themselves claiming to be involved in the leverage business. (citations omitted).
We give great deference to the Commission's interpretation of the Commodity Exchange Act. Lawrence v. C.F.T.C., 759 F.2d 767, 772 (9th Cir.1985). Because there is some basis for the Commission's position that the durational requirement comports with ordinary trade usage, we decline to invalidate the Commission's definition of "leverage contract." The contracts sold by Paragon therefore cannot be treated as leverage contracts.
We reject the contention that the Commission intended only to regulate a subset of leverage contracts, leaving regulation of contracts of a shorter duration to the states. Congress granted the Commission exclusive jurisdiction over the regulation of leverage contracts and has rejected bills that would have granted the states a regulatory role in this area. See, e.g., S.Rep. No. 384, 97th Cong.2d Sess. 52 (1982). Moreover, the Commission itself never intended to regulate only a subset of leverage contracts. After the Commission adopted the definition of "leverage contract," the Commission stated that
[V]arious instruments which call for the future delivery of commodities and which do not meet the definition of a "leverage contract" as contained in the Commission's interim final leverage regulations, are commodity futures contracts.
Under the Commission's interpretation of the Commodity Exchange Act, there can be no such thing as a leverage contract with a duration of less than ten years. The Paragon contracts therefore were not a subset of leverage contracts left unregulated by the Commission, but futures contracts. Paragon sold the contracts directly to the public instead of on or subject to the rules of a designated market. We affirm the district court's holding that the contracts were sold in violation of 7 U.S.C. Sec. 6 (1982).
The district court found that Paragon and Brandon violated 7 U.S.C. Sec. 6b by defrauding and willfully deceiving customers. Brandon does not challenge the evidentiary bases of these findings. Instead, he argues that even if Paragon sold futures contracts, the version of section 6b in effect at the time of the sales applied only to fraud connected with sales made on designated exchanges, and not to sales made directly to the public. He acknowledges that after the complaint was filed Congress amended section 6b to reach off-exchange sales, but argues that the district court erred by applying the amended version of the provision to him.
In Commodity Futures Trading Comm'n v. Savage, 611 F.2d 270 (9th Cir.1979), we faced a similar situation. During the relevant period in that case, the antifraud provisions of 7 U.S.C. Sec. 6o applied to commodity trading advisors "registered under the Act...." 611 F.2d at 281. The defendant was a trading advisor who had engaged in fraudulent practices but who had not registered under the Act. After the Commission initiated an action against him, Congress amended section 6o to clarify that the provision applied to trading advisors who should have been registered under the Act. Id.
After looking to the legislative history of the 1978 amendments to the Act and the underlying purposes of the Act, we concluded that the unamended version of section 6o applied to Savage.
The fact that Congress deleted "registered under this Act" might suggest that a gap in the law existed prior to amendment. We consider the amendment to be a clarification, however. The purpose of the statute supports this interpretation of congressional intent. It would be anomolous indeed if an advisor could escape the fiduciary duties of section [6o] by avoiding required registration. This would frustrate a principal purpose...
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