Commodity Futures Trading Com'n v. Frankwell Bullion Ltd.

Decision Date29 October 1996
Docket Number95-17298,Nos. 95-16977,s. 95-16977
Citation99 F.3d 299
Parties, Comm. Fut. L. Rep. P 26,807, 96 Cal. Daily Op. Serv. 7881, 96 Daily Journal D.A.R. 13,081 COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellant, and Commissioner of Corporations of the State of California, Plaintiff, v. FRANKWELL BULLION LIMITED; Frankwell Investment Services Inc.; Maywell Investment Services, Inc.; Frankwell Investment Services (Texas) Inc.; Frankwell Management Service (New York) Inc., Defendants-Appellees. Thomas Taylor, III, Receiver. COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellant, v. FRANKWELL BULLION LIMITED; Frankwell Investment Services Inc.; Maywell Investment Services, Inc.; Frankwell Investment Services (Texas) Inc.; Frankwell Management Service (New York) Inc., Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Jay L. Witkin, Deputy General Counsel, and James T. Kelly, Assistant General Counsel, Commodity Futures Trading Commission, Washington, D.C., for plaintiff-appellant.

Paul S. Schmidtberger and Gary L. Benton, Coudert Brothers, San Francisco, California, for defendants-appellees.

Mark D. Young, Kirkland & Ellis, Washington, DC, James T. Malysiak, Freeman, Freeman & Salzman, Chicago, Illinois, and Kenneth M. Raisler, Sullivan & Cromwell, New York City, for amici.

Appeals from the United States District Court for the Northern District of California, D. Lowell Jensen, District Judge, Presiding. D.C. No. CV-94-02166-DLJ.

Before: CHOY, CANBY and FERNANDEZ, Circuit Judges.

CHOY, Circuit Judge:

Plaintiff-appellant Commodity Futures Trading Commission ("CFTC") appeals the summary judgment granted in favor of defendant-appellee Frankwell Bullion, Ltd. and its affiliates ("Frankwell"). The district court held that Frankwell was exempted from the jurisdiction of the CFTC by the so-called "Treasury Amendment" to the Commodity Exchange Act ("CEA") because it was not a "board of trade" within the meaning of that amendment. We affirm that ruling of the district court.

The CFTC also appeals the district court's imposition of receivership fees upon the CFTC. We affirm that ruling as well.

Factual and Procedural Background

Frankwell Bullion, Ltd., a Hong Kong corporation established in 1987, offers foreign currency transactions to the general U.S. public through several American-based affiliates. Neither Frankwell nor its affiliates have registered with the CFTC nor sought contract market designation. Nor are they subject to the regulatory jurisdiction of the Treasury Department or any federal bank regulatory agency.

Frankwell sold standardized lots of various foreign currencies, each worth approximately $100,000. The customer could open either "long" or "short" positions in these currencies at a price based on the interbank spot market in Hong Kong. Frankwell customers came both from cold-call solicitations of the general public and from relatives, friends and neighbors of sales agents.

Customers paid "initial margin" for each lot, generally $1000 for a day trade or $2000 for an overnight trade, with additional margin required in the event of adverse market conditions. At no time was the customer required to pay full purchase price for the foreign currency. Customers could satisfy their contractual obligations either by entering into an offsetting transaction or by taking or making delivery of the underlying currency, depending on whether the transaction was a purchase or a sale. Profits or losses depended on the difference between the "spot" price at the time a position was opened and the "spot" price when it was closed. Customers did not expect to actually make delivery of the currencies, nor did Frankwell sales agents indicate that delivery was required.

The Frankwell customer agreements did not contain a specific date for liquidation of positions; contracts could be left open for indefinite periods of time. Once a customer established a position, the position would be automatically "rolled-over" to the next day's "spot" price if the customer did not offset or liquidate his position. However, no intervening roll-over transaction was executed, and nothing in the record indicates that any position was formally closed and reestablished. Instead, each position initiated by a customer was closed out only once. Customers paid a carrying charge for each day the contract was left open.

On June 20, 1994, the CFTC filed a motion seeking a temporary restraining order and appointment of a temporary receiver. The complaint alleged that from August 22, 1991, Frankwell violated sections 5 and 6 of the Commodity Exchange Act, 7 U.S.C. §§ 1-15 ("CEA"), by improperly engaging in commodities trades in the foreign currency and precious metals markets. 1

On June 21, 1994, the district court granted the temporary restraining order and imposed a receivership ex parte. On July 12, 1994, the district court denied the request for a preliminary injunction. The district court then dissolved the temporary receivership. On August 14, 1995, the district court granted Frankwell's motion for summary judgment. On October 3, 1995 the district court ordered the CFTC to pay seventy-five percent of the receivership costs of $223,241.71.

I. CFTC Jurisdiction.

The CEA provides that no person shall enter into, or offer to enter into, a transaction involving the sale of a commodity for future delivery, unless it is conducted on or through a "board of trade" designated and regulated by the CFTC as a contract market. 7 U.S.C. § 6.

In addition, the 1974 Treasury Amendment exempts certain foreign currency transactions from the CEA: "Nothing in this chapter shall be deemed to govern or in any way be applicable to transactions in foreign currency ... unless such transactions involve the sale thereof for future delivery conducted on a board of trade." 7 U.S.C. § 2(ii). The district court held that regardless of whether foreign currency transactions are futures or spot trades, 2 they are exempted from CFTC jurisdiction because they are not transactions involving sales on a board of trade. We agree.

We review a grant of summary judgment de novo. Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir.1994).

A. Is Frankwell a "board of trade"?

Frankwell and the CFTC vigorously dispute the meaning of the term "board of trade." The CFTC argues that "board of trade" includes any association selling foreign currency, making the Treasury Amendment very narrow. As a fallback position, the CFTC argues that "board of trade" includes all associations except banks and other sophisticated investors. In other words, it contends that the Treasury Amendment exempts only off-exchange trades between banks and other sophisticates. Frankwell argues, and the district court held, that "transactions conducted on a board of trade" include only on-exchange trades, and thus the Treasury Amendment excludes all off-exchange trades.

1. Statutory language.

The CEA defines "board of trade" as "any exchange or association, whether incorporated or unincorporated, of persons who are engaged in the business of buying or selling any commodity or receiving the same for sale on consignment." 7 U.S.C. § 1a(1).

The district court held that the "plain meaning" of "board of trade" was an organization conducting on-exchange trades. CFTC v. Frankwell Bullion Ltd., 904 F.Supp. 1072, 1075 (N.D.Cal.1995). Nowhere in the statute, however, do the terms "on-exchange" or "off-exchange" occur. Instead, the plain meaning is the statutory definition: "any exchange or association ... of persons who are engaged in the business of buying or selling any commodity." 7 U.S.C. § 1a(1) (emphasis added). This definition explicitly includes more than just exchanges. Frankwell admits that this definition of "board of trade" would include Frankwell, as Frankwell is an association of persons engaged in the business of buying or selling foreign currency.

The problem with applying the plain meaning of "board of trade," however, is that it renders the Treasury Amendment meaningless. As one court has held,

such a broad definition of "board of trade" creates an ambiguity in the meaning of that amendment. That is, given the breadth of meaning of board of trade, the "unless" clause of the amendment threatens to swallow the whole. Almost all transactions in futures contracts could be characterized as occurring on a "board of trade" involving "informal associations of people engaged in the business of buying and selling commodities." Thus, it is appropriate to turn to the purpose of the amendment as revealed in the legislative history to determine the true meaning of the exemption.

CFTC v. Standard Forex, Inc., 1993 WL 809966 at * 8 (E.D.N.Y.1993).

We therefore resort to the legislative history of the Treasury Amendment.

2. Legislative history.

In 1974, Congress broadened the reach of the CEA to cover additional commodities. Observing that the CEA would apply to foreign currencies, the Treasury Department sent a letter to the Senate Committee on Agriculture and Forestry suggesting an amendment exempting certain foreign currency transactions. The Treasury Department wrote:

We do not believe that either the House of Representatives or your Committee intends the proposed legislation to subject the foreign currency futures trading of banks or other institutions, other than on an organized exchange, to the new regulatory regime.

The Department feels strongly that foreign currency futures trading, other than on organized exchanges, should not be regulated by the new agency. Virtually all futures trading in foreign currencies in the United States is carried out through an informal network of banks and dealers. This dealer market, which consists primarily of the large banks, has proved highly efficient in serving the needs of international business in hedging the risks that stem from foreign exchange rate...

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