Commodity Futures Trading Com'n v. Dunn
| Citation | 58 F.3d 50 |
| Decision Date | 23 June 1995 |
| Docket Number | No. 856,D,856 |
| Parties | , Comm. Fut. L. Rep. P. 26,429 COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. William C. DUNN and Delta Consultants, Inc., Defendants-Appellants, Delta Options, Ltd. and Nopkine Co., Ltd., Defendants. ocket 94-6197. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Gary D. Stumpp, Stumpp & Mandaville, New York City (Adam M. Bond, Stumpp & Mandaville, New York City, of counsel), for defendants-appellants.
David R. Merrill, Deputy Gen. Counsel, Commodity Futures Trading Com'n, Washington, DC (Pat G. Nicolette, Acting Gen. Counsel, Jay L. Witkin, Deputy Gen. Counsel, Jeffrey S. Holik, Asst. Gen. Counsel, Gracemary R. Moleski, Attorney, Commodity Futures Trading Com'n, Washington, DC of counsel), for plaintiff-appellee.
David Yeres, John M. Quitmeyer, Rogers & Wells, New York City, for amicus curiae, Credit Lyonnais, Danforth Newcomb, Shearman & Sterling, New York City, for amicus curiae Bank Julius Baer & Co. Ltd., Kent T. Stauffer, Judah A. Shechter, New York City, for amicus curiae The Chase Manhattan Bank, N.A.
James M. Kenny, Kenny & Stearns, New York City (John G. Gaine, Gen. Counsel, Managed Futures Ass'n, Barbara Wierzynski, Gen. Counsel, Futures Industry Ass'n, Inc., J. Paula Pierce, David M. Kozak, Kenny & Stearns, New York City, of counsel), for amici curiae Managed Futures Ass'n and Futures Industry Ass'n, Inc.
Richard H. Klapper, Sullivan & Cromwell, New York City (Kenneth M. Raisler, Timothy J. Helwick, John T. Corcoran, Sullivan & Cromwell, New York City, of counsel), for amici curiae The Foreign Exchange Committee and the New York Clearing House Ass'n.
Before: WINTER, JACOBS, and CABRANES, Circuit Judges.
This is an interlocutory appeal from the appointment of a temporary receiver. The principal legal issue is whether the Commodity Futures Trading Commission ("CFTC") has power to regulate off-exchange options involving foreign currencies. Based on a prior decision of this court binding on this panel, we hold that it does and affirm.
This is an action by the Commodity Futures Trading Commission against four defendants: (i) William C. Dunn, an individual and the president and sole shareholder of Delta Consultants; (ii) Delta Consultants, a New Jersey corporation formed by Dunn in 1974; (iii) Delta Options, Ltd., an investment company incorporated in the Bahamas in 1991, to which Dunn is an advisor and of which he was managing director; and (iv) Nopkine Co., Ltd., an investment company incorporated in the British Virgin Islands in 1993, to which Dunn is an advisor.
Beginning in 1992, some of the defendants solicited investments from a number of individuals, partnerships, and companies. These investors understood that Delta Options would use the money to execute investment strategies involving the purchase and sale of call and put options on various foreign currencies. Through these trades, various combinations of sales and purchases of different forms of options created relatively exotic positions in foreign currencies, including "strangles" and "boxes." These trades were done in the name of defendants, and no participations or options were sold directly to investors.
The defendants' trading took place in the so-called off-exchange market. Such trading is over-the-counter and not conducted on any kind of organized exchange. Rather, the market consists of myriad and interlocking contracts struck over the telephone between dealers and through brokers.
According to affidavits submitted by the CFTC, Dunn and his agents, including A.P Investors in Delta Options received weekly print-outs summarizing the putative current market value of their particular positions. Until late 1993, these print-outs apparently showed impressive returns on the investments. When options expire, the positions are said to "mature." Prior to the maturity of an investor's position, Delta Options would ask the investor whether the investor wanted to "roll over" the positions or to cash out. By "rolling over" the positions, the investor would reinvest those funds with defendants. Some investors--including those constituting the partnership of Nobad Investment Currency ("Nobad")--claim that misleading print-outs caused them to "roll over" their investments instead of withdrawing them.
Black Limited, an English firm, disseminated false information concerning the risks and rewards of currency trading in general and of investing with defendants in particular. Investors were also deceived as to the success of defendants' trading and the status of the investors' accounts.
The scheme began to unravel in the second half of 1993, and investors began to receive curious communications from defendants. For instance, in early July 1993, investors received a letter from Delta Options to the effect that the "Investment Management Regulatory Organisation Limited," a British regulatory organization, was investigating A.P. Black Limited. In late July 1993, one investor--an English ship repair agency business named Carlden Marine and Industrial Agencies Limited ("Carlden Marine")--was informed by a letter from Delta Options that it would be repaid in full at the next contract maturity dates. Carlden Marine was thus assured that it would be "cashed out" as its positions matured. Over the next two months, however, the monies were not released as anticipated. Funds representing the positions that supposedly matured on August 27, 1993 were sent to Carlden Marine in the middle of October.
Notwithstanding communications from Delta Options and Dunn that alternated between vague and placating, Carlden Marine never received funds corresponding to positions maturing on September 27, 1993. On November 26, Carlden Marine received a letter from Delta Consultants stating that Delta Options had suffered trading losses of $85 million. On November 28, Carlden Marine received a similar communication from Delta Options, except that the losses were set at $95 million. Finally, on December 3, 1993, Carlden Marine received a letter from Delta Options that stated that Delta Consultants could not compensate investors for the losses.
Other investors experienced similar difficulties. The Nobad partnership was informed in July through the "Summary Report of Foreign Exchange Option Positions" sent by Delta Consultants that the maturity of some of its currency positions had been extended to late September. They were then informed in late September that the funds representing such matured positions would not be paid out until November. In late November, the Nobad partners, like Carlden Marine, received communications from Delta Options indicating massive losses and an inability to repay their money.
On the present record, it would appear that, whatever their original intent, defendants became engaged in an old-fashioned "Ponzi" scheme, accompanied by exotic financial vocabulary. The weekly print-outs suggested large returns, which convinced most investors to "roll over" their funds. So long as these funds and money from new investors exceeded losses, any investor who wished to "cash out" could be paid off. The losses, however, were too great to be offset by "roll-overs" or new money, and much of the investors' money has disappeared.
At least some money has been transferred to Switzerland. For example, transfer...
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