Commodity Futures Trading Commission v. Muller

• Decision Date: 10 April 1978
• Docket Number: No. 77-1823,77-1823
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. John J. MULLER, Defendant-Appellant. Summary Calendar. *
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1296

570 F.2d 1296

COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. John J. MULLER, Defendant-Appellant.

No. 77-1823

Summary Calendar. ^*

United States Court of Appeals, Fifth Circuit.

April 10, 1978.

Mark J. Friedman, Miami Beach, Fla., for defendant-appellant.

Richard E. Nathan, Frederic T. Spindel, Associate Gen. Counsel, Joanne Leveque, Howard T. Schwartz, John G. Gaine, Gen. Counsel, Commodities Futures Trading Com'n, Washington, D. C., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before THORNBERRY, RONEY and HILL, Circuit Judges.

RONEY, Circuit Judge:

Having charged John J. Muller, an employee of a commodity option firm, with misappropriating customers' funds, the Commodity Futures Trading Commission, a federal regulatory agency, sought and obtained a federal court preliminary injunction against Muller's concealing or disposing of his assets. Muller appeals from the injunction on two grounds: first, the regulatory agency has no jurisdiction over the London commodity options he sells because they are not specifically enumerated in the statute and are in foreign, not interstate, commerce and, second, the agency failed to present a prima facie case of illegal conduct or the reasonable likelihood of future violations. Holding that the Commission has jurisdiction not only over options in specifically enumerated commodities, but over all other commodity option transactions, including Muller's "London commodity options," and that the evidence was sufficient to support the injunction, we affirm.

Muller, vice president and director of Economic Research Analysts Commodities, Inc., sold "London commodity options" to the public. A "London commodity option" is a contractual right to buy or sell a specified futures contract for a particular commodity traded on the London markets, at a specified price within a specified period of time. There are two London commodity markets on which options are traded: "hard" commodities, like gold, silver and other metals, traded on the London Metal Exchange; and "soft" commodities, like cocoa, grain, coffee, rubber and sugar, traded through the International Commodities Clearing House. ¹

The Commission charged Muller with fraudulently converting and misappropriating for his own use funds entrusted to his care by customers of the commodity option firm by which he was employed, in violation of the Commodity Futures Trading Commission Act of 1974, 7 U.S.C.A. § 6c(b), and antifraud Regulation 32.9, 17 C.F.R. § 32.9 (1977). Muller makes essentially two arguments that these London commodity options, in which his customers were dealing, are not within the regulatory power of the Commission.

First, Muller argues such options are not subject to the regulatory authority conferred by 7 U.S.C.A. § 6c(b), which he contends authorizes the Commission to regulate only option transactions involving those agricultural commodities that are explicitly enumerated in § 2 of the Act. ² The enumeration does not include the commodities sold through the London markets.

The restrictive interpretation urged by Muller is foreclosed by the wording of the Act and its legislative history. Prior to the passage of this Act, the Commodity Exchange Act did apply only to certain agricultural commodities that were specifically enumerated in § 2. It totally banned option transactions in these commodities. The 1974 Act was passed to fill the regulatory gaps in commodities trading. ³ It expanded the definition of " commodity" to include, in addition to those commodities expressly enumerated, " all other goods and articles . . . and all services, rights and interests in which contracts for future delivery are presently or in the future dealt in . . . ." 7 U.S.C.A. § 2. The Act continues the Commodity Exchange Act's ban on all option transactions involving the specifically enumerated agricultural commodities. Id. § 6c(a). ⁴ In addition, however, § 6c(b) subjects option transactions in non-enumerated commodities to regulations promulgated by the Commission. ⁵ The Act clearly applies to option transactions in non-enumerated commodities.

Muller next argues that these London options involve foreign commerce and are outside of the statute and regulations, which only apply to transactions involving interstate commerce. The Act's definition of " interstate commerce" is sufficiently expansive to include the London options. The Act broadly defines "interstate commerce" as commerce between any state, territory, possession, the District of Columbia, "and any place outside thereof." 7 U.S.C.A. § 2. Section 3, which elaborates on when a transaction shall be considered to be in interstate commerce, defines state as including territory, the District of Columbia, possession of the United States, and foreign nation. 7 U.S.C.A. § 3. Thus, when these sections are read together, it is apparent that the jurisdiction of the Commission is sufficiently broad to encompass transactions involving foreign commerce, such as the London options. Cf. British American Commodity Options Corp. v. Bagley, 552 F.2d 482 (2d Cir.) (London options impliedly found by the Second Circuit to be within the jurisdiction of the Commission), cert. denied,--- U.S. ----, 98 S.Ct. 427, 54 L.Ed.2d 297 (1977).

The Commission has exercised this broad authority through the regulations it has promulgated under its delegated rulemaking authority. Antifraud Regulation 32.9, 17 C.F.R. § 32.9 (1977), applies to "any commodity option transaction." ⁶ This would include the full scope of the Act, including transactions involving foreign commerce.

Muller challenges the jurisdiction of the district court to enjoin him from using any funds in his personal or business accounts before the civil action at hand has been decided or terminated.

The Commodity Futures Trading Commission is authorized by 7 U.S.C.A. § 13a-1 to institute an action in federal district court whenever it appears that violations of any provision of the Act have occurred. ⁷ That section provides that upon a proper showing, the district court may issue a permanent or temporary injunction.

It has long been recognized that in an action brought to enforce the requirements of remedial statutes such as this Act, a district court has broad discretion to fashion appropriate relief. In actions for a statutory injunction, the agency need not prove irreparable injury or the inadequacy of other remedies as required in private injunctive suits. A prima facie case of illegality is sufficient. Commodity Futures Trading Commission v. British American Commodity Options Corp., 560 F.2d 135, 141-142 (2d Cir. 1977), petition for cert. pending, 46 U.S.L.W. 3438, --- U.S. ----, 98 S.Ct. ----, 54 L.Ed.2d --- (Jan. 10, 1978); Commodity Futures Trading Commission v. J. S. Love & Assoc. Options, Ltd., 422 F.Supp. 652, 661 (S.D.N.Y.1976).

Muller contends the Commission must show that he has engaged in illegal conduct and that there is a "reasonable likelihood" of future violations. For the issuance of the present injunction, however, it is not necessary for the Commission to show that new funds might be misappropriated. If the Commission had been seeking an injunction against "future violations" of the Act by Muller, it might be necessary to show this. The injunction here, however, does not enjoin defendant from continuing violations by misappropriating customer funds, but rather prevents defendant from further dissipating the funds he allegedly has already misappropriated. The district court has inherent power as a court of equity to order such temporary, ancillary relief in order to preserve the status quo so that an ultimate decision for the Commission could be effective. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1105-1106 (2d Cir. 1972); SEC v. R. J. Allen & Assoc., Inc., 386 F.Supp. 866, 881 (S.D.Fla.1974).

In this case, Muller advised his employer, Economic Research, that he had made arrangements with Commodity Analysis, Inc. for the purchase of London options for Economic's customers, and that Commodity Analysis had opened a bank account in Southeast First National Bank of Miami, Florida. In fact, Muller had not entered into any agreement with Commodity Analysis on Economic's behalf, nor did Commodity Analysis have an account in the Miami bank. Rather, Muller himself had opened that account in the name of Commodity Analysis. Checks in excess of $263,000 were issued by Economics to this Commodity Analysis Muller bank account. Muller supplied Economic with fictitious confirmation purchase statements from Commodity Analysis to conceal his fraud. Muller used the money from the account to purchase commodity future contracts, in his wife's maiden name, from two brokerage firms. By the time the case came to court, the Commission reported that less than $20,000 remained in this account.

Having concluded that the option transactions were covered by the Act and that the Commission had presented a strong prima facie showing that defendant had violated 7 U.S.C.A. § 6c(b) and Regulation 32.9, the district court enjoined defendant, or anyone connected with him, from concealing or disposing of his assets in any manner, except that defe...