Commodity Futures Trading Commission v. Premex, Inc.
| Decision Date | 28 July 1981 |
| Docket Number | No. 80-2636,80-2636 |
| Citation | 655 F.2d 779 |
| Parties | COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. PREMEX, INC., and Samuel Zack, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Mark S. Lieberman, Rosenthal & Schanfield, Chicago, Ill., for defendants-appellants.
Gregory C. Glynn, Commodity Futures Trading Commission, Washington, D. C., for plaintiff-appellee.
Before PELL, Circuit Judge, MARKEY, Chief Judge, * and WOOD, Circuit Judge.
Defendants Premex, Inc. ("Premex") and Samuel Zack ("Zack") appeal the district court's holding that defendants individually violated the terms of a previously entered Consent Judgment of Permanent Injunction. The violation resulted in a civil contempt citation of the consent decree. In consequence, defendants were ordered to pay the expenses and fees incurred by plaintiff, the Commodity Futures Trading Commission ("CFTC"), in bringing defendants' past violations of the decree to the court's attention. At issue is whether Premex and Zack were properly held in civil contempt for violation of the consent decree. The propriety of the court's award of costs and fees to the CFTC is also contested. We affirm.
Premex, a Michigan corporation, solicits from public customers for investment in precious metals leverage contracts regulated by the CFTC. On January 20, 1978, the date of the entry of the consent decree, Zack owned fifty percent of Premex and also served as its president. Until late 1979, Premex maintained a branch office in San Diego, in addition to its principal office in Michigan. After January 1, 1980, Premex shifted its principal office to San Diego.
On January 12, 1978, the CFTC instituted a civil action against Premex and Zack alleging, in part, that defendants: (1) had committed and were committing violations of the CFTC's minimum financial requirements applicable to Premex as a futures commission merchant; (2) were committing fraud in connection with offers and sales of metals leverage contracts; and (3) had distributed promotional literature to purchasers and prospective buyers of its leverage contracts which stated that Premex was segregating its customer funds, when in fact, Premex had failed to do so.
On January 20, 1978, pursuant to the CFTC complaint, Premex and Zack voluntarily agreed to the entry of a Consent Judgment of Permanent Injunction by the district court enjoining them, inter alia, from:
A. Directly or indirectly, by use of the mails or any means or instrumentalities of interstate commerce ...:
(1) employing any device, scheme, or artifice to defraud;
(2) making untrue statements of a material fact or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading....
On or about February 8, 1980, Douglas Campbell, the Chief Regional Investigator for the CFTC's Western Region, received, through the United States mails, promotional literature from Premex stating: "Premex is registered as a Commodity Trading Advisor by the Commodity Futures Trading Commission...." In fact, Premex's CFTC registration as an Advisor had expired on June 30, 1979 and, as the record indicates, has not yet been renewed.
A further misrepresentation within the literature assured prospective customers that if Premex encountered financial difficulties, the CFTC and the regulatory bodies of the various commodity exchanges would discontinue Premex's operations and would transfer all customer open positions and account balances to another company in advance of any threat to customer funds. The movement would be facilitated "because of the constant surveillance kept on every registered brokerage firm by the regulatory agencies." Campbell's affidavit indicated that Premex was at least three weeks behind in processing customer payment orders. Further, Premex was approximately six weeks behind in posting of customer records, rendering "surveillance" difficult if not impossible. Moreover, Premex is not and has never been a member of any commodity exchange designated by the CFTC and is therefore not subject to regulation by regulatory bodies of the commodity exchanges, as represented within the literature.
Based upon these facts, the CFTC on April 24, 1980, moved the district court for an Order to Show Cause why Premex and Zack should not be held in civil contempt of the earlier consent decree. On October 14, 1980, upon review of the affidavits, briefs, and other materials, the court found "clear and convincing" evidence that defendants' statements within the literature had violated portions of the decree and therefore held defendants in civil contempt. They were thus required to pay $3,108.92 in attorneys' fees and $979.71 for other expenses incurred by the CFTC in enforcing compliance with the court's order.
We turn first to the propriety of the civil contempt citation entered by the district court.
A. Defendants claim first that their unintentional failure to comply with the consent decree cannot form a basis for entry of judgment for civil contempt. 1 They urge that the decree merely restates a statutory standard requiring intentional conduct scienter. They submit that scienter is a required element for violation of Paragraph A(2) since both the statutory and regulatory authority which comprise the basis of the issuance of the consent decree proscribes only intentional misconduct. We cannot agree. Reference to the language within the decree itself and to the broad statutory mandate and regulatory scheme which underlie the decree's language indicates that defendants' argument must fail. The scope of the consent decree must be discerned from within its four corners and not by reference to the specific purposes of any of its signatory parties. 2 United States v. Armour & Co., 402 U.S. 673, 681-82, 91 S.Ct. 1752, 1757-1758, 29 L.Ed.2d 256 (1971); Sportmart, Inc. v. Wolverine World Wide, Inc., 601 F.2d 313, 316-17 (7th Cir. 1979). Nowhere within the "four corners" of the consent decree is there a proscription against only intentional conduct. The words "willfully," "intentionally," "purposefully," or "scienter" are absent. Moreover, the proscriptions of Paragraph A(2) of the decree which are derived directly from the language of CFTC antifraud Rule 30.03(b), 17 C.F.R. § 30.03(b) (1978), contrary to defendants' assertions, 3 do not evince a scienter requirement as a prerequisite to violation of the decree's provisions. 4 Nor can such a requirement be ascertained from a review of the CFTC's intent in promulgating Rule 30.03, 5 especially given the need to interpret the Rule broadly so as to effect CFTC's charge to promulgate requisite rules and regulations which are "necessary to effectuate any purpose of (the) Act." 7 U.S.C. § 12a (1976). Compare British American Commodity Options Corp. v. Bagley, 552 F.2d 482, 486-87 (2d Cir.), cert. denied, 434 U.S. 938, 98 S.Ct. 427, 54 L.Ed.2d 297 (1977).
Defendants also contend that C.F.T.C. v. Savage, 611 F.2d 270 (9th Cir. 1979), supports its claim that Rule 30.03 requires scienter. This contention is erroneous since that case construed Sections 4b and 4o of the Act, 7 U.S.C. §§ 6b, 6o (1976), and not Rule 30.03(b). Section 4b, unlike Rule 30.03, incorporates language which may imply a scienter requirement "(w)illfully to make a false report (4b(B)), willfully to deceive (4b(C)), and ... willfully and knowingly to take the opposite side of a transaction for another person (4b(D))." Id., 611 F.2d at 283 (emphasis in the original). Rule 30.03, on the other hand, contains no similar provisions. Its broader language is devoid of any hint that scienter is required before a violation would lie.
Defendants additionally rely upon Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), in asserting that scienter is required before liability may attach for civil violation of the consent decree. Hochfelder involved private actions for damages under Section 10(b) and Rule 10b-5 and therefore is inapplicable here. Accordingly, we must distinguish between private damage actions and public enforcement actions and apply a scienter requirement only in the former class of cases. 6
Even if we read Aaron and Hochfelder 7 as requiring intent as a prerequisite to a violation of Paragraph A(1) of the consent decree, Premex and Zack violated Paragraph A(2) which, as mentioned, prohibits "making untrue statements of material fact or omitting to state a material fact...." The court in Aaron held that the S.E.C. need not establish scienter as an element of an action to enjoin violations of Section 17(a)(2) and 17(a)(3) of the Securities Act of 1933, 15 U.S.C. §§ 77q(a)(2) and 77q(a)(3) (1976). The language of Section 17(a)(2), prohibiting any person from obtaining money or property "by means of a (misstatement) of a material fact or any omission to state a material fact" is nearly identical to the language of Paragraph A(2). Thus, Aaron supports our conclusion that scienter need not be established herein. 8
B. Defendants next contend that they "had no reason to know" that their employee would author, and contrary to Premex policy and procedure, disseminate the violative literature. Premex, however, was required to ensure that the prior court mandates were enforced. 9 As soon as the literature was mailed, the decree was violated, no matter the circumstances underlying its distribution. Good intentions cannot sterilize conduct otherwise contemptuous. Babee-Tenda Corp. v. Scharco Mfg. Co., 156 F.Supp. 582, 587 (S.D.N.Y.1957). See Bigelow v. RKO Radio Pictures, Inc., 78 F.Supp. 250, 258 (N.D.Ill.), aff'd, 170 F.2d 783 (7th Cir. 1948). In short, Premex and Zack may not hide behind the cloak of an unfaithful employee defense. 10
C. Premex and Zack next aver that the proceeding below was properly classifiable as one for criminal...
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