Commodity Futures Trading Commission v. British American Commodity Options

• Decision Date: 03 August 1977
• Docket Number: D,No. 1041,1041
• Citation: 560 F.2d 135
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellant, v. BRITISH AMERICAN COMMODITY OPTIONS CORP., Defendant-Appellee. ocket 77-6002.
• Court: U.S. Court of Appeals — Second Circuit

Page 135

560 F.2d 135

COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellant, v. BRITISH AMERICAN COMMODITY OPTIONS CORP., Defendant-Appellee.

No. 1041, Docket 77-6002.

United States Court of Appeals Second Circuit.

Argued May 4, 1977.

Decided Aug. 3, 1977.

Richard E. Nathan, Acting Gen. Counsel, Commodity Futures Trading Commission, Frederick T. Spindel, Assoc. Gen. Counsel, Richard A. Graham, Sp. Counsel, and Virginia F. Crisman, Atty., Commodity Futures Trading Commission, Washington, D. C., for plaintiff-appellant.

Charles J. Hecht, New York City (Haig Costikyan, New York City, of counsel), for defendant-appellee.

Before MANSFIELD and TIMBERS, Circuit Judges and MacMAHON, ^* District Judge.

MacMAHON, District Judge:

Appellant, Commodity Futures Trading Commission ("the Commission"), appeals from an order of the United States District Court for the Southern District of New York (Gagliardi, J.), denying a preliminary injunction in an action brought by the Commission pursuant to Section 6c of the Commodity Exchange Act, as amended ("the Act"), 7 U.S.C. § 13a-1 (Supp. V, 1975). The Commission sought to prohibit appellee, British American Commodity Options Corp. ("British American") from making use of the mails or any instrumentality of interstate commerce in connection with its business as a commodity trading advisor without being registered, in violation of 7 U.S.C. § 6m. We reverse and remand with direction to issue a preliminary injunction.

I.

In the 1974 Amendments ¹ to the Act, 7 U.S.C. § 1 et seq., Congress established the Commodity Futures Trading Commission and set up a comprehensive scheme for regulation of trading in commodity futures. Central to this statutory scheme is the requirement that persons actively involved in commodities trading shall be registered with the Commission. ² Section 2 defines the new category of "commodity trading advisors," ³ and § 6m unequivocally makes it "unlawful for any commodity trading advisor . . . unless registered (with the Commission) to make use of the mails or any means or instrumentality of interstate commerce in connection with his business as such commodity trading advisor. . . ." 7 U.S.C. § 6m.

Commodity trading advisors seeking registration must furnish the Commission with information concerning their organizational and capital structure, biographical information concerning their key personnel, information about their methods of operations and provisions for handling clients' funds and accounts, compensation data and "such other information as the Commission may require to determine whether the applicant is qualified for registration." 7 U.S.C. § 6n(1).

Applications for registration as commodity trading advisors become effective if the Commission fails to act within thirty days after receipt, ⁴ but the Commission may "deny" or "refuse" registration on various grounds set forth in §§ 6n(6), 6n(7) and 12a(2). ⁵ While the Commission may deny or refuse registration without a hearing in certain limited situations, see §§ 6n(6) and 12a(2)(A), in most cases the Commission must conduct a hearing before denying or refusing registration, §§ 6n(7) and 12a(2)(B) and (C). Section 12a(2)(C) further provides that "pending final determination under clause (B) or (C), registration shall not be granted " (emphasis added). In the case of refusal to register under subsections (B) or (C), the applicant can appeal such refusal directly to the Court of Appeals, see §§ 12a(2)(C) and 9.

Finally, the Commission is empowered in § 13a-1 to bring an action in the district court to enjoin "any act or practice constituting a violation of the Act or any rule, regulation or order under the Act." Section 13a-1 further provides that: "Upon a proper showing, a permanent or temporary injunction shall be issued without bond." (Emphasis added.)

The intent of the congressional design is clear; persons engaged in the defined regulated activities within the commodities business are not to operate as such unless registered, the Commission is charged in the first instance with determining the applicant's qualifications and whether proper grounds exist for refusing registration, and the Commission is empowered to seek injunctive prohibitions against violations of any provisions of the Act, including registration provisions. Registration is the kingpin in this statutory machinery, giving the Commission the information about participants in commodity trading which it so vitally requires to carry out its other statutory functions of monitoring and enforcing the Act.

II.

With this statutory framework in mind, we turn now to the facts of this case. In October 1975, at least five months after the registration requirements of § 6m became effective, British American commenced operations as a dealer in options on futures contracts on commodities traded on London commodity markets. Upon learning of British American's activities, the Commission, on March 3, 1976, notified British American that in its view British American was a commodity trading advisor and was required to register with the Commission. British American disagreed, but nevertheless filed an application for registration on March 17 or 18, 1976. ⁶ On April 16, 1976, the Commission instituted administrative proceedings, pursuant to §§ 6n(7) and 12a(2), to determine whether grounds existed for denying registration.

The Commission's administrative complaint charged as grounds for denial of registration, first, that John Forma, president and sole stockholder of British American, had been twice enjoined, by consent decree, from violating the record-keeping and net capital requirements of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and had been barred by the SEC from certain activities in the securities industry as a result of various alleged violations of the securities laws and regulations. Second, the Commission charged that British American had been cheating, defrauding and deceiving purchasers and prospective purchasers of commodity options, through deceptive literature and oral misrepresentations concerning the risks and expected profits from trading in options and futures contracts, and concerning British American's role as principal in transactions with customers. The Commission stated both § 6n(7) and the "other good cause" provision of § 12a(2)(B)(ii) as the alleged grounds for denying registration. ⁷ A hearing was held before an Administrative Law Judge from November 15 to December 15, 1976, but decision has not yet been rendered.

After the administrative complaint had been filed, but before the matter had come on for hearing, British American purportedly continued to function as a commodity trading advisor, although still unregistered. Consequently, on July 22, 1976, the Commission commenced this action for a preliminary injunction, which the district court denied on October 20, 1976.

III.

The district court found, for the limited purpose of the preliminary injunction motion, ⁸ that British American was a commodity trading advisor, 422 F.Supp. at 664 -65. There is ample evidence in the record to support that finding. Eight witnesses testified that employees of British American had mailed brochures and pamphlets and had contacted customers on the telephone, offering opinions and advice and issuing analyses and reports concerning the value of commodities. Evidence of the literature mailed to customers was also in evidence, including British American's newsletters, "London Commodity Comments" and "Helpful Hints," as well as other mailings, all specifically touting commodity futures (and options on such futures) in rubber, coffee, sugar, cocoa, silver, etc. We note that while § 2 excludes certain persons from the definition of "commodity trading advisor" where the offering of advice is "solely incidental" to another registered or professional occupation, British American did not qualify for any of those exemptions. ⁹ In any event, British American's advising activities were neither "entirely gratuitous" nor mere "incidental expression of views." See S. Rep. No. 93-1131, 93d Cong., 2d Sess. 24 (1974), U. S. Code Cong. & Admin. News 1974, p. 5843. British American could only hope to profit if its customers and prospective customers acting on its regular information and advice concerning the value and market prospects of commodities and commodity options, purchased such options, for, if they did, British American charged a healthy markup of up to 55%. ¹⁰

The district court applied the now well-established rule that in actions for a statutory injunction, such as this, the agency need not prove irreparable injury or the inadequacy of other remedies as required in private injunctive suits, but only that there is a reasonable likelihood that the wrong will be repeated. See SEC v. Management Dynamics, Inc., 515 F.2d 801, 807-09 (2d Cir. 1975); SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1101 (2d Cir. 1972); CFTC v. J. S. Love & Assoc. Options, Ltd., 422 F.Supp. 652, 661 (S.D.N.Y.1976). ¹¹

The district court, however, exercising the equitable discretion vested with the court even in statutory injunctive actions, see Hecht Co. v. Bowles, 321 U.S. 321, 328-30, 64 S.Ct. 587, 88 L.Ed. 754 (1944); Management Dynamics, supra, 515 F.2d at 808, denied the preliminary injunction. The district court felt that while the Commission had made a prima facie showing that British American was offering commodity advice while unregistered,

"the mere continuation of business after the CFTC has found 'good cause' to deny registration is not the necessary repetition of a wrong to grant the injunction. Rather, there must be some indication that a wrong connected with fraud or misconduct, herein related to the alleged activity that led up to the consent decree, is to be repeated. The CFTC introduced no evidence of any illegal behavior of John Forma either leading up to the consent decree or repeated with British American. ...