Commodity Futures Trading Commission v. Savage

Decision Date20 November 1979
Docket NumberNo. 77-2930,77-2930
Citation611 F.2d 270
PartiesCOMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. Jack W. SAVAGE et al., Defendant-Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Joel J. Bellows, Chicago, Ill., on brief; Charles B. Bernstein, Bellows & Associates, Chicago, Ill., for defendant-appellant.

Gregory C. Glynn, Commodity Futures Trading Comm., Washington, D. C., for plaintiff-appellee.

Appeal from the United States District Court for the Central District of California.

Before HUFSTEDLER and SNEED, Circuit Judges, and RENFREW, * District Judge.

SNEED, Circuit Judge:

This appeal raises several questions regarding the proper interpretation of the Commodity Exchange Act (Act), 7 U.S.C. §§ 1-24. Defendant-appellant Savage appeals from an order and judgment of permanent injunction entered on a motion for summary judgment. Savage was one of several defendants in an action brought by the Commodity Futures Trading Commission (CFTC) in the United States District Court for the Central District of California. Each of the other defendants have consented to permanent injunctions or have not pursued appeals. The district court on May 6, 1977 permanently enjoined appellant Savage from engaging in future violations of antifraud, fictitious sale and commodity trading-advisor registration provisions of the Act. We note jurisdiction under 28 U.S.C. § 1291 and affirm in part, reverse in part, and remand for further proceedings.

I. BACKGROUND
A. Overview of the Commodity Exchange Act.

On October 23, 1974, to remedy perceived abuses in commodity transactions, Congress extensively amended the Commodity Exchange Act by enacting the Commodity Futures Trading Commission Act of 1974, Pub.L.No.93-463, 88 Stat. 1389. The 1974 Act created the CFTC, an independent federal regulatory agency, to administer the Act and enforce its provisions. Congress determined that "(t)he public interest . . . requires that these markets operate under close scrutiny so that they serve their legitimate market functions." H.R.Rep.No.93-975, 93rd Cong., 2d Sess. 34 (1974). The CFTC, as one aspect of this scrutiny, was empowered to go directly into federal court to seek injunctive relief restraining any person from violating the Act. 7 U.S.C. § 13a-1. The substantive content of the regulatory framework for commodity market professionals created in 1974 included a broad definition of the term "commodity trading advisor," 1 registration and record- keeping requirements, 2 and antifraud standards analogous to those in other federal securities laws. 3

B. The Complaint.

The CFTC brought this action July 1, 1976 under 7 U.S.C. § 13a-1. The complaint contained six counts, only three of which apply to the appellant. It sought preliminary and permanent injunctions against appellant, the American International Trading Company (AITC), and twelve other individual defendants, including employees of AITC and floor brokers at the MidAmerica Commodity Exchange (MACE), a contract market registered with the CFTC. Appellant Savage was a member of MACE; he traded on the floor for his own account and was not registered in any capacity with the CFTC. The complaint charged appellant and others with various fraudulent activities which operated to defraud the customers of AITC. All of the defendants except appellant and two others, all of whom resided in Chicago and worked at MACE, also in Chicago, allowed consent decrees to be entered against them.

Only three counts III, IV and V contain allegations against the appellant:

1. Count III. In Count III, the complaint alleged that Savage and others violated prohibitions against fraud and fictitious sales contained in sections 4b and 4c of the Act, 7 U.S.C. §§ 6b & 6c. 4 The complaint charged that Savage, by arrangement, took the opposite side of commodity contract trades from AITC customers in two contexts. First, the complaint charged that a series of prearranged transactions in soy beans and silver occurred on April 17 and 18, 1975. In these transactions, Savage bought contracts when contracts were sold for the account of customers of the AITC Managed Account Program, and Savage sold futures contracts simultaneously with the purchase of futures contracts for the accounts of AITC customers. Savage sustained losses with respect to AITC customers who had deficits in their accounts and enjoyed profits on transactions with AITC customers who had credit balances in their accounts. 5 As a net effect of these transactions, Savage's losses and gains substantially offset, leaving him with only a small gain, and AITC customer funds shifted between accounts. 6 In addition, Count III alleged that during at least the period July 9 to September 9, 1975, Savage engaged in or aided and abetted prearranged trades between himself and AITC customers. Savage allegedly profited by becoming the buyer in respect to AITC customer sell orders and the seller in respect to AITC customer buy orders.

2. Count IV. The complaint alleged in Count IV that since April 21, 1975, Savage violated section 4m of the Act, 7 U.S.C. § 6m, 7 by operating as a commodity trading advisor without registering with the CFTC. The CFTC takes the position that Savage operated as an advisor to the customers of AITC's Managed Account Program through Melvin Berman, who made the investment decisions for AITC accounts. The complaint also alleged that Savage prepared portions of a commodity advisory letter.

3. Count V. Count V charged violations of section 4O of the Act, 7 U.S.C. § 6O. 8 That section forbade a commodity trading advisor "registered under this Act . . . to employ any device, scheme, or artifice to defraud any client . . . or . . . to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client . . . ." The specific actions alleged to constitute the violation were those outlined in Count III of the complaint.

C. Proceedings and Issues Below.

With its complaint, the CFTC filed eleven lengthy affidavits of its investigators, AITC customers, and a former AITC employee. Seven more affidavits were filed July 15, 1976. A preliminary injunction issued July 16, 1976, restraining appellant from violating section 4b of the Act by cheating or attempting to cheat a customer by making false reports or engaging in offsetting trades with a customer; from engaging in "wash" or accommodation trades; from holding himself out to the public as a commodity trading advisor without being registered pursuant to section 4m of the Act; from taking the offsetting position from that of customers of AITC and engaging in fictitious trades involving the accounts of AITC customers while acting as a commodity trading advisor to AITC, in violation of section 4O of the Act. 9 (C.T. at 783.)

At the time the preliminary injunction issued against appellant, final judgments and orders of permanent injunction were entered against all defendants except appellant, Ferrara and Wozniak. On August 5, 1976, appellant filed a motion to dismiss for lack of jurisdiction, motion to dismiss, and an alternative motion to transfer the action to Chicago, where all the remaining defendants worked and resided. The supposed lack of jurisdiction was premised upon the special venue provision in section 6c of the Act, 7 U.S.C. § 13a-1, which provides that the CFTC can bring an action "in the district wherein the defendant is found . . . or where the act or practice occurred, is occurring, or is about to occur . . . ." In the alternative, appellant requested that the action be transferred pursuant to 28 U.S.C. § 1404(a). Appellant's motion to dismiss Counts IV and V argued that he did not furnish advice to more than fifteen persons and that since he was properly not registered as a trading advisor, section 4O of the Act did not apply to him. Appellant's motions were denied September 20, 1976.

Appellant then answered the complaint October 12, 1976, denying all the allegations save that he was not registered as an advisor. The CFTC then filed a motion for summary judgment, supplying 115 proposed findings of fact based upon its affidavits, as to which it argued no genuine issue of fact existed. (C.T. at 1057.) Appellant Savage filed an affidavit in opposition to the summary judgment motion. (C.T. at 981-83.) He disputed only 34 of the 115 findings. Most critically, Savage:

1) Denied that he arranged with Ferrara and Wozniak to execute orders from AITC customers that he prepared;

2) Denied "knowingly" entering into trades with AITC customers "away from the market price;"

3) Denied entering into trades With the intention of transferring balances between AITC customers;

4) Claimed that he never advised AITC customers as to commodity investments; and,

5) Claimed that he never dictated market trading advice after July 17, 1975 for use in a market letter.

On May 5, 1977, the district court entered its order and judgment of permanent injunction against the three remaining defendants. From this final order appellant Savage timely filed his notice of appeal on July 5, 1977.

We shall discuss first in Part II appellant's jurisdiction contentions. Thereafter, in Part III, we will concern ourselves with appellant's arguments in support of his motion to dismiss Count IV. Finally, we will address, in Part IV, the propriety of summary judgment with respect to Counts III and V.

II. JURISDICTION AND VENUE

The CFTC asserts jurisdiction in the District Court of the Central District of California properly. It relies upon 7 U.S.C. § 13a-1 which provides that "the Commission may bring an action in the proper district court of the United States . . . to enjoin such act or practice . . . and said court( ) shall have jurisdiction to entertain such actions . . . ." Further, the section states:

Any action under this section may be brought in the district wherein the defendant is found or is an inhabitant or transacts...

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