Frey v. Commodity Futures Trading Com'n
| Citation | 931 F.2d 1171 |
| Decision Date | 29 May 1991 |
| Docket Number | No. 90-1245,90-1245 |
| Parties | George F. FREY, Jr., Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, Respondent. |
| Court | United States Courts of Appeals. United States Court of Appeals (7th Circuit) |
Raymond J. Mengler, Lee A. Freeman, Jr., Freeman, Freeman & Salzman, Chicago, Ill., for petitioner.
Joanne T. Medero, Gracemary Rizzo, James T. Kelly, Commodity Futures Trading Com'n, Washington, D.C., for respondent.
Before CUMMINGS, CUDAHY and COFFEY, Circuit Judges.
George Frey and Edward Cox were subjects of an extended investigation by the Commodity Exchange Authority of the U.S. Department of Agriculture and the Commodity Futures Trading Commission (CFTC) into an alleged commodities price squeeze in 1971. An ALJ found Frey and Cox guilty of price manipulation under sections 6(b) and 6(c) of the Commodity Exchange Act (CEA), 7 U.S.C. Secs. 9, 13b (1970), but the Commission reversed on Cox's and Frey's appeal.
Frey 1 then sought fees and costs under the Equal Access to Justice Act, 5 U.S.C. Sec. 504 (1982) (EAJA) and 17 C.F.R. Secs. 148.1-148.30, which awards fees and costs to a prevailing party in an agency "adversary adjudication" unless the agency's position in initiating and pursuing the claim was "substantially justified" or unless special circumstances make an award unjust. 5 U.S.C. Sec. 504(a)(1). In 1987, the same ALJ awarded Frey $132,226 under EAJA, but the Commission reversed in 1990 and denied Frey all fees. From this adverse determination Frey appeals.
The background of this case is lengthy and detailed, and has been thoroughly documented in the four opinions preceding this. In re Cox, [1982-84 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 21,767 (1983) (hereinafter Merits Order (ALJ)); In re Cox, [1986-87 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 23,786 (1987) (hereinafter Merits Order (CFTC)); In re Cox, [1987-90 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 23,947 (1987) (hereinafter Fees Order (ALJ)); In re Frey, [1987-90 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 24,578 (1990) (hereinafter Fees Order (CFTC)). We mention only those facts relevant for the EAJA issue.
At the center of this case is the market for May wheat futures contracts. Wheat futures contracts trade for five delivery months: July, September, December, March and May. The May contract is the final contract on which the previous year's wheat crop is traded; the new, imminent crop is traded on the July contract. Potential shortfalls of cash wheat to cover the outstanding long interest at the close of the contract period make the May contract highly volatile. See Fees Order (CFTC) at 36,501 (). May 19 is the last day for trading the May contract, and at the close on this day all remaining contracts are settled.
During early 1971, Cox and Frey, registered floor brokers and members of the Chicago Board of Trade, accumulated substantial long positions in May wheat. On January 25, Cox held long May contracts representing 1,995,000 bushels of wheat, one contract less than the speculative limit set by regulation. Cox maintained this position until May 7. Like many speculative traders, Cox neither intended to use the underlying wheat himself nor had agreements providing for its sale to commercial users. Speculative traders normally close out their position before being forced to take or make delivery. Cox also held an equal and opposite (i.e., short) position in the July wheat futures contract. On May 7 delivery against the May long position began. Between May 7 and May 19 Cox stopped delivery notices on 555,000 bushels, putting that much cash wheat in his control. That left his long position in the May contract at 1,440,000 bushels, or thirty percent of the long open interest. Frey held long contracts for 760,000 bushels, or sixteen percent of the long open interest, but controlled no cash wheat. Cox and Frey's combined position at the start of trading on May 19 therefore totalled forty-six percent of the long open interest. The price at the close of trading on May 18 was $1.60 3/4 per bushel. Concerns about the prospects for a disruptive market prompted the Business Conduct Committee of the Board of Trade to give Frey and Cox separate verbal warnings to make their positions available.
On May 19, the two met on the trading floor, and Cox gave Frey authority to sell his wheat for a price of $1.70 per bushel. The open interest declined as contract holders closed their positions, and by 11:31 a.m., the two controlled ninety-seven percent of the outstanding long interest. Frey's trading activity for the rest of May 19 is recounted in the CFTC's merits decision. Merits Order (CFTC) at 34,059-60. Frey ended up liquidating the bulk of the 2.1 million bushels he controlled during the last ten seconds of trading at $1.70 per bushel, more than nine cents above the previous day's settlement price and only slightly less than the daily "limit up" price. After the close, Cox actually ended up short 85,000 bushels and had accepted delivery of 585,000 bushels. He settled his short with his cash wheat, sold 405,000 bushels of his holdings on the cash market between June 3 and July 9 and eventually used his remaining 95,000 bushels to deliver against a short position in the July contract. Frey took delivery of 225,000 bushels of wheat on his closing long position. He sold 130,000 bushels in the cash market between May 26 and June 21 at prices substantially lower than $1.70 and eventually delivered the remaining 95,000 bushels against a short position in the July contract.
The Commodity Exchange Authority of the Department of Agriculture, predecessor to the Division of Enforcement of the CFTC, 2 prosecuted Frey and Cox for price manipulation. An ALJ sustained the complaint and imposed sanctions on January 10, 1983. The Commission granted Cox's and Frey's appeal on July 15, 1987 and reversed the initial decision of the ALJ. The Commission found that the Division had failed to prove either that Cox and Frey had the ability to influence market prices or that artificial prices existed. The Commission also raised doubts that Frey and Cox had caused the price increase. It expressed no view on the question of intent.
Frey then sought fees and expenses under EAJA in August 1987. He was successful in the initial proceeding, where the ALJ found, after examining only the Merits Order (CFTC) and not the entire record, that "[t]he Government made a mistake by instituting this action against the Respondents and the Commission's [Merits] Opinion affords no latitude to hypothesize that there was any substantially justified grounds to conclude otherwise." Fees Order (ALJ) at 34,320. The ALJ concluded that it was impossible for Frey to have manipulated the market and rejected the argument that the Division's victory in the Merits Order (ALJ) proved that the position was substantially justified. And in response to the agency's claim that its position was reasonable because the case attempted to establish a new type of price manipulation, the ALJ responded:
The law in existence on May of 1971 is the same law applied by the Commission in this case. The Government is charged with the knowledge of the law. Simply stated, ignorance of the law on the part of the Government is not a valid bar to a claim for an award.
Fees Order (ALJ) at 34,321. Frey's judgment was for $132,226.22.
This judgment did not survive review. More than two years later, on January 19, 1990, the CFTC reversed the ALJ's decision and denied all fees to Frey. The agency first held that the ALJ erred by confining his review to the Commission's opinion and not reviewing the record as a whole. The CFTC, pointing out that the ALJ erred in replacing the "substantial justification" standard with a "substantial evidence" standard, then held that the government's justification for initiating and pursuing the action was reasonable. Finally, the agency determined that the facts in the record supported the Division's attempted enforcement. From this decision Frey appeals.
We review the Commission's decision for abuse of discretion. Pierce v. Underwood, 487 U.S. 552, 560, 108 S.Ct. 2541, 2547, 101 L.Ed.2d 490 (1988); see also Phil Smidt & Son, Inc. v. N.L.R.B., 810 F.2d 638, 641 (7th Cir.1987) (substantial evidence standard). This standard operates somewhat peculiarly in the EAJA context, since we must review inter alia the agency's interpretation of the law at the time of the prosecution. In Pierce, Justice White's separate concurring and dissenting opinion suggests a more plenary standard of review, 487 U.S. at 583-86, 108 S.Ct. at 2559-61, but the majority opinion clearly affirms the more deferential abuse of discretion standard. 487 U.S. at 558-63 & n. 1, 108 S.Ct. at 2546-49 & n. 1.
We also must plumb the meaning of "substantial justification," a term far from self-defining. The Fees Order (ALJ) interprets the test as "a slightly more stringent measure than one of reasonableness." Fees Order (ALJ) at 34,320. The Commission held that this was not the correct standard and adopted the standard of simple "reasonableness." Fees Order (CFTC) at 36,500. The Supreme Court earlier endorsed the simple reasonableness formulation, Pierce, 487 U.S. at 563-68, 108 S.Ct. at 2549-51, and we apply it here.
We therefore must determine whether the CFTC abused its discretion in determining that the Division's enforcement proceeding had a reasonable basis in law and fact. We examine both the state of the law and the facts in the record to determine whether there was substantial justification. Ramos v. Haig, 716 F.2d 471, 473 (7th Cir.1983) ().
Before assessing the EAJA issue, we must set out the rationale of the merits and fee orders below.
To continue reading
Request your trial
-
United States v. Smith
...exaction of a price determined by forces other than supply and demand ... punishable under the CEA." Frey v. Commodity Futures Trading Comm'n , 931 F.2d 1171, 1175 (7th Cir. 1991). "Just as price artificiality implies misinformation, a specific intent to create an artificial price implies f......
-
Ploss v. Kraft Foods Grp., Inc.
...participants value a security," a plaintiff can state a market manipulation claim. Id. at 101 ; see alsoFrey v. Commodity Futures Trading Comm'n , 931 F.2d 1171, 1175 (7th Cir.1991) ( "Manipulation, broadly stated, is an intentional exaction of a price determined by forces other than supply......
-
U.S. v. Reliant Energy Services, Inc.
..."Manipulation, broadly stated, is an intentional exaction of a price determined by forces other than supply and demand." Frey v. CFTC, 931 F.2d 1171, 1175 (7th Cir.1991); accord In re Abrams, No 88-10, 1994 WL 506250, *10 (CFTC 1994) ("A market participant must have acted with the purpose o......
-
In re Soybean Futures Litigation, Civ. A. No. 89 C 7009
...caused the artificial price; and (4) the defendant specifically intended to cause the artificial price. Frey v. Commodity Futures Trading Comm'n, 931 F.2d 1171, 1177-78 (7th Cir.1991). The court also rejects Defendants' attempt to cast Plaintiffs' claim under Count I as one for submission o......
-
Table of cases
...(11th Cir. 1995), 55 Freeman v. San Diego Ass’n of Realtors, 322 F.3d 1133 (9th Cir. 2003), 114 Frey v. Commodity Futures Trading Comm’n, 931 F.2d 1171 (7th Cir. 1991), 219 G Gainesville Utils. Dep’t v. Fla. Power & Light Co., 573 F.2d 292 (5th Cir. 1978), 180 Gas Utils. Co. of Ala., Inc. v......
-
Table of Cases
...(11th Cir. 1995), 55 Freeman v. San Diego Ass’n of Realtors, 322 F.3d 1133 (9th Cir. 2003), 114 Frey v. Commodity Futures Trading Comm’n, 931 F.2d 1171 (7th Cir. 1991), 219 G Gainesville Utils. Dep’t v. Fla. Power & Light Co., 573 F.2d 292 (5th Cir. 1978), 180 Gas Utils. Co. of Ala., Inc. v......
-
Market Manipulation Statutes and Rules
...that market participants with a “short” position 144 are not able either to offset the futures position (i.e., 136. Id . at 1163. 137. 931 F.2d 1171 (7th Cir. 1991). 138. Id . at 1175. 139. Cargill , 452 F.2d at 1163. 140. Frey , 931 F.2d at 1175. 141. Id. 142 . See, e.g. , Cox, Comm. Fut. ......
-
Table of cases
...(11th Cir. 1995), 206 Four Corners Nephrology Assocs. v. Mercy Med. Ctr. of Durango, 582 F.3d 1216 (10th Cir. 2009), 106 Frey v. CFTC, 931 F.2d 1171 (7th Cir. 1991), 239 FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109 (D.D.C. 2004), 73 FTC v. Equitable Res., 512 F. Supp. 2d 361 (W.D. Pa. 2007),......