MBH Commodity Advisors v. Commodity Futures Trading
| Decision Date | 07 May 2001 |
| Docket Number | No. 00-1957,00-1957 |
| Citation | 250 F.3d 1052 |
| Parties | (7th Cir. 2001) MBH Commodity Advisors, Inc. and Jacob Bernstein, Petitioners, v. Commodity Futures Trading Commission, Respondent |
| Court | U.S. Court of Appeals — Seventh Circuit |
Appeal from an Order of the Commodity Futures Trading Commission. CFTC Docket No. CRAA 99-3. [Copyrighted Material Omitted]
Before Cudahy, Kanne, and Rovner, Circuit Judges.
The National Futures Association (NFA) imposed sanctions on Jacob Bernstein and MBH Commodity Advisors, Inc. (MBH) in connection with an infomercial and web site on which both appeared. Following an unsuccessful appeal to the NFA Appeals Committee, Bernstein and MBH brought their case to the Commodity Futures Trading Commission (CFTC or Commission), which summarily affirmed the NFA Appeals Committee. Bernstein and MBH now appeal to this court, arguing that the CFTC applied a too-lenient standard of review in evaluating the NFA Appeals Committee decision; failed to make and declare required findings; and applied expansive readings of NFA rules in violation of their due process rights. We affirm.
Bernstein has been active in the commodities industry since 1972 and has developed a "seasonal trading method." This method is based on Bernstein's study of the historical behavior of futures markets--a study that allegedly revealed that trades of certain futures products will almost certainly produce a profit when executed on specified dates. The method is described in Bernstein's book, Key Date Seasonals--The Best of the Best in Seasonal Trades, as well as a series of newsletters, videotape lectures and other such materials, all of which he markets to the public.
In the spring of 1995, Ramy El-Batrawi of Genesis/Positive Response Television (Genesis) approached Bernstein at a seminar in Burbank, California about the possibility of marketing Bernstein's futures trading products through the creation of an infomercial. On October 27, 1995, Bernstein, acting for himself and on behalf of MBH,1 entered into a marketing and distribution agreement with Genesis. Bernstein testified before the NFA panel that, during the negotiations leading up to the final marketing agreement, he stressed the need for assurances that the infomercial would comply with NFA and CFTC regulations. Bernstein also stated that he insisted on the right to review the infomercial before it aired. However, the final agreement between Bernstein and Genesis granted Genesis the unrestricted and exclusive right to advertise and market Bernstein's commodity trading products. (Thus, Bernstein retained no right to pull the infomercial from the air, even if the infomercial raised regulatory concerns.) In exchange, Bernstein received four percent of Genesis' gross receipts from the sales of his products through the infomercial.
Prior to the infomercial's production, Genesis provided Bernstein with the infomercial script, which he reviewed. As part of his review, Bernstein independently verified the testimonials of three customers who were to appear in the infomercial as having successfully traded using his method. According to Bernstein, he satisfied himself that they had indeed profited from the use of his method although he did not continue to monitor their accounts to ensure that they remained profitable for the time during which the infomercial aired. For additional scrutiny, Bernstein sent an unspecified excerpt from the script to his attorney for review. Bernstein also requested that Genesis and Jeffrey Fox of Fox Investments, a broker to whom Bernstein referred customers for their trades, send the infomercial's script to their attorneys. All three attorneys suggested changes to the infomercial, which Genesis made. Following these preliminaries, Bernstein approved the script. Genesis produced the infomercial, entitled Success and You, in the spring of 1996.
The infomercial was ultimately aired by 390 television stations throughout the United States in 1996. The infomercial opens with a shot of two men who appear to represent contrasting degrees of wealth and poverty. A narrator states:
Both of these men have had the same opportunities throughout their lives. One struggles paycheck to paycheck trapped in a dead-end job, while the other has financial independence and the freedom to enjoy it. Why are some people stuck living a dull and meager existence while others succeed and lead the good life?
One of the host figures in the infomercial then appears on-screen and exclaims, "Today we'll reveal how you can change your humdrum existence into a life of financial independence on Success and You." Following some preliminary profiles, the infomercial focuses on Bernstein, who tells the audience, "I think trading futures is one of the best possible ways to achieve wealth in America today." Bernstein then recounts his own "rags to riches" story, concluding with a description of the seasonal trading methodology he developed along the way.
Bernstein next tells the viewer that his seasonal trades are "no-brainers," which require no guesswork because the trader is instructed when to enter and exit from the futures market. Bernstein notes that he has done all of the hard work for his customers, and emphasizes that his trades have been historically correct 70 percent of the time. (In fact, Bernstein claims that he doesn't even "fool around with anything that's been correct less than 70 percent of the time.") However, Bernstein also gives examples during the course of the infomercial of his more successful trades, naming, for example, a heating oil trade that he claims has an 87 percent probability of producing a profit.
Following the spotlight on Bernstein, the infomercial turns to three traders who testify to their success using Bernstein's seasonal method. Ken Whisenhunt, a truck driver, is shown telling his wife, "We're going to get that Lincoln now." Whisenhunt also tells the audience that "[i]t's fantastic when you make a trade and come up with several thousand dollars in your favor." Next, the audience is introduced to a Texas farmer named Harold Hinkle, who tells them, Lastly, a housewife named Pam Smith is introduced. Near the end of the infomercial she declares, Following other segments, the infomercial concludes with a casino dealer who tells the viewer that
The infomercial superimposes cautionary statements on six scattered occasions throughout its run. These statements are: (1) (2) "Statistical probabilities do not assure that any particular trade will be profitable;" and (3) "Persons who wish to commit money to the futures market should understand the risks before they do so."
In addition to the infomercial, Genesis created an internet web site, entitled Amazing Discoveries, to promote Bernstein's materials. The web site's address is provided in the infomercial, and the site includes content similar to the infomercial. For example, the site states that "Jake Bernstein's Trade Your Way to Riches will give you the exact skills it takes to make money as a disciplined, successful commodities trader," and states that Bernstein's trades are "no-brainer" trades with "unbelievable accuracy rates of 70, 80, even 90%." The web site only contains one small-print statement at the bottom of the web page warning of the risk inherent in futures trading: "There is a risk of loss in futures trading." The record does not indicate how many visitors viewed the web site.
The infomercial and web site came to the attention of the NFA, which is charged with creating and implementing a comprehensive program for self-regulation of the commodity futures industry.2 To further this goal, the NFA is required to adopt rules governing the conduct of its membership. These rules are subject to Commission approval and must provide standards governing the sales practices of NFA members. See 7 U.S.C. sec. 21(p)(3); 17 C.F.R. sec. 170.5. In addition, these rules must be "designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, in general, to protect the public interest, and to remove impediments to and perfect the mechanism of free and open futures trading." 7 U.S.C. sec. 21(b)(7).
Pursuant to its statutory mandate, the NFA has adopted numerous rules governing member conduct. See generally National Futures Association, NFA Manual (updated on an on-going basis). Because Bernstein and MBH were both members of the NFA at the time of the conduct relevant to this case, they were both subject to these rules, the most relevant of which is NFA Compliance Rule 2-29, entitled "Communications With the Public and Promotional Material." The following provisions of this rule are especially relevant:
(a) General Prohibition. No Member or Associate shall make any communication with the public which:
(1) operates as a fraud or deceit;
* * *
(3) makes any statement that futures trading is appropriate for all persons.
(b) Content of Promotional Material. No Member or Associate shall use any promotional material which:
(1) is likely to deceive the public;
(2) contains any material misstatement of fact or which the Member or Associate knows omits a fact if the...
To continue reading
Request your trial
-
Arobelidze v. Holder
...are not raised by the parties but instead addressed by the administrative agency itself. MBH Commodity Advisors, Inc. v. Commodity Futures Trading Comm'n, 250 F.3d 1052, 1060 n. 3 (7th Cir.2001); Watson v. Henderson, 222 F.3d 320, 322 (7th Cir.2000). This latter exception recognizes that on......
- U.S. v. Baldwin
-
Miami Nation of Indians v. U.S. Dept. of Int.
...of harmless error is applicable to administrative as to judicial decisions. 5 U.S.C. sec. 706(2)(F); MBH Commodity Advisors, Inc. v. CFTC, 250 F.3d 1052, 1063-64(7th Cir.2001); Sahara Coal Co. v. Office of Workers' Compensation Programs, 946 F.2d 554, 558 (7th Cir. 1991); Sierra Club v. Uni......
-
Troyer v. Nat'l Futures Ass'n
...industry, "[the] NFA is required to adopt rules governing the conduct of its membership." MBH Commodity Advisors, Inc. v. Commodity Futures Trading Comm'n , 250 F.3d 1052, 1056 (7th Cir. 2001). "Pursuant to its statutory mandate, the NFA has adopted numerous rules governing member conduct."......