Monieson v. Commodity Futures Trading Com'n, 92-3014

Decision Date07 June 1993
Docket NumberNo. 92-3014,92-3014
Citation996 F.2d 852
CourtU.S. Court of Appeals — Seventh Circuit

Jerrold E. Salzman (argued), Phillip L. Stern, Freeman, Freeman & Salzman, Chicago, IL, for petitioner.

Jay L. Witkin, Jay L. Witkin, Kathleen McDonough, Jeffrey S. Holik (argued), John Nolan, Dennis Klejna, Joanne T. Medero, Commodity Futures Trading Com'n, Office of Gen. Counsel, Washington, DC, Dennis M. Robb, Rosemary Hollinger, Commodity Futures Trading Com'n, Chicago, IL, for respondent.

Before CUMMINGS and MANION, Circuit Judges, and RONEY, Senior Circuit Judge. *

CUMMINGS, Circuit Judge.

Brian Monieson was a major figure in the commodity futures industry. As chairman of the Chicago Mercantile Exchange from 1983 to 1985 and founder, chairman of the board, and majority stockholder of GNP Commodities, a sizeable futures commission merchant, he wielded great influence and shouldered tremendous responsibility. In 1988 the Commodity Futures Trading Commission (CFTC) issued a complaint against Monieson, GNP, and two associated persons of GNP, Norman Furlett and Ira Greenspon. The latter two were charged with, among other things, fraudulently allocating customer trades in violation of Section 4b(A) of the Commodity Exchange Act (CEA). 7 U.S.C. § 6b(A). The complaint also charged GNP with derivative liability for Furlett and Greenspon's activity under 7 U.S.C. § 2, as well as recordkeeping violations, non-competitive trading, and a failure to supervise the traders under Commission Rule 166.3. 17 C.F.R. § 166.3. Most important for this case, the complaint charged Monieson with liability as a "controlling person" of Furlett and Greenspon under Section 13(b) of the CEA, 7 U.S.C. § 13c(b), and with failure to supervise under Rule 166.3.

After a hearing an Administrative Law Judge (ALJ) found all of the defendants guilty on all charges, imposing penalties and fines on each. The judge revoked Monieson's registration as a floor broker, permanently banned him from trading on any contract market, and levied a civil monetary penalty of $500,000 against him. The CFTC affirmed on appeal, though it reduced Monieson's lifetime trading ban to two years. Monieson now appeals, 1 contesting both his liability and the sanctions.

A. Facts

The first task in this complicated case is to define the cast of characters. First, of course, is Monieson, who founded GNP in 1973. At the time of the activity under scrutiny he owned a majority of the company's stock and served as chairman of the board. He was also regularly involved in the daily operation of GNP. For example, he made the decisions to hire both Furlett and Greenspon, he approved the arrangements for Furlett's profits and expenses with GNP, and he resolved commission disputes between Furlett and other traders. The president and vice president of GNP frequently reported to Monieson regarding day-to-day operations of the firm.

Next come Furlett and Greenspon. In 1983 GNP established a retail sales division, and Monieson hired Norman Furlett, a long-time friend, to head the division. Monieson hired Greenspon for the retail division in 1985. Both Furlett and Greenspon maintained personal trading accounts at GNP, as well as trading in a joint account and, of course, trading on behalf of customers.

At the same time it established the retail division, GNP established a compliance department to insure that the company and its employees abided by applicable rules. James Schlifke, an attorney, served as part-time compliance counsel in 1983 and 1984, became full-time in 1985, and in 1986 became GNP's general counsel.

Kathryn Haun, a veteran GNP employee, became part of the compliance department in 1985. Haun established compliance procedures for GNP brokers and reviewed daily trading activity. She also assembled a chart depicting the results of her investigation of trades made by Furlett and Greenspon between February 3-14, 1986.

Closest to Monieson in the GNP structure were Fred Arditti and Donald Breitfelder. Arditti became president of GNP in early 1985. Breitfelder was GNP's executive vice president from 1981 to March 1986. At all relevant times the compliance department reported to either Breitfelder or Arditti, who in turn reported to Monieson.

Other individuals important to this case are Roger Walter, Furlett's personal clerk; Barbara Fiore, one of Greenspon's clerks; and Paul Gelman, a trader at GNP who told Monieson of his suspicions concerning Furlett's trading.

We now move to a brief summary of the facts, as found by the ALJ and adopted by the Commission. 2 Since Monieson is the only appellant in this case, this opinion concentrates on the facts and testimony most relevant to the charges against him.

In January 1986 Furlett's clerk, Roger Walter, told general counsel Schlifke that both Furlett and Greenspon were placing orders to the trading floor without account numbers and later allocating winning trades to their own accounts and losing trades to customer accounts. In traders' parlance, that practice is known as "bucketing" trades. In February Greenspon's former clerk, Barbara Fiore, also told Schlifke that the traders were bucketing trades. Later that month Schlifke told Monieson about his conversations with Walter and Fiore, but Monieson concluded that those two were not very reputable; Fiore had been fired and Walter had been convicted of a felony in 1982, and therefore Monieson did not act on the allegations.

GNP president Arditti was aware of the problem with Furlett and Greenspon both from what Schlifke had told him and from Kathryn Haun of the compliance department, who told him that she suspected illegal trading. Haun said that she had already told Monieson about her suspicions, but he was not convinced. When Arditti discussed Haun's allegations with Monieson, the latter said that they were probably caused by a commission dispute between Haun and Furlett, and that he should stay out of it. This was similar to what had happened in January when Paul Gelman, another trader involved in a commission dispute with Furlett, told Monieson that he thought Furlett and Greenspon were bucketing trades. Believing that Gelman, who had no hard evidence of misconduct, was simply trying to gain leverage in his commission dispute, Monieson disregarded the charges.

Later in February, Schlifke and Arditti discussed the possible problems in Furlett's and Greenspon's accounts and decided to investigate further. Arditti had Haun compile a chart comparing trades in Furlett's and Greenspon's accounts with customer accounts trading in the same commodities at the same time. The chart covered ten days of trading (February 3-14) and revealed that on four of those days one or more of Furlett's and Greenspon's personal accounts made money, while their customers trading the same commodities lost money. Schlifke, Arditti, and Monieson reviewed the chart together. Monieson believed that the evidence was not conclusive and did not warrant dismissing the traders. Arditti agreed, though he asked Schlifke and Haun to continue to monitor the accounts. 3 Schlifke, on the other hand, told Monieson that he thought that "it looked bad, and that the firm had liability, and that he should let Furlett and Greenspon go." 4 Tr. 602.

In May 1986 Furlett's clerk, Roger Walter, testified about Furlett's trading before the Chicago Mercantile Exchange. Afterward, Monieson called Walter into his office and asked if Furlett and Greenspon had been stealing. Walter said yes. Monieson then asked if they were still stealing, and Walter answered no. Monieson testified that he told Walter, "You've got to tell the truth, but you're playing with people's lives and you have to be very careful what you say." Tr. 768. Walter, however, remembered Monieson adding another, more ominous sentiment: "I'm not telling you to lie, but it's okay to say you don't remember." Tr. 139.

Despite his dismissal of the numerous allegations, Monieson acknowledged that he knew there was a real problem with Furlett and Greenspon in May. He reacted, however, not by ordering any further investigation or taking action against the two traders, but by "[trying] to let that play out and disassociate myself from a very, very close person [Furlett]." Tr. 769. He did so based on assurances--presumably Walter's statement, or from Furlett himself, who spoke with Monieson after Walter left the office--that the stealing had stopped. Tr. 768. Monieson allowed the two traders to stay at the firm until October 1986. At that time they left GNP and, with the help of Monieson's attorney, started a new introducing brokerage called Comwest, which was guaranteed by GNP.

B. Prior Proceedings
1. The ALJ's Initial Decision

The case was presented to the ALJ during a two-week hearing in November of 1989. As relevant to this appeal, the CFTC alleged that: (1) At various times between September 1984 and May 1986, Furlett placed orders to the floor at the Chicago Board of Trade and the Chicago Mercantile Exchange without proper account identification, and later fraudulently allocated the trades by placing losing trades in customer accounts and winning trades in personal accounts or the accounts of friends; (2) Between January and May 1986, Greenspon also placed orders without proper account identification and fraudulently allocated losing trades to customer accounts and winning trades to personal accounts or the accounts of friends; (3) Monieson was a controlling person of Furlett and Greenspon and did not act in good faith to prevent their violations, meaning he was liable to the same extent as the two traders; and (4) Monieson failed to supervise Furlett and Greenspon diligently.

After hearing testimony from several GNP employees regarding Furlett and Greenspon's placement of orders and allocation of trades, and after reviewing...

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