New York Currency Research Corp. v. CFTC, Docket No. 98-4159

• Decision Date: 15 June 1999
• Docket Number: Docket No. 98-4159
• Citation: 180 F.3d 83
• Parties: , NEW YORK CURRENCY RESEARCH CORPORATION, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

Page 83

180 F.3d 83, NEW YORK CURRENCY RESEARCH CORPORATION, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, Respondent.

Docket No. 98-4159.

United States Court of Appeals, Second Circuit.

Argued Dec. 3, 1998.

Decided June 15, 1999.

JACOB GINSBURG, New York, New York (Jacob Laufer, Laufer, Halberstam & Karish, New York, New York, of counsel), for Petitioner.

BETH G. PACELLA, Washington, D.C. (Daniel R. Waldman, General Counsel, J. Douglas Richards, Deputy General Counsel, Commodity Futures Trading Commission, Washington, D.C., of counsel), for Respondent.

Before: VAN GRAAFEILAND, CARDAMONE, and CABRANES, Circuit Judges.

CARDAMONE, Circuit Judge:

We deal on this appeal with the interpretation of a statute and rules used by the Commodity Futures Trading Commission (Commission or CFTC) to compel the production of records. The Commission requested, via a letter, voluminous records from petitioner New York Currency Research Corporation (New York Currency, or petitioner), a corporation once registered as a commodity trading advisor and a commodity pool operator. In response to the letter, petitioner said it had never acted as either a trading advisor or a pool operator and believed therefore that absent a subpoena it was not obliged under the statute and rules to produce the documents for the Commission.

In a subsequent enforcement action by the CFTC's Division of Enforcement (Division) pursuant to expedited procedures, the Division was unable to convince an Administrative Law Judge (ALJ) that the Commission was entitled to compel the production of records from petitioner. Hence, in his initial decision the ALJ dismissed the case against petitioner. The Division took an administrative appeal before the Commission, which found four violations and labeled New York Currency's actions a "naked attempt to circumvent the regulatory obligations imposed under the [Commodity Exchange] Act." The seriousness of the violations, in the Commission's opinion, warranted a cease and desist order and a civil monetary penalty amounting to $110,000. Upon reconsidering the case, the Commission reduced the number of violations from four to two, but left the monetary assessment undisturbed and lifted a stay of enforcement it had earlier granted.

Certain aspects of this case have an Alice in Wonderland quality about them. The CFTC's rules promulgated in 17 C.F.R. state that they are to be construed to secure a just and speedy determination "with full protection for the rights of all parties." 17 C.F.R. § 10.1. For purposes of a quick decision, the Commission may adopt expedited procedures and waive the quoted protections provided respondents, so long as no party is prejudiced. See id. § 10.3(b). For example, after a complaint is served respondent normally has 20 days to respond, see id. § 10.23(c), but under the expedited procedures the Commission may shorten the time limit prescribed by the rules for filing any document, see id. § 10.6. We assume that in the usual case the employment of expedited procedures and waiver of such protections is prompted by the Commission's belief that quick decision best serves the public interest.

In the present case, when the Commission's request to New York Currency did not result in the production of the material sought, the Commission could have made use of a prehearing conference under § 10.41--as suggested by petitioner--for the purpose of clarifying the issues or promoting a fair hearing. If that did not succeed, the CFTC, as always, had resort to its subpoena powers under § 10.68. Yet, it appears from this record that rather than following these rules, which the CFTC itself had promulgated, the Commission, in a fit of pique from what it viewed as petitioner's intransigent refusal to do its bidding and unwilling to consider any other reason than its own will, moved immediately to an expedited procedure. In so doing it stripped the ALJ--so he believed--of his discretion to reinstitute the standard procedures, and at the same time fulfilled no public interest that we can see. Instead, the Commission appears to have acted the role of the Queen who declared in a similar fit of pique during the hurried trial of the Knave of Hearts, "Sentence first--verdict afterwards." Lewis Carroll, Alice's Adventures in Wonderland 156 (Justin Todd illus., Crown Publishers 1984).

BACKGROUND

A. Events Leading to Proceedings

We turn to the facts. New York Currency was registered as a commodity trading advisor (CTA) and a commodity pool operator (CPO) for 15 months, from January 16, 1996 to April 3, 1997. It is an off-exchange foreign currency trader. Thus, in light of the Supreme Court's decision in Dunn v. Commodity Futures Trading Comm'n, 519 U.S. 465, 117 S.Ct. 913, 137 L.Ed.2d 93 (1997), clarifying that off-exchange trading in foreign currency options is exempt from CFTC regulation, New York Currency permitted its registrations to lapse. Prior to the decision in Dunn, New York Currency had mistakenly believed it was required to be registered. In the summer of 1997 it ceased doing business.

On July 25, 1997, three months after petitioner's registrations had expired, the Division mailed petitioner a letter directing it to produce--without specifying for what period of time--the following information: (1) the name, address, and telephone number of each client, subscriber, or participant; (2) samples or copies of all reports, letters, circulars, memoranda, publications, writings, or other literature or advice distributed to clients, subscribers, or participants, or prospective clients, subscribers, or participants; (3) any and all opening account documents, powers of attorney, financial and credit records, commission or fee agreements, and any other documents accompanying or related thereto for each client, subscriber, or participant; (4) any and all trading records, confirmations, and daily and monthly account statements for each client, subscriber, or participant; and (5) any and all records, notes, correspondence, and taped conversations relating to New York Currency, including but not limited to customer complaints and communications between New York Currency, Michael Matejka (the President of New York Currency), their agents, employees, or representatives and any third parties or any governmental agencies, bodies, or entities. This letter request was returned to the Division by the U.S. Postal Service, stamped "Moved, unable to forward."

On August 5, 1997 the Division sent another letter to petitioner's new address containing a nearly identical request, but this letter, unlike the first one, specified that the requested documents cover the period from "September 1995 to the present." The requested information therefore included material outside petitioner's registration period that began in January 1996 and ended April 3, 1997. Through counsel, New York Currency declined to produce the requested documents, asserting that the Commission lacked jurisdiction over New York Currency's activities. On September 5, 1997 the Division explained in a letter to petitioner's counsel that it had a statutory right to inspect books and records New York Currency was required to keep while registered, and implied that failure to comply with its request could result in an enforcement action. Ten days later the Division made another production request, and included the Commission's Statement to Registered Persons Directed to Provide Information or Access to Books and Records Other Than Pursuant to Commission Subpoena. Petitioner again declined on the grounds that its activities were outside the ambit of CFTC authority, but repeated its invitation to meet with the Division to confer on the matter.

B. Hearing and ALJ Initial Decision

Nearly three months later, on December 17, 1997, the Division filed a single count complaint alleging that the failure to produce the documents violated § 4n(3)(A) of the Commodity Exchange Act (Act), codified at 7 U.S.C. § 6n(3)(A), and CFTC Rules 1.31(a)(2), 4.23, and 4.33, promulgated under the Act and codified at 17 C.F.R. §§ 1.31(a)(2), 4.23, and 4.33. Pursuant to § 10.3 of its rules of practice, 17 C.F.R. § 10.3(b), the Commission exercised its authority to waive subparts A through H of those practice rules, id. §§ 10.1-10.108--normally applicable to Commission adjudicatory proceedings, id. § 10.1--and instead commenced expedited proceedings against New York Currency.

Service by registered mail occurred at the height of the holiday season on December 18, 1997 with an extremely tight litigation schedule that required pleadings to be filed, discovery completed, and an oral hearing convened all within 11 calendar days. The Division's complaint requested relief in the form of a cease and desist order and a civil monetary penalty of not more than the higher of $110,000 or triple the monetary gain to petitioner arising from each violation.

On December 24, 1997 petitioner informally requested additional time to prepare for the hearing. The Division objected to an adjournment, and the request was denied by the ALJ because of his view that, due to the expedited schedule, he had no discretion regarding the hearing date. Petitioner then filed a timely answer on December 29, 1997, and moved to dismiss the complaint, for summary judgment, and for additional time to prepare for the hearing. The ALJ denied the motion, stating that the expedited complaint stripped him of authority to grant the requested relief.

A one-day oral hearing was held December 29, 1997. At the hearing, the Division characterized the case as involving only three issues, that is, whether New York Currency: (1) was registered as a CTA and a CPO; (2) was subject to recordkeeping requirements as a result of registration; and (3) had failed to maintain and produce these records despite being required to do so. The Division's proof consisted primarily of records showing New York Currency's registration as a CTA and a CPO and...