Reddy v. Commodity Futures Trading Comm'n
| Citation | 191 F.3d 109 |
| Decision Date | 01 August 1997 |
| Docket Number | 98-4099,98-4100,98-4071,Docket Nos. 98-4070 |
| Parties | (2nd Cir. 1999) STEPHEN F. REDDY and JOHN W. SORKVIST, Petitioners, v. COMMODITY FUTURES TRADING COMMISSION, Respondent. SOLOMON MAYER, BARRY MAYER, SHB COMMODITIES, INC., MAYE COMMODITIES CORP., and STEVEN GELBSTEIN, Petitioners, v. COMMODITY FUTURES TRADING COMMISSION, Respondent |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
J. DOUGLAS RICHARDS, Deputy General Counsel, Commodity Futures Trading Commission, Washington, D.C. (Daniel R. Waldman, General Counsel; Laura M. Richards, Assistant General Counsel; Janene M. Smith, Susan W. Nathan, Michael J. Garawski, Beth G. Pacella, Attorneys; of counsel), for Respondent.
MICHEAL T. TOMAINO, JR., Sullivan & Cromwell, New York, New York (Kenneth M. Raisler, of counsel), for Petitioner John W. Sorkvist.
BENJAMIN J. GOLUB, Rogovin Golub Bernstein & Wexler, LLP, New York, New York, for Petitioner Stephen F. Reddy.
KENNETH M. RAISLER, Sullivan & Cromwell, New York, New York (Michael T. Tomaino, Jr., Michael W. Martin, of counsel), for Petitioners Solomon Mayer, Barry Mayer, SHB Commodities, Inc., and Maye Commodities Corp.
GARY D. STUMPP, Stumpp & Bond, LLP, New York, New York (Adam M. Bond, of counsel), for Petitioner Steven Gelbstein.
Audrey R. Hirschfeld, Senior Vice President/General Counsel, Coffee, Sugar & Cocoa Exchange, Inc., New York, New York, for Amicus Curiae Coffee, Sugar & Cocoa Exchange, Inc.
Martin I. Kaminsky, Pollack & Kaminsky, New York, New York (W. Hans Kobelt, of counsel), for Amicus Curiae New York Mercantile Exchange.
Before: WINTER, Chief Judge, DORSEY,* and JONES,** District Judges.
Steven F. Reddy and John W. Sorkvist petition for review of an order of the Commodity Futures Trading Commission which found them guilty of several violations of the Commodity Exchange Act ("CEA"), 7 U.S.C. §§ 1 26, and imposed various sanctions.1 See In re Reddy, No. 92-19, Comm. Fut. L. Rep. (CCH), ¶ 27,271, 1998 WL 44574 (C.F.T.C. Feb. 4, 1998). Solomon Mayer ("SMayer"), Barry Mayer ("BMayer"), SHB Commodities, Inc. ("SHB"), Maye Commodities Corp. ("MCC"), and Steven Gelbstein petition for review of a similar order. See In re Mayer, No. 92-21, 1998 WL 80513 (C.F.T.C. Feb. 25, 1998). Because of the similarity of issues, we heard these petitions together. We hold that the weight of the evidence supports the Commission's liability findings in both proceedings and that the Commission adequately explained the basis for the sanctions imposed. We therefore deny the petitions for review.
In April 1992, the Enforcement Division of the Commission ("Division") filed an eight count complaint against petitioners Reddy and Sorkvist, along with two other traders, accusing them of multiple violations of the CEA and the Commission's Rules in connection with their trading activities in the sugar pit of the Coffee, Sugar & Cocoa Exchange ("CSCE"). The complaint alleged that from June 29 through October 31, 1988, and during March 1989, Reddy and Sorkvist -- both "dual traders"2 -- had engaged in fraudulent executions of customer orders and had accommodated each other in such transactions. Specifically, the complaint alleged that Reddy had engaged in 35 trade practice violations, including indirect "bucketing" of customers' orders and "wash trades." The complaint also alleged that Sorkvist had engaged in 19 trade-practice violations, primarily "accommodation" trades.
A broker buckets a customer's order by trading opposite the order for the broker's own account or for an account in which the broker has an interest. "Indirect bucketing" occurs when a broker, aided by an accommodating trader, trades opposite his own customer while appearing to trade opposite the accommodator.3 See CFTC Glossary: A Layman's Guide to the Language of the Futures Industry 4 (1997). For example, if a customer directs a broker to buy five contracts, the broker can trade against the customer by buying the five contracts for the customer from a trader while selling five identical contracts from the broker's personal account to the same trader. A broker can profit from bucketing by obtaining a better price than available through open outcry or by trading ahead of the customer and reaping the difference between the price of the early trade and the predetermined price for the customer.
A wash trade is a transaction made without an intent to take a genuine, bona fide position in the market, such as a simultaneous purchase and sale designed to negate each other so that there is no change in financial position. See Sundheimer, 688 F.2d at 152; CFTC v. Savage, 611 F.2d 270, 284 (9th Cir. 1979); CFTC Glossary, supra, at 1. Wash trades may be used, inter alia, to avoid margin requirements, to rearrange gains and loss for tax purposes, or to manipulate prices. See Charles R.P. Pouncy, The Scienter Requirement and Wash Trading in Commodity Futures: The Knowledge Lost in Knowing, 16 Cardozo L. Rev. 1625, 1637 (1995).
On November 2, 1995, the Administrative Law Judge ("ALJ") found Reddy liable for CEA violations in 35 trade sequences and Sorkvist liable in 16 trade sequences. See In re Reddy, No. 92-19, Comm. Fut. L. Rep. (CCH) ¶ 26,544, 1995 WL 646200, at *58-*60 (C.F.T.C. Nov. 2, 1995). 4 Based on these findings, the ALJ imposed the following sanctions: cease and desist orders against both petitioners; revocation of their floor broker registrations; imposition of a ten year trading ban on Reddy and a five year trading ban on Sorkvist; and a $300,000 civil penalty on Reddy and a $150,000 penalty on Sorkvist. On February 4, 1998, the Commission affirmed both the ALJ's liability findings and the imposition of sanctions.
In April 1992, petitioners SMayer, BMayer, SHB, MCC, and Gelbstein were, along with other traders, charged in a 23 count complaint of multiple recordkeeping and trade practice violations in connection with futures trading in the heating oil pit of the New York Mercantile Exchange ("NYMEX") from 1987 through mid 1989. With respect to the trade practice violations, the complaint alleged that: (i) SMayer, BMayer, SHB, and MCC knowingly engaged in noncompetitive trades to achieve wash results by trading the SHB and MCC accounts opposite each other ("Schedule A trades"); (ii) SMayer, SHB, and MCC knowingly engaged in noncompetitive trades and Gelbstein accommodated them ("Schedule B trades"); (iii) SMayer bucketed his customers' orders and Gelbstein accommodated him ("Schedule C trades"); and (iv) SMayer bucketed his customers' orders and Gelbstein accommodated him ("Schedule D trades").
On May 15, 1996, the ALJ found petitioners liable on 22 of the 23 counts alleged in the complaint 5 and imposed sanctions. SMayer, BMayer, SHB, MCC, and Gelbstein were ordered to cease and desist from violating the CEA and the Commission's Rules; the registrations of SMayer, BMayer, and SHB were revoked; SMayer, BMayer, and SHB were prohibited from trading on, or subject to the rules of, any contract market for five years; Gelbstein was prohibited from doing the same for 30 days; and a civil monetary penalty of $200,000 was assessed against SMayer, $100,000 each against BMayer, SHB, and MCC, and $25,000 against Gelbstein. See In re Mayer, No. 92-21, Comm. Fut. L. Rep. (CCH) ¶ 26,736, 1996 WL 271177, at *23 .
Petitioners appealed the ALJ's decision to the Commission. The Division did not seek an increase in the sanctions imposed by the ALJ. On February 3, 1998, the Commission issued an opinion and order ("Original Order"), in part affirming, vacating, and modifying the ALJ's decision. In particular, the Commission sua sponte increased the sanctions imposed by the ALJ pursuant to a policy of reviewing sanctions de novo that was adopted several months after the ALJ's decision and petitioners' appeals to the Commission. See In re Grossfeld, No. 89-23, Comm. Fut. L. Rep. (CCH) ¶ 26,921, 1996 WL 709219, at *11 (C.F.T.C. Dec. 10, 1996) ().
Shortly thereafter, it was brought to the Commission's attention that it had erroneously found BMayer and Gelbstein liable for fraud under Section 4b of the CEA even though the complaint contained no such charges. The Commission vacated its Original Order and issued an amended opinion and order ("Amended Order") on February 25, 1998, correcting the error and altering some of the sanctions it had imposed.6 Specifically, the Amended Order affirmed the ALJ's imposition of cease and desist orders against all petitioners and affirmed the revocation of SMayer's, BMayer's, and SHB's registrations. Instead of the five year trading ban imposed by the ALJ on SMayer and SHB, however, the Commission permanently banned them from trading. It also ordered a permanent trading ban against MCC, although the ALJ had imposed no ban. And, instead of the five year trading ban imposed by the ALJ on BMayer and the thirty day ban imposed upon Gelbstein, the Commission imposed ten year bans upon each of them. Finally, the Commission assessed civil penalties of $500,000 against SMayer, $250,000 each against SHB and MCC, and $150,000 each against BMayer and Gelbstein.
1) Standard of Review
The Commission's liability findings are conclusive if supported by the weight -- or preponderance -- of the evidence. See 7 U.S.C. § 9; Haltmier v. CFTC, 554 F.2d 556, 560 (2d Cir. 1977); see also Dohmen-Ramirez v....
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