Rosenthal & Co. v. Commodity Futures Trading Commission

• Decision Date: 05 February 1980
• Docket Number: No. 78-1327,78-1327
• Citation: 614 F.2d 1121
• Parties: ROSENTHAL & COMPANY, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1121

614 F.2d 1121

ROSENTHAL & COMPANY, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, Respondent.

No. 78-1327.

United States Court of Appeals Seventh Circuit.

Submitted Jan. 16, 1980.

Decided Feb. 5, 1980.

Fred R. Kimmel and Ralph Mantynband, Chicago, Ill., for petitioner.

John G. Gaine, Gregory Glynn, Glynn L. Mays, Susan A. Arnold, Gen. Counsel, CFTC, Washington, D. C., John Troelstrup, CFTC, Chicago, Ill., for respondent.

Before PELL, WOOD and CUDAHY, Circuit Judges.

PELL, Circuit Judge.

The petitioner, Rosenthal & Company, applies to this court for review of an order of the Commodity Futures Trading Commission (CFTC or Commission). The petitioner maintains, inter alia, that the CFTC's order was entered without jurisdiction and in violation of its own regulations, that the method adopted by the CFTC for determining the legal sufficiency of complaints in reparation proceedings is at variance with the Administrative Procedure Act as well as with the requirements of due process of law, and that the complained of actions by the CFTC are inherently irrational, unreasonable, capricious, unfair, and prejudicial. Rosenthal, therefore, asks us to reverse the order of the CFTC and direct that the complaint against it be dismissed. The CFTC contradicts each of the petitioner's allegations about the legality of its order and the adequacy of its procedures and argues additionally that in any event this court is without jurisdiction to consider the merits of Rosenthal's complaint at this stage of the proceedings.

An understanding of the context in which the petitioner seeks relief requires a review of the purposes of reparation proceedings under the Commodity Exchange Act and of the rather protracted proceedings in this case before the Commission and this court. In 1974, Congress extensively revised the Commodity Exchange Act and created an independent agency, the CFTC, to administer and enforce the Act's provisions. Commodity Futures Trading Commission Act of 1974, 88 Stat. 1389. (Previously the Act had been administered by the Commodity Exchange Authority of the Department of Agriculture.) In order to protect the investing public in a previously little-regulated area, Congress granted the CFTC exclusive jurisdiction over futures trading and broad enforcement powers. See 7 U.S.C. §§ 2, 9, 13b, 13a-1. See also Board of Trade v. CFTC, 605 F.2d 1016 (7th Cir. 1979). Congress also sought to encourage inexpensive and expeditious adjudication of customer claims against commodity professionals by requiring the CFTC to establish a reparation procedure for the resolution of claims arising under the Act. The reparation procedure was intended to be a new remedy for aggrieved customers in addition to litigation in the courts and arbitration. See Rosen, Reparation Proceedings Under the Commodity Exchange Act, 27 Emory L.J. 1005, 1005 (1978). "The 1974 legislation envisioned the Commission's reparations proceedings as being analogous to the operation of a small claims court," in which a customer, often representing himself pro se, could obtain satisfaction of his claim. S.Rep.No.95-850, 95th Cong., 2d Sess. 16 reprinted in (1978) U.S.Code Cong. & Admin.News, pp. 2087, 2104. Unfortunately, the goal of providing "a fast, efficient, nontechnical forum," Rosen, supra at 1055, has been hampered, at least in part, by the increasing number of reparation claims that have been filed with the Commission. Id.; S.Rep.No.95-850, 95th Cong., 2d Sess. 16 reprinted in (1978) U.S.Code Cong. & Admin.News, pp. 2087, 2104.

The procedure in reparation cases before the CFTC is established in 7 U.S.C. § 18. CFTC rules promulgated under that section are found in 17 C.F.R. §§ 12.1-12.102 (1979). Under the Act, any person may file a complaint with the CFTC alleging a violation of the Act or of CFTC rules, regulations, or orders. 7 U.S.C. § 18(a). The Commission is empowered to investigate the complaint, id. at § 18(b), and if it determines that the complaint states a violation of the Act, require the accused commodity professional to file an answer. ¹ If the claim is not then settled, the case is referred to an Administrative Law Judge for a formal adjudicatory proceeding.

The Commission's role in these proceedings is to provide a forum for the resolution of claims arising out of trading in commodity futures. The CFTC in its brief before this court characterizes itself as "a quasi-judicial administrative forum for adjudication of complaints." It apparently does not assume a prosecutorial role in formal adjudicatory proceedings or represent complainants in asserting their claims for damages. ² In general, complainants must either retain private counsel or represent themselves before the ALJ and in any subsequent stages of the reparation proceedings.

A hearing presided over by the ALJ is held on the complaint upon referral. ³ Under the Commission's regulations, the ALJ renders an initial decision, 17 C.F.R. § 12.84 (1979), which becomes the final order of the Commission unless an application for review by the CFTC is filed within 15 days of the service of the initial decision or the CFTC decides to review the ALJ's decision sua sponte. The CFTC may decline review or grant the appeal and render its own decision. In either event, if a violation of the Act and damages are finally found, the Commission's order directs the offender to pay the complainant the amount of his damages. 7 U.S.C. § 18(e). An order directing payment can be enforced by the complainant in the federal district courts, 7 U.S.C. § 18(f), and a commodity professional's failure to pay results in loss of trading privileges, id. at § 18(h). Review of CFTC reparation orders is by petition to the court of appeals pursuant to 7 U.S.C. § 18(g).

The facts in this case are examined at some length in the Commission's opinion. Spurgeon v. Rosenthal & Co., Comm.Fut.L.Rep. (CCH) P 20,906 (Sept. 26, 1979), and need not be set forth in great detail here. The proceedings before the Commission were initiated upon the complaint of Lloyd Spurgeon. The complaint alleged various irregularities by Rosenthal in handling a commodities option transaction on Spurgeon's behalf. The CFTC's Division of Enforcement, Reparations Unit, determined that the complaint stated a violation of the Act, called for an answer by Rosenthal, and referred the matter to an ALJ. Rosenthal's answer asserted, inter alia, that the complaint failed to state a violation of the Commodity Exchange Act and therefore requested that the complaint be dismissed. The Administrative Law Judge granted Rosenthal's motion to dismiss. Spurgeon v. Rosenthal & Co., Comm.Fut.L.Rep. (CCH) P 20,471 (July 27, 1977).

The complainant then filed an application for review which was received by the Commission on August 9, 1977. Unfortunately, the complainant failed to serve a copy of the application on Rosenthal as is apparently contemplated by the CFTC's rules. 17 C.F.R. §§ 12.101(a), 12.48 (1979). The Commission, however, unaware of the defect, granted review and on February 10, 1978, reversed. In its brief unreported order, the Commission held that the ALJ was without authority under the Commission's rules to grant a motion to dismiss. In support of its holding, the CFTC relied on its previous decision in Antoniolli v. Clayton Brokerage Co., Comm.Fut.L.Rep. (CCH) P 20,546 (Jan. 18, 1978), in which it had held that,

since the Commission has made no provision in its Reparation Rules for its Administrative Law Judges to dismiss reparation complaints for failure to state a cause of action, once they have been forwarded for hearing, the Administrative Law Judge in this case acted in excess of his authority under the Act and the Commission's Reparation Rules in dismissing the complaint and his order of dismissal must be reversed.

See also Baker v. Rosenthal, Comm.Fut.L.Rep. (CCH) P 20,552 (Feb. 10, 1978). The service of the Commission's decision apparently was the first indication that Rosenthal had that its victory before the ALJ was the subject of an administrative appeal.

Rosenthal upon learning of the reversal petitioned for review in this court and moved that all proceedings before the Commission be stayed. Rosenthal simultaneously asked the Commission to stay all proceedings pending review in this court and also asked that the CFTC reconsider and vacate its order reversing the ALJ's decision. This court denied the motion for stay pending review in an unpublished order dated April 3, 1978. On April 28, 1978, however, the Commission stayed all proceedings until its further order and agreed to reconsider its earlier decision. On the motion of the CFTC and with Rosenthal's acquiescence, this court ordered that the appeal be held in abeyance pending the decision of the Commission.

On September 26, 1979, the Commission entered an order reaffirming its earlier ruling that the ALJ was without power to grant a motion to dismiss. Spurgeon v. Rosenthal & Co., Comm.Fut.L.Rep. (CCH) P 20,906 (Sept. 26, 1979). The Commission also rejected the contention that the ALJ's action could be regarded as a summary disposition in accordance with its reparation rule 12.67, 17 C.F.R. § 12.67 (1979). The Commission held meritless as well several procedural objections which Rosenthal had interposed, objections which Rosenthal renews in its brief before this court. Because further proceedings in conformity with the CFTC's decision were scheduled to be conducted before the ALJ on October 24, 1979, Rosenthal requested that this court enjoin further proceedings before the ALJ. This court, after considering the response of the CFTC, granted the motion. In that order, this court, in order to afford itself an adequate opportunity to rule on the petitioner's claims, enjoined all further Commission proceedings pending judicial review and ordered that this case be decided expeditiously and without oral argument. Neither party has objected to this procedure, and upon...