S.E.C. v. American Commodity Exchange, Inc.

• Decision Date: 13 December 1976
• Docket Number: No. 76-1064,76-1064
• Citation: 546 F.2d 1361
• Parties: Fed. Sec. L. Rep. P 95,798 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. AMERICAN COMMODITY EXCHANGE, INC., et al., Defendants, Howard D. Williams, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1361

546 F.2d 1361

Fed. Sec. L. Rep. P 95,798

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. AMERICAN COMMODITY EXCHANGE, INC., et al., Defendants, Howard D. Williams, Defendant-Appellant.

No. 76-1064.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted Nov. 15, 1976.

Decided Dec. 13, 1976.

Paul Gonson, Associate Gen. Counsel, Securities and Exchange Commission, Washington, D. C. (Harvey L. Pitt, Gen. Counsel, James H. Schropp, Sp. Counsel, and John M. Mahoney, Atty., Securities and Exchange Commission, Washington, D. C., on the brief), for plaintiff-appellee.

Cleeta John Rogers, Oklahoma City, Okl., for defendant-appellant.

Howard Schneider, Gen. Counsel, Richard E. Nathan, Deputy Gen. Counsel, and Joan L. Loizeaux, Atty., Commodity Futures Trading Commission, Washington, D. C., amicus curiae.

Before SETH, McWILLIAMS and DOYLE, Circuit Judges.

WILLIAM E. DOYLE, Circuit Judge.

Defendant-appellant Williams seeks reversal of a judgment of the United States District Court for the Western District of Oklahoma granting a permanent injunction enjoining him from violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b) promulgated thereunder.

There were a total of 36 defendants named in the complaint. However, Williams is the only appellant. Twenty of the defendants consented to the entry against them of final judgments. They neither admitted nor denied the allegations of the complaint. Permanent injunctions by default were entered against seven other defendants and there was a dismissal without prejudice as to two defendants who were not served. Final judgments of permanent injunction permanently enjoining the defendants was entered against seven of the defendants and Williams who, as we have noted above, is the only appellant.

The SEC filed numerous affidavits, exhibits and transcripts of testimony in support of its motion for summary judgment. Appellant filed a motion to dismiss Counts II and III of the complaint, those which applied to him, and, in the alternative, moved for summary judgment. The only support for this motion was his own affidavit.

The essential theory of the complaint by the SEC against Williams and the others was that they were conducting a commodity options enterprise which was largely fictitious and designed solely to generate fees for Williams and his associates. Williams was a member of the Oklahoma State House of Representatives and had worked in conjunction with William G. Fisher, Administrator of the Oklahoma Securities Commission, to enact the measure. Williams obtained the passage of an amendment to a pending bill before the Oklahoma House of Representatives, the purpose of which was to regulate certain sales schemes. This amendment undertook to define a commodity option contract as a security subject to registration with the Oklahoma Securities Commission. It provided that such contracts were exempt from registration if purchased or sold on the floor of a bona fide exchange or board of trade by a broker-dealer or agent registered with the Oklahoma Securities Commission.

On March 15, 1973, this bill together with the Williams Amendment was passed. Thereafter, on May 17, 1973, Williams with three others organized the American Commodity Exchange, Inc. This exchange was intended to provide a marketplace facility for the buying, selling and trading of commodity option contracts. Williams then organized the Commodity Clearing House, Inc., which was designed as a clearing house for commodity option transactions which took place on the American Commodity Exchange. Following the organization of these two institutions, Fisher refused to promulgate rules defining bona fide exchange or board of trade, as those terms were used in the House Bill. He also refused to approve the formation of any bona fide exchange other than the American Commodity Exchange nor would he permit broker-dealer firms which were registered with the Oklahoma Securities Commission to join any other bona fide exchange. In addition, Fisher pressured the broker-dealers to become members of the American Commodity Exchange by issuing, in his official capacity, letters which stated that all commodity option contracts sold in Oklahoma were required to be transacted on domestic exchanges organized in conformity with the laws of the state of Oklahoma. The effect of this action was to make the American Commodity Exchange a monopoly.

Broker-dealer firms which became members of the American Commodity Exchange and Commodity Clearing House were required to pay a five per cent fee on each transaction negotiated on the exchange. This fee was passed on by the member firms to their commodity option customers.

The legislative measure exempted from registration only those commodity option contracts purchased or sold on the floor of a bona fide exchange or board of trade, and American Commodity Exchange literature stated that commodity option transactions would be effected on the floor of the exchange. The truth was, however, that the American Commodity Exchange did not in fact provide a marketplace for the agents of commodity option contracts. And the contracts were never negotiated on the floor of the exchange. Also, the Commodity Clearing House which purportedly acted as a clearing house for commodity option transactions merely received notification by telephone of transactions which had been brought about by broker-dealers and prepared reports of these transactions. In order to get fees from broker-dealer firms, Williams and others put the pressure on the firms by threatening that if they did not pay the fees they would be reported to Fisher, who could suspend their operations. They also told the broker-dealers that Fisher would recognize only the American Commodity Exchange since it was the only one designated by the Oklahoma Securities Commission to regulate commodity option trading in Oklahoma.

The so-called commodity option contracts were not genuine. The issuers failed to implement the purported option contracts by purchasing either the underlying commodity futures contracts or the actual commodities. The investor was led to believe that he had purchased an option to buy or sell commodity futures within a specified period of time at a set price and that the price included the price charged by the issuer of the option plus the commission paid to the broker. Since, however, no actual contracts nor commodities were purchased, the customer was at the mercy of the broker-dealer and so the fact that the option was eventually exercised by a customer was meaningless. The success of the enterprise from the standpoint of the customer or buyer depended on the broker-dealer's general financial success.

The evidence in support of the summary judgment motion, consisting for the most part of ex parte depositions taken by the SEC as part of its pre-filing investigation, showed that as purported options were exercised at a profit, the issuers frequently defaulted on the payment of money owed to the successful investors. At other times the broker-dealer firms paid their customers the amounts owed by the issuers with premiums received from new investors for the purpose of other purported commodity option contracts. In some instances the broker-dealers credited profits to the accounts of their customers who had successfully exercised their options, but induced the customers to reinvest the "funds" in new purported option contracts.

For a period of about a year, from May 1973 until June 1974, according to the SEC evidence, the enterprise received at least $66,000 in fees for services. The so-called services consisted mostly of preparing reports of the commodity option transactions which had been brought about by the member broker-dealer firms with the customers. A large portion of the fees were for the most part diverted for the personal use and benefit of Williams through the Fourth Dimension Investment Company and Earl E. Williams.

The SEC also offered evidence concerning a particular broker-dealer called Preferred Commodity Options Corporation which ran into financial difficulties and as a result agreed to transfer on March 15, 1974, over $150,000 in customer funds which had been escrowed to pay for option contracts. The allegation and proof was that Williams used these funds to purchase U. S. treasury bills totalling $150,000, which treasury bills were later cashed in Washington, D. C. and cashier's checks were obtained for them.

The defendant-appellant Williams has not denied most of the extensive allegations contained in the SEC complaints which have been summarized above. As noted, he filed an affidavit in which he set forth that he had never sold or attempted to sell any commodity option contracts to the public personally and that he did not hire or direct anyone at any time to sell commodity option contracts. He further said that he had not obtained a sales staff for these commodity option contracts and he did not take part in the organization of Preferred Commodity Options Corporation. There is a dispute on this because the SEC has claimed that he brought about the formation of Preferred Commodity Options Corporation. There is also an issue as to whether the $150,000 taken from Preferred Commodity Options Corporation was money belonging to the public. Williams claims it was not public money. Since, however, this transaction is not essential to the issuance of the injunctive relief, it is not the kind of fact issue which impedes grant of summary judgment.

Appellant does not deny that he created the American Commodity Exchange and the Commodity Clearing House, Inc., which companies provided the framework for the scheme, nor is there denial of its relationship to the State Securities Commission. The collection of the transaction fees is not challenged. Since, in addition to the above, there is undisputed evidence as to...