Schor v. Commodity Futures Trading Com'n

Decision Date10 August 1984
Docket NumberNos. 83-1703,83-1704,s. 83-1703
Citation239 U.S.App.D.C. 159,740 F.2d 1262
PartiesWilliam T. SCHOR, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, ContiCommodity Services, Inc. and Richard L. Sandor, Respondents. MORTGAGE SERVICES OF AMERICA, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, ContiCommodity Services, Inc. and Richard L. Sandor, Respondents.
CourtU.S. Court of Appeals — District of Columbia Circuit

Leslie J. Carson, Jr., Philadelphia, Pa., for petitioners in Nos. 83-1703 and 83-1704. Mark R. Eaton, Alexandria, Va also entered an appearance for petitioners in Nos. 83-1703 and 83-1704.

Robert L. Byman, Chicago, Ill., for respondent, ContiCommodity Services, Inc. in Nos. 83-1703 and 83-1704.

Nancy E. Yanofsky, Attorney, Commodity Futures Trading Commission, Washington, D.C., with whom Kenneth M. Raisler, General Counsel and Whitney Adams, Deputy Gen. Counsel, Commodity Futures Trading Commission, Washington, D.C., were on the brief for respondent, Commodity Futures Trading Commission in Nos. 83-1703 and 83-1804.

Before GINSBURG, Circuit Judge, MacKINNON, Senior Circuit Judge, and PARKER, * United States District Judge for the District of Columbia.

Opinion for the Court filed by Circuit Judge GINSBURG.

GINSBURG, Circuit Judge:

The principal question raised by this petition for review is whether the Commodity Futures Trading Commission ("CFTC" or "Commission") has authority to entertain counterclaims not alleging violations of the Commodity Exchange Act 1 ("CEA" or "Act") or CFTC regulations. Article III concerns impel us to construe the Act to deny the Commission that authority.

Petitioners William T. Schor and Mortgage Services of America (hereinafter collectively referred to as "Schor") filed complaints with the Commission seeking approximately $1.8 million in damages (reparations) from respondents ContiCommodity Services, Inc. and Richard L. Sandor (hereinafter collectively referred to as "Conti"). Schor alleged that Conti had committed sundry violations of the Act and CFTC regulations in handling Schor's financial futures accounts. 2 Conti counterclaimed to recover over $90,000 in post-liquidation deficit balances in Schor's accounts.

After discovery, briefing, and a three-day trial, the Administrative Law Judge ("ALJ" or "Law Judge") ruled against Schor on all aspects of his complaints and in favor of Conti on its counterclaims. The Commission declined to review the ALJ's decision; Schor then petitioned for judicial review. On all but one matter--Schor's contentions that Sandor "traded ahead" for his own account--we affirm the dismissal of Schor's complaints; on that sole matter, we remand to the Commission for an initial determination. On the principal question Schor's petition poses, we hold that the CFTC lacks authority (subject matter competence) to adjudicate Conti's counterclaims; we therefore reverse the ALJ's decision on the counterclaims and instruct their dismissal for lack of jurisdiction.

I. BACKGROUND

Petitioner Schor is the president and majority stockholder of petitioner Mortgage Services of America ("MSA"). MSA is a mortgage banker; it makes mortgage loans and then sells them to long-term investors. To hedge against shifts in interest rates, Schor entered the financial futures market.

Respondent Conti is a futures commission merchant registered with the CFTC. Respondent Sandor was the account executive at Conti in charge of Schor's accounts. Schor opened his Conti accounts in September 1976; at that time, Schor and MSA had a net worth of approximately $235,000 each. Over the next three years, Schor developed a heavily net "long" position. 3 He occasionally made additional deposits to his accounts in response to Conti's margin calls. 4 At the time of the events principally at issue in this proceeding, Schor's accounts were seriously undermargined.

On October 6, 1979, the Federal Reserve Board announced decisions Schor deemed likely to increase interest rates, thereby rendering unenviable his net long position. 5 On the following Monday--October 8--petitioner Schor attempted to call respondent Sandor for the alleged purpose of taking up short positions to hedge against rising interest rates. Sandor was out of the office that day; Schor spoke instead with several other Conti employees.

In testimony before the ALJ, the parties presented sharply conflicting versions of the Schor-Conti October 8, 1979, conversations. Schor insists that he wanted to take up short positions, but was blocked from trading because of instructions Sandor had given concerning Schor's accounts. Conti, on the other hand, presented evidence suggesting that Schor merely sought market information, but declined to trade when asked if he wished to do so.

When Schor spoke to Sandor the following day--October 9--Schor stated that further margin calls on petitioners' accounts could not be met. Pursuant to the parties' customer agreement, Conti then liquidated Schor's accounts. After liquidation, Schor's accounts retained substantial deficit balances.

In February 1980, Schor filed reparations complaints with the CFTC to recover from Conti losses suffered in Schor's futures trading ventures; he alleged numerous violations of the Commodity Exchange Act and CFTC regulations. Conti counterclaimed to recover the deficit balances remaining in Schor's accounts. 6 After trial in March 1981, the ALJ issued an initial decision denying relief to Schor and awarding judgment to Conti on its counterclaims. See Initial Decision, CFTC Docket No. R 80-566-80-723 (Oct. 19, 1981), reprinted in Appendix ("App.") 869-80. 7 The Commission found no question of law or policy warranting its consideration of the merits of the ALJ's determinations; it therefore allowed the initial decision to become final. See Order Denying Review, CFTC Docket No. R. 80-566-80-723 (June 15, 1983), reprinted in App. 939-40. 8 Schor then petitioned for this court's review. 9

II. PETITIONERS' CLAIMS

Schor maintains that, in dismissing his reparations claims, the ALJ erred in several critical respects. With one exception, we find Schor's objections utterly insubstantial.

First, Schor asserts that Conti neglected "to issue margin calls adequate to meet margin requirements and to enforce those requirements by liquidation of the accounts if they remained undermargined for any period of time." Petitioners' Brief at 32. These alleged oversights, Schor contends, violated the CEA's anti-fraud provision, 7 U.S.C. Sec. 6(b), as well as the Commission regulation requiring futures brokers to "diligently supervise the handling of all commodity interest accounts," 17 C.F.R. Sec. 166.3 (1983). The Commission has repeatedly ruled that a futures broker's decisions concerning margin requirements, even if in violation of commodity exchange rules, are subject to review only under the lenient business judgment rule unless bad faith is shown. See Friedman v. Dean Witter & Co., [1980-1982 Transfer Binder] COMM.FUT.L.REP. (CCH) p 21,307, at 25,536-38 (Nov. 13, 1981); Graves v. Shearson Hayden Stone, Inc., [1980-1982 Transfer Binder] COMM.FUT.L.REP. (CCH) p 21,301, at 25,521-22 (Oct. 14, 1981); Baker v. Edward D. Jones & Co., [1980-1982 Transfer Binder] COMM.FUT.L.REP. (CCH) p 21,167, at 24,770-72 (Jan. 27, 1981), appeal dismissed sub nom. Baker v. CFTC, 661 F.2d 871 (10th Cir.1981) (per curiam).

We uphold the Commission's position as a reasonable interpretation of the Act. See, e.g., First Commodity Corp. v. CFTC, 676 F.2d 1, 4-7 (1st Cir.1982); British American Commodity Options Corp. v. Bagley, 552 F.2d 482, 489-92 (2d Cir.), cert. denied, 434 U.S. 938, 98 S.Ct. 427, 54 L.Ed.2d 297 (1977). See generally Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 381, 89 S.Ct. 1794, 1802, 23 L.Ed.2d 371 (1969) ("[T]he construction of a statute by those charged with its execution should be followed unless there are compelling indications that it is wrong....") (footnote omitted). The CFTC's business judgment approach reflects the "special status accorded margin under the Commodity Exchange Act." Baker v. Edward D. Jones & Co., [1980-1982 Transfer Binder] COMM.FUT.L.REP. (CCH) at 24,770. The CEA specifically excepts "the setting of levels of margin" from the Commission's authority to approve, disapprove, or alter contract market rules. Id.; see 7 U.S.C. Secs. 7a(12), 12a(7)(C). Futures brokers have an incentive, wholly apart from CFTC regulation, to impose and enforce reasonable minimum margin requirements; they assume responsibility to third persons for any trading losses sustained, but not honored, by their customers. See P. JOHNSON, COMMODITIES REGULATION Sec. 1.10, at 32 (1982).

Schor has not alleged bad faith on the part of Conti in handling margin requirements on petitioners' accounts. Nor would the record support a charge of bad faith. We therefore reject Schor's arguments concerning Conti's alleged failure to police petitioners' margin deposits. Cf. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Brooks, 548 F.2d 615, 615 (5th Cir.) (per curiam) (rejecting proposition that "a sophisticated commodity futures investor who at all times possessed knowledge of his deficient margin account status ... should not be required to pay back any remaining indebtedness because the extension of credit violated a rule or regulation of the Chicago Board of Trade"), cert. denied, 434 U.S. 855, 98 S.Ct. 173, 54 L.Ed.2d 126 (1977).

Schor next attacks the Law Judge's determination that Conti did not "fail[ ] to accept and act upon directions given by [Schor]" on October 8. 10 See Initial Decision at 2, reprinted in App. 870. As earlier stated, the parties presented conflicting accounts of the October 8 telephone conversations between Schor and Conti employees. The testimony on this issue required the ALJ to resolve a credibility question. See id. at 7, ...

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