Silverman v. Commodity Futures Trading Commission

• Decision Date: 19 September 1977
• Docket Number: No. 77-1320,77-1320
• Citation: 562 F.2d 432
• Parties: Jeffrey L. SILVERMAN, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 432

562 F.2d 432

Jeffrey L. SILVERMAN, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, Respondent.

No. 77-1320.

United States Court of Appeals, Seventh Circuit.

Argued June 3, 1977.

Decided Sept. 19, 1977.

Joel J. Bellows, Charles B. Bernstein, Chicago, Ill., for petitioner.

Richard E. Nathan, Joanne Leveque, Commodity Futures Trading Comn., Washington, D. C., for respondent.

Before FAIRCHILD, Chief Judge, CUMMINGS, Circuit Judge, and GRANT, Senior District Judge. ^*

CUMMINGS, Circuit Judge.

Petitioner Jeffrey L. Silverman is an account executive employed by a commodity futures commission merchant in Chicago, Illinois. Petitioner presently appeals from the revocation of his registration as an "associated person" licensed to do business on commodity futures markets pursuant to the regulatory authority of the Commodity Futures Trading Commission (Commission) as empowered by the Commodity Futures Trading Commission Act of 1974 (1 U.S.Code Cong. & Admin.News (1974), pp. 1589-1622).

Procedural History

On February 16, 1977, in Silverman v. Commodity Futures Trading Commission, 549 F.2d 28 (7th Cir. 1977), this Court affirmed a two-year suspension of petitioner's trading privileges on commodity futures markets as a result of certain unauthorized and fraudulent trades on behalf of five customers' accounts in 1970 and 1971. ¹ The nature of petitioner's improvident trades was the subject matter of a disciplinary petition dated March 13, 1973, as initiated by the Secretary of Agriculture pursuant to the Commodity Exchange Act of 1936. See In Re Jeffrey L. Silverman, CFTC Docket No. 75-6. At issue there was Silverman's allegedly fraudulent placement of 23 futures transactions in eggs, hogs, and pork bellies, with respect to five customers' accounts during September and October 1970 and in March 1972. In Silverman, supra at 33, we fully concurred in the Commission's finding that petitioner had wilfully violated the anti-fraud provision of the 1936 Act (7 U.S.C. § 6b) ² and held that the suspension of his trading privileges was justified by the record.

After jurisdiction in the above case had been transferred to the Commission, ³ but before an administrative decision in the matter could be reached, petitioner on March 31, 1975, applied for registration as an "associated person" with the Commission pursuant to 7 U.S.C.A.Sup. § 6k(2). The completed application form (CFTC Form 4-R) disclosed under item 15 that Silverman was currently involved in administrative proceedings before the Commission on account of CFTC Docket No. 75-6, supra. Nonetheless, on July 18, 1975, the Commission granted petitioner's application for registration as an "associated person" and issued him License Number 505-54-9283. Thereafter, on February 28, 1977, during the pendency of this controversy, petitioner's registration was renewed for another two years as a matter of course. See 7 U.S.C.A.Sup. § 6k.

Events subsequent thereto before the Commission have resulted in petitioner's revocation of registration as an "associated person," in accordance with the Commission's regulatory authority as an independent federal agency entrusted with the safeguarding of the nation's commodity futures industry. The revocation of registration ⁴ was to be effective 15 days from the date of the Commission's final order of March 14, 1977, which would have been March 29, 1977. However, due to the serious effect of this unreviewed sanction, this Court on March 29, 1977, granted Silverman's emergency motion to stay enforcement of the Commission's order pending our decision in this matter and ordered that the appeal be expedited. This appeal arises on a petition to review the revocation of petitioner's registration.

Regulatory Mission of the Commission

On October 23, 1974, Congress enacted the Commodity Futures Trading Commission Act of 1974 which extensively amended the Commodity Exchange Act of 1936, its predecessor. The legislative aim of the 1974 Act was to further the purpose of the previous Act in "ensuring fair practice and honest dealing on the commodity exchanges and providing a measure of control over those forms of speculative activity which often demoralizes the markets to the injury of producers, and consumers, and the exchanges themselves." See Senate Report No. 93-1131, 93rd Cong., 2nd Sess. (1974), reported in 3 U.S.Code Cong. & Admin.News (1974), pp. 5843, 5856.

An integral part of the 1974 Act was the creation of a new independent federal regulatory agency to be known as the Commodity Futures Trading Commission. See 7 U.S.C.A.Sup. § 4a. Unlike the Commodity Exchange Authority, the Commission was to have exclusive jurisdiction over all previously unregulated commodities and all transactions involving the sale of commodities on the nation's futures markets. See 7 U.S.C.A.Sup. § 2. In addition, the Commission was armed with broad regulatory and rule-making powers necessary to its operating procedures and business. See 7 U.S.C.A.Sup. §§ 2 and 4a(j).

Scope of Registration Expanded

The 1974 Act also added a new category known as the "associated person" to the list of those persons required to be registered with the Commission in order to conduct business. ⁵

In relevant part, 7 U.S.C.A. Sup. § 6k regulates an "associated person" as follows:

"(1) It shall be unlawful for any person to be associated with any futures commission merchant or with any agent of a futures commission merchant as a partner, officer, or employee * * * in any capacity which involves (i) the solicitation or acceptance of customer's orders * * * or (ii) the supervision of any person or persons so engaged, unless such person shall have registered * * * with the Commission * * *.

"(2) Any such person desiring to be registered shall make application to the Commission in the form and manner prescribed by the Commission * * *. Such person, when registered hereunder, shall likewise continue to report and furnish to the Commission such information as the Commission may require. Such registration shall expire two years after the effective date thereof, and shall be renewed upon application therefor unless the registration has been suspended * * * or revoked after notice and hearing as prescribed in Section 9 of this title * * *."

Revocation of Registration

Critical to the present controversy is the Commission's discretionary power to revoke the registration of an "associated person" pursuant to the procedures set forth in 7 U.S.C.A.Sup. § 9. Under this provision the Commission may upon reasonable belief of wrongdoing serve an "associated person" with a complaint and order to show cause why his registration should not be suspended or revoked. The substantive grounds for such revocation are contained in 7 U.S.C.A.Sup. § 12a(3) as follows:

"The Commission is authorized:

"(3) in accordance with the procedure provided for in section 9 of this title, to suspend or revoke the registration of any person registered under this chapter if cause exists under paragraph (2)(B) (e. g., violation of the anti-fraud provisions of Section 4(b) of the 1936 Act, 7 U.S.C. § 6b) or (C) (failure to meet certain minimal financial requirements) of this section * * *."

Thereafter, the Commission may in its discretion, "suspend, for a period not to exceed six months, or revoke the registration of such person, and may assess such person a civil penalty of not more than $100,000 for each violation." See 7 U.S.C.A.Sup. § 9.

In addition to administrative sanctions, the 1974 Act contains criminal penalties ranging from several felonies, as defined in 7 U.S.C.A.Sup. §§ 13(a) and (b), to numerous misdemeanors as defined in 7 U.S.C.A.Sup. § 13(c). In particular, violation of the anti-fraud provisions of Section 4b of the 1936 Act (7 U.S.C. § 6b) is a misdemeanor punishable by imprisonment not to exceed one year or a fine not to exceed $100,000, or both.

Order to Show Cause

On May 27, 1976, an order to show cause was issued by the Commission in In the Matter of Jeffrey L. Silverman (Docket No. 76-18) pursuant to 7 U.S.C.A.Sup. § 9. Therein petitioner was ordered to appear before an Administrative Law Judge (ALJ) on June 10, 1976, in Washington, D.C., for the purpose of attending a public hearing to determine whether Silverman's registration as an "associated person" should be revoked.

The order to show cause, inter alia, contained the following allegations:

"A. Jeffrey L. Silverman willfully violated Section 4b of the Act (7 U.S.C. § 6b) in that, while employed as a solicitor and account executive for two registered futures commission merchants in 1970 and 1972, Jeffrey L. Silverman cheated and defrauded five customers of such registered futures commission merchants by executing trades for the accounts of such customers without their knowledge, consent or prior authorization.

"B. On May 5, 1976, the Commission issued a Final Order, in CFTC Docket No. 75-6, prohibiting Jeffrey L. Silverman from trading on or subject to the rules of any contract market for a period of two years and ordering that all contract markets should refuse him all trading privileges during said period. It was further ordered that Jeffrey L. Silverman permanently cease and desist from placing, or causing to be placed, in any customer's account, any contracts of sale of any commodity for future delivery, without the prior knowledge, consent or authorization of such customer or otherwise to cheat or defraud, or attempt to cheat or defraud, any person in connection with any order to make, or the making of, any contract of sale of any commodity for future delivery on or subject to the rules of any contract market for, or on behalf of, any person.

"C. By reason of the willful violations of the Act as alleged in paragraph A above and the sanctions imposed as described in paragraph B above, the registration of Jeffrey L. Silverman as an associated person as described in Section 4k of the Act (7 U.S.C. § 6k) should be revoked."

Thereafter,...