Stotler and Co. v. Commodity Futures Trading Com'n

Decision Date25 August 1988
Docket NumberNo. 86-2695,86-2695
Citation855 F.2d 1288
PartiesSTOTLER AND COMPANY and Richard C. Allen, Petitioners, v. COMMODITY FUTURES TRADING COMMISSION, Respondent.
CourtU.S. Court of Appeals — Seventh Circuit

Thomas F. Kolter, Chicago, Ill., for petitioners.

Daniel S. Goodman, Commodity Futures Trading Com'n, Washington, D.C., for respondent.

Before CUMMINGS, WOOD, Jr. and MANION, Circuit Judges.

MANION, Circuit Judge.

Stotler and Company ("Stotler") petitions this court to review an order of the Commodity Futures Trading Commission ("the Commission") finding Stotler, a futures trading house, vicariously liable under the Commodity Exchange Act's (the Act's) 1 antifraud provisions for the actions of Richard Allen, a commodity trading advisor and pool operator, in soliciting accounts he traded through Stotler. The Commission also found that Stotler violated one of the Act's registration provisions by not registering Allen as an "associated person." Having taken a fresh look at the evidence, we affirm the Commission's order for the reasons stated in its opinion. In re Stotler and Company, CFTC Docket No. 80-7, Comm.Fut.L.Rep. (CCH) p 23,298 (CFTC Sept. 30, 1986).

I. NATURE OF THE CASE

Briefly stated, Stotler, a partnership, is a registered futures commission merchant. Allen was a commodity trading advisor who prepared a weekly tout sheet with his advice. He was also a commodity pool operator who traded discretionary accounts for his clients.

Sometime in 1975, Stotler's managing partner, Howard Stotler, agreed on behalf of Stotler to rebate to Allen half of the gross commissions generated on all accounts Allen brought to Stotler. Allen subsequently registered as a commodity trading advisor and commodity pool operator, but did not register as an associated person of Stotler's. 2 At the time of this agreement--and up to the present--a futures commission merchant could lawfully share commissions with trading advisors as well as with associated persons.

The relationship between Stotler and Allen encompassed more than sharing the commissions generated by the trades that Allen placed with Stotler. Stotler's internal business records listed Allen as a salesman and Stotler assigned Allen a salesman number. Stotler gave to Allen its own literature and forms to distribute to those people Allen solicited. In addition, Stotler permitted Allen to place his trades directly through its clerks on the floors of the commodities exchanges.

At the hearing before the administrative law judge, one of Allen's and Stotler's joint clients, Arthur Lipton, testified that he received from Allen the trading authorization and customer agreement forms necessary to open an account with Stotler. Allen had told Lipton that Stotler was the only brokerage house through which Lipton could trade. Subsequently, when Lipton had a question about his monthly statement from Stotler, Edwin Hansen, who testified that he was "in charge of" Stotler's futures trading department, told Lipton to direct his inquiry to "the broker on the account," whom Hansen identified as Allen.

Patrick Thompson, a Commission investigator, testified that Allen dealt exclusively with Stotler. Allen had told this investigator that he had

proposed to Mr. Stotler that he wanted to put his business through one merchant and that he was trying to arrive at what would be an acceptable rate for putting his business through one merchant, and they negotiated whatever the rate was ... and ... he then began to put through all of his business through Stotler & Company.

It is undisputed that Allen not only failed to disclose the commission-sharing arrangement with Stotler to his clients and potential clients, but that he also affirmatively misrepresented how he was compensated. In particular, Allen told clients that he was paid only a percentage of the client's profits and that he received no part of any commissions. For example, Allen wrote to client Lipton as follows:

My single purpose is to make money for you. I receive no part of the commissions or any type of reward for the trading I do on your behalf. This simply means that if I make you money I will make money.

For purposes of this appeal, Stotler does not dispute the Commission's finding that Allen willfully engaged in statutory commodities fraud in soliciting the commodities accounts that were traded through Stotler.

II. NATURE OF THE PROCEEDINGS

In October, 1979, the Commission filed an administrative enforcement complaint against Stotler and Allen for violations occurring in the period between April 1, 1977 through July 1, 1978. The Commission brought the first count (Count I) pursuant to Sec. 4b of the Act, 7 U.S.C. Sec. 6b (1976), and the second (Count II) pursuant to Sec. 4o, 7 U.S.C. Sec. 6o (1976). Both counts arose from the same underlying factual allegations that Allen failed to disclose and instead affirmatively misrepresented the commission-sharing arrangement. Both counts charged Stotler not only as aiding and abetting Allen but also as Allen's principal under Sec. 2(a)(1)(A), 7 U.S.C. Sec. 4 (1976), which makes a principal liable for the acts of his agent which violate the Act. (An aider and abettor need not be a principal, nor need a principal aid and abet.)

Section 4b, the Act's general antifraud provision, makes it unlawful "(2) for any person, in or in connection with any order to make, or the making of, any contract of sale of any commodity for future delivery made ... for or on behalf of any other person ... (A) to cheat or defraud or attempt to cheat or defraud such other person...." 7 U.S.C. Sec. 6b (1976). Section 4o is a parallel statute forbidding fraud and misrepresentation by commodity trading advisors. Section 4o (1) makes it unlawful "for any commodity trading advisor or commodity pool operator ... (A) to employ any device, scheme, or artifice to defraud any client or participant or prospective client or participant; or (B) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant." 7 U.S.C. Sec. 6o (1976).

Also at issue on appeal is a third count (Count III) which alleged that Stotler violated Sec. 4k, 7 U.S.C. Sec. 6k (1976), by allowing Allen to remain associated with it when Allen had not registered with the Commission as an associated person and Stotler knew or should have known that Allen was not so registered.

The ALJ found against Stotler and Allen on all three counts. He imposed a $10,000 fine upon Stotler and ordered Stotler to stop violating these provisions. Stotler filed a timely notice of appeal to the Commission from the ALJ's initial decision. Allen did not appeal. On September 30, 1986, the Commission issued its opinion and order, which affirmed the initial decision with minor modifications not relevant here.

III. ANALYSIS
A. Standard of Review

This court's standard of review on direct appeal from the Commissioner is set forth in Sec. 6(b) of the Act, which provides in pertinent part as follows:

After the issuance of the order by the Commission, the person against whom it is issued may obtain a review of such order ... by filing in the United States court of appeals ... a written petition.... Upon the filing of the petition the court shall have jurisdiction to affirm, to set aside, or modify the order of the Commission and the findings of the Commission as to the facts, if supported by the weight of evidence, shall in like manner be conclusive.

7 U.S.C. Sec. 9 (1982). "[T]he function of this court is ... to review the record with the purpose of determining whether the finder of the fact was justified, i.e., acted reasonably, in concluding that the evidence, including the demeanor of the witnesses, the reasonable inferences drawn therefrom and other pertinent circumstances, supported his findings." Silverman v. CFTC, 549 F.2d 28, 30-31 (7th Cir.1977) (quoting Great Western Food Distributors v. Brannan, 201 F.2d 476, 479-80 (7th Cir.1953)).

B. Stotler's Liability for Allen's 4b and 4o Violations

With regard to its liability for Allen's fraud, Stotler protests that the industry accepts a futures commission merchant and a trading advisor sharing brokerage commissions, and that the futures commission merchant is not required by law or by custom to disclose the arrangement to the shared customers. We assume for purposes of this appeal that Stotler's position is correct.

The Commission did not penalize Stotler for what it did, but rather for what its agent Allen did. Section 2(a)(1)(A) of the Act, 7 U.S.C. Sec. 4 (1976) provides in pertinent part as follows:

For the purpose of this chapter the act, omission, or failure of any official, agent, or other person acting for any ... partnership ... within the scope of his employment or office shall be deemed the act, omission, or failure of such ... partnership ... as well as of such official, agent, or other person.

Section 2(a)(1)(A) has not changed since its enactment in 1922. Pub.Law No. 67-66, 42 Stat. 187 (1921). Section 2(a)(1)(A) imposes vicarious liability upon a principal for the acts of its agent committed within the scope of his employment. Cange v. Stotler and Co., 826 F.2d 581, 589 (7th Cir.1987); Rosenthal & Co. v. CFTC, 802 F.2d 963, 966 (7th Cir.1986); Bogard v. Abraham-Rietz & Co., Docket No. R 77-315, [1984-1986] Comm.Fut.L.Rep. p 22,273 at 29,393 n. 13 (CFTC 1984). As under the common law, under Sec. 2(a)(1)(A) it does not matter if the principal participated in or even knew about the agent's acts; he is strictly liable for them. Cange, supra, 826 F.2d at 589; Rosenthal, supra, 802 F.2d at 966-67.

Stotler first contends that the Commission's complaint did not adequately plead Sec. 2(a)(1)(A) liability. We reject this contention. First, in Count I the complaint tracked the language of Sec. 2(a)(1)(A) and alleged that Stotler and Allen violated Sec....

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