U.S. v. Catalfo

• Decision Date: 16 November 1995
• Docket Number: No. 94-2562,94-2562
• Citation: 64 F.3d 1070
• Parties: Comm. Fut. L. Rep. P. 26,486 UNITED STATES of America, Plaintiff-Appellee, v. Anthony CATALFO, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1070

64 F.3d 1070

Comm. Fut. L. Rep. P. 26,486

UNITED STATES of America, Plaintiff-Appellee, v. Anthony CATALFO, Defendant-Appellant.

No. 94-2562.

United States Court of Appeals, Seventh Circuit.

Argued March 27, 1995.

Decided Aug. 30, 1995.

Rehearing and Suggestion for Rehearing

In Banc Denied Nov. 16, 1995.

Barry Rand Elden, Asst. U.S. Atty. and Charles Ex (argued), Office of the U.S. Atty., Crim. Receiving, Appellate Div., Chicago, IL, for plaintiff-appellee.

Michael D. Monico, Barry A. Spevack, Monico, Pavich & Spevack, Chicago, IL, and Peter Goldberger (argued), and Alan Ellis, Ardmore, PA, for defendant-appellant.

Before FLAUM and MANION, Circuit Judges, and SHARP, ^* District Judge.

FLAUM, Circuit Judge.

Defendant Anthony Catalfo was convicted on six counts of wire fraud under 18 U.S.C. Sec. 1343 for his trading activities at the Chicago Board of Trade on October 22, 1992, and sentenced to 42 months imprisonment. On appeal, Catalfo challenges both his conviction and sentence. We affirm.

I.

In 1992, Anthony Catalfo came to Chicago to learn about the options market. He enrolled at the International Trading Institute ("ITI") in April, entering their "Lab Tech" program, which allowed students to attend classes on basic options trading tuition free in exchange for six months of work.

At ITI, Catalfo met Donald Zimmerman, who taught classes there and traded on his own. Zimmerman soon became Catalfo's mentor and friend, the two of them often socializing and working together during the summer of 1992. In June, Catalfo and another student, Mark Mason, pooled $30,000 of their own money and agreed to have Zimmerman trade with it at the Chicago Board of Trade ("CBOT"). Zimmerman leased a Commodity Option membership at the CBOT so he could trade with the funds, while Catalfo functioned as Zimmerman's clerk and watched him work. Zimmerman tripled the $30,000.

Also during the summer, according to the government, Catalfo and Zimmerman developed a strategy to make their fortune in U.S. Treasury bond futures and options. A future is a contract for the sale of a specified quantity of a commodity, in this case Treasury bonds, at a given date. A person buying a futures contract believes the market will rise, while a person selling futures believes it will decline. An option, on the other hand, is a contract for the sale of an underlying futures contract at a set price at a given date. Options are either puts or calls. A put is an option to sell the contract at a set price, known as the "strike" price, before a given date. A call is an option to buy the contract at a given price before a given date. A person who purchases puts or sells calls generally believes the market will decline or is hedging against such a decline. Conversely, a person who purchases calls or sells puts believes the market will rise.

Catalfo and Zimmerman's plan focused on the purchase of Treasury bond puts and sale of Treasury bond futures contracts in massive quantities. They reasoned, in line with elementary principles of mass psychology, that such large-scale investment in a downward-looking position would cause other traders to think the market was going down and to act accordingly. With everyone believing the market would decline, it would, thus making their initial positions increasingly valuable. Before other traders realized what had happened, Catalfo and Zimmerman planned to exit the market by purchasing offsetting calls and collecting their profits.

Commodity traders often hedge their market speculations by executing offsetting trades going in the opposite market direction, thereby reducing their potential profits but also their risks. For example, a person purchasing bond futures contracts might offset those purchases with positions that envision a market decline, such as a sale of call options or a purchase of put options. What Catalfo and Zimmerman planned to execute is known as a "Texas hedge." In a Texas hedge, all one's market positions anticipate the market moving in the same direction--such as the purchase of put options and sale of bond futures. A Texas hedge is thus really no hedge at all. ¹

In addition to talking about such trading strategies, Catalfo apparently made a dry run of such a scheme while at ITI. ITI uses as a teaching tool a simulator called Trade$tar. Trade$tar is a computerized, interactive voice-activated simulator for trading futures and options. One day, about three weeks after Catalfo started at ITI, Catalfo was discovered making huge trades on the Trade$tar by purchasing thousands of puts and selling thousands of shares of the stock underlying the puts--a Texas hedge. An ITI instructor warned Catalfo that if he traded in real life the way he was trading on the simulator, he would be "taken away either in handcuffs or on a stretcher."

In order to trade on the floor of the CBOT, a trader needs a clearing firm. Clearing firms are members of the CBOT and guarantee their customers' trades on the basis of security put up by the customer. Zimmerman, who had had a history of trouble with clearing firms, had executed his trades with Mason and Catalfo's money through the Transmarket Group clearing firm. At the end of July, however, Transmarket asked Zimmerman to leave. On July 30, 1992, Zimmerman contacted the clearing firm of Lee B. Stern & Co. to trade there. Zimmerman talked to Stern's general manager, Marvin Parsoff, and was able to secure a position there with a series of misrepresentations. Zimmerman told Parsoff that he had left Transmarket because they were cutting back on options traders (he had been asked to leave because of his trading habits) and that he had a net worth of $100,000 (he had negative bank account balances). Zimmerman also promised that he was a small trader who would keep his market positions "delta neutral," meaning that the positions would offset one another and be risk free. Parsoff agreed to clear Zimmerman's trades, and Zimmerman transferred his Transmarket account--$40,000 in bond and soybean option positions with offsetting futures--to Stern.

Soon after the transfer, Parsoff learned that Zimmerman still had an outstanding debit balance with another trading firm as a consequence of trading losses totaling nearly $75,000. Parsoff also discovered that Zimmerman had stopped making payments on the debt a few months earlier. Parsoff responded by telling Zimmerman that he wanted Zimmerman's account moved out of Stern and that Zimmerman should cease trading. Zimmerman replied that he was leaving for Germany and asked Parsoff if he could leave the account open until he returned. Parsoff agreed but restricted the account to a "liquidation only" trading parameter, meaning that Zimmerman could only trade out of the positions he had already placed or make small adjustments to keep them delta neutral. While Zimmerman was in Germany, Catalfo and Mason controlled the account and liquidated it down to the point where all that remained was $500 in risk-free bean options.

Also at the end of July, Catalfo applied for a full membership at the CBOT so that he could trade there. He contacted the clearing firm of Goldenberg, Hehmeyer & Co. ("GH"), and asked if they would sponsor his application and become his clearing firm. Catalfo first met with Ralph Goldenberg, one of the principals of GH, who discussed with him the credit limits GH extended to its customers: three times the net liquidating value of his account up to a maximum of $150,000. Catalfo apparently understood this, or at least never indicated that he did not. Catalfo later met with Chris Hehmeyer, GH's other principal, and told Hehmeyer that he intended to trade in offsetting contracts with very small price differentials between them, a practice known as "scalping." Scalping offers a low rate of return but also involves comparably little risk. Goldenberg and Hehmeyer agreed to sponsor him and to let him use GH as his clearing firm.

In the course of doing a routine background check on his CBOT membership application, CBOT's Membership Services Department discovered that Catalfo had an unpaid student loan owed to New York State and that a judgment had been entered against him for that debt. The CBOT application requires the disclosure of all unpaid debts and judgments, and Catalfo had not mentioned the student loan. On detecting the discrepancy, the CBOT held Catalfo's application in abeyance pending resolution of the problem. Catalfo then contacted the New York student loan center, which responded by sending him a telefacsimile indicating that the debt had been paid in full on August 5, 1992. Catalfo, in turn, submitted the facsimile to the CBOT, which accepted the explanation and continued processing his application.

On October 13, 1992, Catalfo met with Hehmeyer to fill out a customer agreement form and other trading documents with GH. Catalfo indicated on the form that he had a net worth of between $50,000 and $100,000, risk capital of $80,000 available, ² and that no other person had a financial interest in his account. The form also contained a question concerning the customer's limit of margin exposure, which Catalfo left unanswered. Hehmeyer indicated at trial that "[t]he question about margin I don't necessarily have to have from an individual because it is not a hedging operation and it is not a margin call where we would have to be calling a business and getting margins sent in by wire." Goldenberg likewise noted in his testimony that the question did not worry him "because we felt we would have tight control as to what his positions would be and what exposure he would have" and that his discussions with Catalfo had led him to that conclusion. Catalfo similarly reaffirmed his scalping intentions to Hehmeyer while signing the form. The customer agreement otherwise required Catalfo to "affirm[ ] that he is able to assume the financial risks of commodity futures trading" and that he "will at all times maintain...