Weinberg v. Commodity Futures Trading Com'n

• Decision Date: 02 May 1988
• Docket Number: No. CV86-7603-R.,CV86-7603-R.
• Parties: Mark Ross WEINBERG, Plaintiff, v. COMMODITY FUTURES TRADING COMMISSION, Susan M. Phillips, National Futures Association and Robert K. Wilmouth, Defendants.
• Court: U.S. District Court — Central District of California

699 F. Supp. 808

Mark Ross WEINBERG, Plaintiff, v. COMMODITY FUTURES TRADING COMMISSION, Susan M. Phillips, National Futures Association and Robert K. Wilmouth, Defendants.

No. CV86-7603-R.

United States District Court, C.D. California.

May 2, 1988.

Gregory C. Glynn, Walter, Finestone, Richter & Kane, Los Angeles, Cal., for plaintiff.

Ellen J. Abraham, Commodity Futures Trading Com'n, Los Angeles, Cal., for defendants Commodity Futures Trading Com'n and Susan M. Phillips.

Robert D. Lewis, Sidley & Austin, Los Angeles, Cal., for defendants National Futures Ass'n and Robert K. Wilmouth.

OPINION

REAL, Chief Judge.

Plaintiff MARK ROSS WEINBERG (WEINBERG) moves for summary judgment on his Amended Petition and Complaint. His complaint alleges that the procedure used by National Futures Association to discipline members is not authorized by the Commodity Exchange Act, 7 U.S.C. §§ 1-24. He also alleges that the Member Responsibility Actions employed by the National Futures Association to discipline him denied him due process of law under the 5th Amendment. A final allegation is that the Commodity Futures Trading Commission's final order affirming the action of the National Futures Association was contrary to constitutional right, in excess of statutory discretion, arbitrary, capricious, an abuse of discretion and without observance of procedures required by law in violation of the Administrative Procedure Act, 5 U.S.C. §§ 702-706.

The defendants NATIONAL FUTURES ASSOCIATION (NFA), COMMODITY FUTURES TRADING COMMISSION (CFTC), SUSAN M. PHILLIPS (PHILLIPS), and ROBERT K. WILMOUTH (WILMOUTH) deny WEINBERG'S allegations and move for summary judgment in their favor.

This is a case of first impression as the first MEMBER RESPONSIBILITY ACTION ever appealed to the CFTC and the first brought for review in federal court. It is ripe for summary judgment since there is no dispute of material fact. All turns of the authority and procedures of the NFA and the CFTC in suspending WEINBERG'S trading activities in the commodity markets.

BACKGROUND

Plaintiff WEINBERG is engaged in commodity market trading. He is registered with the CFTC as a Commodity Trading Advisor¹ and a Commodity Pool Operator.²

In the summer of 1985 the NFA became aware of certain customer complaints concerning WEINBERG. This complaint charged that WEINBERG had borrowed large sums of money to be used to exercise certain put options in Mocatta silver and held in WEINBERG'S personal trading account. These loans totaled over $700,000 and had not been repaid. WEINBERG had promised to repay the loans from trading profits he guaranteed would be forthcoming from his personal trading account.

NFA undertook an investigation of these charges. NFA auditors requested access to WEINBERG'S books and records, including his personal financial records. WEINBERG'S personal financial records were requested because WEINBERG commingled his personal and business records. To trace funds loaned to WEINBERG and the disposition of these funds his personal financial records were essential.

WEINBERG refused to produce his records could jeopardize his status as an FBI informant in the investigation of certain organized crime figures. This claim was refuted when the NFA confirmed with the FBI that NFA's request would not interfere with any FBI investigation.

WEINBERG further told the NFA auditors that he had been "laundering" money for organized crime figures and could not repay his loans because of the loss of money to these persons.

The NFA in a letter dated August 2, 1985 again requested access to WEINBERG'S personal financial records. In this letter he was warned that failure to produce the requested records could result in disciplinary action. In answer to the NFA's request WEINBERG'S counsel offered to produce an excised copy of records. The NFA rejected that offer because the NFA auditors could not trace the transactions in question without WEINBERG'S complete records.

On September 20, 1985 the NFA issued the first MEMBER RESPONSIBILITY ACTION (MRA 1). The NFA found that WEINBERG'S refusal to produce his records violated NFA Compliance Rules 2-5,³ 2-13⁴ and 3-1.⁵ The NFA also found that prompt action was necessary to protect customers, the commodity futures market and other members. NFA acted under summary proceedings.

MRA 1 prohibited WEINBERG from soliciting, accepting, entering or forwarding any futures or options order for any customers accounts over which he had power of attorney, except for orders liquidating positions. WEINBERG received MRA 1 on September 27, 1985.

October 7, 1985 WEINBERG requested a hearing before the WESTERN REGIONAL BUSINESS CONDUCT COMMITTEE of NFA (WRBCC). WEINBERG'S request was that the hearing be held no later than October 24, 1985 in Los Angeles. Shortly before the hearing before a subcommittee of the WRBCC held on October 23, 1985 WEINBERG, for the first time, claimed that production of his personal financial records would violate his 5th Amendment privilege against self-incrimination.

On October 21, 1985, while the MRA 1 sanctions were still in effect, WEINBERG entered an order establishing a new position for a customer's account. WEINBERG had also solicited and accepted customer funds for the purchase of futures positions. In this latter case WEINBERG was acting as an unregistered futures commission merchant (FCM).⁶ The WRBCC issued its written decision affirming MRA 1 on November 4, 1985. WEINBERG appealed the decision of the WRBCC to the CFTC on December 2, 1985. Upon that appeal the MRA 1 sanctions were automatically stayed.⁷

It was not until mid-December 1985 that the NFA discovered WEINBERG'S violation of MRA 1 and unregistered futures commission merchant activity.⁸ Upon learning of the violation of MRA 1 and the violation of law NFA issued a second MEMBER RESPONSIBILITY ACTION (MRA 2) suspending WEINBERG'S membership in NFA until he demonstrated compliance with all NFA requirements.⁹ Effectively WEINBERG was precluded from engaging in the commodity futures business.

On January 14, 1986 the WRBCC held a hearing on the appeal of MRA 2 by WEINBERG. The WRBCC affirmed MRA 2 on January 28, 1986. WEINBERG appealed to the CFTC.

Finding that WEINBERG had committed the acts alleged by NFA the CFTC on June 6, 1986 affirmed, after a de novo review of both MRA 1 and MRA 2.

WEINBERG has been suspended from engaging in the commodity futures market.

THE CLAIMS OF WEINBERG

1. THE SUMMARY PROCEEDING EMPLOYED THE NFA IN ISSUING MRA 1 AND MRA 2 IS NOT AUTHORIZED BY THE COMMODITY EXCHANGE ACT.

The NATIONAL FUTURES ASSOCIATION rules provide for a procedure by which the president and the executive committee of the NATIONAL FUTURES ASSOCIATION can summarily restrict a members operations in the commodity futures market or suspend membership where they believe such action is necessary to "protect the commodity futures markets, customers or other members." This is an emergency power that supplements the provision for a compliance hearing providing notice, discovery and hearing.

Title 7 U.S.C. § 21 provides for the registration with the CFTC of registered futures associations. These associations must provide in their rules for the discipline by expulsion, suspension, fine, censure, or being suspended or banned from being associated with all members, or other fitting penalty for any violation of its rules 7 U.S.C. § 21(b)(8).

As part of the qualification to act as a registered futures association the rules of the association must provide "a fair and orderly procedure with respect to the disciplining of members" 7 U.S.C. § 21(b)(9). As part of the "fair and orderly procedure" 7 U.S.C. § 21(b)(9) requires the association rules to provide (1) specific charges be brought, (2) the member be notified of the charges, (3) the member be given an opportunity to defend against such charges and (4) a record be kept of the proceedings.

The statutory scheme does not provide for summary proceedings in disciplinary action but does specifically provide that summary proceedings are not to be used in the denial of membership. This specific exclusion permits the interpretation of the statutory language requiring approval by the CFTC of NFA rules to permit the summary proceedings that led to the issuance of MRA 1 and MRA 2 as part of the simple statutory rubric "fair and orderly procedure."

The CFTC could and did grant NFA registration as a registered futures association in 1981. It must be inherent in the grant as a registered futures association that the Commission found the summary MRA procedures to be "fair and orderly." If this was not done expressly at least the Commission gave tacit approval by its acceptance of NFA as a registered futures association. Cf. CBS, Inc. v. FCC, 453 U.S. 367, 382, 101 S.Ct. 2813, 2823, 69 L.Ed.2d 706 (1981).

As important to the consideration of the authority for summary proceedings is the fact that Congress, itself having knowledge of the procedure, did nothing to change it although it did make other changes in the MRA procedures.¹⁰

2. THE MRA ACTIONS OF NFA DENIED WEINBERG DUE PROCESS OF LAW UNDER THE FIFTH AMENDMENT OF THE UNITED STATES CONSTITUTION.

The Supreme Court has uniformly sanctioned the use of summary proceedings where action is necessary to protect the public for improper conduct that must be stopped before a formal hearing can be had.¹¹ In such cases a post summary proceeding has satisfied the Supreme Court's concern for due process.¹² WEINBERG'S reliance on Fuentes v. Shevin, 407 U.S. 67, 92 S.Ct. 1983, 32 L.Ed.2d 556 (1972) is misplaced. The public interest in the maintenance of a viable and honest commodities futures market unlike the suspension of welfare privileges or grant of attachments makes summary action permissible. Fuentes, supra, acknowledged that concern and justification in 407 U.S. at 90-92, 92 S.Ct. at 1999-2000.

The charges against WEINBERG were serious. The NFA had received complaints...