Wilson v. Commodity Futures Trading Commission

Decision Date11 March 2003
Docket NumberNo. 02-1314.,02-1314.
Citation322 F.3d 555
PartiesDonald W. WILSON, Petitioner, v. COMMODITY FUTURES TRADING COMMISSION, Respondent.
CourtU.S. Court of Appeals — Eighth Circuit

Alfred Stanbury, argued, Minneapolis, MN, for appellant.

William S. Liebman, Office of General Counsel, argued, Washington, DC, for appellee.

Before HANSEN, Chief Judge, and HEANEY and BYE, Circuit Judges.

HEANEY, Circuit Judge.

Donald Wilson appeals the Commodity Futures Trading Commission's (the Commission) determination that he violated the Commodity Exchange Act (CEA or "Act") and the penalties imposed against him as a result of his misconduct. We affirm.

By initial decision issued July 21, 1999, an ALJ found that Wilson did not offer to enter into, enter into, or confirm wash trades in violation of § 4c(a)(A) of the CEA as charged in the complaint, and dismissed the complaint in its entirety. By order issued September 29, 2000, the Commission vacated the initial decision and determined that Wilson had violated § 4c(a)(A) of the Act. Based on its review of the gravity of the violations, the Commission ordered that Wilson cease and desist from violating the Act as charged, and that his registration be suspended for six months. It then determined that a tentative civil monetary penalty of $25,000 be imposed against Wilson. Because some of the violations occurred prior to October 28, 1992, the Commission remanded the matter and directed the ALJ to determine whether the tentatively imposed civil monetary sanction against Wilson was appropriate, considering the provisions of § 6(d) of the CEA. The ALJ determined that § 6(d) does not require modification of the civil monetary penalty proposed by the Commission, and ordered that Wilson comply with the Commission's recommended sanctions. Wilson appeals.

I. Background

Wilson filled twenty-two (or, eleven pairs of) intramarket wheat futures spread orders at the Minneapolis Grain Exchange (MGE) between August 26, 1992 and February 18, 1993. In 1997, four and a half years later, the Commission's Division of Enforcement charged Wilson and Alfred Piasio1 with offering to enter, entering, or confirming wash sales. Wilson and Piasio denied any wrongdoing. Initially the case had six respondents: Merrill Lynch Futures, Inc., Mitsubishi Corporation, Country Hedging, Inc., Charles Soule, Piasio, and Wilson. Following a review of charges that the Division intended to bring against them, Merrill Lynch, Mitsubishi, Country Hedging, and Soule settled their cases on June 24, 1997. Piasio and Wilson refused to settle, and the Division filed complaints against them.

The spread orders at issue were entered in New York by Mitsubishi through its Merrill Lynch futures account. Kazushig Takao was manager of Mitsubishi's Foods Division during August and September 1992. Takao was succeeded by Takeski Momosaki, who served as manager in January and February 1993. Between them, Takao and Momosaki placed with Piasio the eleven sets of paired spread orders for Mitsubishi's futures account at issue.

Mitsubishi's accounting problem appeared in the summer of 1992, when it fell short of its budgeted profit objectives. In August 1992, Takao was advised by Mitsubishi's Tokyo office that, while the Foods Division had a loss in the first part of the fiscal year ending September 1992, the Division had profits in the futures markets in a later accounting period, and that the corporation needed to adjust its profits and losses between the two periods. To correct the problem, Mitsubishi sought to shift profits in its futures and cash trading program from the second half of its fiscal year (October-March) to the first half (April-September).

The profit-sharing strategy that Takao adopted took advantage of the broad discretion allowed traders in pricing the legs of a spread under Minneapolis Grain Exchange (MGE) Rule 2018. Takao decided to buy and sell the September/December wheat spread, but to price the legs of the spread so that he bought the September contract at the day's low and sold it at the day's high. This created a large apparent profit in the nearby leg, which was offset by a comparable loss in the more distant leg. Takao phoned Piasio, Mitsubishi's Merrill Lynch futures broker, and told him that in order to adjust profits and losses, he wanted to show a profit from Mitsubishi's futures trading in the nearby month, and explained how to price each spread transaction. Takao placed simultaneous orders to purchase and sell 500 September/December wheat spread positions. He was indifferent as to whether the purchase or sale was executed first, but he did specify that the result of the purchase and sale should not be a loss that exceeded one cent per bushel.

In January 1993, Mitsubishi sought to remedy a similar budgetary shortfall using the same type of transactions. After consulting Takao, Momosaki (the new manager of the Foods Division) spoke with Piasio by telephone and simultaneously placed paired orders to buy and sell 500 March/ May wheat spread positions. He told Piasio that the result of the purchase and sale should not be a loss that exceeded 1/4 cent per bushel.

Merrill Lynch maintained an omnibus futures account with Country Hedging in Minneapolis. After receiving Mitsubishi's spread orders by phone in 1992 and 1993, Piasio phoned the orders to Country Hedging's MGE trading floor phone clerk, Charles Soule. Soule prepared separate but consecutively numbered Country Hedging floor orders reflecting Mitsubishi's instructions for the purchase and sale of the same quantity of wheat spread positions. The omnibus account number and the time stamped on the paired purchase and sale orders were the same. Having never received such pricing instructions before, Soule considered Piasio's instructions unusual. He repeated them back to Piasio to confirm, then subsequently walked the orders to the MGE pit and handed them to Wilson, a floor broker, for filling.

According to Wilson, transactions one through three lacked instructions regarding acceptable losses, while transactions four through eleven were accompanied by instructions to limit any loss to 1/4 cent per bushel. He considered the orders unusual because of the pricing instructions, which raised questions about his ability to fill them in compliance with MGE rules. After asking around about the propriety of the transactions, and without getting a clear or informed answer, Wilson relied upon Country Hedging to ensure that the orders were in compliance with exchange rules. Wilson acknowledged to MGE staff that after executing transactions one through three, he suspected that the trades were for the benefit of one customer.

Wilson bid and offered the spread within seconds of each other and did not believe that the traders who bought and sold opposite him in transaction four were at risk. He apparently told MGE that if he did not execute the sets of paired orders simultaneously, he would have exposed himself to financial risk. It appears that the result for each participating trader was a guaranteed profit without the risk attendant on an unmatched position.

The results of the transaction are the following: because of the structure and execution of each of the eleven transactions, Mitsubishi began and ended each one with the same net position in the wheat spread market, but it was able to create the desired apparent profit in the nearby month. The actual financial result for Mitsubishi was a relatively small loss of $20,263.00.

II. Discussion
A. Wash Sales

The first issue before us is whether the Commission was clearly erroneous in concluding that Wilson knowingly participated in wash sales. The factual findings of the Commission are conclusive "if supported by the weight of the evidence." CEA § 6(c), 7 U.S.C. § 9; Maloley v. R.J. O'Brien & Assocs., 819 F.2d 1435, 1440 (8th Cir.1987). The proper standard of review of the Commission's application of law to facts depends on the comparative qualifications and competencies of courts and agencies. Maloley, 819 F.2d at 1440-41. Where the issue involves the agency's specialized knowledge and Congress has vested the agency with discretion in a technical area, the courts should recognize the agency's presumed competence and expertise, and uphold the agency's conclusion if it is rationally based. Id. at 1441.

Wilson's principal challenge involves the Commission's interpretation of the CEA regarding the...

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