Chu v. U.S. Commodity Futures Trading Commission
2016 U.S. App. LEXIS 9560
| 9th Cir. | 2016Background
- Chu, an experienced retiree, opened a new Peregrine Financial Group (FCM) account with $500,000 after her husband’s death; she had a long-standing relationship with commodity trading advisor (CTA) Jennifer Huang.
- Chu signed account forms that incorporated prior account documents, and she granted Huang a power of attorney and blanket trading authority over existing and future Peregrine accounts.
- Chu wrote a handwritten note on the new account form: “move $500K T‑Bill” and asked Peregrine to link margin among three accounts, but never actually ordered a T‑Bill.
- Trades were executed in the account via Chu’s electronic key and by Huang; by June 2005 the account had a net loss exceeding $500,000, and Huang requested the account be closed.
- Chu filed an administrative complaint alleging unauthorized trading, failure to follow instructions, failure to supervise, and fraud by Peregrine and account executive James Kelly; the ALJ sided with Chu but the CFTC reversed as to Kelly, finding Huang had actual and apparent authority.
- The Ninth Circuit applied the Administrative Procedure Act substantial‑evidence standard and denied review, affirming the CFTC’s findings that (1) Huang had authority to trade and (2) Kelly did not commit fraud or misrepresentation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether trades were unauthorized under 17 C.F.R. § 166.2 | Chu: she intended the account for a T‑Bill (interest) and did not authorize trading; Peregrine and Kelly permitted Huang to trade without authority | Kelly/Peregrine: Chu gave Huang blanket authority and incorporated prior POA/forms; Huang had actual/apparent authority | Held: Substantial evidence supports CFTC that Huang had actual and apparent authority; trades were authorized |
| Whether Kelly committed fraud or willful deceit under 7 U.S.C. § 6b(a) | Chu: Kelly represented funds would be used for a T‑Bill and left funds untraded, then allowed trading leading to loss | Kelly: Chu never ordered a T‑Bill; margin‑linking and POA made trading consistent with Chu’s instructions; no scienter | Held: No material misrepresentation or scienter; record does not support fraud finding |
| Proper standard of judicial review of CFTC factfinding after Dodd‑Frank | Chu: (argued under prior practice) CFTC findings should be upheld under weight/preponderance standard | CFTC/defendants: Dodd‑Frank removed the weight‑of‑evidence language; APA substantial evidence applies | Held: Court applies APA substantial‑evidence review (and notes petition would fail even under preponderance) |
| Whether Peregrine failed to supervise or recklessly follow instructions | Chu: Peregrine and Kelly ignored explicit instructions and failed to supervise Huang | Defendants: Peregrine followed incorporated forms, had translations and communications; no supervisory violation shown as to Kelly | Held: CFTC’s findings of no supervisory liability as to Kelly supported by substantial evidence |
Key Cases Cited
- Morris v. Commodity Futures Trading Comm’n, 980 F.2d 1289 (9th Cir.) (discussing review standard for CFTC findings)
- First American Discount Corp. v. CFTC, 222 F.3d 1008 (D.C. Cir.) (definition/role of FCM)
- Peltz v. SHB Commodities, Inc., 115 F.3d 1083 (2d Cir.) (authority to trade when designated by customer or has actual/apparent authority)
- Wasnick v. Refco, Inc., 911 F.2d 345 (9th Cir.) (scienter requirement for fraud under futures statutes)
- Dickinson v. Zurko, 527 U.S. 150 (1999) (APA substantial‑evidence review as default for agency factfinding)
- King v. Burwell, 135 S. Ct. 2480 (2015) (refusal to rewrite statutes for alleged drafting errors)