*4 GRAAFEILAND, VAN Circuit Judge, concurs Parts I and IV and concurs result as to II and Parts III. SACK, Judge: Circuit Commodity Futures Trading Com- (the mission “Commission” “CFTC”), an independent regulato- federal ry agency charged with the administration and enforcement Commodity Ex- Act, (the 1 et seq. change §§ 7 U.S.C. “CEA”), and the regulations promulgated thereunder, 1.1 et seq., §§ 17 C.F.R. brought a civil enforcement action in United States Court for District the South- ern District against York New defen- dants Corp., AVCO Financial Anthony Vartuli and J. Gent. In its Michael com- plaint, the claimed that Commission had defendants violated the CEA man- grounds. different Because on somewhat advertising a com- ufacturing, selling district court “Recurrence,” enjoined by the conduct which the called program puter of Recurrence pro- the dissemination fraudulently claimed included the defendants court did not and the district speech trading opportunities profitable vided analysis, engage prior restraint in the first and users market purchasers however, injunctive that the sought we conclude The Commission currency futures. court is in by the district barring granted future vio- relief injunction permanent unconstitutional, defendants; and to that extent part the CEA lations of restitution, injunction fоr the and remand we reverse of disgorgement, awards we also direct modified. On remand rescission; monetary penalties. to be civil whether an court to determine the district the commencement Subsequent to opinion, II of this identified Part issue action, AVCO enforcement Commission’s below, customers of relating to whether bankruptcy. voluntary petition filed a applicable were “clients” under (John Keenan, F. The district it, raised before statutory language, was however, ruled, bankrupt that the Judge) and, was, in the if that issue decide stay the Commission’s filing did not cy the award instance. We affirm first *5 seek the Commission was action because disgorgement. the power and regulatory ing to enforce the au exempt from action was therefore BACKGROUND 362(b)(4). stay 11 U.S.C. tomatic under appeal, relating facts to this F.Supp. The Corp., Fin. v. Avco See CFTC ”). substantially dispute, in are de- (S.D.N.Y.1997)(“Avco are I When 232, 235 brief, in II. In the extensively Avco scribed appear, a de failed to AVCO nevertheless Anthony incorporated defendant it. against entered judgment fault AVCO Group, later renamed the Taurus then conducted bench court The district corpo- Corp., in AVCO’s Financial which, to Fed.R.Civ.P. pursuant trial — according to its certificate of rate 55(b)(2), purpose, inquest the form of an was in investment provide was “to incorporation, order of its default —in to AVCO because stocks, and commodities.” options in fact conclu advice findings to make AVCO, was the In of which Vartuli wheth necessary to determine of law sions shareholder, marketing a set of began sole injunctive impose to what extent to er and system, called the “Recurrence” materials and to deter against the defendants relief developed had with defen- relief, which Vartuli any. if ancillary appropriate mine Five versions of Recurrence dant Gent. trial, judg the district court entered After (Recurrence eventually produced I- were all and Vartuli on against AVCO ment V), form and the the first two book com counts the Commission’s three on disk. computer three as software latter Corp., Fin. v. Avco plaint. See CFTC (S.D.N.Y.1998) (“Avco principal- are appeal, In this concerned 104, 122 F.Supp.2d versions. II ”). ly computerized against complaint The Gent entirety. See id. in its dismissed to obtain a told its customers AVCO injunction permanent issued a feed сurrent reporting service to market Vartuli and ordered against AVCO and franc future con- prices Swiss market they that had disgorgement profits V, (or, yen Japanese for Recurrence tracts from the sale of Recurrence. garnered contracts) computer into a loaded future appealed. at 120-21. Vartuli See id. program. Recur- with the Recurrence issue of cross-appealed Commission analyze then the transactions rence would disgorgement award. the size of the market and place the futures taking “buy” or “sell” give user instantaneous agree that AVCO and Var- Because we following claimed CEA, signals. dis- AVCO we affirm the tuli violated the would Recurrence effect, although signals these enable holding to that trict court’s profitably. users trade futures contracts (Emphasis in original.) An ad run mul- According to parties’ Joint Pretrial tiple editions of Magazine Futures in- Order in the district court: prospective formed customers they pay
The Defendants’ customers must “follow the signals AVCO’s with no second- fee, and, licensing they if guessing.” to follow And wish an advertisement that ap- given by instructions peared the Defen- various editions of various publi- themselves, system dants’ install the De- cations warned that Recurrence custom- fendants’ computer program on their er had to possessed of a “lack ego” personal computers, procure a market order for him or her to “begin taking reporting service to feed current market profits immediately.” prices computer, to the and then act on From 1991 to AVCO’s advertise- given instructions by the Defen- ments for the system Recurrence claimed dants’ system. some remarkable results. adver- AVCO In addition to selling system, AVCO tised that “Recurrence III money makes gave supplemental occasional advice Re- automatically,” system “the turned currence telephone. users pro- It also $10,000 trading $544,704 account into a vided customers with a list of “authorized fortune-a return per year,” and, 833% brokers” who willing were to trade for the you’re “If serious about making money account anof using customer markets, see the enclosed veri- system Recurrence if purchaser performance fied summary showing how system did not want to specific order each $2,500 Recurrence IV turned into well over transaction him or hеrself. $130,000 trading only one Swiss Franc fu-
AVCO advertised the sys- Recurrence tures contract.” But AVCO’s claims were *6 tem, which prices sold for ranging from based on computer-generated hypothetical for Recurrence I $1500 for Recur- $4500 system use of the rather than actual IV, rence extensively. The advertising trades, a fact not disclosed in the adver- made clear that Recurrence being was sold tisements. system as a commodities fu- In addition to mass-media advertise-
tures, and that system for the to function ments, promotional AVCO sent also mate- properly its commands were to be followed prospective rials to customers. The order explicitly. A Recurrence ad run the form that accompanied these materials Packet, 1995 Partnership example, contained a began: disclaimer that said: CFTC While Disclosure: the numbers “You’ll be advised pattern on what used this literature are “Real Time present, price sell, at what or buy Data” the CFTC requires following what price place your protective stop, disclaimer on all market related litera- and where take profits.... All the Hypothetical ture. perfor- or Simulated trader needs to do is call . [his her] mance results have certain limitations. place broker and appropriate record, performance Unlike an actual trades.” represent simulated do not results actu- Recurrence potential also told purchasers: trading. al message gives you [Recurrence’s] a spe- buy recommendation, or sell as well (Emphasis in the original.) cific a specific as stop profit objective. and AVCO’s were advertisements successful. just You your call give broker and Total revenue sales of system complete (you can order read even grew to more four million than dollars. screen) right instructions your off and then sit back and watch as Recurrence The results of trading using actual monitors the your market and position system up Recurrence did not live in real time. promotional AVCO’s claims. The district trading. futures in connection with made trading as directed
court found that were AVCO and Vartuli conducted id. at 116-17. whether See system, Recurrence broker[s],” representations, re- liable for directly “authorized held individuals or II, 28 losses. Avco a con- held liable as sulted substantial was also and Vartuli customers Even after F.Supp.2d at 113. and as an aider of AVCO trolling person that Re- and to AVCO Vartuli complained at 117-18. id. See abettor. poor, had performance been currence’s determined court On Count about the make claims continued to they though it in fact a CTA even AVCO extraordinary profitability. system’s one, and that registered had never three-count filed a The Commission subject to therefore actions were AVCO’s AVCO, Vartuli complaint against conduct. governing CTA regulations the defendants with charged Count I Gent. then conclud- The court id. at 118-19. of Section fraud in violation solicitation “devices, employed had ed that AVCO 6b(a)(i). 4b(a)(i) CEA, § of the U.S.C. “prac- artifices to defraud” schemes with the defendants charged II Count operate of business which tices or courses commodity trading advisor by a fraud its customers in upon” or deceit as a fraud (“CTA”) advertising under and fraudulent (1) § and 17 C.F.R. 7of U.S.C. violation CEA, § 6o 7 U.S.C. Section 4o 4.41(a). held that It further § Id. at 119. (1). charged defendants Count III accompany hypo- failed to AVCO had register failed to AVCO having in its used performance statistics thetical 4m(l) of the required by Section CTA warning re- materials with promotional 6m(l). CEA, complaint 7 U.S.C. 4.41(b). See id. 17 C.F.R. quired by control- both as charged Vartuli Gent liable as control- again held and as aiders persons of AVCO ling and abettor. and as an aider ling person respect conduct with of AVCO’s abettors at 120. See id. to each count. of the evi- Employing preponderance court concluded that the district Because standard, found the district dence concededly was a CTA and AVCO all three and Vartuli on against AVCO Commission, the with the registered never *7 at F.Supp.2d See AVCO counts. hable on that court held AVCO district all of The court dismissed 115-20. III, register as CTA. failure Count ground that against Gent on charges held again, Vartuli was hable Once See id. the false and responsible not for he was as an aider controlling person and as a the other actions with misleading or claims id. abettor. See charged. See
which AVCO was id. them, against entering judgment After I, that the court On Count found enjoined AVCO and permanently the court Recur- representations about AVCO’s CTAs, trading in acting Vartuli past per- of risk and system’s rence level commodities, for soliciting customers material, false, misleading, were formance id. at 120-21. trading. See commodities id. at 115-18. and made with scienter. See held originally and Vartuli were AVCO that the maintained the defendants While severally disgorge- for jointly and liable be were performance claims basis for their $4,148,572, in amount of ment models, legitimate “hypothetical” by received defendants gross revenue that AVCO cus- the district court found id. at 121. sale of Recurrence. See for the reasonably that the statis- tomers believed $701,534 later reduced to The award in Recurrence advertise- provided tics net only the defendants’ income to reflect of actual ments to the results referred Finan- v. Avco sales. See CFTC on such mislead- and as such were false and trades 3119(JFK), 1998 Corp., No. 97 con- cial CIV. also ing. Id. at 115-16. court *1, Dist. at LEXIS representations were WL cluded that those
1Q1 (S.D.N.Y. 1998) 12996, at *4 Aug.21, cheat or defraud or attempt to cheat or (“Avco III ”). defraud such other person.” Id. appeal, argues
On Vartuli that argues the mis- the district representations by made in holding AVCO were not erred the defendants lia “in ble made with” the purchase § connection commodities fraud under 6b be any cause misrepresentations sale of commodity futures сontracts were made by advertising were therefore covered not the anti- Recurrence CEA; were made provisions fraud connection with that a soft- AVCO’s sale software, of its not publisher ware connection such as AVCO does fall not transactions in commodity CTA; engaged within the futures statutory definition of a in by AVCO customers. We that if find this ar publishers software are CTAs then gument unpersuasive. the CEA licensing scheme violates the Amendment; First that AVCO’s custom- terms, “By its Section [6]b not re- ers were not by “clients” covered 7 U.S.C. stricted ... to instances of fraud or deceit § and that they case were ‘in’ orders to make or the making of con- provided with the disclosure language Rather, tracts. Section encompasses [6]b specified Regulation 4.41 under conduct ‘in or in connection with’ futures CEA; Regulation and that 4.41 unconstitu- transactions. plain meaning of such tionally compels He speech. does dis- broad language cannot ignored.” Saxe pute liability his a controlling person Co., v. E.F. & Hutton 110-11 F.2d abettor; AVCO or as an aider and (2d Cir.1986) (ellipsis in original) (quoting therefore do not address Vartuli’s and Council, Inc., Hirk v. Agri-Research actions, liability, AVCO’s separately. (7th Cir.1977)). F.2d 103-04 And lia- CFTC, See Guttman v. 197 F.3d 39-40 bility explicitly under 6b beyond extends (2d Cir.1999) (discussing liability vicarious of the contract “member[s] market” to CEA); under the Cuoco v. Moritsugu, “any person” engaging in conduct “in con- (2d Cir.2000) (issues F.3d 112 n. 4 not nection with” futures transactions. sufficiently 6b(a); raised Saxe, in the briefs will normal- U.S.C. F.2d ly not be ap- addressed this Court on Recurrence was sold the defendants peal). system for trading in futures con-
tracts, a “currency trading system.” The
purpose
function
DISCUSSION
of the software was
to advise
what
users
futures transactions
We review the district
findings
court’s
to execute.
implored
users to “fol-
error,
fact for clear
and its
conclusions
low” signals from Recurrence “with no
See,
law de novo.
e.g., Counihan v. All
*8
second-guessing.”
of
Purchasers
Recur-
Co.,
(2d
state Ins.
194 F.3d
Cir.
rence
were instructed
the defendants
1999).
to
specific
undertake
entirely
transactions
in
on it.
reliance
Thousands of such
I. Count I: Solicitation Fraud
in
transactions were
fact undertaken.
I
Count
of the Commission’s complaint Misrepresentations
Recurrence,
about
the
against
charged
the
functioned,
defendants
them with way it
the risks involved in
committing
it,
fraud
using
commodities
in violation
and the
produce
results it would
4b(a)(i)
CEA,
of Section
of the
necessarily
U.S.C. were
misrepresentations about
6b(a)(i).
6b(a)
§
Section
makes
unlawful
all
the
directed
trades
the Recurrence
any person,
“for
in or in
system.
connection with
The intended and
link
direct
be-
make,
any
of,
order to
making
any
or the
tween the advertisements
the curren-
and
contract
any
of sale
commodity
cy
fu-
trading
any
for
rendered
misrepresenta-
made,
delivery,
made,
ture
or to be
for
tions
advertising
the
“in connection
(i)
on
any
person
behalf of
other
...
to with”
suggested
the
futures transactions.
by the district
as found
There,
representations
according
is instructive.
Saxe
“nearly identical”
II as
in Avco
of that
court
accepted
purposes
for
facts
soft-
in the sale of
misrepresentations
opened
commodities
plaintiff
appeal, the
court). The
before
in the case
upon defen- ware
in reliance
account
trading
view in
to the CFTC’s
deferred
com-
particular
that a
statement
dant’s
at
id.
proceedings,
com-
experienced
administrative
“an
trader was
modities
“not unrea-
adopted the CFTC’s
advisor,
would
which
therefore
[sic]
trading
modities
“in con-
that advice
trading
contention
computerized
sonable”
sophisticated
use
if it “relates
trading
futures
nection with”
plaintiffs]
to [the
custom-tailored
program
primary
and the
trading
Saxe,
risk of the
F.2d at
to the
objectives.”
investment
is to
the advice
client,
purchasing
defen-
purpose
his
guiding
In so
trades,”
“expen-
Because
id.
broker,
“misrepresented]
execute
dant, a stock
purpose
had no
issue]
[at
na-
software
speculative
sive
highly
of risk and
degree
choosing
as a device
he reas-
trading
except
when
of commodities
ture
make,”
in the sale of
fraud
trading
trades
commodities
appellant that
sured
fraud “in connection with”
safe,
invest-
software
non-speculative
be a
would
Id.
futures transactions.
about
commodities
“Misrepresentations
Id.
ment.”
true here.
The same is
trading affected
172-73.
risks of commodities
appellant’s
on
made
subsequent trades
all
the district court’s
therefore affirm
statement
Id. The defendant’s
behalf.”
representations about
finding that AVCO’s
with”
“in connection
therefore made
made in con-
system were
the Recurrence
transactions,
though the
even
commodities
And
trading.
futures
because
nеction with
recom-
more than
nothing
did
defendant
made about
that AVCO
the statements
placed
eventually
an
who
advisor
mend
false,
misleading
were
Recurrence
id; see also
plaintiff.
for the
trades
findings that are
made
scienter —
approval
Hirk,
cited with
561 F.2d at
hold that
appeal
on
dispute
—we
(fraud
Saxe,
in solicita-
at 110
789 F.2d
4b(a)(i)
§
conduct violated
defendants’
“in
connection
account
tion
6(b)(a)(i).
CEA,
§
7 U.S.C.
purposes
futures transactions
with”
6b).
§
Commodity
by a
II:
II. Count
Fraud
the asserted
between
The connection
Trading Advisor
trading seems
misrepresentations
than
be,
here
if
clearer
anything,
tous
Frame-
Regulatory
Statutory
A.
misrepresentations
Saxe.
work.
directly reflected
advertisements
AVCO’s
alleges
complaint
II of the
Count
made
suggestions
of the
reliability
CEA, 7
§
violated
futures
specific
about
by Recurrence
6o(l),
Rules
and Commission
U.S.C.
trades,
misrepresen-
whereas in Saxe
4.41(a)-(b).
4.41(a)
(b),
17 C.F.R.
in turn
a broker who
concerned
tation
6o(l)
it unlawful for
makes
CTAs
Section
about
recommendations
independent
made
associates:
or their
commodity transactions.
scheme,
device,
(A)
employ
recently
Fifth
affirmed
Circuit
*9
any
partici-
cliеnt or
defraud
to
artifice
court’s
the district
ruling similar to
CFTC
participant;
client or
prospective
or
pant
began as an
The case
case at bar.
in the
or
brought
action
enforcement
administrative
transaction,
(B)
any
engage
prac-
of soft
to
against a seller
by the Commission
tice,
oper-
of
or course
business
striking
resemblance
bearing
ware
upon any
a fraud or
client
as
deceit
Technical Servs.
ates
R & W
Recurrence.
(5th
client or
or
CFTC,
participant
prospective
or
173
35
F.3d
n.
Ltd.
W”)
Cir.2000) (“R
participant.
(referring to the mis-
&
4.41(a)
(1)
Regulation
prohibits CTAs from
for compensation or profit, engages
§
in a
advertising
manner that violates
others,
the business of advising
either
(1).
4.41(b)
Regulation
prohibits any per-
directly or through publications, writ-
“presenting]
performance
son
of
ings,
media,
or electronic
to the
as
value
hypothetical
simulated or
commodities
of or the advisability of trading in—
account of a CTA” without a specified dis-
(I) any contract of sale of a commodi-
claimer.
ty for
delivery
future
made or to be
argues
cannot
AVCO
have
made
subject
on or
to the rules of a
(1)
4.41(a)
§
Regulаtion
violated
and
be-
market;
contract
... or
CTAs,
provisions apply only
cause those
(ii)
compensation
for
or profit, and as
and AVCO does not
statutory
meet
part
regular business,
of a
issues or
definition of a
He
argues
CTA.
further
promulgates analyses or reports con-
that we could not conclude that
is a
cerning any of the activities referred to
rendering
CTA without
the CEA unconsti-
(i).
in clause
tutional because the act contains a provi-
la(5)(B)
(C)
Sections
combine to
requiring
sion
all
register.
CTAs to
Var-
exclude certain classes of people and enti-
tuli asserts that
registration provision,
this
definition,
ties from this
however. Rele-
applicable
AVCO,
if
violates the First
vant for
purposes, they
our
exclude both
Amendment.
“any news reporter,
columnist,
news
or
conclude that
AVCO meets the stat-
news
print
editor of the
or electronic me-
utory definition of a CTA and affirm the.
dia,”
la(5)(B)(ii),
§
publisher
“the
or
district court’s holding that AVCO violated
producer
any print
or electronic data of
provisions
the fraud
applicable to CTAs.
general
dissemination,
regular
includ-
provisions apply
Those
irrespec-
to CTAs
ing
§
employees,”
la(5)(B)(iv),
provided
tive of
they
whether
are “exempt from
furnishing
“the
[advisory
such
ser-
Act,”
registration under
17 C.F.R.
la(5)(A)
§
vices as described in
...
]
4.41(c)(2),
§
question
so the
whether
solely incidental to the
of their
conduct
registration
CEA’s
requirement would be
la(5)(C).
profession,” §
business or
unconstitutional as applied to
in-
AVCO is
dependent from
question
of whether
dispute
There
no
that as the
AVCO is a CTA
purposes
of the re-
found,
district court
AVCO advised others
Act,
mainder of the
including U.S.C.
through
media,
the electronic
profit,
(1).
§ 6o
Currency
New York
Re-
Cf.
to “the
or the advisability
value
of trading
CFTC,
(2d
Corp.
search
180 F.3d
in” futures contracts for Swiss francs and
Cir.1999) (holding that registering as a
Japanese
Avco
yen.
F.Supp.2d
and acting
CTA
independent
CTA are
118. “Throughout
day,
response
requirements, both of which must met
conditions,
market
provided
Recurrence
for certain provisions of
ap-
the CEA to
sell,
specific buy,
stop
profit objective
ply). We address the constitutional issues
recommendations
customers.”
Id.
to the
particular
provisions
antifraud
of AVCO therefore falls
primary
within the
§
Regulation
E,
4.41 in Section
definition
It
of CTA:
in the
engaged
below, and separately
registra-
discuss the
othеrs,
business
advising
through
Re
requirement
tion
in Part III.
currence,
to the
advisability
value or the
contracts, i.e.,
in futures
it told
B. AVCO is a Commodity
Ad-
Trading
buy
yen
customers whether to
sell
visor
Swiss franc futures.
la(5)(A)
A
CTA is
defined
la(5)(A).
CEA,
7 U.S.C.
question
thus
becomes
*10
“commodity
[T]he term
trading advisor” whether
fits
within the relevant
any person
means
who-
CEA
from the
exclusions
definition of
speech.
on
prior restraint
the
unconstitutional
language of
plain
the
Based upon
CTA.
204-05,
2557.1 The Court
105 S.Ct.
data it
Id. at
not. The electronic
it does
statute
regu-
and
“generality]
concluded:
not
produced were
la(5)(B)(iv).
larty]
disseminat[ed].”
between
long as the communications
As
currency
the
about
And the information
remain
their subscribers
and
petitioners
by Recurrence
provided
futures markets
develop
not
and do
entirely impersonal
the conduct
“solely incidental” to
not
fiduciary, person-to-per-
kind of
the
into
la(5)(C);
business, §
it was
of AVCO’s
that were discussed at
relationships
son
business.
AVCO’s
of
history
the
legislative
in the
length
SEC, 472 U.S.
on Lowe v.
relies
Vartuli
of invest-
that are characteristic
and
Act
2557,
181,
86 L.Ed.2d
105 S.Ct.
we be-
relationships,
ment adviser-client
(1985),
of the exclusions
that one
argue
to
are,
pre-
at least
publications
the
lieve
Lowe, the Se-
apply.
In
must nonetheless
exclusion
within the
sumptively,
at-
Exchange
Commission
curities
under
subject
registration
to
thus
defendant, a former
enjoin the
to
tempted
Act.
had
whose license
adviser
investment
210, 105
Lowe,
at
S.Ct. 2557.
472 U.S.
misconduct,
for criminal
revoked
been
semimonthly newsletter
publishing
from
court,
in order to
Lowe
Because
com-
advice and
containing investment
issue, read the
First Amendment
avoid the
that the
argued
mentary.
defendant
registration
Act’s
Advisers
Investment
register
or-
not force it to
could
SEC
only
personalized
to
apply
provision
its newsletter because
publish
der to
have
communications,
would
us
Investment
of the
provision
registration
state,
by implication,
read
Lowe
1940,
§ 80b-
Act of
15 U.S.C.
Advisers
defini-
general
the CEA’s
must construe
advis-
3(c), only
to “investment
applied
who
only
include
those
tion
CTA
of
ad-
ers,”
of “investment
and the definition
communications.
personalized
engage
publisher
“the
specifically excluded
viser”
otherwise,
render
he
would
argues,
To do
maga-
newspaper, news
of
bona fide
CEA,
registration provi-
its
or at least
of
publication
financial
zine or business
in Sec-
(which
separately
we address
siоn
at
circulation.” Id.
regular
general
III),
tion
unconstitutional.
203-04, 105
2557.
S.Ct.
of
basis
Lowe was decided
legisla-
But
analysis of the
After an extended
history of the Invest-
language
of
provisions
history of the relevant
tive
court, al-
Lowe
Act,
Act. The
ment Advisers
Supreme
Investment Advisers
language
interpreting the
though
required
it was
concluded
Court
of constitutional
light
principles
Act
free of
keep
“to
the Act
interpret
them
of the Act
207,
the drafters
105 law with
infirmities.” Id. at
constitutional
familiar, see
presumably been
have
read
would
The Court therefore
S.Ct. 2557.
re-
pointedly
105 S.Ct.
id.
Act’s
at
exclusion
Investment Advisers
question,
defendant,
the constitutional
and fused to reach
cover the
registration to
Thus
Lowe
at
105 S.Ct.
whether
see id.
question
thereby avoided
binding inter-
us with neither
provides
an
constituted
registration provisions
pub-
formerly
could
a license what
particular perils posed
without
discussing the
1. In
restraints,
press
only
cited Near
prior
Court
with one....
lished
697, 713,
Olson, 283 U.S.
every
ex. rel.
comprehends
Minnesota
sort
connotation
historic
(1931) (stating
We are thus left where we First, statutory language plaintiff similar to the “plainly CEA. Lowe exclusion, to fit within the data falls within the ‘commodity AVCO’s definition of a general regular had to be “of dissemi- only advisor’.... question (5)(B)(v). § nation.” U.S.C. la As the ... is whethеr publishing] [its activities W, pointed Fifth Circuit out in R business.”). & are ‘solely incidental’ to its provided by recommendations software publishing of Recurrence was AVCO’s such general as Recurrence are not “of primary business. The exclusion therefore because, and regular dissemination” as the AVCO, does not cover and for purposes of Supreme Court reasoned when analyzing Count II of the complaint AVCO was a phrase the identical the Investment Ad- CTA.2 Act, regular
visers
requires
dissemination
that there be
Fraud by
C.
a CTA Under 7 U.S.C.
“... no indication that [dissemination]
6o(l)
kM(a)
§
§
C.F.R.
specific
ha[s] been timed to
market ac-
agree
We thus
with the
district
case,
In
tivity.”
petitioners’
this
CTA,
that AVCO acted as a
and on appeal
provided by
recommendations were
soft-
dispute
Vartuli does not
that AVCO’s con-
ware that
programmed
“speak”
however,
duct
argues,
was fraudulent. He
only when certain market conditions
§
that AVCO did not violate 7 U.S.C.
6o
Thus,
were met.
petitioners’
recom-
4.41(a)
§
and 17 C.F.R.
because those
particular
mendations were timed to
provisions
only
apply
to frauds committed
activity
market
and not “regularly” dis-
upon
participant
CTA
“client or
seminated.
prospective
participant.”
client or
R & W,
Lowe,
Second, observed, whereas Investment Advis- As the R&W court the issue R & W, ers Act excluded from registration re- is not free from doubt. See argues la(5)(B), la(5)(A), quirement. § that the "such services” lan- Section not la(5)(C), (“unless guage §in provision. such services are is the CEA's exclusion There is no solely reading "personalized” incidental to the conduct” of one's busi- basis for the word la(5)(A). profession) advisory ness or refers ser- into We therefore follow the Fifth la(5)(A), vices described in holding and that those and Seventh Circuits in that the defi advisory personalized providers services must be advi- nition of CTA extends to those sory personalized impersonal provide services under Lowe. The advice who do such Lowe, however, language applies incidentally profes advice advice to their business or R & W, 174; to the exclusion sectiоn—Lowe-held that im- sion. See 205 F.3d at Commodi Serv., (7th personal ty advice fit within the Investment Ad- Trend 149 F.3d Cir. 1998). registration visers Act’s exclusion from its re- *12 106 ques- to reach this decline ordinarily We therefore not would at 176.3 One
F.3d tion, time. at least at this software purchaser a of think of software, the even the of “client” of seller are, however, remanding this case to was to tell the software purpose if the of purposes. for other the district court buy and sell futures when to purchaser the superabundance perhaps With what is other contracts or securities. district caution, direct we therefore this The R & W court never reached and recol- records to review own court its the R & W issue, however, peti- because the argu- whether lections to determine during agency it failed to raise tioners term “client” scope of the ment as to being was appeal proceedings which if, If, only to it. presented was in much the Id. We find ourselves taken. raised, the dis- previously argument has sug- situation. The Commission same court, having addressed this issue not trict not raised that the issue was gested to us far, proceed should in its decisions thus court, has and Vartuli nоt in the district it. address and decide that it The Commission’s established was. moreover, strongly is sup- suggestion, ^41(b) § 17 C.F.R. D. Fraud Under concept by the ported treatment 4.41(b)(1) § that: provides 17 C.F.R. in Avco II. by “client” the district performance may present person No word replaced the simply The court com- hypothetical or any simulated discussing when “customer” “client” with account, transaction in modity interest statute, that the giving impression of transac- commodity or series interest the two words its between distinction a com- commodity interest of in a tions before it. argued been significance had not commodity trad- modity pool operator, II, See Avco F.Supp.2d 28 at 119. thereof, advisor, any principal ing right court was The district accompanied is performance unless such litigated it was not ignore the issue if disclaimer]. specified [a Artuz, Acosta 221 court. before the requires regulation further (2d Cir.2000). And is a “[i]t 122 F.3d disclosed.” “prominently disclaimer be appel rule that an general well-established 4.41(b)(2). “any ... applies It C.F.R. raised an issue late court will not consider the texts of including ... advertisement U.S., appeal.” Maska for the first time on 17 C.F.R. presentations.” ... mass media Co., 198 F.3d v. Kansa Ins. Inc. General 4.41(c)(1). Cir.1999) (citation (2d and inter 79-80 omitted). pre that AVCO See also Gu undisputed It quotation nal mark (2d Winehouse, hypothetical performance sented the rary v. F.3d with Cir.1999) in advertisements pres simulated accounts (“Having failed to make court, disclaimer. The including required out plaintiff argument ent to the district here.”).4 while also found that district court heard to advance will*not be Lowe, W, (quoting at 176 R & 205 F.3d 3. The Fifth Circuit said: (footnote 2557) omit- U.S. ted). regarding § petitioners' argument [6]o support superficial in cases such ... finds Lowe, distinguished between raising bar to an absolute 4. "This rule not impersonal publisher-subscriber relation- appeal,” and the decision new issues on ship "the investment adviser-client” re- panel,” discretionary disregard it "is lationship. distinction made Lowe's States, (2d 13 F.3d Greene United Cir.1994), Act Advisers] [Investment based on persua- present case no but in the However, the CEA the CEA. even makes not prof- doing so has been sive reason for our fered, clients and a distinction between subscrib- ruling on the matter would 4.41(c) example, § and Rule [6]o ers. For facts that should clients, 4.33(a) require an- examination only while Rule apply instance performed in the first have been specifically applies to clients and subscrib- district court. ers. infirmity promotion- the disclaimer because Recurrence “constituted did include materials, “prominently” personalized al it was investment advice.” AVCO placed therein. We see no reason to dis- at 119. The F.Supp.2d emphasis on appears finding. turb that The disclaimer “personal” advice comes from Lowe. 472 *13 separate page a from the contain- page 191-96, 105 U.S. S.Ct. 2557. Lowe’s representations the to which it was ing holding was based on the Investment Ad- it apply, meant was labeled “CFTC Act, visers not the Constitution. It there- Disclosure,” by and it was introduced provide fore does a not framework for sentence, the numbers used in this “While analysis of the constitutional issues raised Time Data’ literature are ‘Real the CFTC appeal. on this requires following disclaimer on all We are also not as certain as was the market related literature.” The district district court that provided “per- clearly in error in perceiving court was not sonalized investment advice.” The advice phrasing the intent of this to be to mislead personal in the thаt sense into prospective believing customers that needs, defendants learned about the re- applicable the disclaimer was not to the sophistication sources and of individual AVCO, provided by having statistics been clients and gave individualized advice formality. a mere included as bureaucratic Lowe, upon based information. Avco at 119-20. The F.Supp.2d Cf. (discuss- 191-96, 472 U.S. at S.Ct. presentation plain- of the disclaimer seems ing personal nature of the investment ad- convey ly designed to have been relationship viser’s with his or her clients warning pro reader forma in legislative history the context of the and, such, seriously. not to be taken 1940).5 the Investment Advisers Act of include in AVCO’s failure to the disclaimer advertisements, computerized And the advice disseminated its and its failure to dis- give means of Recurrence did not play prominently unequivocally and materials, agents opportunity defendants or their promotional violated 4.41(b). physical presence purposes § to use their for intimidation, fraud, overreaching, E. Constitutional Issues abuse, specific a to face-to-face danger may particular- communications that allow The district court concluded that treat- CTA, ly interac- ing enjoin- regulation in-person AVCO as a and therefore close ing sanctioning defendants under tions. Ohralik v. Ohio State Bar Cf. Ass’n, U.S.C. for the fraud which the 98 S.Ct. (1978).6 engaged,
defendants
avoided constitutional L.Ed.2d 444
Lowe,
by personal
lawyers]
injury
472 U.S. at
held:
solicitation
aspects
well founded. The detrimental
long
As
communications between
selling
ordinary con-
face-to-face
even of
petitioners and their subscribers
en-
remain
products
recognized
sumer
have been
tirely impersonal
develop
and do not
into
by the Federal Trade Commis-
addressed
fiduciary, person-to-person
the kind of
rela-
sion,
hardly
said that the
and it
need be
tionships
length
that were discussed at
potential
overreaching
significantly
legislative history of the Act and that
greater
lawyer,
professional
when
are characteristic of investment adviser-
personally
persuasion,
in the
trained
art
relationships,
publica-
client
we believe the
unsophisticated,
injured,
solicits an
or dis-
are,
presumptively,
tions
at least
within the
may
lay person.
individual
tressed
Such an
subject
registra-
exclusion аnd thus not
regardless
place
lawyer,
of the
his trust in
tion under the
Act.
[Investment Advisers]
qualifications
ac-
latter's
individual's
legal representation, simply
tual need for
lawyers’ in-person
6. Ohralik dealt with
solici-
response
persuasion
under circum-
Supreme
tation of clients. The
Court ob-
acquies-
stances conducive to uninformed
served:
cence.
Ohralik,
464-65,
perception
potential
The State’s
ers
and AVCO’s defense that
accompany
pre
in an effort to ment that a disclaimer
all
track record of Recurrence
program
purchase
hypothetical
induce customers to
sеntations of
or simulated
*14
Recurrence’s
recommenda-
compels speech
and follow
data
violation
II,
at 119. It
F.Supp.2d
tions.” Avco
28
In
First Amendment.
the commercial
context, however,
been understood that
such
long
has
speech
“an advertiser’s
“[fjrauds may be denounced as offenses
rights
adequately protected
long
are
as
as
State,
by law.”
v.
punished
Schneider
requirements
reasonably
are
re
disclosure
146,
147, 164,
84 L.Ed.
308 U.S.
60 S.Ct.
preventing
lated
interest
State’s
(1939).
155
deception of consumers.” Zauderer v. Of
Counsel,
626,
Disciplinary
471 U.S.
fice of
Moreover,
charges
II
Count
(1985).
651,
2265,
105 S.Ct.
S.Ct.
speech may
justified by
be
a mere
mit an attenuated form of First Amend-
that the
possibility
prohibited speech will
speech.
for commercial
protection
ment
Lowe,
235, 105
472
at
be fraudulent.”
U.S.
ability to
speaker’s unique
Because of the
(White, J., concurring in the
S.Ct. 2557
product or
ascertain the truth about the
result)
Zauderer,
626,
(citing
471 U.S.
105
selling,'
pecu-
and the
service he or she is
2265;
R.M.J.,
191,
In re
455 U.S.
S.Ct.
advertising,
liar heartiness of commercial
(1982);
203, 102 S.Ct.
provider of information and
Re-
sion.”
our
that publishing
clear
Recurrence alone—
currence communications to those custom-
ie.,
as an
trading system—
not
automatic
may
“speech,”
pro-
ers
well have been
аs
qualify
“acting
commodity
would
as
speech
tected
that. But AVCO was
trading advisor.” The district court en-
properly required
register
to
for its non-
joined
acting
from
as such
defendants
activities,
speech
such as the sale Recur-
they registered
unless
with the CFTC.
system
rence as the automatic
for curren-
injunction
currently
as it
Under
cy
it
to
trading was intended
be. The fact
stands, therefore, the defendants would be
may
engaged
pro-
that AVCO
also have
required
register
to
with the Commission
speech
require-
tected
does not make the
publish
to
if it were being
Recurrence even
register
carry
ment that it
non-
if
soley
speech,
example
used
any the
speech business
less constitutional-
advertised,
being
were
sold and
as an
used
ly permissible.
commentary
academic
on the commodities
Finally, a caveat.
Statements
formulated,
injunction
markets. Thus
striking-
form orders or instructions are
together
registration requirement
with the
ly
by military
common: Commands
offi- may act as a
restraint
prior
on constitu-
subordinates, by
cers to their
restaurant
tionally protected speech for which the
waiters,
patrons
by
to their
doctors to
perform any
district court did not
constitu-
patients,
political
religious
their
lead-
analysis.
tional
We therefore remand for
ers to their devoted followers.
doWe
not
injunction
the district court to limit the
think and
suggest by
do not mean to
our
systems
the dissemination of
for the auto-
holding
that
today
such communications
matic
of futures contracts.
immunity
“can claim ...
talismanic
do
hold that
Vartuli or AVCO
constitutional
limitations.” New York
may
required
register
never be
Sullivan,
254, 269,
Times Co.
376 U.S.
engage
protected speech.
CTA even to
(1963).
L.Ed.2d 686
only
requiring
We observe
either to
subtle,
language
complex
uses of
are
prior
subject
do so would be a
restraint
infinitely
Any
variable.
assertion that a
judicial
especially
scrutiny,
careful
statement
“buy”
like or unlike the
that “the barriers to prior restraint remain
“sell” instructions issued
a Recurrence-
Ass’n,
high.” Nebraska Press
427 U.S. at
computer
fully protected by
loaded
is not
561,
H3 Amendment, First we af- purposes of the AVCO for which award disgorgement of the district court judgment firm liable severally jointly and are and Vartuli injunction issued to III. Because Count $701,534, the court concluded which at enjoins III response to Count constitu- by AVCO generated profit the cumulative however, we re- speech, tionally protected III, 1997. See Avco through may so that it to the district court mand *1, Dist. 1998 U.S. at 1998 WL injunction in accordance with this limit ar- *4. The Commission at LEXIS opinion. on the award “should based gues that with no receipts, deductions gross
AVCO’s GRAAFEILAND, Judge, Circuit VAN expenses.” for business concurring the result: of disgorgement order “The to decision my reservation col I concur without of the calculation gains, and ill-gotten I Count As leagues’ disposition of IV. within the discretion gains, lie those I opinion, concur the remainder of to lati- court, given must be wide trial “If there is one doc solely in the result. Lorin, SEC in these matters.” tude rooted than other deeply trine more curiam) Cir.1996) (2d (per F.3d adjudication, process constitutional of omitted). Here, (internal marks quotation pass to ought ques that we it is submis- review[ing]” the “carefully after adju unless such constitutionality tions of in mind “keeping parties sions of the Department dication unavoidable.” of equita- nonpunitive ais disgorgement Rep House v. United States Commerce of wrongdoers deprive remedy meant ble 316, 343-44, resentatives, 525 U.S. court or- the district gains,” ill-gotten of (1999). 765, 142 L.Ed.2d S.Ct. $701,- disgorge and AVCO dered Vartuli *1, III, at 1998 WL 534. Avco *4. We Dist. LEXIS
1998 U.S. wisely left decisions are that such conclude courts, and of the district discretion court did not abuse the district LURIE, Petitioner-Appellee- Brett K. discretion here.
Cross-Appellant,
CONCLUSION AVCO Vartuli committed Because Acting WITTNER, Justice G. Bonnie fu- with commodities fraud in connection Supreme of the State Court transactions, judgment affirm the tures Attorney York; Spitzer, Eliot New Because court as Count I. of the district York; New General State statutory fit within and Vartuli Commissioner, Goord, New Glenn S. CTA, fraud and committed definition of Department of Correction- York State such, failed include they and because Services, Respondents-Appellants- al along their disclaimer required Cross-Appellees. trading activi- hypothetical presentation 1186, 1449, Dockets Nos. judgment of the district ty, we affirm 99-2425, 99-2426. direct although we as to Count *19 Appeals, Court of United States review whether the district court Circuit. Second a Recurrence customer issue of whether under 7 U.S.C. a “client” 17, 2000 Feb. Argued: at trial and to decide raised before 26, 2000 Sept. Decided: above. if it was. See Section II.C issue of which on the basis Because the conduct punish Commission seeks to “speech”
failing register