COMMODITY FUTURES TRADING COMMISSION, Plaintiff, Appellee/Cross-Appellant, v. JBW CAPITAL, LLC; John B. Wilson, Defendants, Appellants/Cross-Appellees.
Nos. 14-2173, 14-2224.
United States Court of Appeals, First Circuit.
Jan. 29, 2016.
812 F.3d 98
V.
For the foregoing reasons, the decision of the District Court is affirmed.
Ajay B. Sutaria, Counsel, Commodity Futures Trading Commission, with whom Jonathan L. Marcus, General Counsel, and Robert A. Schwartz, Deputy General Counsel, were on brief, for appellee.
Before TORRUELLA, LYNCH, and BARRON, Circuit Judges.
LYNCH, Circuit Judge.
In this commodity trading fraud case brought by the Commodity Futures Trading Commission (“CFTC” or “Commission“) against John B. Wilson and JBW Capital LLC (“JBW“), the Massachusetts federal district court granted on summary judgment the CFTC‘s request for a finding of liability, and imposed injunctive relief and civil penalties. It declined to award restitution, as measured by loss to pool participants. As a result, both sides have appealed.
Specifically, Wilson and JBW contest the district court‘s conclusion that they are liable under the Commodity Exchange Act (“CEA“) for failing to register with the CFTC, in violation of
I.
On review of an order granting summary judgment, we recite the facts “in the light most favorable to the nonmoving party.” Del Valle-Santana v. Servicios Legales De Puerto Rico, Inc., 804 F.3d 127, 129 (1st Cir. 2015). Here, in violation of the Federal Rules of Appellate Procedure, Wilson and JBW1 have provided no recitation of the facts with citations to the record, instead devoting almost their entire brief to simply asserting there are many issues of fact in their argument section.2 Nonetheless, we have tried to recite the facts from the record in the light most favorable to Wilson.
On July 23, 2007, JBW (which stands for “John B. Wilson“) was registered as a Massachusetts limited liability company. JBW‘s Operating Agreement stated that its “specific business purposes and activities contemplated by the founders of this LLC” included to “invest in stocks, bonds, derivatives, commodity futures, financial futures, stock index futures, options on stocks, and options on futures.”
Wilson was listed as the only registered agent in the Operating Agreement and the Certificate of Organization, and in an affidavit, Wilson said that he was the “manager and sole administrator” of JBW. Wilson was also listed as the only manager in the Operating Agreement, which said that except as otherwise specified or provided under state law, “all management decisions relating to the LLC‘s business shall be made by and be the sole responsibility of the Manager.” Wilson testified3 that he was the only person with trading authority over JBW‘s account.
Wilson did not register as a commodity pool operator (“CPO“) with the CFTC, nor did he file a notice with the National Futures Association (“NFA“) stating he was exempt from registration. Before his tenure with JBW, Wilson had been registered with the NFA from about 2005 to 2006 as an associated person of Tradex Group LLC. He also previously had a personal commodity futures account, which Wilson testified was not profitable.
In September 2007, Wilson‘s brother and a number of acquaintances invested in JBW. Wilson referred to these investors as “founders.” Their investments were used to create a fund, and JBW began trading in October 2007, in part using an algorithm called the “Humphrey Program.” By January 2008, JBW had thirteen investors and approximately $369,890 in contributions. According to a CFTC Division of Enforce-
Wilson testified that he did not tell his investors that he “had limited experience trading on commodities,” though he agreed that he “had limited experience.” There was no requirement that the investors have trading experience, and as far as Wilson was aware, the investors, other than his brother, had “no experience in futures trading.” He said that he told some, but not all, of the investors about the risks involved with commodity futures trading, and there was no document of any kind given to investors describing the risks of engaging in commodity futures trading.
JBW began trading in October 2007 and stopped trading in September 2009, and its account at MF Global, Inc., a commodity broker, was closed in May 2010. Wilson lost almost $1.8 million in trades and returned about $227,000 to investors.
Wilson e-mailed investors with JBW‘s Net Asset Value (“NAV“) on a weekly, biweekly, or quarterly basis. In at least four instances, Wilson‘s e-mails overstated JBW‘s value. First, a December 1, 2007, e-mail stated that as of November 30, 2007, “Today‘s NAV” was $159,460.95, while JBW‘s November 30, 2007, bank statement listed its “Account Value at Market” as $147,281.51. Second, a December 21, 2007, e-mail stated that as of December 21, “Today‘s NAV” was $180,071.71, while JBW‘s December 31, 2007, bank statement listed its account value at market as $177,385.40.4 Third, a March 1, 2008, e-mail said that “Today‘s NAV” was $566,076.07, while JBW‘s February 29, 2008, bank statement listed its account value at market as $553,523.54. Fourth, a May 30, 2008, e-mail said that “Today‘s NAV” was $2,029,271.45, while JBW‘s May 30, 2008, bank statement listed its account value at market as $1,041,399.80.
As to this last egregious overstatement, Wilson said that the amount provided as “Today‘s NAV” in the May 30, 2008, e-mail was an “estimate,” but he acknowledged that the word “estimate” did not appear anywhere in the e-mail.
A series of e-mails in September 2008 misrepresented JBW‘s value and then tried to explain the misrepresentation. On September 13, 2008, Wilson e-mailed investors that “Today‘s NAV” was $2,475,941.00. However, the e-mail did not include that two days earlier—on September 11, 2008—JBW had lost $1,045,632.91. JBW‘s account value at market on September 13, 2008, was actually about $1,149,628.82.5 On September 22, 2008, Wilson e-mailed investors apologizing for not informing them about the $1 million loss on September 11, stating “I ... want to apologize for not reporting the $1M loss of 9/11 in my weekly report.” Wilson wrote that his “intention was not to deceive but to ‘roll’ the loss into the next week and hopefully show some recovery.” He continued, “[c]learly, a recovery was not the case because I experienced the second major loss on the following Monday.” Specifically, on September 15, 2008, JBW lost $990,390.00. In his September 22, 2008, e-mail, Wilson said that he would send a report later in the month “explain[ing] how [he] plan[s] to recover from this.” A September 2008 trading state-
On September 30, 2008, Wilson sent investors an e-mail with the subject “Recovery Plan.” It stated that Wilson would transfer $200,000 of his “personal funds to the trading account for the beneficial interest of each investor of record on 9/6/08 (the ‘high water mark‘). As a result, each investor will recoup approximately 9% of their loss on day one.” The e-mail included that “[t]he automated trading program will be modified with a ‘stop loss order’ feature to avoid accumulation of losing positions (which got us in trouble in the first place).” Wilson also said that he would segregate contributions from new investors.
Wilson did transfer $200,000 of his personal funds to JBW, but he “did not have the time to” modify the trading program to include a “stop loss order,” nor did he segregate the funds from new investors.
On September 15, 2008, a new pool participant, Daniel Mann, invested $100,000 in JBW.6 When Wilson initially spoke to Mann about the fund in May or June of 2008, the fund was showing a strong performance. In September, Wilson told Mann over the phone that JBW had taken a loss, but he “did not specify what the loss was“—which, by September 15, was about $2 million. Wilson said that he felt “a moral obligation to tell [Mann] there had been a loss,” but he “told him nothing other than it was a loss. [Mann] didn‘t inquire further,” and agreed to invest his money with Wilson “regardless.” When Mann made his investment, Wilson said to him that the fund was worth about $2 million, which Wilson knew was inaccurate, but Wilson was afraid that otherwise Mann would not invest the money.7 Wilson also did not include Mann on the September 22 e-mail to investors that informed them of the losses suffered in mid-September. On September 26, 2008, Wilson sent an e-mail to Mann, saying that Wilson would “monitor [Mann‘s] $100K investment in such a way that if any time the equity fall[s] 10% [Wilson] will insure all funds are in cash, and will contact [Mann] for further direction.”
JBW suffered further losses after Mann‘s investment. On December 12, 2008, Wilson e-mailed Mann telling him that the NAV of Mann‘s investment on that day was $120,867.40. JBW‘s balance at the end of that day was approximately $42,409. Three days later, on December 15, 2008, Wilson e-mailed Mann a “Certificate of Beneficial Interest” dated September 28, 2008. The Certificate said that Mann‘s $100,000 constituted a 3.76% beneficial interest in JBW.8 On September 28, 2008, around $10,000 was in the fund. Wilson testified that he had “calculated [Mann‘s] $100,000 as a percentage of the high watermark of the fund,” which was about $2.5 million. He testified that he calculated it this way because it was his “intent all along ... to recover the entire fund back to ... the 2.3 or $4 million that [he] consider[ed] the high watermark with [his] own contribution of $200,000 trading
Mann made a second investment of $100,000 around December 16, 2008. Wilson testified that before placing Mann‘s second investment in the fund, he had told Mann that JBW had suffered further losses since the first investment but that he had made up the losses. However, Wilson also testified that he did not disclose that JBW had lost more than $2 million in September 2008 and that he did not recall telling Mann that the Certificate of Beneficial Interest he had sent on December 15, 2008, was inaccurate. On February 2, 2009, Wilson e-mailed Mann that Mann‘s balance was $224,812.23 on January 31, 2009. JBW‘s bank account statement from January 30, 2009, listed its balance at $278,079.61, and its account value at market at $193,767.19.9 On February 25, 2009, Mann sent an e-mail to Wilson stating that “of course, [he] want[s] the same downside limit of 10% loss on the 2nd 100,000 that [he] had on the original 100,000.” Wilson testified that he did not honor the ten percent stop-loss provision, and Mann‘s investment was ultimately lost.
II.
On September 28, 2012, the CFTC filed a complaint against Wilson and JBW in the federal district court of Massachusetts, alleging violations of
On May 27, 2014, the CFTC filed a motion for partial reconsideration with respect to restitution, in which it contended that “under the circumstances of this case as well as First Circuit precedent, restitution should be calculated by reference to the customers’ losses.” The district court denied the motion in an order dated July 17, 2014. CFTC v. Wilson, 19 F.Supp.3d 352, 365-66 (D.Mass.2014). It found that “[t]he additional cases cited by the CFTC neither compel an order of restitution as a matter of law, nor are the facts of those cases analogous to those in this case,” id. at 365-66, and concluded that its disagreement with the CFTC was a “difference of opinion,” id. at 366. On October 5, 2014, the district court issued a final judgment for a permanent injunction and a
III.
“We review orders for summary judgment de novo, assessing the record in the light most favorable to the nonmovant and resolving all reasonable inferences in that party‘s favor.” Packgen v. BP Expl., Inc., 754 F.3d 61, 66 (1st Cir.2014) (quoting Barclays Bank PLC v. Poynter, 710 F.3d 16, 19 (1st Cir.2013)). “Summary judgment is appropriate when ‘there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.‘” Id. (quoting
A. Failure to Register as a CPO
Under
Instead, Wilson contends that there were disputed facts as to his reliance on and engagement of “several professionals,” and that “[t]he record below demonstrates that [he] sought out, engaged and relied upon the advice of the Professionals.”12 We assume that Wilson has not waived the argument that liability for failure to register requires scienter.13
We agree with the district court that “the registration requirement does not contain a ‘state of mind’ limitation to liability.” Wilson, 19 F.Supp.3d at 360; cf. CFTC v. British Am. Commodity Options Corp., 560 F.2d 135, 142 (2d Cir. 1977) (de-
B. Commodity Fraud
Wilson was held liable under two commodity fraud provisions: (1)
1. 7 U.S.C. § 6b(a)
Liability attaches under
Wilson does raise numerous issues with the district court‘s determination that based on the undisputed facts, Wilson violated this anti-fraud provision. These claims are meritless.
Wilson clearly made numerous false and misleading statements and reports, including those in his e-mails to investors about “Today‘s NAV,” those about his recovery plan, and those in his communications to Mann about Mann‘s investment. Indeed, Wilson acknowledges that “[t]he evidence showed that Wilson sent certain e-mails to Investors, which were incomplete or inaccurate in several respects.”15
As to scienter, Wilson argues that the record does not show “knowing misconduct or severe recklessness,” and so does not support a finding of scienter. Our circuit has held that liability under § 6b can be found based on recklessness. See First Commodity Corp. of Boston v. CFTC, 676 F.2d 1, 4, 6–7 (1st Cir. 1982) (explaining that § 6b has a “specific willfulness, or ‘scienter’ requirement,” id. at 4, and that “willful” behavior includes “reckless” actions in the commodities fraud context, id. at 6-7). “A reckless’ misrepresentation is one that departs so far from the standards of ordinary care that it is very difficult to believe the speaker was not aware of what he was doing.” Id. at 6-7. There is ample evidence in the record for us to determine that Wilson acted recklessly, without reaching whether he did so knowingly.16
For example, Wilson testified that the September 13, 2008, e-mail stating that “Today‘s NAV” was $2,475,941 was an intentional statement and admitted that the e-mail was “[a]bsolutely not” accurate when it was sent out. He also characterized the amount provided as “Today‘s NAV” in the May 30, 2008, e-mail as an “estimate” even though the word “estimate” did not appear anywhere in the e-mail. Further, Wilson admitted that when he told Mann what percentage Mann‘s investment was of the fund in 2008, he gave Mann “a fictitious number“—“it was basically $100,000 of two and a half million.” He admitted he did not tell Mann that there was in fact not $2 million in the fund because of “[f]ear, simple as that” and a concern that Mann would not invest the money if he learned the truth. Further, Wilson acknowledged that he needed Mann‘s money to help regain the losses JBW had suffered. Wilson admitted that when he received funds from Mann and told Mann that he would deposit the funds in the next few days, he did not tell him about the losses that JBW suffered in the preceding days. Wilson said that he “incorrectly based” Mann‘s beneficial interest in the company as stated in the Certificate of Beneficial Interest “on the high water-mark of the fund ... [b]ecause [his] intent all along was to recover the entire fund back to the 2.3 or $4 million that [he] consider[ed] the high watermark.... It was a grievous error on [his] part showing the power of [his] addiction.”
Wilson protests that he must have lacked scienter because “if [he] had intended to act fraudulently, he would have liquidated his own position in JBW long before ... September 2008.” This argument fails. Wilson could have acted recklessly, whether or not intentionally, with regard to false or misleading statements, even as his money remained in the fund. Indeed, his own testimony explains that he made the misrepresentations in order to attract and retain investors. Wilson admitted
The cases that Wilson relies on from the securities context to support his claim that he lacked scienter because his money remained in the fund do not apply here. In In re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1424-28 (9th Cir. 1994), the Ninth Circuit affirmed the district court‘s grant of summary judgment to the defendants with regard to the plaintiffs’ claims under § 10(b) and Rule 10b-5 of the 1934 Securities Exchange Act. With regard to one group of defendants, the company‘s officers, the court found that “[t]he plaintiffs produced no direct evidence of any scienter on the part of the [officer defendants]” and instead sought to “rely on speculative inferences that arise from the [officer defendants‘] allegedly suspicious conduct.” Id. at 1425. There, the court found that “[t]he detailed risk disclosure in the [p]rospectus negates an inference of scienter.” Id. With regard to another group of defendants, the directors and major shareholders, the court noted that it was faced with “mere speculation and conclusory allegations.” Id. at 1427 (quoting In re Worlds of Wonder Sec. Litig., 814 F.Supp. 850, 871 (N.D.Cal. 1993)). It then found that under the facts of that case, “[e]ven if the evidence was sufficient to permit an inference that one or more of the defendants had access to inside information, the defendants’ actual trading would conclusively rebut an inference of scienter.” Id. As to the directors and major shareholders, there was no evidence that any of the defendants intentionally or recklessly engaged in fraudulent conduct, only that the defendants had access to “undisclosed adverse, material information” when they sold the company‘s securities. Id. Here, however, Wilson‘s own statements viewed most favorably to him provide direct evidence not only that he had accurate information about JBW‘s performance but also that he intentionally or recklessly withheld that information from investors, in at least one instance out of fear of losing a potential investor. And so, the fact he kept his funds in JBW cannot rebut a finding of scienter here.
As to materiality, there is no doubt that the misrepresentations were material. A statement or omission is material “if there is a substantial likelihood that a reasonable [investor] would consider it important” in making an investment decision. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). Here, it is clear that there was a substantial likelihood that a reasonable investor would have considered information about “Today‘s NAV,” the value of the fund on the market, and the recovery plan as important to his or her investing decisions. See Bruhl v. Price Waterhousecoopers Int‘l, 257 F.R.D. 684, 697 (S.D.Fla. 2008) (“The fact that a hedge
Wilson suggests that the inaccurate statements were immaterial because “the evidence is undisputed that no Member of JBW Capital sought to buy or sell his or her membership interests in JBW, or attempt[ed] to buy or sell such JBW membership interest, in reliance of such emails and in contravention to the provisions of the Operating Agreement,” and “[t]he evidence submitted by the CFTC demonstrated that none of the Investors pulled their funds in September 2008.” Similarly, Wilson argues that “[t]he evidence showed that not only were these events disclosed to Mann, but that he continued to hold his investment for months after disclosure, thereby ratifying the transactions.”
However, reliance is not an element required to prove a violation of § 6b(1). See Slusser v. CFTC, 210 F.3d 783, 786 (7th Cir. 2000) (suggesting that the actions proscribed by § 6b(a) “may be condemned ... without proof of reliance“). Wilson‘s arguments therefore miss the mark because they do not address whether his misrepresentations were material but instead discuss whether investors actually acted on material information or omissions.
Finally, Wilson asserts that the district court erred in granting summary judgment on the commodity fraud provisions “due to the absence of material, undisputed evidence that demonstrated any misrepresentation of the Appellants was ‘in connection with’ any order to [m]ake, or making, a future contract.” See
Further, other circuits’ case law makes clear that “[t]he plain meaning of [§ 6b‘s] broad language cannot be ignored.” Hirk, 561 F.2d at 104 (explaining that “[b]y its terms, Section [6b] is not restricted in its
Wilson‘s knowingly or recklessly issuing “account statements that fraudulently misrepresented the NAV” of pool participants’ investments also violated § 6b(a). See CFTC v. Arjent Capital Mkts. LLC, No. 12-CV-1832, 2013 WL 3242648, at *5 (S.D.N.Y. Mar. 19, 2013); see also CFTC v. PMC Strategy, LLC, 903 F.Supp.2d 368, 377 (W.D.N.C. 2012) (“Delivering, or causing the delivery of, false account statements to pool participants constitutes a violation of the [Commodity Exchange] Act....“); cf. Princeton Econ. Int‘l Ltd., 73 F.Supp.2d at 422-24 (finding that letters overstating the accounts’ NAV “certainly were in connection with later ‘sales’ “).19
2. 7 U.S.C. § 6o(1)
Under
Wilson was a CPO. He has admitted to using the telephone and e-mails as an officer of JBW. That ends the matter. Cf. Stotler, 855 F.2d at 1291 (explaining that § 6o “is a parallel statute [to § 6b] forbidding fraud and misrepresentation by commodity trading advisors“).
IV.
We review “a district court‘s decision to grant or withhold an equitable remedy ... for abuse of discretion.” State St. Bank & Trust Co. v. Denman Tire Corp., 240 F.3d 83, 88 (1st Cir. 2001). Under
To be clear, restitution, as the CFTC seeks it, includes total losses suffered by the victims. Disgorgement is limited to “the amount with interest by which the defendant profited from his wrongdoing.” SEC v. MacDonald, 699 F.2d 47, 54 (1st Cir. 1983) (en banc) (quoting SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978)). While some of the language used by the district court appears not to recognize the distinction,21 in the end we believe its decision not to award restitution to the victims rested on different grounds. The court did not, as the CFTC asserts, hold it lacked authority to order restitution, but rather explained that it was not compelled to order restitution in light of the CFTC‘s presentation.
In its memorandum and order on the CFTC‘s motion for summary judgment, the district court stated, “[i]n the absence of a showing by the CFTC of any personal gain on Wilson‘s part as the result of the fraud, the appropriate measure of a civil penalty is the statutory per-violation amount.” Wilson, 19 F.Supp.3d at 364. In a footnote, it said that the CFTC requested disgorgement and restitution, and that “the court‘s jurisdiction under [
The CFTC filed a motion for partial reconsideration of the judgment with respect to restitution, arguing that the district court erred as a matter of law by relying on Verity, a case that our circuit has explained represents “an exception limited to the situation ‘when some middleman not party to the lawsuit takes some of the consumer‘s money before it reaches a defendant‘s hands.‘” FTC v. Direct Mktg. Concepts, Inc., 624 F.3d 1, 14 (1st Cir. 2010) (quoting Verity, 443 F.3d at 68). In its memorandum and order on the CFTC‘s motion for partial reconsideration, the district court stated that this “First Circuit precedent essentially affirm[s] the discretion of a district court to fashion a remedy tailored to the facts of a given case.” Wilson, 19 F.Supp.3d at 365. The district court explained that it “was not persuaded by the CFTC‘s argument that restitution should be awarded,” and quoting Trabal-Hernandez v. Sealand Servs., Inc., 230 F.Supp.2d 258, 260 (D.P.R.2002), referred to its disagreement with the CFTC as “a difference of opinion.” Id. at 366.
On appeal, the CFTC maintains that the district court erred as a matter of law and so abused its discretion by concluding restitution was unavailable. We disagree. Our reading of the district court‘s decision is that it viewed its decision not to award restitution as an exercise of discretion—not that it lacked authority to do so. In Direct Marketing, we explained in the context of deceptive advertising that “the law allows for broad discretion in fashioning a remedy.” 624 F.3d at 14. And that is what the district court did. It explained that under the facts of this case, where the CFTC presented “no evidence ... with regard to the amount of retained profits or ill-gotten gains,” it “declines to enter an order of restitution.” Wilson, 19 F.Supp.3d at 364 n. 16. Indeed, the district court clarified that its decision was a matter of discretion when, in its decision on the CFTC‘s motion for reconsideration, it explained that Direct Marketing “essentially affirm[s] the discretion of a district court to fashion a remedy tailored to the facts of a given case.” Id. at 365.
The CFTC has argued to us that the error was one of law, an argument we have rejected. It has otherwise not argued on the facts how this choice not to order restitution was an abuse of discretion, other than saying other courts have chosen to grant restitution in similar circumstances. In the absence of such an argument, we cannot say there was an abuse of this discretion.
We affirm the district court‘s grant of summary judgment and the relief it ordered.
LYNCH
CIRCUIT JUDGE