COMMODITY FUTURES TRADING COMMISSION, Plaintiff-Appellee, v. CO PETRO MARKETING GROUP, INC., a California corporation; Harold D. Goldstein; and Michael Bradley Krivacek, Defendants-Appellants.
No. 80-5370
United States Court of Appeals, Ninth Circuit
June 28, 1982
680 F.2d 573
Argued and Submitted Nov. 5, 1981.
The trustee contends that even if the Commission was entitled to intervene in the original bankruptcy proceedings, it was not entitled to appeal to the Bankruptcy Appellate Panel. The trustee relies upon the analogy between the Commodity Futures Trading Commission and the SEC, and upon
CONCLUSION
The decision of the Bankruptcy Appellate Panel is affirmed in part, reversed in part, and remanded for further proceedings consistent with this opinion.
RUSSELL E. SMITH, District Judge, concurs in the result.
David R. Merrill, Washington, D. C., argued, for plaintiff-appellee; Gregory C. Glynn, Washington, D. C., on brief.
Before CANBY and NORRIS, Circuit Judges and SMITH,* District Judge.
CANBY, Circuit Judge:
Co Petro Marketing Group, Inc., and individual appellants, Harold Goldstein and Michael Krivacek,1 (Co Petro) appeal from an
FACTS
Co Petro is licensed by the State of California as a gasoline broker. It operated a chain of retail gasoline outlets and also acted as a broker of petroleum products, buying and reselling in the spot market several hundred thousand gallons of gasoline and diesel fuel monthly. While part of its business operations involved the direct sale of gasoline to industrial, commercial, and retail users of gasoline2, Co Petro also offered and sold contracts for the future purchase of petroleum products pursuant to
Under the Agency Agreement, the customer (1) appointed Co Petro as his agent to purchase a specified quantity and type of fuel at a fixed price for delivery at an agreed future date, and (2) paid a deposit based upon a fixed percentage of the purchase price. Co Petro, however, did not require its customer to take delivery of the fuel. Instead, at a later specified date the customer could appoint Co Petro to sell the fuel on his behalf. If the cash price had risen in the interim Co Petro was to (1) remit the difference between the original purchase price and the subsequent sale price, and (2) refund any remaining deposit. If the cash price had decreased, Co Petro was to (1) deduct from the deposit the difference between the original purchase price and the subsequent sale price, and (2) remit the balance of the deposit to the customer. A liquidated damages clause provided that in no event would the customer lose more than 95% of his initial deposit.
Co Petro marketed these contracts extensively to the general public through newspaper advertisements, private seminars, commissioned telephone solicitors, and various other commissioned sales agents. The Commodity Futures Trading Commission brought this statutory injunctive action under section 6c of the Act,
NATURE OF THE AGENCY AGREEMENT
Co Petro contends that the Commission lacks jurisdiction over transactions pursuant to its Agency Agreements because these agreements are “cash forward” con
The exclusion for cash forward contracts originated in the Future Trading Act, Pub.L.No.67-66, § 2, 42 Stat. 187 (1921). Congress passed the Future Trading Act as a result of excessive speculation and price manipulations occurring on the grain futures markets. S.Rep.No.212, 67th Cong., 1st Sess. 4-5 (1921). See S.Rep. No.93-1131, 93d Cong., 2d Sess. 13 (1974), reprinted in [1974] U.S.Code & Ad.News 5843, 5854-55. To curb these abuses, the Future Trading Act imposed a prohibitive tax on all futures contracts with two exceptions. Section 4(a) of the Act exempted from the tax future delivery contracts made by owners and growers of grain, owners and renters of land on which grain was grown, and associations of such persons. 42 Stat. 187. Section 4(b) of the Act exempted from the tax future delivery contracts made by or through members of boards of trade which had been designated by the Secretary of Agriculture as contract markets. Id. During hearings on the bill that became the Future Trading Act, various witnesses expressed concern that the exemption for owners and growers of grain, owners and renters of land on which grain was grown, and associations of such persons, was too narrow. By its terms, this section might not exempt from the tax a variety of legitimate commercial transactions, such as cash grain contracts between farmers and grain elevator operators for the future delivery of grain. Hearings on H.R. 5676 Before the Senate Committee on Agriculture and Forestry, 67th Cong., 1st Sess. 8-9, 213-214, 431, 462 (1921). As a result, the Senate added language to section 2 of the bill, excluding “any sale of cash grain for deferred shipment” from the term “future delivery“.4 S.Rep. No.212, 67th Cong., 1st Sess. 1 (1921). There is no indication that Congress drew this exclusion otherwise than to meet a particular need such as that of a farmer to sell part of next season‘s harvest at a set price to a grain elevator or miller.5 These cash forward contracts
The exclusion was carried forward without change into the Grain Futures Act, Pub.L.No.67-331, § 2, 42 Stat. 998 (1922).7 In 1936, Congress enacted the Commodity Exchange Act, Pub.L.No.74-675, 49 Stat. 1491 (1936). This Act expanded the scope of federal regulation to include certain specified commodities in addition to grain, id., § 3, and reworded the exclusion to except “any cash commodity for deferred shipment or delivery.” Id., § 2. The Commodity Exchange Act also deleted the express exemption for owners and growers of grain, owners and renters of land, and associations of such persons. Congress considered the exemption redundant since section 2 of the Act, which excluded cash commodity contracts for deferred shipment or delivery, served to protect the same interests that had been protected by the exemption for owners and growers. H.R.Rep.No.421, 74th Cong., 1st Sess. 4-5 (1935). Although the Act has been amended numerous times since 1936, the language excluding cash commodities for deferred shipment or delivery has remained the same.
A more recent House Report on the 1974 Amendments to the Act reconfirms the narrowness of the exclusion. H.R.Rep.No.93-975, 93d Cong., 2d Sess. 129-30 (1974). The House Report describes a typical cash transaction as involving, for example, a farmer who wants to convert 5,000 bushels of wheat into cash. He seeks a buyer such as a grain elevator for whom the wheat has “inherent value.” The wheat has “inherent value” for the grain elevator because the elevator “is in contact with potential buyers such as the flour miller, and has the facilities to store, condition, and load out the grain and earn additional income from these services.” Id. at 129. The wheat also has “inherent value” to the flour miller, who can increase its utility and value by grinding it into flour. Id. A cash forward contract is common in these kinds of transactions because it guarantees the miller, for example, a price but allows delivery to be deferred “until such time as he could process the wheat.”8 Id. This House Report therefore supports prior history indicating that a cash forward contract is one in which the parties contemplate physical transfer of the actual commodity.
The situation for which the exclusion for cash forward contracts was designed is not present here. Co Petro‘s Agency Agreement customers were, for the most part, speculators from the general public. The underlying petroleum products had no inherent value to these speculators. They had neither the intention of taking delivery nor the capacity to do so. Yet it was to the general public that Co Petro made its strongest sales pitches. For example, in an
There is nothing in the legislative history surrounding cash forward contracts to suggest that Congress intended the exclusion to encompass agreements for the future delivery of commodities sold merely for purposes of such speculation. Congress has recognized the vital role speculators play in the proper functioning of futures markets, H.R.Rep. No.93-975, supra, at 138, and has expressed its desire to protect speculators through expansive federal regulation. See Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 1845, 72 L.Ed.2d 182 (1982). Prior to the 1974 Amendments to the Act, only certain specified commodities were regulated. In 1974, Congress not only expanded the list of commodities subject to regulation, but also extended regulation to “all other goods and articles, ... and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt with.”
This does not end our inquiry, however. Even though Co Petro‘s Agency Agreements do not fall within the exclusion for cash forward contracts, there remains the question whether they are “contracts of sale of a commodity for future delivery” (futures contracts) within the meaning of section 2(a)(1) of the Act,
While contracts pursuant to Co Petro‘s Agency Agreements were not as rigidly standardized as futures contracts traded on licensed contract markets, neither were they individualized. Tables furnished by Co Petro to its sales agents demonstrate uniformity in the basic units of volume, multiples of which were offered for sale.11 Similarly, relevant dates in Co Petro‘s Agency Agreements were uniform. The date on which an investor had to notify Co Petro of his intent to take delivery or appoint Co Petro as his agent to resell the contract was set at approximately eight months from the purchase date. An investor could not give notice prior to the specified notice date. The delivery date was always ten months from the purchase date.
More important, however, than the degree to which Co Petro‘s Agency Agreements conform to the precise features of standardized futures contracts is the rationale for standardization in futures trading. Standardized form contracts facilitate the formation of offsetting or liquidating transactions. The ability to form offsetting contracts is essential, since investors rarely take delivery against the contracts.12 Pursuant to provisions in Co Petro‘s Agency Agreements, Co Petro was obliged to perform an offsetting service for its customers by reselling contracts for their accounts. Customers also could liquidate their positions in the face of adverse price movements by cancelling their contracts with Co Petro and paying only the liquidated damages provided for in the Agency Agreements.13 Therefore, Co Petro‘s customers, like customers who trade on organized futures exchanges, could deal in commodity futures without the forced burden of delivery. Disregarding form for substance, Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967), we find without merit Co Petro‘s argument that its Agency Agreement represents a radical departure from the classic elements of a standardized futures contract. We also reject Co Petro‘s final contention that, contrary to the practice in organized futures markets where price is established by public auction, it negotiated prices directly with its Agency Agreement customers. The evidence indicates that, for the most part, Co
In determining whether a particular contract is a contract of sale of a commodity for future delivery over which the Commission has regulatory jurisdiction by virtue of
VIOLATIONS OF SECTIONS 4 AND 4h OF THE ACT
We further decline to accept Co Petro‘s contention that sections 4 and 4h of the Act,
Section 4 of the Act,
Because section 4 prohibits any board of trade from selling futures contracts unless the Commission has designated that board as a contract market, Co Petro has violated the Act. Co Petro points out, however, that since the Commission has not designated a contract market for the futures it sold, it could not comply with section 4. It argues strenuously that Congress could not have intended to make unlawful that which could not be done. We note, however, that section 6(a) of the Act,
We hold that Co Petro was a board of trade as defined by section 2(a)(1) of the Act,
PROPRIETY OF THE ANCILLARY RELIEF
Ancillary to the permanent injunction prohibiting Co Petro from dealing in petroleum futures contracts, the district court ordered the appointment of a receiver, an accounting, and disgorgement16. We
The starting point for interpretation of a statute, of course, is the statutory language itself. Consumer Product Safety Commission v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980). We have little difficulty in finding that section 6c is broad enough to authorize the appointment of a receiver, an order requiring that the receiver have access to the firm‘s books and records, and an order for an accounting. Section 6c authorizes the Commission to bring an action to “enforce compliance” with the Act and empowers the court to order “such action as is necessary to remove the danger of violation.”
Finally, we conclude that it would frustrate the regulatory purposes of the Act to allow a violator to retain his ill-gotten gains. Commodity Futures Trading Commission v. Hunt, 591 F.2d 1211, 1223 (6th Cir.), cert. denied, 442 U.S. 921 (1979); SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir.), cert. denied, 404 U.S. 1005, 92 S.Ct. 561, 30 L.Ed.2d 558 (1971). Thus we affirm the district court‘s award of ancillary relief.
JUDICIAL NOTICE
We find no error in the district court‘s taking judicial notice of two consent judgments entered against defendant Goldstein in 1972 and 1973, and of a 1973 conviction of Goldstein. All three proceedings arose out of Goldstein‘s illegal sales of commodity options. The evidence was relevant to show Goldstein‘s familiarity with commodities laws and was admissible to rebut Goldstein‘s contention that Co Petro‘s actions were, at worst, innocent, technical violations.
CONCLUSION
The decision of the district court is affirmed.
CANBY, CIRCUIT JUDGE
I dissent.
In my opinion it was not proved that the defendants violated either Sections 4 or 4h (
I turn first to that portion of Section 4 relating to boards of trade (
I believe that the term “board of trade” means an organized board of trade or mercantile exchange, such as the Chicago Board of Trade, which is described in Hill v. Wallace, 259 U.S. 44, 42 S.Ct. 453, 66 L.Ed. 822 (1922), and which has members who are traders and rules which govern the details of trading. When the Futures Trading Act of 1921 was enacted, there were big markets through which substantial parts of the grain production of America was bought and sold. The practice of trading in futures developed on those markets because of the very practical values of such practice to producers and users of commodities in determination of price and in hedging, i.e., insuring against risk of loss by reason of price fluctuation. These values were specifically recognized by Congress in Section 3 of the Grain Futures Act of 1922 and in Section 3 of the Commodity Exchange Act (
The Grain Futures Act of 1922 was designed mainly to enable the Government to deal with the exchanges themselves, rather than with individual traders. To conduct futures trading lawfully, the grain exchanges were required to be federally licensed or “designated” as “contract markets.” A condition of such designation was that the exchanges themselves would take major responsibility for the prevention of price manipulation by their members.
S.Rep.No.93-1131, 93d Cong., 2d Sess., reprinted in [1974] U.S.Code Cong. & Ad. News 5843, 5855 (emphasis added).
There is other evidence confirming the thought that Congress has used the term “board of trade” as the equivalent of “organized exchange.”
(a) No contract for the sale of onions for future delivery shall be made on or subject to the rules of any board of trade in the United States. The terms used in this section shall have the same meaning as when used in this chapter.
(Emphasis added.) It was the congressional intent to prohibit speculation in onion futures. In dealing with this subject the Senate and House used the terms “boards of trade” and “organized exchanges” interchangeably. Thus, the Committee report states as follows:
The Committee on Agriculture and Forestry, to whom was referred the bill (H.R. 376) to amend the Commodity Exchange Act to prohibit trading in onion futures in commodity exchanges, having considered the same, report thereon with a recommendation that it do pass with amendments.
PURPOSE OF THE BILL
This bill would prohibit trading in onion futures on any board of trade in the United States.
S.Rep.No.1631, 85th Cong., 2d Sess., reprinted in [1958] U.S.Code Cong. & Ad.News 4210, 4210 (emphasis added). H.R.Rep.No. 1036, 85th Cong., 1st Sess., reprinted in [1958] U.S.Code Cong. & Ad.News 4212, doesn‘t use the words “board of trade” at all. It speaks of “commodity exchanges” and lists the New York Mercantile Exchange and the Chicago Mercantile Exchange as the places in the United States where onion futures were traded.
Section 2(a)(1) of the Act (
Also, the Committee included an amendment to clarify that the provisions of the bill are not applicable to trading in foreign currencies and certain enumerated financial instruments unless such trading is conducted on a formally organized futures exchange. A great deal of the trading in foreign currency in the United States is carried out through an informal network of banks and tellers. The Committee believes that this market is more properly supervised by the bank regulatory agencies and that, therefore, regulation under this legislation is unnecessary.
(Emphasis added.) The only words used in the Act itself are “board of trade.” If, as indicated in the majority opinion, Co Petro and its officers and agents were an association and constituted a board of trade, then the “network of banks and tellers” trading in foreign currency must likewise have been an association, and, if an association, a “board of trade.” Obviously Congress gave no such meaning to the words “board of trade,” but equated those words with “formally organized futures exchange.”
Section 3 of the Act (
Not conclusive, but indicative that Congress, in defining “board of trade,” had in mind something different from a mere association of individuals, is the incorporation in the law of words suggestive of organized exchange. Thus Section 4g (
For these reasons I am of the opinion that the sales made in this case were not made “on or subject to the rules of any board of trade.”
I now turn to Section 4h(1) of the Act (
It shall be unlawful for any person—
(1) to conduct any office or place of business ... for the purpose of soliciting or accepting any orders for the purchase or sale of any commodity for future delivery, or for making or offering to make any contracts for the purchase or sale of any commodity for future delivery, or for conducting any dealings in commodities for future delivery, that are or may be used for
(A) hedging any transaction in interstate commerce in such commodity or the products or by-products thereof, or
(B) determining the price basis of any such transaction in interstate commerce, or
(C) delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof,
if such orders, contracts, or dealings are executed or consummated otherwise than by or through a member of a contract market ....
Almost identical language is found in §§ 4,2 4b, and 4c of the Act (
- Those conducted on a board of trade;
- Those not conducted on a board of trade but made subject to the rules of a board of trade; and
- Those conducted by bucket shops or other private traders which are or could
be used for hedging or price determination.
If, as has been indicated, Congress regulated rather than abolished futures trading so as to preserve the valid economic uses of futures trading, i.e., price determination and hedging, then the foregoing interpretation makes some sense.
Sales made on a board of trade determine price. Sales made subject to the rules of a board of trade would probably be sales under a standardized contract, and any substantial volume of such sales could be used to determine price. It is conceivable that under some fact circumstances sales not related to boards of trade or the rules of such boards could be used to determine price. Any private sales could be used for hedging. In my opinion, sales which do not fall within classes 1, 2, or 3 above are not regulated.
Section 4h(1) refers to: orders for “future delivery“; contracts for the “purchase or sale of any commodity for future delivery“; and dealings in “commodities for future delivery.” The language is not entirely clear. For instance, the words “orders for the purchase or sale of any commodity for future delivery,” read literally, could describe every order made from a mail order catalog. I do not think Congress intended that meaning.
There is no indication in the entire legislative history of Section 4h(1) that Congress intended to regulate the kinds of fraud that might be involved in every private sale of goods to be delivered at a future date.
There is an indication that Congress intended by Section 4h to regulate the sale of “futures” as that term is used in the trading markets of the nation. Thus, H.R.Rep. No.421, 74th Cong., 1st Sess. 6 (1935) states: “Section 4h(1) prohibits operation of a place of business where orders for futures contracts are solicited or accepted unless such orders are to be executed by or through a member of a contract market.” (Emphasis added.)3
Next, as I see it, the words of Section 4h(1), “that are or may be used for,” limit the language of each of the disjunctive phrases in the section. The language as to orders is followed by a comma; the language as to contracts for future sales is followed by a comma; and the language as to dealings is followed by a comma. This suggests that it was the intent of Congress that the limiting language of Subsections (A) (relating to use for hedging) and (B) (relating to use for price determination) limits the language relating to each of the three kinds of acts mentioned in the section. This interpretation is almost compelled by an amendment of Section 4h(1) which was made on the floor of the House. That amendment4 did no more than place a comma after the word “delivery” and before the words “that are or may be used for.” It could serve no purpose other than to indicate that the words following the inserted comma did not modify only the phrase (immediately preceding it) relating to “dealings in commodities for future delivery,” but rather to each of the three preceding disjunctive phrases.
I am troubled by Subsection (C) of Section 4h(1). I note that, while Subsections (A) and (B) contain limitations, Subsection (C) is not limiting in character but rather expansive. The layout puzzles me. If Subsection (C) is read without any reference to Subsections (A) and (B), then any delivery made in accordance with an order for such delivery would violate the Act, even though the order itself, not being of the kind mentioned in the limiting language of Subsections (A) and (B), was lawful. I am inclined to think that the word “thereof” at the end of Subsection (C) refers to orders, contracts, and dealings (appearing in the body of Section 4h(1)) and that it refers to those acts as they are limited by Subsections (A) and (B). I think that Congress did not intend that the act of delivery of goods in fulfillment of a lawful order would be unlawful.
Finally, if by Section 4h Congress intended to regulate all dealing in commodities
In this case no contention is made that the sales of the defendant were or could be used to determine price, or that they were or could be used for hedging. The district court made no findings as to any relationship between defendants’ acts and price determination or hedging. In the absence of such fact-finding, I think no violation of Sections 4 or 4h of the Act was proved.
I would reverse and remand the case to the district court with instructions to dismiss the action or, if application is made by plaintiff to prove the defendants’ actions were or could be used for price determination or hedging, to make such orders permitting amendments and the introduction of new evidence as the district court should in its discretion deem proper.
RUSSELL E. SMITH
DISTRICT JUDGE
Notes
| PRODUCT | TANKS | GALLONS | PER GALLON | DEPOSIT AMOUNT |
|---|---|---|---|---|
| Unleaded gasoline | 2 (minimum) | 17,600 | 20 cents | $3,520 |
| Unleaded gasoline | 6 | 52,800 | 20 cents | 10,560 |
| Diesel No. 2 | 2 (minimum) | 17,600 | 25 cents | 4,400 |
| Ethanol | 2 (minimum) | 17,600 | 25 cents | 4,400 |
| Heating Oil No. 6 | 1,000 barrels | 42,200 | 25 cents | (by quotation) |
Whenever in the judgment of the Administrator any person has engaged or is about to engage in any acts or practices which constitute or will constitute a violation of any provision of section 4 of this Act, he may make application to the appropriate court for an order enjoining such acts or practices, or for an order enforcing compliance with such provision, and upon a showing by the Administrator that such person has engaged or is about to engage in any such acts or practices a permanent or temporary injunction, restraining order, or other order shall be granted without bond.
Emergency Price Control Act of 1942, Pub.L.No.77-421, § 205(a), 56 Stat. 23, 33 (1942) (emphasis added). Relying in part on the inherent equitable jurisdiction of the court and in part on the statutory language “other order,” the Court decided that an order for restitution was proper under the statute. 328 U.S. at 398-400, 66 S.Ct. at 1089-1090. We believe that the language in section 6c empowering the court to order “such action as is necessary to remove the danger of violation,”