*1 FUTURES TRADING COMMODITY
COMMISSION, Plaintiff-
Appellant, INC., Ray CO., & FITZGERALD
R.J. Fitzgerald, Fitzgerald, Leiza
mond Burnett, Kowalski,
Greg De Chuck
fendants-Cross-Claimants-Third-
Party-Plaintiffs-Appellees, Coringrato,
Al Defendant-
Cross-Defendant, Eubanks, Rodgers, et
Scott John
al., Third-Party-Defendants.
No. 01-14780. Appeals,
United States Court
Eleventh Circuit. 29, 2002.
Oct. *2 Kosma, Jones,
Montgomery Day, N. Reav- Gibson, Pogue, Gately Loy, is & Jennifer LLP, & Crutcher DC, Dunn Washington, for Defendants-Cross-Claimants-Third- *3 Party-Plaintiffs-Appellees. TJOFLAT,
Before and WILSON COWEN,* Judges. Circuit COWEN, Judge: Circuit Presented in appeal question this is the liability allegations for fraud and related Act, under Exchange the Commodities (the §§ 1 et seq., “Act”) U.S.C. “CEA” or 'and accompanying regulations. Plain- tiff/Appellant Commodities Futures Trad- (“CFTC”) ing appeals Commission from a judgment finding all not Defendants liable under the Act for various solicitation and trading activities carried out at R.J. Fitz- (“RJFCO”). gerald Company, & Inc. Af- matter, in reviewing ter the record considering parties, submissions of the having argument, and benefitted from oral we conclude that the District Court erred liability finding under the Act as a specific matter of for two solicitation law (1) utilized devices RJFCO: television commercial that aired on the “CNBC” ca- (The ble network in March 1998 “Commer- cial”) promotional seminar for potential RJFCO customers that also took (the “Seminar”). place For the Manhardt, Nancy R. Kirk T. Page, Dep- below, expressed reasons we will reverse Counsel, DC, uty Washington, General Raymond Fitzgerald, Fitzger- as to Leiza Plaintiff-Appellant. RJFCO, remand ald en- Gekas, against forcement those two proceedings K. Constantine John Alenna Bo- Ltd., hn, Associates, IL, Chicago, & and the firm. Gekas individuals * Cowen, E. U.S. Honorable Robert Circuit tion. Circuit, Judge by designa- sitting for the Third 6c(b), § in 7 .Background pass grounded claims U.S.C. Procedural
I. 33.10(a) (c), § 17 C.F.R. C.F.R. commenced this CEA 13c(b). 166.3, § § and 7 U.S.C. by filing Complaint case enforcement RJFCO, one, two, alleged seven and nine Defendants/Appellees Counts against Fitzgerald, Raymond Fitzgerald, principal Fitzgerald, Leiza Raymond Burnett, RJFCO, RJFCO, Kowlaski, alleg- Fitzgerald Leiza Greg Chuck by misrep- committed fraud Greg involved fraudulent Burnett they were ing that resentation or omission of material facts to attract solicitations solicitation of commod- the United States invest connection throughout *4 three, ity in violation of the Act futures transactions. Counts ten commodity options, charged Raymond Fitzgerald, regulations.1 This and fifteen and related federal RJFCO, RJFCO, Bur- essentially principal Greg dismissed as was Complaint particularity. operating fraud with nett and Chuck Kowalski with plead failure to cheat, introducing brokerage an to de- required then The District Court fraud, deceive, cheat, attempt or to de- Complaint detailing Amended to file an fraud or deceive clients. Counts four and prove to establish- every fact it intended charged Raymond Fitzgerald, eleven com- liability under ACT. CFTC ing RJFCO, Greg and Burnett with commit- filing ah extensive request, plied with by ting trading client accounts exces- fnaud Complaint count which sets page, sively generate to commissions without re- case. The framework for instant gard to client interests. Count five alleged that Defen- Complaint Amended charged Raymond Fitzgerald and RJFCO Defendants, dants, individual or some vio- failing provide with to adequate risk dis- (1) by: committing the Act fraud lated prior opening closure statements to cus- or omission of material misrepresentation six, eight, tomer accounts. Counts and solicitation, in connection with the facts charged Raymond Fitzgerald, twelve Leiza maintenance, commodity or execution of Fitzgerald Greg failing Burnett with (2) transactions; operating an in- futures supervise diligently practices to the sales cheat, brokerage firm to de- troducing and solicitations of RJFCO brokers. cheat, fraud, deceive, attempt to de- (3) clients; trading client After some of the claims the Amend- fraud or deceive summary excessively generate Complaint order to ed were dismissed on accounts regard judgment, parties agreed, pursuant without to customer to commissions (4) 636(c) 73, § to to (“churning”); failing pro- 28 U.S.C. and Fed.R.Civ.P. interests a trial prior Magistrate risk disclosure statements to the conduct bench before a vide accounts; That trial Judge.2 of RJFCO customer commenced on Febru- opening 26, 8, 2001, firm failing supervise personnel ary to 2001. On March the Court Raymond Fitzger- argument granted heard oral what it diligently. Defendant charged “controlling person” against sig- ald labeled “directed verdict” Act. The various alle- nificant of the CFTC’s case. Ger- liability part under the appeal, maine will be ex- gations Complaint in the Amended encom- to as Magistrate Judge Complaint named a Defendant 2. Trial before the will here- 1. The also Coringrato employee who after be referred to as the “District Court” or RJFCO Al settled before trial. the “Court.” claim below, further the District Court tions or entered into the firm. plained part Fitzgerald’s on that Defendant Leiza granted responsibili- relief Defendants that the the CFTC’s claim Commercial ties at involved developing train- well violated the Act as as on claim ing training materials and sales brokers. duty that Defendants had disclose Greg person Burnett was associated (i.e., specific trading their record their suc- responsible RJFCO and was supervis- rate) cess customers. ing traders and brokers. Chuck Kowalski was RJFCO’s analyst, chief financial re- pressed completion The trial forward to sponsible for studying the commodities remaining on the claims the Amended markets developing trades trade Complaint and concluded on March strategies. Thereafter, 2001. the District Court en findings extensive of fact and con tered B. Customer Solicitation Devices law, in favor of all De ruling clusions fendants on all counts in the Amended At appeal the heart of this are two solici- Complaint. Fitzgerald See CFTC R.J. tation used devices RJFCO to attract *5 (M.D.Fla. Co., Inc., F.Supp.2d & 173 1295 in options customers to invest on futures 2001). appeals, essentially arguing contracts: the Commercial and the Semi- regardless of the Court’s factual find nar. ings credibility, based on witness Defen committed and vi dants fraud other CEA 1. The Commercial olations as a matter of law.
The Commercial El stated that “the phenomenon] Nino [weather has struck II. Background Facts continue, if expected, patterns where A. The Defendants effects could devastating. floods, Droughts, and other condi- adverse “introducing was a full service RJFCO drastically tions could supply alter the broker” at all appeal. times relevant to this dynamics § demand of the corn market....” obligations 7 la. See U.S.C. RJFCO’s Commercial guaran- “[w]ith to those with whom it dealt were The also declared (“Iowa nations, Company giant developing teed Iowa Grain such as China Grain”), a registered badly grains futures commission and Russia need of test, opened grain supplies put merchant. RJFCO for business world to the condi- may 1992. It a firm operated designed profits high as tions exist for as as 200 to accounts, percent.” accompanied by service small customer where the 300 This was customer had little experience graphic base statement on the television screen operated commodities markets. that the percentages RJFCO were mathematical perhaps unique example leverage. in a manner in the com- The fur- Commercial industry modities in that it used team ther that “the one asserted generating may greater. Tight sales brokers for corn market never be telephone via a separate coupled calls and team of U.S. reserves with domestic and brokers and traders to do the actual trades worldwide demands could be the formula Ray- you and monitor accounts. Defendant for a trade won’t want to miss. Find $5,000 Fitzgerald principal mond was the of out how as little as could translate percent. all responsible high was deci- into as to 300 ” sions, actions, Fitzgerald today.... recommenda- Call R.J. (3) inevitable; initially display drafted events were did not was The Commercial Raymond prominently When the risk loss statement advertising agency. screen; enough downplayed on the script, received the he ed- first Fitzgerald In response the risk of loss. to this con- additional risk disclosures it to add ited cern, Raymond Fitzgerald informed just above the firm’s appear that would already Croom that the Commercial had number, anyone watching so that phone discontinued and would not be aired been would see the risk disclo- the Commercial again. disclo- further insisted sure. He more than half the time the appear sure case, At the close of CFTC’s and before running. After his edits Commercial presented, the defense was the District done, script he sent to Iowa
were entered a in favor Court directed verdict officer, Far- compliance Anne Grain’s chief part of Defendants on the of the claim that approved script ris. Iowa Grain the Commercial was fraudulent and violat- 18,1998. February ed the CEA. The District Court ad- again opin- dressed the Commercial its actually ran on CNBC Commercial trial, stating ion issued after the bench March, 1998, first half of but did “misleading that the Commercial was not total, it generate much business. deceptive” and that there was no “intent appeared eight about or nine times and to defraud.” F.Supp.2d 1310. point At af- was then discontinued. some discontinuation, Raymond Fitzger- ter its by a
ald was contacted National Futures 2. RJFCO’s Promotional Seminar *6 (“NFA”)3 officer, compliance Association Commercial, In addition to the expressed concern over the Commer- who in alleged pro- CEA violations occurred specifically, NFA cial’s content. More the by motional seminar used RJFCO to at- Croom, officer, Raymond David informed tract customers. The devel- Seminar was ap- that the Commercial in Fitzgerald was by Fitzgerald Leiza oped (1) parent violation of NFA rules because: Campbell brokers Scott and Tom West in it misleading it was failed to tell they training after attended a on session that the potential options spo- customers topic by the conducted the National Intro- money options” ken of were “out-of-the ducing Brokers Association.4 in require that would a dramatic move the in options premium value order for the The informed customers that Seminar events, gains equal patterns, customer to see political weather and his- Commercial; in prices claimed the mislead- torical trends can affect the cer- ingly gave impression the that weather tain commodities. The also Seminar told (“NFA”) employees Futures Association 3. The National bench trial revealed that RJFCO congressionally is a authorized futures indus- promotional scripts given would read the regulatory organization. try purpose self Fitzgerald them Leiza verbatim. The Sem- high of the NFA is to assure standards of provided general background inar on the firm pro- conduct its Members and to business operates. market how commodities public tect the interest. Seminar, beginning participants At the of the received written risk disclosure material. As script Fitzgerald developed 4. of this Leiza Commercial, of the with content Semi- part materials from an Seminar based on approved by Grain nar was Iowa before it NFA manuals from the Chica- workbook and into went action. go Testimony Board of Trade. adduced at the contract would analysis heating could as- oil futures result that technical $46,200 if was a cent move in the commodity mar- there options sist them if price. they Customers were told that ket, “history repeats often itself’ since risk,” they wanted “limited could invest provide you can price action “past contract, would option where re- action.” Customers were clues to future of that “approximately profit— ceive 50% advantage” of “fun- they could “take told 46,200 $23,100.”5 2by equals divided as weather market moves such damental” “technical events and political events and trial, opinion following In its the bench market movements theory” past such as the District Court concluded that the Sem- invest- futures or through either inar did not violate the CEA. The District drew a distinction ing. The Seminar also nothing explained Court there based on investment instruments between latently or deceit- “patently misleading involved: quantum of risk ful” about the illustrations used how you depends choose Which one F.Supp.2d seminar. 173 at 1311. you degree what of risk aggressive or on.
wish to take
III. Discussion
looking
you
highly aggressive
If
are
jurisdiction
The District Court had
over
profit potential as well as
for unlimited
§
13a-l and 28
this case under U.S.C.
it
be the
unlimited risk than
would
[sic]
§
jurisdiction pur-
1331. We have
U.S.C.
something
But
like
futures.
most would
636(c)(3)
§
and 28
suant
to 28 U.S.C.
un-
something offering
aggressive,
less
§
U.S.C.
1291.
profit potential but limited risk—
limited
option
briefing
trade
It
unclear from the
[sic].
is somewhat
specific parts
judgment
what
below
risk,
the Seminar addition-
topic
On the
CFTC,
especially
being challenged
ally
“options
told
customers:
given
large
allegations
number of
managers
and risk
futures allow investors
extremely lengthy
Amended Com-
and limit it to the loss of a
to define risk
*7
that
requests
CFTC’s initial brief
plaint.
right
buy
to
or sell a
premium paid
the
“reverse the district court’s
this Court
...
providing
futures contract while still
judgment and remand with instructions to
profit potential.”
unlimited
appellant
in favor of
judgment
enter
employees
The RJFCO
who conducted
Complaint” Ap-
on the Amended
CFTC
what
However,
the Seminar offered
the Seminar
we can
Brief at 57.
pellant’s
exciting”
script
“very
deemed a
illustration
appellate position
construe the CFTC’s
options.
could be made on
argument.
of how
oral
briefing
from the
and from
the
focused on the
discrete as-
Specifically,
specifically challenges
Seminar
It
these
(1)
oil, explaining
judgment:
that for
commodity heating
of the District Court’s
pects
(2)
Act;
an aver-
the
eighteen years,
the last
there was
did not violate
the Commercial
(3)
Act;
commodity
“of
did not violate the
age increase
the Seminar
duty
had no
to disclose their
high
price
Defendants
cents from the low to
(4)
customers;
$5,000
potential
that a
investment on a
record
range” and
go
taking profit,
general
"you
broke
Finally,
ad-
will never
5.
the Seminar had more
"big
just
piece
vice for
RJFCO customers:
at a time.”
take it one
"greed”
people
money
reason"
lose
liability
establish
In order to
excessively trade their
did
Defendants
fraud,
proving
regard to cus-
had the burden
without
CFTC
accounts
customers’
(5)
(1)
interest;
Raymond Fitzger-
of a
making
mis
three elements:
tomer
“controlling person”
statement,
liabil-
or a
misleading
not have
representation,
ald did
below,
(3)
we
explained
Act. As
omission;
scienter;
ity under
deceptive
erred in not
District Court
that the
agree
Bar
materiality.
Hammond v. Smith
See
under
a matter of law
liability as
finding
Co.,
Upham
[1987-1990
&
ney Harris
Seminar,
Commercial, the
Act for the
Rep.
L.
Fut.
Binder]
Transfer
Comm.
trad-
RJFCO’s
to disclose
for failure
(CFTC
(CCH) 24,617
1, 1990);
Mar.
CFTC
agree that
We further
in both.
ing record
Inc.,
Fut.
Group,
Finan.
Comm
Trinity
v.
liable in this case
Fitzgerald is
Raymond
(S.D.Fla.
27,179,
L.
Rep.
WL
at the firm. We
“controlling person”
aas
29, 1997),
part,
in relevant
Sept.
aff'd
judg-
the District Court’s
do not disturb
(11th
Sidoti,
Cir.
preclude CFTC’s A. The Commercial misrepresentation has Whether the District Court argues on the “overall mes depends been made fraudu- the Commercial is erred because understanding “common sage” and the Upon of law. review of a matter
lent as Hammond, conveyed.” the information Commercial, we full text of 36,657 n. 12. Fut. L. & Comm. and its agree. The CEA constrained in an purposes For of fraud or deceit directly pro- regulations accompanying action, scienter is established enforcement to deceive and defraud attempts scribe defraud, manipu if Defendant intended to trad- futures and connection with deceive, late, or or if Defendant’s conduct § provides: 33.10 ing. 17 C.F.R. departure an extreme from represents any person di- It be unlawful for shall ordinary e.g., care. Mes See, standards indirectly: rectly or Co., v. E.F. Hutton & 847 F.2d ser Cir.1988). (11th (a) In the similar con 677-79 attempt cheat or defraud or To law, pre we have any person; defraud other text of federal securities cheat or is met when viously stated scienter (c) attempt to deceive To deceive or “highly un Defendant’s conduct involves person by any means what- any other misrepresenta reasonable omissions or soever *8 of mislead present danger tions ... with an offer to enter in or in connection which either known to ing [customers] into, into, entry the confirmation of Defendant or so obvious that Defen of, of, the maintenance execution it.” dant must have been aware of Ziemba commodity transaction. any option Int'l, 1194, Inc., 256 F.3d 1202 v. Cascade (11th Cir.2001). A or omis representation (iii) 6b(a)(i), (proscrib- § 7 See also U'.S.C. if a is “material” reasonable investor sion in connection with a ing similar conduct contract). important deciding it in consider would futures See, e.g., v. Rosen- action. for fraud under the enforcement 6. Unlike a cause of action Torts, 424, (D.N.J.2000). rep- berg, F.Supp.2d law of "reliance" on -the 446 common 85 requisite is not a element in resentations
1329
viewer,
an objectively
to make an investment. See
reasonable
whether
television
Af
v. United
Citizens
Utah
overemphasizes
Ute
the Commercial
profit po-
filiated
States,
128, 153-54,
1456,
92 S.Ct.
406 U.S.
loss,
tential and downplays
present-
risk of
1472,
(1972);
Technical
31 L.Ed.2d
R&W
ing an
image
unbalanced
of the two. The
vs.,
CFTC,
Ser
Ltd. v.
205 F.3d
suggests
potential
Commercial
to the
in-
(5th Cir.2000).
vestor,
(200-
truly
profits
enormous
300%) can
be made on
on futures
applying
In
these various elements
contracts
looking
expect-
known and
ease,
guided by
we are
present
to the
ed
patterns.
weather
More specifically,
principle that the CEA is a remedial stat
affirmatively represents
the Commercial
crucial purpose
pro
ute that serves the
RJFCO customers
El Nino
individual
tecting the innocent
investor— had struck
expected”
“where
and that
if
may
who
know little about the intricacies
continue,”
“patterns
“huge
profits” of
complexities
of the commodities mar
“200 to 800%” could be realized. The
misled or
being
ket—from
deceived. As
improperly
Commercial also
overstated
recently explained
the Fifth
Circuit
profit potential by
suggesting
poten-
R&W:
tial customers that
should
pass up
not
1974, Congress gave
In
the [CFTC]
such a
chance
money.
tremendous
to make
greater
powers,
enforcement
even
Rather, viewers are told to call RJFCO
part
unscrupu-
because of the fear that
may
“now” because there
“never” be such
encouraging
individuals were
ama-
lous
an opportunity
again.
in the corn market
to trade in the commodities mar-
teurs
(“The potential of the corn
may
market
through
advertising.
kets
fraudulent
greater
never be
‘could be the formu-
[and]
Remedial statutes are to be construed
la
you
trade
won’t want
to miss.’
in an
liberally,
increasing
era of
$5,000
Find out how as little as
could
participation
individual
commodities
high
translate into
as 200 to 300
markets,
protection
the need
such
percent.
Fitzgerald today.”).
Call R.J.
has
lessened.
Against
highly alluring
these
statements is
(citations omitted)
(emphasis
boilerplate
language.
Id. at 173
risk disclosure
added).
agree
position
We
CFTC’s
these
directly
legal
statements
contravene the
parties obviously
do not contest the
principles
prior
established
commodities
textual content of the Commercial. The
See, e.g., Trinity
fraud cases.
Finan.
actual words of the Commercial and how
27,179,
Group,
Fut. L.
Comm.
aff'd
physically appeared
the Commercial
Sidoti,
1132;
part,
relevant
F.3d
re
undisputed
television are
matters of record
JCC, Inc.,
Transfer
[1992-1994
Binder]
require
guess
and do not
us to second
(CCH)
(CFTC
26,080
Fut. L. Rep.
Comm.
what
the District Court concluded with
JCC,
12, 1994),
CFTC,
May
aff'd,
Inc. v.
regard
credibility
to witness demeanor and
(11th Cir.1995); Bishop
F.3d 1557
v. First
said,
at the
trial. That being
bench
we are
Group,
Investors
Transfer
[1996-1998
persuaded that
undisputed
these
facts
*9
(CCH) 27,004,
Rep.
Fut. L.
Binder] Comm.
fraud
deception
demonstrate
as a mat-
(CFTC
44,841
26, 1997);
Mar.
In re Sta
ter of law.
ryk,
Transfer
[1996-1998
Binder] Comm.
27,206, 45,809,
Fut. L.
1997
Rep.
WL
message,
Read for its overall
(CFTC
18, 1997).
message
how that
have
interpreted
would be
840840
Dec.
As we
(3) substantially inflating op-
prior
profits;
commodities
in various
indicated
profit expectations
downplaying
a
while
cases,
that the Commercial had
tion
the fact
Defendant,
a
statement does not
risk of loss. We hold that
as
disclosure
general
knowl-
liability
federally registered professional,
under the
automatically preclude
message
clearly
edgeable
complexities
the overall
the nuances and
where
CEA
misleading
deceptive.
industry,
in an extreme
objectively
of
deviated
CFTC,
Brokerage
ordinary
of
Co. v.
manner from
standards
Clayton
See
63,
(11th Cir.1986); JCC,
care.
F.2d
580-81
Sidoti,
23, 1569-70;
n.
F.3d at 1565
element, materiality,
The final
is satis
(“we seriously doubt whether
at 1136
F.3d
fied as well.
It is too obvious
debate
language could
boilerplate risk disclosure
choice-making
that a reasonable listener’s
misrepre-
an earlier material
render
ever
process
substantially
would be
affected
immaterial.”);
Bishop,
see also
sentation
potential
emphatic
profit
statements on
44,841. Contrary
at
Rep.
Fut. L.
Comm
(“200-300%”)
suggestion
and the
no
argument,
Defendants’
we see
abso-
expected
known and
weather events
lute,
bright-line requirement
these cases
achieving
the vehicle for
those enormous
guaran-
that a
offer a “clear
solicitation
A
profits.
reasonable investor would also
liability
trig-
before
tee[]”
heavily
suggestion
be
influenced
Brief at 40. "Nor should
gered. Appellees’
that, due to
the Commercial
weather
exacting
there be. Such an
standard
events,
day
present
opportu
offers an
deception
the door of
wide
would thrust
nity
money
like no other to make
allowing clearly misleading state-
open,
JCC,
Fut.
corn market. See In re
Comm.
enforcement,
escape CFTC
ments
(“When
41,576
lan
L.
n. 23
underlying
thereby thwarting
purpose
a
guage
impor
solicitation obscures the
reign
have free
of the Act. Brokers would
possibility
tant
distinction between the
by subtly manip-
knowledge
to abuse their
profit
probability
substantial
and the
the func-
ulating customer beliefs about
earned,
likely
it will be
it is
to be material
markets,
tioning of commodities
afforded
customers.”).
ly misleading to
also
See
long
“guaran-
so
as no actual
safe haven
Data,
F.Supp.2d
CFTC v. Noble Wealth
tee” is made.
.
(D.Md.2000)
676, 686
(representations
“go
that the Commercial
Having
determined
about
and risk
to the
deceptive
misleading
contained
state-
heart
customer’s investment decision
ments,
next consider the element of
and are therefore material
we
as matter
law”),
is also met here
part
part,
scienter. This element
vacated in
aff'd
(4th Cir.2000).
law: Defendant acted reck-
matter of
on television. lacking regard to the Commercial be fact that this and the ised on the Court Raymond Fitzgerald cause edited the at- previously CFTC have condemned disclosures, (1) Commercial to include more tempts by: linking attract customers sought approval and received from Iowa profit expectations on commodities Grain, events, NFA and assured official Croom expected to known and weather trends, already that the Commercial had been dis highs; seasonal and'historical expressed continued after concern suggesting the commodities market Croom correctly large misleading can over its content. None of these generate timed to
1331
is,
posi-
language
posits,
as CFTC
established
can overcome
CFTC’s
arguments
of law in
illegality
precedent.
as matter
prior
that
cases establish
tion
precise error at the district court level
a matter of
content as
of the Commercial’s
definitively legal in nature:
it
failure
Moreover,
is the
Defendants should not be
law.
recognize
that the outcome of CFTC’s
by
liability under the Act
escape
able to
claim on the uncontested words in the
private
a related
busi-
simply claiming that
Grain)
(Iowa
Commercial is controlled
case law. See
stamp
issued its
entity
ness
generally
Regents,
Lincoln Board
not
Iowa Grain does
deter-
approval.
(11th Cir.1983) (if
F.2d
legal
error
finality what constitutes
legal
mine with
finding
taints fact
de
process,
novo review
under the CEA and
deceptive solicitations
court).7
may
be used
appellate
regulations.
its
that
argue
Defendants further
B. The Promotional Seminar
in the
not established “clear error”
has
finding that the Commer-
District Court’s
Much of
on
the discussion above
“deceptive misleading,”
or
as-
cial was not
illegality
of the Commercial
applies
possibly leap
cannot
serting that CFTC
the Seminar as well. We hold that
highly
the barrier of this
deferential stan-
is also fraudulent and deceptive
Seminar
persuaded.
are not
It
dard of review. We
Commercial,
as a matter of law. Like the
dispute
findings
well-settled for
is too
Seminar,
entirety,
when viewed in its
directly
of fact which flow
from the obser-
to a
suggests
reasonable listener
at trial cannot be re-
vation of witnesses
strategy
place
RJFCO has
reliable
But that
clearly
versed unless
erroneous.
limiting
increasing profits and
losses.8
appellate
implicat-
doctrine of
review is not
Commercial,
presents
Like the
it
a dis
is not a situation where we
ed here. This
tinctly
picture
po
unbalanced
between the
must defer to a trial court’s conclusion of
and the
for loss
tential
on the
fact because that conclusion rests
downplaying
one
options, inflating
while
personally
scrutinize
unique opportunity
impermissi
the other. The Seminar also
at trial
testimony
live
and measure credi-
bly suggests
profits
(the
Rather,
precise
in
bility
specific type
word
word.
futures contracts
language
promoting)
pro
in the Commercial is an undis-
were
are
vestment
record. The
to the cash market.
puted part
appellate
portionally
related
v. Commonwealth Finan.
deceptive
fraudulent and
nature of
See CFTC
making
part
argument
representations in the commodities
7. As
of their
that the Commer-
deceptive,
cial is not
Defendants assert that
pro
market because
standard
forma
had,
past, actually
prof-
in the
investors
do
"warn the customer to
disclosures
not
However, just
large
be-
its
as 200-300%.
representations that certain
disbelieve
possible,
hap-
cause such
are
have
strategies
...
market
can
overcome inherent
pened
degree
past,
to some
does not
risks,
vola-
or that certain commodities
less
message
mean that the Commercial's total
workings of
Those
with the
tile.
unfamiliar
JCC,
misleading.
n.
See
63 F.3d
unlikely
that no
markets are
to understand
literally
statements can be
34. Even
true
Clay-
risk.”
broker can eliminate or diminish
extremely
deceptive
impermissibly
when
added).
ton,
(emphasis
at 580-81
F.2d
See, e.g.,
context.
In re
viewed in their overall
designed
We note that RJFCO
its business
45,809.
Staryk,
Rep. at
Comm. Fut. L.
smaller,
experi-
specifically to deal with
less
Fitzgerald, 173
See R.J.
enced customers.
clearly explained previously
8. This Circuit has
F.Supp.2d at 1297.
extremely
when
that brokers must be
careful
*11
il-
examples and
patterns, and
Inc.,
1352 oil-weather
F.Supp.
Group,
repre-
large profits.
Such
grounds,
lustrations
(S.D.Fla.1994),
on other
vacated
law,
sentations,
alter the
as a matter of
(11th Cir.1996); Bishop,
F.3d 1159
available
mix of relevant information
total
44,841
to
(deceptive
Rep.
Fut. L.
Comm.
commodity option investor.
potential
to the
for
one could earn $420
that
tell customer
also
on this record
Scienter is
established
oil); In re
heating
in
increase
every penny
for the same reasons as
as a matter of law
(fraud
26,080
JCC,
Rep.
Fut. L.
Comm.
has con-
with the Commercial. Precedent
every
sugar
time
moves
that
tell customer
materially
representations
similar
demned
$67,000);
cents,
Trinity Fi-
you make
ten
representa-
past, including specific
in the
27,179
Fut. L:
Group,
nan.
Comm.
hold that Defen-
heating
tions on
oil. We
prices
predict
cash
(deceptive to use
recklessness
requisite
dants acted with the
heating
options).
oil
proportional profits
in an extreme manner from
departed
Commercial,
Furthermore,
the
as with
care.
ordinary
the
standards of
Seminar,
heating oil mathemati-
in its
illustration,
custom-
cal
misleads
Fraudulent
Nortr-Disclo-
C.
Omission:
move-
that historical
by suggesting
ers
Record
sure
the Film’s Success
expected seasonal
and known and
ments
above, CFTC con
explained
As
reliably
predict
can be used
patterns
tends,
liability
that
is estab
agree,
and we
gave
The Seminar
options.
in
language
to the
used
regard
lished with
impression
deceptive
those in attendance
and the
As an
the Commercial
Seminar.
trends will lead to
that known seasonal
Act,
violation of the
additional
options pro-
that
success and
quick
their
two solicitation devices
claims
these
“limited risk.”
vide a
scenario
were fraudulent as a matter of law because
concerned with
regard,
especially
we are
strategy for enor
they spoke of RJFCO’s
end
suggestion toward the
the Seminar’s
without
simulta
profit potential
mous
“greed”
is a
undisputed script
neously informing potential RJFCO cus
money in
major
do not make
people
reason
that more than 95% of the firm’s
tomers
“will nev-
and that a customer
commodities
money
types
lost
of invest
clientele
Despite the
go
taking
profit.”
er
broke
agree.
advertised.9 We
being
ments
material,
of risk disclosure
Seminar’s use
impression is
the overall
rosy
for
extremely
picture
Given
money
if
going to make
profit potential painted
the Seminar
simply
conduct
options.
invest
Such
Commercial,
a reasonable investor
Act,
underly-
its
cannot survive under
surely would want to know—before com
regulations, and the inter-
ing purpose, its
money to a broker —that 95% or
mitting
Commercial,
law. As with the
pretive case
money.
lost
more of RJFCO investors
clearly
in the Seminar are
the statements
gone
long
have
Such a disclosure would
objectively
out,
reasonable
example,
material because
way
balancing
would
decision-making process
representation
investor’s
affirmative
Commer
grain
ripe
market was
substantially affected
Seminar’s
cial
risk,
and to
cyclical heating
“huge” profits
percent”
of “200-300
limited
discussion on
Raymond Fitzgerald,
money.
principal,
customers lost
9. RJFCO’s
of Defendants’
that more than
testified
95%
*12
your
such a on whether
competitors
doing
RJFCO “now5’because
are not
telephone
may
any
you
“never” exist
better than
are.
focus
opportunity
market
of the
corn
inquiry
much to
is not on how well or how poorly
It would also have done
again.
even,
others firms have done or
the assertion of “limited risk”
some
counteract
circumstances, whether a firm has affirma
misleading
It
and de
in the Seminar.
tively
particular
boasted about a
win-loss
speak
to
of “limited risk” and
ceptive
Rather,
judicial
record.
cross
hairs
percent profits
“200-300”
without also tell
fall squarely
this case
on what the investor
that the over
ing the reasonable listener
reasonably
would
want to know before de
whelming bulk of firm customers lose mon
See,
ciding to
money
commit
to a broker.
Ziemba,
ey.
(duty
Trading Group, Transfer [1994-1996 (CCH) record, 26,253, Raymond that L. we conclude Fut. Binder] Comm. 13c(b) (CFTC 1994). 42,125 Fitzgerald meets the criteria for Unlike the Oct. First, Seminar, Raymond note that churning liability. we Commercial and a intimately Fitzgerald openly with factual concedes that he was claim is connected “controlling person” Appel at RJFCO. derived from witness testimo- conclusions Raymond credibility Fitzgerald made at the lees’ Brief at 62. ny and assessments principal and exercised the ulti example, requisite bench trial. For RJFCO’s power within the firm choice-making over customer accounts mate element of control inquiry upon regarding that turns its business decisions. See 173 in this case is ap at 1297. He reviewed and given F.Supp.2d the credit to witnesses the trier proved today have the District the activities that we hold of fact. We reviewed analysis regulations-the of this claim and cannot violated the Act and its Court’s and the He was entering judgment find that in favor of Seminar Commercial. ultimately responsible compliance claim Defendants this was erroneous. applicable
all rules on commodities solicita power authority tions. He had the and the “Controlling Liability E. Person” un- prevent being the Seminar from con der the Act ducted, comply or to alter its content to asserts the District with extant law. by finding Raymond Fitzger Court erred “controlling person” ald not liable as a IV. Conclusion 13c(b). § provisions under the of 7 U.S.C. “A a agree. purpose pungent
We fundamental This case serves as reminder emptor place to allow the to that caveat has no Section 13b is Commission corporate entity reach behind the to the realm of federal commodities fraud. Con- CFTC, Judiciary controlling corporation gress, individuals of the have liability and to determined that customers must be zeal- impose violations directly ously protected deceptive Act on such individuals well as from statements as JCC, corporation highly itself.” 63 F.3d at brokers who deal these com- (internal inherently risky financial instru- quotations plex and citation omit ted). 13c(b) Upon to succeed ments. review of the record and order claim, Defendant, law, conclude that the controlling CFTC must show that we Dis- controlling person, good finding did not act in trict Court erred in that the Com- induced, not violate knowingly directly faith or or in- mercial and the Seminar did and must also warn that up to 200 to 300% Both were regulations. and its the CEA high type of involves investment misleading, unquestionably deceptive customer, (only capital investment should be of loss to the material used).” evidently feels that The dissent scienter. requisite with the promulgated capi- “investment proclaiming violate devices also two solicitation These used,” together with an disclose tal should be they failed to because the Act disclaimer, a any equally generic reasonable material information extremely that com- put should be on notice to know investor would want investor reasonable extraordinarily modities volatile money. committing before Recogniz- the risk loss enormous. for the Fitzgerald is liable Raymond “[cjommodities brokerage firms ing under 7 U.S.C. and Seminar Commercial *14 potential the need to disclose both and 6c(b) Fitz- § Leiza § 33.10. and C.F.R. options trading,” involved dis- risks with liable for her involvement gerald is just does that “RFCO sent concludes 6c(b) § § 33.10. under and the Seminar appropriate amount of disclosing that — by violation of this CEA purposes For adequate well as the profit potential as a Fitzgerald is Fitzgerald, Raymond Leiza amount of risk.” is liable under and controlling person with my disagreement crux The of 13c(b). for the individ- § is liable dissent, then, necessary congru- in the lies Raymond Fitzgerald ual of violations profit between claims of ence to 7 U.S.C. Fitzgerald pursuant Leiza risk involved. The the concomitant dis- Defendants, 2(a)(1)(B). As to all other § believes that commodities evidently sent District of affirm the order we will can advertise about enor- brokerage firms en- the matter remand Court. We repeti- (replete with constant profits mous viola- proceedings on above forcement tion, pho- points, and satellite explanation Fitz- Fitzgerald, Raymond Leiza tions hurricanes) making while brief of tographs that we To the extent gerald RJFC. involved—a discussion mention of the risk raised of error points discuss other did not assertions about sugar-coated with of risk Defendants, deem or we by CFTC while can be “limited” still how this risk Each to bear party merit. them without potential.” providing “unlimited its own costs. view, advertising is hard- lopsided such my adequate of the “the a disclosure ly TJOFLAT, concurring: Judge, Circuit proclaims. as the dissent amount of risk” convey magnitude certainly to underscore separately I write It failed (remember: com- 95% the risk involved misrepresentations the extent money on the ad- a lost and make the firm’s by the defendants clientele mitted investments). two is- “clarity” about vertised point broader —the the dissent. troubling sues most regarding the substantial deception deception more compounded risk was in the dissent particular passage One how, potential gains precisely, about dispute this the essence of the contains The discussion is, realized. going were options, fact of the matter case: “The timing urgency win about El Niño big or going either to lose you are of inevita- created an air the investment like of why brokerage firms big is —that spe- had some if the defendant bility potential profits can advertise RFJCO —as case, knowledge cial with which to an exploit the defendants had ample notice that asymmetry of information in the market. their heavily portrait op- unbalanced fine, All of the dissent argues, so tions picture far different from —a long as the advertiser skirts the line reality impermissible. When an in- —was peppering language his with conditional vestor seeks to money, invest his he is (“could” “may”) language and does not principally concerned with two re- factors: say absolutely inevitable. turn and risk. A rational investor with no perspective Viewed from reason- peculiar aversion to risk would be indiffer- able investor —not investment banker ent having between one-in-ten $5 Lynch specialist Merrill futures chance at winning Change the risk $50. misleading ADM1—a expectation of invest- factor to one-in-eighty and the bet be- certainly ment success can be made even if comes unattractive even to the most risk- language conditional is used. This mis- seeking individual. The defendants in this leading exactly picture the sort that the case that by knew trumpeting enormous painted. defendants Perhaps the dissent involved, returns and downplaying the risk would rather have a world of emp- caveat (if a reasonable unsophisticated) investor tor: “If it is the ‘surely’ case investors would be enticed to make a bet that he wanted to know about [information the would not otherwise make were the full *15 past of success the defendants’ be- clients] picture disclosed. majority As the opinion invested, they fore why they then didn’t out, points “it is misleading deceptive says ask?” the dissent. But this is not the speak to of ‘limited risk’ and ’200-300’ Congress world envisioned when it enacted percent profits without also telling the rea- the commodities laws. sonable listener the overwhelming bulk of firm money.” lose The dissent further bemoans the lack of Don’t make an active attempt to in instill clarity in the law. While it is undoubtedly the investor a grossly picture inaccurate true that by the terms chosen Congress— the risk-to-reward ratio. That is the rule “defraud” and “deceive”—lack the preci- in this case'—a rule I abundantly find to be necessary guide sion to behavior in all clear. transactions, “problem” this is a necessary byproduct of difficulty the inherent in legal WILSON,
drafting. Judge, Circuit Language general dissenting: applicabili- ty stuff of statutes and common law —the I am majority’s troubled the holding, simply incapable conveying rules—is provides because it guidance no useful to range entire of permissible and impermis- brokerage commodities firms as to how to sible conduct. The law replete bring their solicitation advertising ac- phrases “proximate nebulous such as compliance tivities into with the law. Our cause” and “rule of reason.” Some cases already case law contains a confusing and may post judicial refinement, entail hoc vague definition of what constitutes resulting in the problem unavoidable of a “fraud” under the Exchange Commodities civil defendant without pre- notice his (CEA) Act 33.10; and Commission Rule cise conduct could result in liability. the majority’s opinion only adds to the problems
Whatever may be created uncertainty body of this of law. On this rules, I record, nebulous am in confident that I would have found that Fitz- R.J. 1. The advertisement in ly this case was obvious- aimed at the novice commodities investor. (AP) the likelihood misrepresent not must (RJFCO) involved & Co. gerald. prospective or any current profit at- to solicitations, nor did fraudulent JCC, Inc., See, In re defraud, e.g., clients cheat, deceive customer. tempt Therefore, Fut. Binder] Comm. 33.10. Transfer [1992-1994 Rule under Commission (CCH) 41,576; Staryk, In re at Rep. L. respectfully I dissent. Fut. Binder] Comm. Transfer [1996-1998 (CCH) 45,809. commis- As the Rep. L. at DISCUSSION JCC, stated, “[w]hen Inc. in In re sion the state- contends majority The im- obscures the a solicitation language of in the commercial by RJFCO ments possibility distinction between portant “directly con- seminar promotional it probability profit and of substantial established legal principles travene earned, materially likely it will .be ma- fraud cases.” prior commodities [1992-1994 to customers.” misleading sup- following four cases jority cites Rep. Fut. Binder] Comm. Transfer L.. committed finding that its port added). (CCH) 41,576 (emphasis n. 23 Group, (1) Fin. Trinity CFTC fraud: repre- an AP must not specifically, More Comm. Inc., Binder] Transfer [1996-1998 trend, anticipated seasonal that an sent ¶ (CCH) 27,179, 1997 WL Rep. Fut. L. summer, “almost winter and will such as 1997), (CFTC 29, Sept. aff'd 178 F.3d at profits'.” guarantee Sidoti part, vacated part and relevant 1135-36. (11th Cir.1999); 178 F.3d v. Sidoti Inc., Transfer JCC, [1992-1994 re Trinity Finan- example, the APs For ¶ (CCH) 26,- Fut. L. Binder] Comm. “misrepresented Group, cial Inc. JCC, 1994), Inc. (CFTC aff'd, May commodity ... *16 (3) (11th Cir.1995); CFTC, F.3d 1557 v. .they ... customers that telling falsely the Group Investors Bishop First of make a guaranteed to practically were Inc., Transfer Beaches, [1996-1998 Palm sea- cyclical the because of and/or profit ¶ (CCH) 27,- Rep. Fut. L. Binder] Comm. oil heating gasoline and nature of the sonal 26, 1997); re Sta (CFTC In Mar. Transfer Binder] [1996-1998 markets.” Binder] Comm. Transfer ryk, [1994-1996 (CCH) 45,628. at Rep. Fut. L. Comm. ¶ (CFTC (CCH) 26,701 June Rep. L. Fut. heating oil “that a customer AP told One. vacated 1996), part arid in relevant aff'd was a and that cyclical nature was Binder] Transfer part, [1996-1998 ten past had seen over the that he pattern ¶ (CCH) 27,206, 1997 Fut. L. Comm. consistently had that he years, and (CFTC 18, 1997). Dec. WL said that Another AP it.” Id. money on these four the facts of comparison A the up during always went “heating oil lead case should in this to the facts eases $10,000, he if he invested and that winter statements that RJFCO’s conclusion to the $70,000 by the end $60,000 to make would distinguishable legally dissimilar and AP Yet another year.” the Id. .said all four from cases. “the trend is market heating oil the that-in init months sell buy in the summer to misrepresent falsely not I. RJFCO did made the And he months. winter that seasonal or claim profit potential buy a fur coat? you do analogy, ... when profits. guaranteed practically trends months in the winter buy a fur coat youDo months?” in the summer buy it you do a or law that case prior from It is clear person Id. as an associated registered broker JCC, Inc., scripts given In re to AP’s statements that upon based the histo- emphasized
the APs “often historical mar- ry market, of the heating oil profits were that earned ket moves customers substan- “probable.” [1996-1998 Transfer Binder] profits, encouraged tial customers to (CCH) 44,841. Comm. Fut. L. Rep. at anticipate profits.” similar [1992-1994 AP said that history “based Comm. L. Rep. Binder] Transfer Fut. heating past oil market for the 12 years, I (CCH) 41,576. example, For one cus- could make a lot of money heating tomer related that an AP told him that oil.... [P]eople had money made a lot of buying before prices rose and selling after I purchase position should in heating they had risen.” Id. The commission oil, that it was a thing every sure found types that “[t]hese of representa- heating goes Fall oil up. guaran- It was tions made provide [an decep- AP] $3,000
teed that I’d make Spring, no message tive predictable that the nature of ifs, ands, or buts. It was a sure the seasonal price demand and trends es- losses], thing.... heating After [the oil sentially assured the likelihood of dramatic me with story he called the same about far outweighed loss crude oil and that time I going was generally associated with trading commod- $8,000. make ity options.” Id. What made the AP’s JCC, Id. The commission In re Inc. so deceptive statements as to be “mislead- that, held ing half-truths” was the fact that AP [g]iven the distorted view of the likeli- “failed disclose that a seasonal increase profit hood of loss fostered in the demand heating oil would not misrepresentations blatant discussed necessarily result in the increased value of above, history-based such statements do a option, oil heating because the market our escape scrutiny merely because already had factored seasonal demand into indeed, such a possible, had the price of an option.” Id. actually been earned at a particular his- Lastly, in In re Staryk, an repre- AP point torical ... Without additional his- sented his clients that “given the histori- context, torical such frequency as the cal pricing seasonal gasoline trends in the described market movement and *17 oil, heating speculation in gasoline and
whether market fundamentals or related heating options oil is significantly less circumstances have since changed the risky likely more and profits result occurrence, last cautionary and some than speculation in those options tied to language about difficulty the of catching non-seasonal markets.” [1994-1996 Trans- a market escaping trend and its rever- (CCH) fer Comm. Binder] Fut. L. Rep. sal, can be misled undue fact, In the AP claimed to custom- emphasis on such 43.928. historical successes. ers that “the gasoline likelihood of the ease, In the circumstances of this we market going down in the is summer simi- find that JCC and EDCO’s focus on lar to the likelihood that someone would such helped successes their cus- deceive cancel July, the Fourth of cancel Memorial tomers about the fundamental nature of Day, or cancel summer vacations in schools the futures markets. in North America in Europe.” and Id. at Id. The administrative law judge de- 43.929. Bishop, In the customer was induced termined that representations those were into opening an account as a result of an false”: “blatantly August of 1990 (and (specifically conditions the cor- in demand shifts seasonal War), and new techni- impending Gulf the generally that changes) price responding (in which cal, “[t]ech- models hypothetical for markets physical the characterize price volume and trading use analysts nical oil, not reduce heating do gasoline pro- computer charts or along with study op- energy involved in risks the trends- identify project grams from gained is advantage No tions. market”). discusses script when the Even pat- these seasonal of knowledge heating oil profit in the for the ... terns. the market, not claim that does RJFCO events unexpected only It when ... is oil heating the demand fluctuations than or lower occur, including higher will increase or and winter in the summer that gasoline, demand expected or option of an futures. price the decrease profitable. become may option Instead, unexpect- on focuses the seminar supply, such may affect events that ed 43,930-31. Id. at being depleted, pipelines facilities storage cases, is it four reviewing these After and Northern in Colombia being destroyed the not overstate does that RJFCO clear events, such as Iran, political that claims or make likelihood dispatching the United States President trends, compared seasonal expected East. Nimitz to Middle USS trends, guar- practically will non-seasonal “the that majority also contends commercial The RJFCO profits. antee suggests [sjeminar impermissibly also Niño, effects El on focuses specifically (the type of in- specific options profits highly hardly say were can which one pro- promoting) were vestment states RJFCO predictable. expected to the cash market.” related portionally adverse and other “[d]roughts, floods is However, stating dramatically alter could conditions cash market related to proportionally corn dynamics demand supply fact, only it is necessarily fraud. have an El Niño Not did market.” a one-for-one asserts the AP when market the corn effect on unanticipated profits and between correlation greater in other seasonal trends compared to other com- price cash movements markets, weather but commodities See CFTC fraud exists. modity that history that no also had phenomenon Inc., 874 Group, Fin. Commonwealth previ- to boast could utilize APs (S.D.Fla.1994), rev’d F.Supp. bold contrary to the This profits. ous part, F.3d and vacated part Trinity, inAPs by the statements Cir.1996) deci- table (unpublished (11th consistently they had bragged who *18 Board sion). Chicago RJFCO.followed-the market, or heating oil money on Chicago Board The example. Trade’s of JCC, Inc., claimed who In re APs in “a explains that manual Trade’s options up. heating goes oil every fall that price would in the change futures one-cent in the change promotional only seminar a half-cent Nor RJFCO’s does result Therefore, when seasonal premium.” historical anticipated, option focus by using script in its script focuses fact, explains RJFCO seminar trends. In heat- cent move in twenty-two a option, such abnormal unanticipated trends profit be 50-75% (such oil “could ing as Hurricane phenomena weather earned,” is have future would floods), political Andrew, drought, assuming a one-cent change in the instant case. These conclusions are not price futures would result in record, half- supported by this nor the legal change price. cent the futures As the underlying standard supported them by concludes, equation the script provides: our precedent. “Now remember that aon futures Clayton In Louis, Brokerage Co. St. contract, if you had a aggressive less APs made misrepresentations affirmative option, you because want limited risk so risk; as to were “ignore told to you would receive profit— 50% of that statement,” the risk disclosure “that cer- $23,100.” 46200 divided equals tain trading losses,” strategies can limit RJFCO never that profits asserts on op- and “that the broker’s scheme can over-
tions directly move in relation to the cash risks, come inherent markets or that cer- commodity. market for the tain commodities are less volatile.” Id. at 580-81. II. downplay RJFCO did not or mini- In the APs downplayed the de-
mize
degree
Sidot%
involved in
gree
of risk
telling customers that the
investing in commodity options.
risks of trading “commodity options were
Clayton Brokerage Co.
St. Louis v.
non-existent or minimal.” 178
at
F.3d
CFTC,
(11th
Cir.1986)
794 F.2d
1135-36.
curiam),
(per
tells us that “[t]he extent of
JCC, Inc.,
former APs testified that
necessary
disclosure
provide
full infor-
risk,
were taught “to minimize
...
mation about
vary
risk will
depending on
characterize the
management
$2500
fee as
the facts and circumstances of trading as
insignificant compared to potential profits,
well as on the nature of the relationship
and to use the Regulation 1.55 risk disclo-
between the broker and the customer.”
sure statement as
a sales tool
explain-
This standard leaves a lot to be desired
ing away various paragraphs of the
provides
docu-
courts with a significant
inapplicable
ment as
to the FLT program.”
amount of
as to
discretion
what constitutes
tempts to attract
conflicting.
arbitrary and
been both
has
on commodities
profit expectations
ing
introduced
must be
guidelines
Additional
weather
expected
to known
fraud
the elements
clarify
further
trends,
historical
events,
seasonal
Rule 33.10.
under
(2)
that the commodi-
suggesting
highs;
correctly timed
can be
market
ties
difficulty
the most
have had
Courts
(3) substan-
profits;
generate large
a material
constitutes
determining what
expectations
option profit
inflating
tially
omission.
or a material
misrepresentation
risk of loss.
downplaying
while
“wheth-
majority opinion,
According to the
made de-
been
has
misrepresentation
these
er
supporting
prior precedent
I find no
message’
‘overall
most,
pends
these state-
theAt
contentions.
the information
understanding of
‘common
prior
oversimplifications
ments
compensate the
sought to
relief
misrepre
to restitution
on the
reliance
5. While customer
Rosenberg, 85
party. CFTC
injured
CFTC en
proven
sentation need
(D.N.J.2000).
F.Supp.2d
fraud,
essential
alleging
it is
forcement action
conveyed.’”
As for materiality, a state
A
*22
misrepresentation
material
that is
ment is considered material if “there
obvious,
not patently
just
but
as damaging,
likelihood
substantial
that a reasonable in
exists when a brokerage firm deliberately
vestor would consider it important in mak
profit
overstates
potential and conceals the
ing an investment decision.” Saxe v. E.F.
possibility of loss. Any prediction or rec-
Co.,
105,
(2d
Hutton &
789 F.2d
111
Cir. ommendation must have a reasonable basis
1986). Unfortunately, Rule 33.10 and case
in fact and should
explicitly
be
just
labeled
law do
provide adequate
not
guidance to
prediction
that —a
guarantee.
not a
A
either the CFTC or commodity futures
statement regarding potential profits that
brokerage firms.
could be earned should not be considered a
material misrepresentation or misleading
every
While
claim of commodities fraud
statement
if it
possible
pro-
these
must be reviewed on a case-by-case basis
jected earnings could realistically occur.
standard,
under
existing
specif-
more
ic interpretation of the elements under
For example, RJFCO informed custom-
Rule 33.10 would create a standard where-
ers of the
for profits up to 300%
misrepresentations
“material
or materi-
if the El Niño atmospheric disturbances
al omissions” would be more readily dis- occurred
projected.
If
profit
po-
cernible.
attainable,
tential was
and RJFCO com-
piled significant research
suggested
which
What constitutes a “material misrepre-
climactic conditions
created
the El Niño
sentation”?
phenomenon could create drought and
(1)The
thereby
most
increase the price
material misrepre-
grain
obvious
due to
its
scarcity,
outright
then
sentations
falsehoods told
marketing
RJFCO’s
strategy
firm
did
brokerage
represent
not
APs and sales
pro-
staff to
a material mis-
spective
representation.
or current customers. Examples
of blatant material misrepresentations in-
Existing
situations,
case law reflects
un-
clude promising
open
a trading account
RJFCO,
like
where other firms made un-
so,
doing
reporting erroneous ac-
warranted
predictions which were
balances,
count
or making unlawful trades
considered to
inherently
fraudulent due
in a customer’s account without his or her
an
absence of technical research or
Muller,
authorization. See CFTC v.
570
proof to back
these
up
claims. See CFTC
(5th
F.2d 1296,
Cir.1978)
1300-01
(finding
v.
Love
J.S.
&
Options, Ltd,.,
Assocs.
422
evidence
to support
injunction
sufficient
an
652,
F.Supp.
(S.D.N.Y.1976);
In re
because AP lied concerning opening of
British Am. Commodity Options Corp.,
bank
account
supplied
op-
fictitious
(C.F.T.C.
Nos. 76-15
77-3
2,
Dec.
statements).
tions trade
A material mis-
1977), noted in [1977-1980 Transfer Bind-
representation also occurs if an AP lies
¶
(C.F.T.C.
er]
would be or deceptive if it did inherently risky. The fact of the matter not disclose its track record. Ziemba v. is, options, you going either to lose Int’l, Inc., Cascade 256 F.3d 1206 big or win big why brokerage —that (11th Cir.2001) (We recognize duty firms like RJFCO can advertise potential *24 disclose when “a defendant’s failure to upof to 200 to 300% and must also speak would render the warn that type defendant’s own this of investment involves a prior speech high risk of misleading (only or loss deceptive”); capital should used). Rudolph v. Co., Arthur Andersen & (11th 1040, Cir.1986) (“[A] F.2d de- Sidoti, Admittedly, JCC, under In re fendant’s omission to state a material fact Inc., Bishop, and In re Staryk, the stan- proscribed only when the defendant has dard for fraud However, is vague. these disclose”) duty added). (emphasis at provide cases least a sensible set of guidelines Simply put, is no mandatory duty brokerage there firms to follow designing their solicitations disclose. and advertis- ing programs. Essentially, these cases majority argues that a reasonable suggest that brokerage firms must not investor would “surely” want to know how misrepresent guarantee or profits, nor many RJFCO investors had lost money, minimize degree However, of loss. and, therefore, it was duty RJFCO’s to tell case, this the majority has extended the them. If it is the case that investors to apply standard to a situation where “surely” wanted to know this information firm did not misrepresent guarantee invested, before why then didn’t they profits and in fact disclosed the amount of ask? This is not a case where the APs risk involved.6 And the majority opinion misrepresented the firm’s track simply record or fails to offer any useful guidance to lied about past. successes actors Mod area of See the law. Cane, lin [1999-2000 Transfer Binder] Commodities brokerage firms should be ¶ (CCH) 28,059 Comm. Fut. L. Rep. on the alert —this may decision it make
49,549-50 (CFTC 2000) (The Mar. AP difficult to advertise and solicit business told customers “his method the future. It is uncertain what subse- successful” and key was “the making quent advertising language may “overem- money,” and he “that would jump phasize into the profit and downplay risk of loss.” East River if he I generate was unable to dissent.
profit.”). RJFCO never any bold
misrepresentations regarding prior its and, therefore,
track record was under no
duty to disclose its record.
6. No customer beyond suffered a loss his or her initial investment.