The opinion of the court was delivered by: BONSAL
Plaintiff Commodity Futures Trading Commission ("CFTC") commenced this action in this Court on February 26, 1976 by authority conferred in the Commodity Exchange Act, as amended in 1974 (7 U.S.C. § 2 et seq., § 13a-1) (the "1974 Act") seeking preliminary and permanent injunctions against the eight named defendants whom the CFTC alleges violated the antifraud provisions of the 1974 Act (7 U.S.C. §§ 6c(b), 6m & 6 o) and CFTC Rule 30.01 (17 C.F.R. § 30.01, 40 Fed.Reg. 26504 (June 24, 1975)), promulgated pursuant to § 4c(b) of the 1974 Act which provides for the CFTC's regulation of, inter alia, commodity options trading.
In March and April, 1976, each of the defendants other than Geoffrey Winters consented to the entry of an order of permanent injunction enjoining them from violating the antifraud sections of the 1974 Act, without admitting or denying the allegations in the complaint.
Upon the CFTC's motion for a preliminary injunction against Winters for violation of § 4c(b) of the 1974 Act and Rule 30.01, a hearing was held on April 6, 9, 15 and 16, 1976. The CFTC called as witnesses James Spencer Love ("Love"), three customers of J.S. Love & Associates Options, Ltd. ("Options"),
two former sales representatives of Options,
two accountant-investigators of the CFTC staff,
and others who had dealt with Winters while he was working with Love at Options and at J.S. Love & Associates Consultants, Inc. ("Consultants"), Options' parent company.
In addition, the CFTC relies on several affidavits filed in support of its motion. Winters testified on his own behalf. At the hearing Winters moved for summary judgment dismissing the complaint.
Options, a New Jersey corporation incorporated on February 7, 1974 and wholly-owned by Consultants, was primarily engaged in the business of offering and selling to public investors "London commodity options".
Options' principal place of business was New York City and during 1975 and 1976 it established and maintained branch offices located across the country.
Consultants was a New Jersey corporation incorporated in May, 1973 with its principal office in New York City (apparently at the same address as Options). Love was the sole shareholder of Consultants. Consultants conducted business in the name of "J.S. Love & Associates" and, among other things, sold silver bullion and coins, and prepared and distributed to the public commodities market newsletters such as "The Love Letter", "Economic Realities", and "Gold and Economic Predictors". The business and finances of Options and Consultants (hereinafter referred to as "Love's companies") appear to have been highly integrated. Love was the principal operating officer of both companies. On March 11, 1976, Love's companies filed voluntary petitions in bankruptcy in this Court and a trustee was appointed.
The Promotional Literature. -- The CFTC contends that during Winters' association with Love's companies, pieces of promotional literature were distributed to the public to encourage purchases of commodity options through Love's companies, and that this literature was deceptive and misleading, including: a brochure entitled "Trading London Commodity Options" (Pltff.'s Exh. 4); a glossy brochure entitled "Options in London commodity Futures" (Pltff.'s Exh. 2); a brochure entitled "Anyone Can Make a Million" (Pltff.'s Exh. 3); an excerpt from a publication called Money Tree, Vol. V, No. 5 (May, 1975) (Pltff.'s Exh. 1); an article published in the magazine The O-T-C Market Chronicle, Vol. 8, No. 45 (Nov. 28, 1974) (Pltff.'s Exh. 8); and a letter on J.S. Love & Associates letterhead entitled "How Would You Like to Eliminate Margin Calls When Trading Commodities?" (Pltff.'s Exh. 9). In addition, the CFTC contends that promotional advertisements placed by "J.S. Love & Associates" in The New York Times Sunday editions of June 29, 1975 and July 20, 1975 (Pltff.'s Exhs. 13 & 14)
and in an Illinois newspaper in September, 1975 (see, PLTFF.'S Exhs. 31 & 33) (hereinafter referred to as the " Times advertisement") were deceptive and misleading.
Based upon a review of the promotional literature and the Times advertisement described above, the testimony of Adelaide Blitzer, an accountant-investigator for the CFTC with experience in the operation of the commodity futures and options markets, and the testimony and affidavits of various customers of Options, the Court concludes that many of the pieces of the promotional literature written by representatives of Love's companies and the Times advertisement contained deceptive and misleading statements. For example, in contrast to the impression conveyed by the promotional literature, no "guarantees" of payment or satisfaction are extended to customers of Options by the London firms, Options, or the clearing house of the London exchanges; guarantees of completion of the options contracts are extended only by the International Commodity Clearing House ("ICCH") on "soft" commodities
and only to member firms of the ICCH. Neither Options nor its customers can assert rights under these guarantees. No options are purchased in the customer's name; rather the options contracts are purchased by a London broker in the name and for the account of Options. Thus recovery by Options' customers of any profits on these options is contingent upon transfer of funds by Options to the customers' accounts in the United States.
Neither the promotional literature nor the Times advertisement reveals (1) that the profit earned on an options contract would be affected by fluctuations in the foreign currency exchange rates; (2) that many of the salesmen of Options had had no experience in the commodity options market prior to working at Options; and (3) that the price charged to customers on options was up to 40% higher than that charged by the London brokers. In addition, it appears that contrary to statements in the promotional literature, no financial support is provided to the London commodity exchanges by the Bank of England. As to statements in the Times advertisement that "75.2% of [Options'] customers' London commodity options were profitable this year" and that "profits of even up to 700% with limited risk" were possible, these assertions are misleading in that they fail to adequately explain the data on which they are based and omit to state other relevant facts. Finally, and significantly, the promotional literature and the Times advertisement do not state that investment in commodity options is often highly speculative and is usually engaged in by sophisticated investors. See "Commodity Trading," Business Week, Mar. 15, 1976, at 50-57; Shakin, B., "Commodities Options", Barron's, Jan. 27, 1975, at 11-12.
The Parties' Contentions -- The complaint alleges that Winters, as vice president of Options with "responsibility for supervising and training sales persons at Options . . . and . . . responsibility for establishing, maintaining and supervising the operations of branch offices of Options" participated in an allegedly "high-pressure sales campaign to offer and sell commodity options to public investors . . . through the use of deceptive advertisements, brochures, . . . and other promotional literature" (Complaint para. 11(a) et seq.) and that Winters "failed to supervise properly and implement appropriate supervisory procedures to prevent salespersons of Options . . . from engaging in [the various] fraudulent and deceptive sales practices [alleged]." (Complaint para. 11(m).)
Winters denies these allegations. He contends that neither the complaint nor the evidence at the hearing establishes that he performed acts constituting violations of Rule 30.01 since the Rule "proscribes only wilful misconduct"; that securities law principles do not apply to interpret Rule 30.01; and that, in any event, no violations of Rule 30.01 have been proven. Winters also moves for summary judgment dismissing the complaint on these grounds.
The Evidence. -- Winters testified that from 1968 to 1974 he worked at four different member firms of the New York Stock Exchange as a registered representative; that in 1974 he established a financial consulting and public relations firm, G.J. Winters & Associates, Inc.; that in July, 1974 the firm agreed to take on Love's companies as clients; and that Winters did not trade commodity futures or options for himself or for any of Love's companies' customers. Winters testified that in July, 1974 Love sought to "broaden his company and nationalize it" and through advertising to gain greater recognition in the commodity options business; that, pursuant to Winters' suggestion, Love began bi-weekly distribution to his customers and prospective customers of a market newsletter entitled "The Love Letter"; that in December, 1974 Winters agreed to devote 80% of his time to Love's companies to implement a "more aggressive plan . . . [and] to really get down to putting together the branch [offices] and developing broker-dealer relations." For these services Love paid Winters $3,000 (and later $4,000) per month, and provided office space and secretarial assistance.
The evidence shows that in March, 1975 Winters was made a senior vice president of Consultants; that as of about August, 1975 and thereafter, in Love's absences Winters acted as the principal officer of Love's companies and had check-signing authority for Options' accounts; that for several months starting in April, 1975 he acted as sales manager for Options' New York office; that he often distributed the names for new customers to the Options sales representatives; that the sales representatives thought of Winters as the person to whom they directly reported; that Winters approved and often signed sales representatives' pay and commission checks; that he advertised for new personnel and interviewed applicants for positions as sales representatives and sales manager for the Options New York office; and that he taught telephone sales techniques during training sessions to new Options sales representatives.
Winters and Love testified that upon Winters' recommendation Love selected AC&R Advertising Inc. ("AC&R") as the advertising agency for his companies; that Winters signed the contract dated June 16, 1975 engaging AC&R's services; and that on Winters' recommendation the form of Love's companies' advertising was changed. The testimony of Love, Winters and the witnesses from AC&R indicated that Winters was the liaison between Love's companies and AC&R; that Winters authorized AC&R to place advertisements in the newspapers to attract customers; and that the Times advertisement described above (see note 9 supra) was written from information provided by Winters to AC&R, although it appears that Winters did not participate in its preparation. Winters participated in the discussions regarding the layout of the Times advertisement and questioned the use of the word "guarantees", but relied on the approval of counsel for AC&R and Love's companies that the wording was satisfactory. It appears that Winters did not investigate the accuracy of the statements made in the brochures or the Times advertisement.
Love also testified that one of Winters' primary functions was to set up "branch" offices for Love's companies. Winters testified that he would visit each potential branch office, interview the personnel there, and then make recommendations to Love as to whether Love should make a contract. Winters stated that after establishing each branch office, he had responsibility to see it operated according to the terms of its contract with Love. Winters had check-signing authority on accounts for each of the branch offices and it appears that he was responsible for distribution to these offices of the promotional materials used by the sales representatives.
Love and Winters testified that Winters did not see financial statements of Love's companies and was not privy to the finances of the companies, although he had inquired about such information from Love. It appears that he did see financial data in connection with sales representatives' commissions and the firm's trading (or "house") account in London, through which the customers' options were handled. The evidence indicates that the allegedly deceptive promotional literature was written by persons other than Winters and were written prior to Winters' association with Love's companies.
Winters terminated his employment with Love's companies in February, 1976, prior to the ...