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Commodity Futures Trading Commission v. British American Commodity Options Corp.

August 3, 1977

COMMODITY FUTURES TRADING COMMISSION, PLAINTIFF-APPELLANT,
v.
BRITISH AMERICAN COMMODITY OPTIONS CORP., DEFENDANT-APPELLEE



Appeal by the Commodity Futures Trading Commission from an order entered in the Southern District of New York, Lee P. Gagliardi, District Judge, Mansfield and Timbers, Circuit Judges and MacMahon,*fn* District Judge.

Author: Macmahon

MACMAHON, District Judge:

Appellant, Commodity Futures Trading Commission ("the Commission"), appeals from an order of the United States District Court for the Southern District of New York (Gagliardi, J.), denying a preliminary injunction in an action brought by the Commission pursuant to Section 6c of the Commodity Exchange Act, as amended ("the Act"), 7 U.S.C. § 13a-1 (Supp. V, 1975). The Commission sought to prohibit appellee, British American Commodity Options Corp. ("British American") from making use of the mails or any instrumentality of interstate commerce in connection with its business as a commodity trading advisor without being registered, in violation of 7 U.S.C. § 6m. We reverse and remand with direction to issue a preliminary injunction.

I.

In the 1974 Amendments*fn1 to the Act, 7 U.S.C. § 1 et seq., Congress established the Commodity Futures Trading Commission and set up a comprehensive scheme for regulation of trading in commodity futures. Central to this statutory scheme is the requirement that persons actively involved in commodities trading shall be registered with the Commission.*fn2 Section 2 defines the new category of "commodity trading advisors,"*fn3 and § 6m unequivocally makes it "unlawful for any commodity trading advisor . . . unless registered [with the Commission] to make use of the mails or any means or instrumentality of interstate commerce in connection with his business as such commodity trading advisor. . . ." 7 U.S.C. § 6m.

Commodity trading advisors seeking registration must furnish the Commission with information concerning its organizational and capital structure, biographical information concerning its key personnel, information about its methods of operations and provisions for handling clients' funds and accounts, compensation data and "such other information as the Commission may require to determine whether the applicant is qualified for registration." 7 U.S.C. § 6n(1).

Applications for registration as commodity trading advisors become effective if the Commission fails to act within thirty days after receipt,*fn4 but the Commission may "deny" or "refuse" registration on various grounds set forth in §§ 6n(6), 6n(7) and 12a(2).*fn5 While the Commission may deny or refuse registration without a hearing in certain limited situations, see §§ 6n(6) and 12a(2)(A), in most cases the Commission must conduct a hearing before denying or refusing registration, §§ 6n(7) and 12a(2)(B) and (C). Section 12a(2)(C) further provides that "pending final determination under clause (B) or (C), registration shall not be granted " (emphasis added). In the case of refusal to register under subsections (B) or (C), the applicant can appeal such refusal directly to the Court of Appeals, see §§ 12a(2)(C) and 9.

Finally, the Commission is empowered in § 13a-1 to bring an action in the district court to enjoin "any act or practice constituting a violation of the Act or any rule, regulation or order under the Act." Section 13a-1 further provides that: "Upon a proper showing, a permanent or temporary injunction shall be issued without bond." (Emphasis added.)

The intent of the congressional design is clear; persons engaged in the defined regulated activities within the commodities business are not to operate as such unless registered, the Commission is charged in the first instance with determining the applicant's qualifications and whether proper grounds exist for refusing registration, and the Commission is empowered to seek injunctive prohibitions against violations of any provisions of the Act, including registration provisions. Registration is the kingpin in this statutory machinery, giving the Commission the information about participants in commodity trading which it so vitally requires to carry out its other statutory functions of monitoring and enforcing the Act.

II.

With this statutory framework in mind, we turn now to the facts of this case. In October 1975, at least five months after the registration requirements of § 6m became effective, British American commenced operations as a dealer in options on futures contracts on commodities traded on London commodity markets. Upon learning of British American's activities, the Commission, on March 3, 1976, notified British American that in its view British American was a commodity trading advisor and was required to register with the Commission. British American disagreed, but nevertheless filed an application for registration on March 17 or 18, 1976.*fn6 On April 16, 1976, the Commission instituted administrative proceedings, pursuant to §§ 6n(7) and 12a(2), to determine whether grounds existed for denying registration.

The Commission's administrative complaint charged as grounds for denial of registration, first, that John Forma, president and sole stockholder of British American, had been twice enjoined, by consent decree, from violating the record-keeping and net capital requirements of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and had been barred by the SEC from certain activities in the securities industry as a result of various alleged violations of the securities laws and regulations. Second, the Commission charged that British American had been cheating, defrauding and deceiving purchasers and prospective purchasers of commodity options, through deceptive literature and oral misrepresentations concerning the risks and expected profits from trading in options and futures contracts, and concerning British American's role as principal in transactions with customers. The Commission stated both § 6n(7) and the "other good cause" provision of § 12a(2)(B)(ii) as the alleged grounds for denying registration.*fn7 A hearing was held before an Administrative Law Judge from November 15 to December 15, 1976, but decision has not yet been rendered.

After the administrative complaint had been filed, but before the matter had come on for hearing, British American purportedly continued to function as a commodity trading advisor, although still unregistered. Consequently, on July 22, 1976, the Commission commenced this action for a ...


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