The opinion of the court was delivered by: WEINFELD
OPINION, FINDINGS OF FACT AND CONCLUSIONS OF LAW
Plaintiff, the Commodity Futures Trading Commission ("CFTC" or the "Commission"), a regulatory agency established under the 1974 amendments to the Commodity Exchange Act (the "Act" or the "Commodity Act") to administer and enforce various provisions of the Act,
commenced this action for preliminary and permanent injunctive relief to restrain the defendants from engaging in practices asserted to be in violation of the Act and regulations promulgated thereunder.
The defendant, Metals Depository Corp. ("Metals Depository" or "MDC"), a New York corporation with its principal place of business at 880 Third Avenue in New York City, solicits and sells what it describes as contracts for "deferred delivery" of gold and silver to members of the public located throughout the United States. The individual defendants are Richard Keats, the President and chief executive officer of the company; William Rodman, MDC's Secretary-Treasurer; James Morse, the President of Quorum Communications, Inc., a marketing and sales consultant to MDC, with which it shares offices; and William Droge, a salesman and assistant sales manager for MDC. The Commission's complaint charges that since August 1978 the defendants have entered into, or aided and abetted one another and other persons in entering into, contracts which partake of the character of option transactions, in violation of the Commodity Act's prohibition of the sale of commodity options and of the antifraud regulations issued by the CFTC.
In 1974, Congress, greatly concerned by pervasive fraud in the commodity option industry, broadened regulation over option transactions and vested in the Commission plenary rulemaking powers.
The primary antifraud regulation promulgated under the CFTC's rulemaking authority is Rule 32.9:
FRAUD IN CONNECTION WITH COMMODITY OPTION TRANSACTIONS.
It shall be unlawful for any person directly or indirectly
(a) to cheat or defraud or attempt to cheat or defraud any other person;
(b) to make or cause to be made to any other person any false report or statement thereof or cause to be entered for any person any false record thereof;
(c) to deceive or attempt to deceive any other person by any means whatsoever; in or in connection with an offer to enter into, the entry into, or the confirmation of the execution of, any commodity option transaction.
The Rule has been interpreted in Pari materia with Rule 10b-5 adopted by the Securities & Exchange Commission ("SEC") under the Securities Exchange Act of 1934
and, accordingly, has been applied to assure that the highest ethical standards prevail in every facet of the commodities industry.
A second antifraud regulation adopted by the CFTC is Rule 32.5, which requires that "prior to the entry into a commodity option transaction, each option customer or prospective option customer shall be furnished a summary disclosure statement by the person soliciting or accepting the order therefor,"
that these disclosures clearly describe the option being offered and prominently (in large capital letters at the beginning of the statement) inform investors of the risks of commodity investments,
and that within twenty-four hours of the transaction the seller should furnish the customer with a written confirmation statement.
A third provision, Rule 32.3, forbids commodity option trading by all persons except those "registered as a futures commission merchant under the Act and (whose) registration shall not have expired, been suspended . . . or revoked."
The Commission determined in 1978 that these rules were not sufficient to regulate the sale of commodity options, because fraud in the industry was, as Congress had found earlier, still deeply entrenched and pervasive and posed substantial risks to the general public.
Thus it issued Rule 32.11, which made it unlawful after June 1, 1978 "for any person to solicit or accept orders for, or to accept money, securities or property in connection with, the purchase or sale of any commodity option, or to supervise any person or persons so engaged."
Congress, in amending the Commodity Act in 1978, confirmed the Commission's approach, codifying Rule 32.11 in section 4c(c) of the Act,
which prohibits all trading in options except sales to persons who in their regular business buy, sell, produce, or otherwise use that commodity or sales by persons granted exemptions by the CFTC pursuant to its regulations.
Thus, unless exempted by the Commission, the offer or sale of any commodity option is proscribed both under the 1978 amendment of the Act and Rule 32.11.
To determine whether the Commission has sustained its claim that defendants violated these legal mandates, the Court conducted a hearing which extended over six days, during which the application for a preliminary injunction was consolidated with a trial on the merits pursuant to Rule 65(a)(2) of the Federal Rules of Civil Procedure. The witnesses included alleged victims of the company's sales campaign, employees and attorneys associated with MDC, defendant Droge, and an expert in the field of commodity options, Adelaide Blitzer.
Defendant Keats, called as a witness, exercised his constitutional right against self-incrimination and declined to answer questions material to the issues in the case. Upon a word-by-word review of trial transcripts, the Court's contemporaneous trial notes, an examination of the trial exhibits, and an evaluation of the demeanor of the witnesses, the Court is persuaded that the Commission has established its charges that the defendants, singly and in concert with one another, violated the Act's prohibitions against trading in commodity options and the CFTC's antifraud regulations.
It would be futile to contend that defendants could lawfully have engaged in commodity option transactions in the period at issue, August 1978 to the present. It is undisputed that the defendants were not properly registered with the CFTC as options dealers, and have not applied for a CFTC exemption from the Act's prohibition of option transactions.
MDC and other defendants argue, instead, that what they sold or offered for sale was not a commodity option but was an actual sale of gold or silver for "deferred delivery." The sale was, according to defendants, simply a leverage ...