The opinion of the court was delivered by: MOTLEY
On August 16, 1979, the Commodity Futures Trading Commission (Commission) filed with the court a complaint for a temporary restraining order, preliminary and permanent injunction, an order granting access to premises, books and records, the appointment of a receiver, and the issuance of a protective order pendente lite, naming as defendants MORGAN, HARRIS & SCOTT, LTD., EURO AMERICAN CURRENCY CORP., HARRISON PRESCOTT, INC., and EARL R. WILT. The complaint alleged violations of sections 4c(b) and 4c(c) of the Commodity Exchange Act, as amended (the Act) (7 U.S.C. § 6c(b) and 7 U.S.C.A. § 6c(c)) and section 32.11 of the Regulations promulgated thereunder (43 Fed.Reg. 16161 (Apr. 17, 1978)).
On August 17, 1979, a temporary restraining order, a protective order pendente lite, and an order granting access to the premises, books, records, and accounts were issued by this court. The temporary restraining order restrained defendants from 1) offering to enter into, entering into, or confirming the execution of any transactions which were, or were of the character of, commodity options, and 2) engaging in the solicitation or acceptance of orders for the purchase or sale of commodity options. The protective order pendente lite prohibited defendants from directly or indirectly 1) dissipating, concealing, or disposing of, in any manner, any assets, choses in action or other property of the defendants; such order did not preclude expenditures in the ordinary course of business by the corporate defendants, nor expenditures for ordinary and necessary living expenses by the individual defendant; and 2) destroying, mutilating, concealing, altering, or disposing of, in any manner, any or all of the books, records, documents, correspondence, brochures, manuals, obligations, or other property of the defendants.
The Commission is an independent regulatory agency of the United States Government which has been charged with the responsibility for administering and enforcing the provisions of the Act, (7 U.S.C. §§ 1 et seq.), and the Regulations promulgated thereunder (17 C.F.R. §§ 1 et seq.).
This court bases its findings of fact on the following evidence: the record of the hearing on the preliminary injunction, including the sealed portion of that record, the testimony of Peter Scott Shedden (Shedden), Philip D. Rix (Rix), Joseph Bush (Bush), and James Douberley (Douberley); plaintiff's exhibits 1-24 in evidence; the affidavit of Philip D. Rix filed in support of plaintiff's motion for a temporary restraining order, preliminary injunction, and ancillary relief (Rix affidavit); the declaration of Murray A. Wolkis (Wolkis); and the general ledger accounts of defendant MHS (Ledger). Most of the background facts set forth in various affidavits regarding the defendants are not disputed by them. Defendants, of course, dispute the claim that they have engaged in illegal activity of any kind and particularly dispute the claim that they have sold commodity options. They also vigorously oppose the issuance of an order which would freeze the personal assets of defendant Wilt. Parties have stipulated that the trial be consolidated with the hearing on the merits. The court now makes the following findings of fact and conclusions of law:
Morgan, Harris & Scott, Ltd., (MHS) is a New York corporation with offices at 59 John Street, New York, New York, and 1995 and 2691 East Oakland Boulevard, Fort Lauderdale, Florida. In August, 1978, MHS was incorporated in the State of New York for the express purpose of selling "options and all other manner of contracts respecting deferred deliveries of commodities" (Pl's Exh. 3). Since September, 1978, to the present, MHS has been engaged in the business of offering and accepting orders and money from public customers for the purchase of contracts which purport to be for the "deferred delivery" of gold, silver, platinum, and copper (Shedden p. 4; Pl's Exhs. 1, 9, 10, 11, 12, 14, 15, 15a, 15b, 15c, 15d, 16, 17, 17a, 22). MHS was registered with the Commission as a Commodity Trading Advisor and Commodity Pool Operator, but is not currently registered with the Commission in any capacity (Pl's Exhs. 6, 6a; Rix Aff. p. 2).
Euro American Currency Corporation (EAC) is a New York corporation having its principal place of business at 59 John Street, New York, New York 10038 (Pl's Exh. 2). EAC was incorporated in the state of New York in November, 1978 to sell "deferred delivery currency contracts" to members of the public (Pl's Exh. 5; Shedden p. 44). Since at least March, 1979, EAC has been engaged in the business of offering and accepting orders and money from public customers for the purchase of contracts which purport to be for the "deferred delivery" of German Deutschemarks, Swiss Francs, Pounds Sterling, Japanese Yen, and Mexican Pesos (Pl's Exhs. 2, 18, 18a, 18b; Rix Aff. p. 3). EAC is not registered with the Commission in any capacity (Rix Aff. p. 3).
Harrison Prescott, Inc. (HP) is a New York corporation with offices at 59 John Street, New York, New York, and 1995 and 2691 East Oakland Park Boulevard, Fort Lauderdale, Florida. In November, 1978, HP was incorporated in the State of New York in order to sell "options and all other manner of contracts respecting deferred deliveries of commodities" (Pl's Exh. 4; Shedden p. 51). Since at least March, 1979, HP has been engaged in the business of offering and accepting orders and money from public customers for the purchase of contracts which purport to be for the "deferred delivery" and "spot-based delivery" of gold, silver, platinum and copper (Rix Aff. p. 3; Pl's Exh. 7, 17b, 17c).
Earl R. Wilt (Wilt) resides at 211 Thompson Street, New York, New York. Wilt is a controlling principal and officer of MHS, EAC, and HP (Pl's Exhs. 6, 6A; Shedden pp. 12, 20; Rix pp. 56-61). Wilt actively participated in the management of the corporations by leading sales meetings (Shedden p. 8), and determining commissions earned (Shedden p. 18). Wilt actively participated in the sale of "deferred delivery" contracts to the public by "closing" deals (Shedden pp. 7-8, 27-28), "rolling" clients into additional investments (Bush pp. 111-15) and sharing commissions with other salesmen (Shedden p. 7). Wilt was registered with the Commission as an associated person of a futures commission merchant, but his registration expired in June, 1979, and was not renewed (Rix Aff. p. 3).
The MHS, EAC, and HP Contracts
The MHS, EAC, and HP contracts are investment vehicles which purport to confer upon their purchasers the right, but not the obligation, to buy a specified quantity of bullion, coins, or currency at a pre-set price on a specified date in the future (Pl's Exhs. 1, 2, 7; Rix pp. 65-75).
To acquire the MHS, EAC, or HP contract, the purchaser tenders a fixed, nonrefundable transaction fee which MHS, EAC, and HP denominate variously as a "premium," "contango," "reservation," or "service" fee (Pl's Exhs. 1, 2, 7; Rix pp. 68-71). This transaction fee is the sum which the MHS, EAC, or HP customer sends to the firm in the form of a check (Pl's Exh. 8) or by means of a bank-wire (Douberley pp. 127, 134-35). Customers were not informed that these funds constituted a nonrefundable premium which provided no equity in the contract (Bush pp. 103-18; Douberley pp. 123-44).
For this transaction fee, the contract purchaser gains "control" (Bush p. 124; Douberley p. 106) of a specified commodity for a specified term (Pl's Exhs. 1, 2, 7; Rix pp. 68-69). At the end of the contract term, the purchaser has the right to tender the full purchase price of the contract, as was established at the outset of the transaction, and take delivery of the commodity. If the purchaser does not wish to take delivery, the contract entitles him to direct MHS, EAC or HP to liquidate the contract and remit to him the earned equity. If the market price has remained the same or has dropped during the term of the contract, the purchaser may elect to take delivery of the commodity at the prevailing market price, which is tantamount to abandonment of the contract (Pl's Exhs. 1, 2, 7; Rix pp. 71-75).
The funds remitted by the purchaser at the outset of the transaction do not give the purchaser any equity in the underlying commodity. If a purchaser wishes to take delivery of the commodity, he must tender the full purchase price of the contract, a sum which does not include the transaction fee. If the purchaser elects to liquidate his contract, he does not realize a net profit on the transaction unless the value of the commodity at the time of liquidation exceeds its value at the time the contract was purchased by an amount greater than the transaction fee. If the purchaser elects to abandon the contract, the entire transaction fee is forfeited (Pl's Exhs. 1, 2, 7; Rix Aff. 8-11).
The MHS, EAC and HP investment vehicles limit the purchaser's risk of loss to the amount remitted as the "premium," "contango," "reservation," or "service" fee. There are no additional costs for storage or margin calls (Shedden p. 16; Pl's Exhs. 1, 2, 7).
The expert testimony introduced by plaintiff established that a commodity option is defined as the right, but not the obligation, to purchase a specified quantity of a specified commodity at a preset price for a specified term (Rix pp. 65-66). For this right, the option purchaser remits a nonrefundable transaction fee which is not applied to the purchase price of the commodity.
Expert testimony presented established that the purchase of an "actual" or physical commodity anticipates delivery of the physical commodity at some time in the future. Payment tendered for an "actual," whether lump-sum or by installment, constitutes equity in the commodity and is applied as a down-payment on the ultimate purchase price (Rix pp. 163-65).
Offer and Sale of MHS, EAC, and HP Contracts
Members of the public were solicited to purchase MHS, EAC, and HP "deferred delivery" and "spot-based delivery" contracts through a series of unsolicited "cold-canvass" telephone calls (Shedden p. 5; Bush pp. 103-04; Douberley p. 123). Names of potential ...