The opinion of the court was delivered by: KNAPP
The Commodity Futures Trading Commission (the "Commission") has applied for preliminary injuctive relief against D.E. Jones Commodities, Inc. ("Jones") for alleged violations of § 4b(A) of the Commodities Exchange Act, as amended (the "Act"), 7 U.S.C. § 6b(A) and § 166.3 of the Regulations promulgated thereunder ("Regulations") 17 C.F.R. § 166.3. Our decision in this case is based on evidence presented at a hearing which commenced on Novemer 9, 1983 and continued through November 17th and on post-hearing papers submitted by the parties. The Commission asserts two violations for which it seeks relief. First, it claims that Jones violated the anti-fraud provisions of the Act, § 4b(A), 7 U.S.C. § 6b(A), through the acts of Commodity Fluctuations Systems ("CFS") and CFS salespersons who were Associated Persons ("AP's") of Jones. Second, it asserts that Jones failed to supervise CFS and the AP's in violation of its obligation to do so under § 166.3 of the Regulations, 17 C.F.R. § 166.3. We will first address the Commission's assertions that the Act has been violated by Jones and then the propriety of injunctive relief.
The Act contains a broad anti-fraud provision. Section 4b provides in pertinent part:
It shall be unlawful . . . (2) for any person, in or in connection with any order to make, or the making of, any contract of sale of any commodity for future delivery, made or to be made, on or subject to the rules of any contract market, for or on behalf of any other person . . . (A) to cheat or defraud or attempt to cheat or defraud such other person. 7 U.S.C. § 6b(A).
Following an evidentiary hearing in November, we found that CFS salespersons had violated that section by misrepresenting certain risks attendant to commodities trading.
The violations of the salespersons were, of course, imputed to their employer, CFS. After finding that such violations were likely to continue, we issued an injunction against CFS. The queston before us now is whether the acts of those salespersons may be imputed to Jones, with whom the salespersons were registered as Associated Persons.
The Commission asserts that the CFS salespersons/Jones AP's were agents of Jones, and that we must impute liability to Jones for their fraudulent acts under § 2(a)(1) of the Act. That Section provides:
[T]he act, omission or failure of any official, agent or other individual, association or partnership, corporation or trust, within the scope of his employment or office shall be deemed the act, omission or failure of such individual, association, partnership, corporation or trust, as well as of such official, agent or other person. 7 U.S.C. § 4.
Although we find that Jones itself committed no fraud, we must impute the fraudulent acts of the CFS salespersons to Jones under the statute just quoted.
The CFS salespersons at issue are those hired by CFS who solicited accounts for a program which CFS developed and marketed called the Extended Futures Account ("EFA"). The salespersons marketed the account largely by telephoning potential customers and then sending them promotional literature. In these telephone solicitations salespersons identified themselves as representatives of CFS.
The materials distributed, with the exception of two documents (a Jones application and a Jones risk disclosure statement) are developed and packaged by CFS. CFS reviews the hiring of the AP's, retains control over their activities, arranges for compensation, and retains the right to terminate the relationship at any time.
Although these salespersons are hired and supervised by CFS to market a CFS program, they have a relationship with Jones which makes them agents within the meaning of § 2(a)(1). The salespersons involved in this case were each registered with Jones as an AP
and Jones carried the accounts which these AP's solicited. At the end of a successful solicitation a customer completed an application to purchase which was on a Jones letterhead, made his or her check payable to Jones, and sent the purchase money directly to Jones. Jones received the money, sent to CFS that portion of the check designated by CFS as a supervisory fee,
cleared the trade, maintained the account, and, for its services, took a fee of $13.00 for trades cleared on the New York Exchange and $15.00 for trades on the Chicago Exchange. From the evidence we must conclude that the CFS salespersons/Jones AP's solicited accounts in part at least for Jones's benefit and were, therefore, agents of Jones. Accordingly, we must impute liability for the agents' misconduct to Jones under § 2(a)(1).
JONES'S ALLEGED FAILURE TO SUPERVISE
Jones, as a Commission registrant, has an obligation to supervise the activities of the persons registered with it as Associated Persons. Section ...