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Commodity Futures Trading Commission v. American Board of Trade Inc.

decided: October 10, 1986.

COMMODITY FUTURES TRADING COMMISSION, PLAINTIFF-APPELLEE, CROSS-APPELLANT,
v.
THE AMERICAN BOARD OF TRADE, INC., ARTHUR N. ECONOMOU, PHYLLIS H. ECONOMOU, THE AMERICAN BOARD OF TRADE CLEARING CORP., INC., THE AMERICAN BOARD OF TRADE SERVICE CORP., INC., AND ARTHUR N. ECONOMOU AND COMPANY INC., DEFENDANTS-APPELLANTS, CROSS-APPELLEES



Appeals and cross-appeals from a judgment of the United States District Court for the Southern District of New York, Vincent L. Broderick, Judge, permanently enjoining defendants from engaging in certain commodity option transactions and ordering them, inter alia, to disgorge $126,706, representing sums lost by their customers, and to pay $210,000 as fees and expenses of court-appointed trustee. Affirmed.

Author: Kearse

Before: KEARSE, PRATT, and ALTIMARI, Circuit Judges.

KEARSE, Circuit Judge :

Defendants American Board of Trade, Inc. ("ABT"), et al., appeal from a final judgment entered in 1985 in the United States District Court for the Southern District of New York, Vincent L. Broderick, Judge, which, inter alia, permanently enjoined defendants from engaging in certain commodity option transactions in violation of the Commodity Exchange Act, as amended ("the Act"), 7 U.S.C. §§ 1-24 (1982), and ordered defendants to disgorge $126,706 to their injured customers and to pay approximately $210,000 as the fees and expenses of a court-appointed trustee. On appeal, defendants contend principally that the district court erred in finding the Act applicable to their activities and abused its discretion in fashioning relief. Plaintiff Commodity Futures Trading Commission ("CFTC" or the "Commission") cross-appeals, contending principally that the court should have ordered defendants to disgorge at least $434,961, representing its estimate of the profits received by defendants in their unlawful activities. For the reasons below, we affirm the judgment in all respects.

I. BACKGROUND

ABT is an organization that provided, inter alia, an exchange and marketplace for certain commodity options transactions. Defendants Arthur N. Economou ("Economou") and Phyllis H. Economou are officers and directors of ABT. The other defendants are corporations affiliated with ABT, Economou, and Phyllis H. Economou.

CFTC commenced the present action in April 1979, alleging that defendants, none of whom was then registered with the Commission in any capacity, were engaged in the offer and sale of "put," "call," "standard double," "combination double," and "hedge double" options in gold and silver bullion, silver coins, platinum, copper, plywood, and several foreign currencies, in violation of §§ 4c(b) and 4c(c) of the Act as then codified at 7 U.S.C. §§ 6c(b) and 6c(c) (1976 & Supp. II 1978), and of Commission Regulations 32.7 and 32.11, promulgated under the Act, 17 C.F.R. §§ 32.7, 32.11. CFTC sought injunctive relief and an order requiring defendants to disgorge all benefits received from their allegedly unlawful transactions.

In their answers to the complaint, defendants admitted that they were engaged in the option transactions described in the Commission's complaint, but denied that such transactions were subject to regulation under the Act. Economou asserted several affirmative defenses and counterclaims, which eventually were adopted by his codefendants, alleging, inter alia, that regulatory and statutory actions limiting commodity options violated defendants' First Amendment rights, deprived them of their property without due process, and created unreasonable classifications.

The principal thrust of defendants' statutory argument was that the Act reached only options on futures contracts, not options in spot and cash markets, i.e., options on the underlying commodities; since defendants engaged only in the latter transactions, they contended that their conduct was outside the Act. Alternatively, they contended that a sentence (the so-called "Treasury Amendment") in § 2(a)(1) of the Act, 7 U.S.C. § 2, excluded from the Act options to buy or sell foreign currency, which were part of defendants' business.

A. The Proceedings Leading to the Granting of the Permanent Injunction

The Commission promptly moved for and was granted preliminary injunctive relief against defendants' continuation of their commodity options transactions. In a Memorandum Order filed on July 13, 1979, and published at 473 F. Supp. 1177, the district court construed the Act, in light of its language and legislative history, to extend to options on the underlying commodities as well as options on futures contracts, and to cover options to buy and sell foreign currencies. Finding it clearly likely that defendants would continue their challenged activities unless enjoined, the court entered an order preliminarily enjoining defendants, inter alia.

(a) from accepting money, securities, or property (or extending credit in lieu thereof) from any person in connection with the purchase or sale of any commodity option; [and] (b) from soliciting and accepting orders for the purchase or sale of commodity options and from supervising persons so engaged . . . .

Id. at 1178.

In October 1981, having granted the Commission's motion to strike defendants' affirmative defenses and denied defendants' motions to file amended answers on the ground that they failed to state viable constitutional defenses, the district court found that there were no genuine issues of material fact as to the unlawfulness of defendants' activities. It therefore granted the Commission's motion for partial summary judgment making the preliminary injunction permanent, adopting the findings of fact and conclusions of law set forth in its order granting the preliminary injunction. As incorporated into the final judgment in 1985, defendants were enjoined from

(a) offering to enter into, entering into, or confirming the execution of any commodity option transaction involving any commodity regulated under the Act;

(b) accepting money, securities or property (or extending credit in lieu thereof) from any person in connection with the purchase or sale of any commodity option;

(c) soliciting or accepting orders for the purchase or sale of commodity options, or from supervising persons so engaged; and

(d) refusing to produce for inspection by authorized representatives of the Commission records that Commission regulations require to be kept;

in violation of Sections 4c(b) and 4c(c) of the Commodity Exchange Act, as amended, 7 U.S.C. §§ 6c(b) and 6c(c) (1982), and Regulations 32.7(e) and 32.11 promulgated under the Act, 17 C.F.R. §§ 32.7(e) and 32.11 (1983).

B. The Disgorgement Order

Following the entry of its permanent injunction, the district court ruled that defendants would be required to disgorge certain sums received as a result of their unlawful transactions. A trustee was appointed, and defendants were ordered to deliver to the trustee "all premiums and other proceeds received by defendants in connection with the offer and sale, by them, of commodities options during the period June 1, 1978 to July 13, 1979." The trustee was given authority to, inter alia, retain an accounting firm and other consultants to assist him, take testimony under oath, and examine into defendants' books and records. He was directed to report to the court a proposal for distribution of the recovered proceeds to customers who had purchased commodity options from defendants during the period at issue.

An initial report filed by the trustee in February 1984, accompanied by an analysis made by his retained accounting firm, calculated that defendants had received premiums and other proceeds totaling at least $5.1 million. An alternative calculation of $6.3 million was also reported. The different figures represented disagreements between the parties as to the proper interpretation of the court's order leading to the proceedings before the trustee. The district court held a hearing with respect to the trustee's report and raised further questions with respect to the amount of profits gained by defendants from the sale of commodity options in the period specified.

In January 1985, the trustee reported back to the court that, in light of certain retractions in the testimony of defendants' accountant there was "no way to quickly ascertain ABT's profits from the sale of commodity options." In a hearing convened thereafter, the court stated as follows:

While I find that there were substantial profits realized, I am satisfied that it is almost impossible, without a further extraordinary expenditure of effort and expense, to determine the amount of such profits. . . .

What I have done, therefore, is to determine an amount of disgorgement which, under all the circumstances of this case, I determine to be equitable.

The court concluded that defendants should be required to disgorge the sum of $126,706, representing the monetary losses suffered by their customers as ...


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