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decided: November 23, 1987.


Petition for review of a decision of the Commodity Futures Trading Commission finding that petitioner engaged in "wash sales" in violation of Section 4c(a)(A) of the Commodity Exchange Act, 7 U.S.C. § 6c(a)(A), and imposing sanctions for the violations. Petition granted and order reversed.

Oakes, Newman, and Pierce, Circuit Judges.

Author: Pierce

PIERCE, Circuit Judge:

Manning Stoller ("Stoller"), a registered account executive with a commodities brokerage firm, petitions for review of a decision and order entered in an administrative enforcement proceeding before the Commodity Futures Trading Commission (the "Commission"). The administrate complaint charged Stoller and others with engaging in "wash sales" in violation of section 4c(a)(A) of the Commodity Exchange Act (the "Act"), 7 U.S.C. § 6c(a)(A). The Commission found that Stoller had engaged in prohibited transactions, see In re Collins, [1986-87 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 22,982 (Apr. 6, 1986) (hereinafter Collins I), and subsequently clarified its opinion in response to a request by the Chicago Mercantile Exchange, see In re Collins, [1986-87 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 23,401 (Nov. 26, 1986) (hereinafter Collins II). For the reasons stated below, we grant Stoller's petition and reverse the Commission's order.


This case concerns trading practices on the New York Mercantile Exchange (the "NYMEX") relating to May 1976 Maine potato futures contracts (the "Contracts"). The transactions in question occurred on May 5 and 6, 1976, during the last few days of trading in the Contracts, and were entered into on Stoller's instructions on behalf of his own account and those of six of his customers.

As would later be shown, see Merrill Lynch, Pierce, Fenner & Smith, Inc., Curran, 456 U.S. 353, 72 L. Ed. 2d 182, 102 S. Ct. 1825 (1982), the market price of potato futures was being artifically depressed at tath time by an illegal conspiracy. The conspirators planned to reap large profits when the May potato crop proved to be less plentiful than they were leading the market to believe, thereby causing the price of the futures contracts to rise. See id. at 369-70. In the end, holders of many Contracts failed to deliver potatoes on the specified dates, "resulting in the largest default in the history of commodities futures trading in this country." Id. at 367 (citations omitted).

In early May 1976, however, the details of this fradulent scheme were still unknown. It apparently is clear that Stoller sensed that artificial forces were being brought to bear upon the market and recognized that the market price of the Contracts was below the level that would otherwise be indicated by an anticipated short supply of potatoes. Further, it appears that Stoller consequently believed that the artificial depression of the market would cease, either through official intervention or by investors' realization that the potato crop would be small. Futures prices would then rise, thereby creating a profit for those holding fixed-price "long" contracts to receive delivery of potatoes in May 1976.

NYMEX regulations specified that commodity deliveries were to be made first to those who had held their futures contracts the longest, with holders of the most recently acquired contracts receiving their deliveries last. Thus, when the price of the cash crop is expected to rise during the period when deliveries are made, it likely would be profitable to acquire long contracts very shortly before the close of trading in order to "get behind [i.e. at the end of] the delivery line." Those like Stoller who already owned Contracts, and who therefore expected to have to take early delivery of potatoes, probably in mid-May, would likely prefer to sell their existing Contracts and to acquire newer ones, which would entitle them to take delivery instead in late May or early June, when the value of the commodity was expected to be higher. Stoller claims that this "rollover" or "roll forward" was a commonly-used practice in Maine potato futures.

On May 5 and 6, 1976, Stoller placed orders with floor brokers to sell existing Contracts, which carried early delivery dates because of the length of time for which they had been held, and to replace them one-for-one with other Contracts at a price as near as possible to the price for which the old ones were sold. By virtue of owning newly-acquired Contracts, Stoller and his customers would be entitled to later delivery dates under applicable NYMEX regulations. The transactions were designated "market not held", which Stoller asserts signified that the floor broker was entitled to exercise discretion in placing the orders so as to minimize the price differential, but would not be held liable for any losses resulting from an error in judgment. Stoller further claims that the brokers were instructed to liquidate the old positions before acquiring the new ones, thereby subjecting him to market risk in the intervening period.

The Commission brought a three count enforcement proceeding against Stoller in June 1977, alleging, inter alia, that these vitually simultaneous sale and repurchase transactions at substantially the same price constituted "wash sales" within the prohibitory language of section 4c(a)(A) of the Act, 7 U.S.C. § 6c(a)(A). The Division of Enforcement moved for summary disposition in May 1978, which Stoller opposed on the ground that there were genuine issues of material fact to be resolved. In his opposition papers, Stoller sought factual hearing at which he might seek to substantiate his claims that "roll forward" trading was a common industry practice and that his "market not held" instructions did not demonstrate an intent not to engage in a bona fide market transaction. He also cross-moved for summary disposition, claiming that his conduct could not constitute a "wash sale", as that term had been applied in prior cases almost exclusively in the context of prearranged trading or other collusive action. Both motions were denied: the Division of Enforcement's because of the existence of factual questions, and Stoller's as premature because the Division of Enforcement was entitled to seek to produce evidence that would support its allegations. See [1977-80 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 20,909 (August 23, 1978); No. 77-15 (CFTC Sept. 15, 1978).

In May 1979, when the Division of Enforcement still had not produced significant additional evidence, Stoller again moved to have the charges against him dismissed. In August 1979, the administrative law judge ("ALJ") granted summary disposition in favor of Stoller on the ground that he had demonstrated a legitimate market purpose to the transactions, thereby excluding them from the intended scope of the "wash sales" prohibition. [1977-80 Transfer Binder] Comm. Fut.L.Rep. (CCH) para. 20,908 (Aug. 16, 1979). In November 1979, the ALHJ denied a motion by the Division of Enforcement to reconsider his August ruling. In February 1984, following the dismissal for lack of evidence of the other two counts of the complaint against Stoller, the Division of Enforcement appealed to the Commission from the ALJ's order with respect to the wash sale allegations, and in April 1986, almost ten years after the trades in question were executed, the Commission reversed the ALJ's decision and entered judgment against Stoller. In its decision, it said, "We infer from his conduct that [Stoller] initiated transactions with the intent to create the appearance of genuine purchases and sales while avoiding any bona fide market transaction." Collins I at 31,903.

The Chicago Mercantile Exchange requested a claification of this decision on the ground that Collins I seemed to prohibit transactions in which the parties seek to minimize market risk. See [1986-87 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 23,112 (June 18, 1986). The Commission modified its holding and explained that it only sought to prohibit transactions that did not expose the principals to any risk of market price fluctuation. Collins II at 33,078. Nevertheless, it reaffirmed its decision that Stoller had violated this prohibition. This case never progressed beyond the stage of summary disposition; and no factual hearing was ever held at which Stoller would have had the opportunity establish his defense ...

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