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NEW YORK MERCANTILE EXCH. v. CFTC

March 4, 1993

NEW YORK MERCANTILE EXCHANGE, Plaintiff,
v.
COMMODITY FUTURES TRADING COMMISSION, Defendant.


DUFFY


The opinion of the court was delivered by: KEVIN THOMAS DUFFY

KEVIN THOMAS DUFFY, D.J.

 Plaintiff New York Mercantile Exchange ("NYMEX") commenced this action for declaratory and injunctive relief, pursuant to the Commodity Exchange Act ("CEA"), 7 U.S.C. §§ 1 et seq., and the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701 et seq., against defendant Commodity Futures Trading Commission ("CFTC"). CFTC now moves pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the complaint for failure to state a claim.

 FACTS1

 NYMEX, which CFTC has designated as a "contract market" pursuant to 7 U.S.C. § 7, is the world's largest market for the trading of energy futures contracts and options, including contracts in crude oil, heating oil, gasoline, natural gas, platinum, and palladium. NYMEX consists of institutional and individual members, and is a private self-regulatory organization. CFTC is an independent regulatory agency of the United States government charged with responsibility for regulating commodity futures trading pursuant to the CEA and regulations promulgated thereunder.

 David Baker, a non-party to this action, was a member of NYMEX from 1984 to 1987, when he voluntarily resigned his membership. In 1988, Baker reapplied for membership in NYMEX, but after NYMEX learned that he was the target of an ongoing CFTC investigation, Baker voluntarily withdrew his application.

 In 1989, notwithstanding the continued CFTC investigation, Baker again applied for NYMEX membership. NYMEX reviewed Baker's application in accordance with internal rules approved by CFTC. See 7 U.S.C. § 7a(12); 17 C.F.R. § 1.41. On August 22, 1989, NYMEX's Membership Committee, having reviewed and investigated Baker's application, recommended that NYMEX's Board deny the same. The Committee reasoned that the mere existence of a CFTC investigation into possible unlawful trading by Baker during his earlier membership in NYMEX prevented it from concluding that Baker possessed sufficiently good character for readmission to NYMEX.

 Subsequently, Baker requested a NYMEX Board hearing on his application. As required by NYMEX Rule 2.80, a panel of three disinterested directors was appointed to review Baker's application, conduct a hearing, and make a recommendation to the Board. On January 25, 1990, the panel recommended that the NYMEX Board deny Baker's application on the basis of the ongoing CFTC investigation.

 NYMEX's Board of Directors then conducted its own review of Baker's application and held a meeting on April 4, 1990 to consider the panel's recommendation. On April 16, 1990, the Board issued a decision denying Baker's application based on their inability to form an opinion as to Baker's "good character, commercial standing and business experience" as required by NYMEX Rule 2.09(A).

 On May 18, 1990, Baker appealed NYMEX's denial of his membership application by commencing a proceeding before CFTC entitled Baker v. New York Mercantile Exchange, CFTC Docket No. 90-E-5. On September 29, 1990, during the pendency of Baker's appeal, CFTC filed an administrative complaint charging Baker with violations of CEA anti-fraud and trade practice provisions. Those violations arose from Baker's handling of customer orders in 1986-87 while he was a NYMEX member. See In the Matter of Dean Tyler and David A. Baker, CFTC Docker No, 90-31 (Sept. 29, 1990). On July 19, 1991, Baker submitted an Offer of Settlement to resolve CFTC's administrative complaint, and on October 29, 1991, CFTC issued an "Opinion and Order Accepting Offer of Settlement of David Baker" ("Settlement Order").

 The Settlement Order found that Baker had violated 7 U.S.C. §§ 4b(A), 4b(D), 4c(A), 4c(a)(B), and 4(g)(1), and 17 C.F.R. §§ 1.31(a), 1.35(a-1), and 1.38(a), *fn2" and imposed upon Baker a civil penalty of $ 5,000, a four-month trading prohibition, and a three-year prohibition from registration with CFTC in any capacity. The Settlement Order further provided:

 
Solely by virtue of his Offer and not by any adjudication on the merits, BAKER agrees that these findings may be used in any other proceeding brought by this Commission or any other state or federal governmental regulatory authority, by any futures association registered pursuant to Section 17 of the Act, or by any board of trade designated as a contract market under the Act or the Regulations; provided, however, BAKER does not consent to the use of the Complaint in this proceeding or the findings, sanctions, or Order of the Commission consented to by virtue of his Offer, as the sole basis for any such proceeding.

 On June 22, 1992, CFTC issued an order ruling on Baker's appeal from NYMEX's denial of his membership application (the "Order"). CFTC declined to decide whether NYMEX's proof was sufficient to deny Baker's membership application, or whether an applicant's involvement in a CFTC investigation is, of itself, sufficient to establish unfitness for membership under NYMEX's rules. Instead, CFTC ruled that the administrative complaint against Baker, Baker's subsequent settlement offer, and CFTC's acceptance of that offer presented issues that NYMEX should consider prior to CFTC's review of the membership decision. Accordingly, CFTC remanded the matter to NYMEX with instructions to consider Baker's application "in the context of the facts now available."

 In addition, however, CFTC noted that the findings encompassed in the Settlement Order could not form the sole basis for any adverse action taken by NYMEX with respect to Baker, but that NYMEX could: (1) use the Settlement Order's findings in conjunction with an additional basis which reflected upon Baker's fitness for NYMEX membership; or (2) develop its own record of the events and actions underlying CFTC's complaint ...


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