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CFTC v. AVCO FIN. CORP.

September 29, 1997

COMMODITY FUTURES TRADING COMMISSION, Plaintiff, against AVCO FINANCIAL CORP., ANTHONY VARTULI and J. MICHAEL GENT, Defendants.

JOHN F. KEENAN, United States District Judge.


The opinion of the court was delivered by: KEENAN

JOHN F. KEENAN, United States District Judge:

 Before the Court is the Defendants' motion to dismiss this action, pursuant to Fed. R. Civ. Pro. 12(b)(6), for failure to state a claim upon which relief may be granted. For the reasons stated below, the Court denies the motion.

 Background

 A. The Underlying Action

 This civil enforcement action brought by the Commodity Futures Trading Commission (the "CFTC") is based upon Defendant AVCO Financial Corporation's ("AVCO") manufacture, advertisement and sale of a computer software program called "Recurrence" that generates specific recommendations to advise a customer to buy, sell or exit position in exchange-traded futures contracts on Swiss francs and Japanese Yen. Defendant AVCO, Defendant Gent, the chief executive officer of AVCO, and Defendant Vartuli, the president and sole shareholder of AVCO, are not registered with the CFTC as commodity trading advisors.

 
When a historically profitable pattern develops, the system uses several parameters to evaluate the pattern in terms of the probability of profit or loss. If the percentages are greatly in your favor, Recurrence instantly signals a trade with both a screen message and audio alert. The message gives you a specific buy or sell recommendation, as well as a specific stop and profit objective. You just call your broker and give the complete order (you can read the instructions right off your screen) and then sit back and watch as Recurrence monitors that market and your position in real time. When your profit objective is reached -- or your stopped out -- Recurrence alerts you again with an on-screen message and audio alert . . . you must be willing to let the system 'call the shots,' and overcome your natural tendency to second-guess it.

 Compl. P 30. Many of AVCO's customers and the brokers who traded for customers on the basis of Recurrence's recommendations "telephoned AVCO to ensure that AVCO agreed with the recommendations the customers and brokers were getting from the system. Several placed orders only after . . . AVCO employees confirmed [Recurrence's] recommendations." Compl. P 31. AVCO has advertised the Recurrence program in such publications as Futures, CompuServe Magazine, Technical Analysis of Stocks and Commodities Magazine, The New York Times, The Washington Post, as well as through direct mail and phone solicitations, and promoted the program in its partnership packet and through promotional materials. These publications contain such statements as: The system is "automatic" and "all you have to do is decide whether or not to take advantage of the trade," Compl. P 29(b); "You'll be advised on what pattern is present, at what price to buy or sell, at what price to place your protective stop, and where to take profits . . . All the trader needs to do is call their [sic] broker and place the appropriate trades," Compl. P 29(d); "Those traders with the vision, foresight and lack of ego necessary to let Recurrence IV tell them when to trade will begin taking profits immediately," Compl. P 29(d); "Recurrence III makes money automatically", Compl. P 33(a); Recurrence IV "Turns $ 2,500 into $ 121,000 in 5 years!", Compl. P 33(b); "Between Jan. 1 1989 and December 31, 1994, trading only Swiss Franc futures, the system turned a $ 10,000 trading account into a $ 522,800 fortune --a return of 855% per year!", Compl. P 33(d); "Our basic portfolio had average earnings of over $ 81,000 per year for six consecutive years", Compl. P 33(e); "Guarantee: If the Recurrence Program does not produce a Total Net profit after 1 full year from the date of purchase, [AVCO] will refund 100% of your purchase price", Compl. P 40(c). In direct response to questions from customers as whether Recurrence's performance numbers were based on real trading, AVCO employees told customers that Recurrence's performance record was based on real trades, despite the fact that the promoted performance record was based on a hypothetical trading history. In addition, AVCO circulated an advertisement that stated:

 Compl. P 30.

 The CFTC asserts that, through the Recurrence program, AVCO acts as a commodity trading advisor by providing investment advice for trading commodity futures. Insofar as AVCO is not registered as a commodity trading advisor, the CFTC argues that AVCO violates the CEA. The CFTC further claims that AVCO's promotional statements to actual and prospective customers contain misrepresentations as to the profitability of the advice given by Recurrence, the accuracy of Recurrence, the performance history of Recurrence, and the risks involved in trading commodity futures with Recurrence. Based on the activities alleged above, the Complaint states three counts against the Defendants: (1) solicitation fraud in violation of the CEA; (2) fraud by a commodity trading advisor and fraudulent advertising in violation of the CEA; and (3) acting as a commodity trading advisor without registering in violation of the CEA. The CFTC has moved for preliminary injunctive relief in this case, and the parties consented to the entry of an order preventing the Defendants from engaging in the activities at issue in this action pending a decision on the preliminary injunction motion. The CFTC also seeks disgorgement, an order assessing civil penalties against the Defendants, and an order of restitution directing the Defendants to make whole each and every client for all losses sustained due to the Defendants' illegal actions.

 Defendants move to dismiss all three counts in the Complaint on the grounds that the CFTC has not alleged facts demonstrating that AVCO is a commodity trading advisor under the CEA, and therefore Defendants argue that AVCO is not amenable to the CFTC's regulatory jurisdiction. Defendants also assert that the count one claim must be dismissed because the Complaint has failed to satisfy the requirement that the alleged fraud be "in ...


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