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COMMODITY FUTURES TRADING v. HANOVER TRADING CORP.

February 2, 1999

COMMODITY FUTURES TRADING COMMISSION, PLAINTIFF,
v.
HANOVER TRADING CORP., ET AL., DEFENDANTS, AND THE PERSON KNOWN AS "JEFFREY ROBERTS," ET AL., RELIEF DEFENDANTS.



The opinion of the court was delivered by: Kaplan, District Judge.

MEMORANDUM OPINION

This case involves an allegedly fraudulent commodity operation, Hanover Trading Corporation ("Hanover") and presents a significant issue regarding the propriety of ordering disgorgement by a so-called "relief defendant" — one who is not charged with wrongdoing — of money allegedly traceable to the alleged wrongdoers.

Facts

The complaint in this case contains three causes of action. The first alleges that defendants Hanover, Dupont, Singer and Droge (the "Principal Defendants") violated Section 4b(a) of the Commodity Exchange Act (the "Act")*fn1 by making material false statements and omissions in connection with orders to make, or the making of, contracts of sale of commodities for future delivery ("futures contracts"), misappropriating customer funds, and issuing false reports to customers. The second alleges violations by the Principal Defendants of Section 4(a) of the Act*fn2 in that the alleged futures contracts were sold in unlawful off-exchange transactions. The third seeks disgorgement by Aronowitz and the other relief defendants on the theory that the funds that are the subject of the claim are directly traceable to the proceeds of the fraud carried out by the Principal Defendants, that the relief defendants are not bona fide purchasers with legal and equitable title to the funds they received, and that the relief defendants would be enriched unjustly absent disgorgement. The case has been disposed of as to all Principal Defendants and relief defendants but Aronowitz. Singer has pleaded guilty to criminal charges in connection with these events.*fn3

Plaintiff Commodity Futures Trading Commission (the "CFTC") moves for summary judgment requiring relief defendant Paul Aronowitz to disgorge the sum of $73,599.01 plus interest. In an order dated December 28, 1998, this Court struck Aronowitz's untimely papers in opposition to the Commission's summary judgment motion. In accordance with Local Civil Rule 56.1, all of the factual assertions contained in Plaintiff's Statement of Facts Not in Dispute ("Pl. 56.1 St.") therefore are deemed established for purposes of the motion. The remaining question is whether, given those facts, the CFTC is entitled as a matter of law to the judgment it seeks.*fn4 The only points warranting discussion in that regard are whether (1) the investments sold by defendant Hanover Trading Corp. ("Hanover") were futures contracts within the meaning of the Act and thus within the CFTC's jurisdiction and, if so, (2) disgorgement is an appropriate remedy against Aronowitz on the facts of this case.

Briefly stated, the facts are these. Hanover was engaged in selling an investment program involving commodities through telephone solicitation or telemarketing. None of the contracts it sold to its customers was concluded on a registered contract market, and so all violated Section 4b(a) of the Act if they were futures contracts. Moreover, Hanover's solicitations were fraudulent, and it misappropriated customer funds.

Aronowitz worked for Hanover. He solicited investments in these futures contracts through telemarketing, helped defendant Singer run the Hanover office, interviewed potential telemarketers and trained those whom Hanover hired, participated in fraudulent solicitations himself, and spoke with customers who had complaints.*fn5 He knew that Hanover itself did not purchase physical commodities and told customers that they would not have to take delivery.*fn6 He also used an alias on a letter sent to new customers in an apparent attempt to create the impression that Hanover was more substantial an operation that in fact it was.*fn7 Nevertheless, the complaint does not accuse Aronowitz of any violation of law and, as will appear, the Commission has not charged him in this motion with knowledge of the fraudulent nature of Hanover's conduct.

The Commission seeks to have Aronowitz disgorge the proceeds of 48 checks drawn on Hanover bank accounts and paid to Aronowitz as commissions with respect to investments he solicited for Hanover.*fn8 Hanover's source of those funds was payments of customers in respect of the illegally solicited investments.*fn9

Discussion

As the facts set forth in the Commission's Rule 56.1 statement are established for purposes of the motion, there are but two issues requiring discussion — whether the investments marketed by Hanover were futures contracts subject to the jurisdiction of the CFTC and whether the Commission is entitled to disgorgement from Aronowitz on these facts.

Futures Contracts

While the statute does not define contracts for future delivery, or futures contracts, the cases demonstrate that they have two salient characteristics. First, futures contracts are contracts for the purchase or sale of a commodity for delivery in the future at a price that is established at the time the contract is initiated.*fn10 Second, the ability to offset the obligation to purchase by selling the contract, or to offset the obligation to deliver by buying a contract, "is essential, since investors rarely take delivery against the contracts."*fn11 The lack of an expectation that delivery of the physical commodity will be made is an important factor indicating the presence of a futures contract.*fn12

Hanover's contracts involved the purchase of commodities for future delivery at prices agreed when the transactions were initiated. The "positions" were purchased in the expectation that they would be offset by selling transactions. There was no intention or expectation that Hanover's customers ever would take delivery.*fn13 In consequence, the investments sold by Hanover were futures ...


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