The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge
Plaintiff Commodity Futures Trading Commission ("CFTC") has moved for a preliminary injunction prohibiting defendants Commodity Investment Group, Inc. ("CIG"), Linda Kuhney a/k/a/ Linda Reinman Enzinna ("Linda Kuhney"), and Michael Kuhney a/k/a Michael Kirkney ("Michael Kuhney")*fn1 (collectively "defendants") from violating section 4c(b) of the Commodity Exchange Act (the "Act"), 7 U.S.C. § 6c(b), and CFTC Regulations 33.10(a) and (c), 17 C.F.R. § 33.10(a) and (c). In addition, CFTC seeks an order: 1) preserving all records relevant to this action and permitting CFTC to inspect such records; and 2) freezing CIG's assets as well as the assets of Linda and Michael Kuhney pending the outcome of this litigation.
Plaintiff alleges that the defendants violated the Act by systematically misrepresenting the likelihood of profit and risk of loss in connection with their sale of commodity options. On January 17, 2006, a hearing was held before me on CFTC's motion at which both parties presented testimony. During the hearing, defendants' stated that, while they did not concede that the CFTC was entitled to any injunctive relief, defendants were willing to consent to an injunction prohibiting them from violating the Act and preserving all relevant records. (Tr. 69).*fn2 Defendants further stated that they would be willing to consent to a freeze of CIG's corporate assets. (Id.)
At the conclusion of the hearing, I directed the parties to attempt to agree on the terms of an injunction prohibiting defendants from violating the Act, as well as on the terms of an order preserving relevant documents. By letters dated January 27, 2006, the parties indicated that they had been unable to agree on either point.
The CFTC is entitled to a preliminary injunction upon a prima facie showing that defendants have violated the Act and "that there is a reasonable likelihood that the wrong will be repeated." CFTC v. British Am. Commodity Options Corp., 560 F.2d 135, 141 (2d Cir. 1977). Plaintiff need not show irreparable harm or the inadequacy of alternative remedies. Id. To establish liability for fraud in connection with the sale of commodity options, CFTC must establish "(1) the making of a misrepresentation, misleading statement, or a deceptive omission; (2) scienter; and (3) materiality. CFTC v. R.J. Fitzgerald & Co., Inc., 310 F.3d 1321, 1328 (11th Cir. 2002). Solicitations that advise prospective customers of the potential for large profits without also disclosing that the majority of customers lose money trading commodity options may constitute fraudulent misrepresentations. Id. at 1332-1333. "Whether a misrepresentation has been made depends on the overall message and the common understanding of the information conveyed." Id. at 1328 (internal quotation omitted). A "boilerplate" risk disclosure statement will not necessarily preclude liability where the overall message is objectively misleading. Id. at 1330.
At the hearing, plaintiff presented testimony from a former employee of CIG, James Connellan. Connellan testified that he and other CIG brokers were given scripts to use during sales calls, and that these scripts touted profit ratios of between 30% and 80%. (Tr. 9-10, 18-19). Connellan testified that the scripts were provided by Linda and Michael Kuhney, and that the Kuhneys trained him and the other brokers on their sales pitches. (Tr. 8-12). The CFTC also provided 15 declarations from CIG customers who attested to misleading sales pitches by CIG employees. (See, e.g., Declaration of Norman Fisher, dated March 5, 2005, ¶¶ 3,6 (stating that both Linda Kuhney and a CIG broker told him to expect 50% profits on his investment and that Linda Kuhney advised him to sell stocks in a retirement fund and to use the money to trade options with CIG)). In addition, CFTC investigator Eliud Ramirez testified that approximately 94% of CFTC customers lost money between 2001 and 2004. (Tr. 51).
In response, defendants presented the testimony of two CIG customers, Robert Johnson and Dale Danner, who testified that they were satisfied with their experience trading with CIG and that CIG had fully disclosed the risks involved with their investments. (Tr. 115-119, 127-132). Linda Kuhney testified that CIG had received very few customer complaints, (Tr. 73), and she disputed the assertions made in several of the customer declarations. (Tr. 84-87). Defendants also presented the testimony of Janell Breig-Wright, CIG's president and compliance director. Breig-Wright testified that the account opening documents regularly provided to CIG customers contained detailed risk disclosures, and that new customers underwent a tape-recorded telephone compliance interview during which the risks of investing were explained. (Tr. 143). Defendants played the tapes of two compliance calls with customers who were ultimately rejected by CIG as unsuitable to trade options. (Tr. 175-76, 182-83).*fn3
I find that the testimony and other evidence produced at the hearing, while far from overwhelming, meets the minimal requirements for a prima facie showing of material misrepresentations to customers in violation of section 4c(b) of the Act and that there is a "reasonable likelihood" that these violations would be repeated. See British Am., 560 F.2d at 141. Therefore, CFTC is entitled to a preliminary injunction with respect to a prohibition on further violations of the Act and the preservation of records relevant to this proceeding.
The next item to be considered, and indeed the only matter truly in dispute, is the CFTC's request for an asset freeze. The CFTC is entitled to an asset freeze pending the resolution of an enforcement action when "necessary to ensure that the assets will be available to compensate public customers" or "to preserve the status quo while an investigation is conducted to clarify the sources of various funds." CFTC v. Morgan, Harris & Scott Ltd., 484 F. Supp. 669, 678 (S.D.N.Y. 1979). See also Securities and Exchange Comm'n v. Unifund S.A.L., 910 F.2d 1028, 1041 (2d Cir. 1990) (affirming temporary freeze order prior to resolution of SEC enforcement action); CFTC v. Muller, 570 F.2d 1296, 1300 (5th Cir. 1978) (affirming asset freeze in connection with preliminary injunction).
Here, the CFTC seeks to preserve funds because the ultimate relief it seeks includes disgorgement. See CFTC v. American Metals Exchange Corp., 991 F.2d 71, 76 n.9 (3rd Cir. 1993) (noting that disgorgement is available as a remedy in enforcement actions brought by the CFTC). However, the CFTC has not provided any specific information regarding the amount of funds possessed by either CIG or the Kuhneys that may be subject to disgorgement.*fn4 Furthermore, the CFTC waited three months after filing the complaint in this action to seek a preliminary injunction. Thus, there is a significant possibility that any "dissipation" of funds has already occurred. Put another way, it is likely that by now the genie is out of the bottle. Nonetheless, defendants have indicated that they are willing to consent to a freeze of CIG's assets. (See Tr. 69). Therefore, I will order an asset freeze with respect to CIG, but decline to do so with respect to Linda or Michael Kuhney's personal assets.
For the reasons set forth above, plaintiff's motion for a preliminary injunction is GRANTED. ...