Securities Regulation Daily Wrap Up, COMMODITY FUTURES—N.D. Ill.: Judge upholds fast-acting jury’s verdict that individual failed to register as CPO, (Sept. 21, 2017)
Thursday, September 21, 2017

Securities Regulation Daily Wrap Up, COMMODITY FUTURES—N.D. Ill.: Judge upholds fast-acting jury’s verdict that individual failed to register as CPO, (Sept. 21, 2017)

By Mark S. Nelson, J.D.

It took only 90 minutes for a Chicago jury one year ago to find that Grace Reisinger violated the Commodity Exchange Act by failing to register as a commodity pool operator. Despite voicing some misgivings about the jury’s "unusually brief" deliberations, the district court found the CFTC’s evidence against Reisinger substantial enough to uphold the verdict under CEA Section 4m(1) and CFTC Regulation 4.13(a)(3)(iii) against Reisinger’s bid for a new trial or for judgment as a matter of law. All told, Reisinger and the firm she controlled, ROF Consulting, LLC, were ordered to pay a combined $2.06 million in disgorgement, restitution and civil penalties (CFTC v. Reisinger, September 19, 2017, Gottschall, J.).

Evidence sufficient. Reisinger had argued that she was not a CPO. The CEA and related CFTC regulation prohibit persons from acting as CPOs unless they are registered with the Commission. But the law and regulation also provide for an exemption where the "person reasonably believes, at the time of investment ... that each person who participates in the pool is," among other things, an accredited investor or qualified eligible participant.

In Reisinger’s case, the court concluded that a jury could find that not all pool participants were eligible. The court also rejected Reisinger’s argument that her notice of exemption form was somehow late being filed. Instead, the court credited the CFTC’s argument that the filing of the form was irrelevant because Reisinger was never entitled to an exemption from CPO registration.

Kokesh argument inapt. Reisinger argued that the Supreme Court’s recent decision in Kokesh, which held disgorgement in an SEC case was a penalty for purposes of the general federal statute of limitations, should likewise bar the CFTC’s request for disgorgement against her. Reisinger cited a footnote in Kokesh in which the Supreme Court declined to opine on whether the statute at issue authorized the SEC to seek disgorgement.

The court quickly dispatched Reisinger’s assertion for two reasons: (1) the Supreme Court decided nothing about the question in its Kokesh footnote; and (2) the CEA expressly authorizes the CFTC to seek disgorgement and restitution. Dodd-Frank Act Section 744 added these provisions to the CEA.

With respect to the limitations period, the court previously held that the CFTC could not seek remedies for Reisinger’s alleged conduct before June 29, 2006. Reisinger never made a serious attempt to argue the limitations issue even though the court could have heard such arguments.

Legal or equitable remedies? Reisinger also launched an attack on the CFTC’s disgorgement and restitution claims based on one court’s restrictive interpretation of the Employee Retirement Income Security Act of 1974 that distinguished between legal and equitable restitution. Reisinger argued that she no longer possesses the funds the CFTC seeks via restitution and disgorgement and, thus, the CFTC seeks legal variants of these remedies rather than the "[e]quitable remedies" mentioned in the title to the subparagraph in CEA Section 6c(d)(3) where the CFTC’s authority resides.

But the court rejected this assertion. Rather, the court said the CEA authorizes restitution beyond specific funds held by an individual and would extend the remedy to "restitution to persons who have sustained losses proximately caused by such violation (in the amount of such losses)." Likewise, disgorgement would extend to "gains received in connection with such violation" (the court’s opinion emphasized the word "gains").

Penalties. The CFTC initially asked the court to impose civil penalties of $3.12 million against Reisinger and $1.04 million against ROF Consulting. After mulling myriad factors and calculating the maximum statutory penalty amounts, the court decided that, among other things, Reisinger’s negative net worth favored a penalty set at 10 percent of her financial gain or $64,124; the court awarded the CFTC its requested amount regarding ROF Consulting.

Moreover, the court ordered disgorgement by Reisinger ($153,355) and ROF Consulting ($344,108). Reisinger also was ordered to pay restitution of $497,894. Lastly, Reisinger is subject to a permanent injunction against future violations and a trading ban, which the court said were justified by her involvement in a previously settled court case brought by the CFTC in which she agreed to pay $50,000 for recordkeeping violations.

The case is No. 11-cv-08567.

Attorneys: Danielle Edward Karst for the CFTC. Michael D. Carper (Burd and Carper Attorneys at Law) for Grace Elizabeth Reisinger.

Companies: ROF Consulting, LLC

LitigationEnforcement: CommodityFutures DoddFrankAct Enforcement FormsFilings FraudManipulation IllinoisNews

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