In reversing the district court’s decision, the appellate court hands the Commission a major victory in this high-profile case interpreting the market reform legislation’s actual delivery exception and "manipulative or deceptive device" language. A Ninth Circuit panel reversed the district court’s dismissal of the CFTC’s enforcement action against Monex Credit Company, its affiliated companies, and its principals for alleged fraud in precious metals sales and remanded the matter further proceedings. The appellate court ruled that Monex failed to carry its burden of proof in establishing the applicability of the actual delivery exception, which served as the basis for the lower court dismissing three counts of the complaint. With respect to another complaint count, the court held that the CFTC did not have to establish that Monex manipulated the market. Rather, the fraud action could proceed based on the Commission’s allegation that the defendants had simply engaged in fraudulent conduct (CFTC v. Monex Credit Company, July 25, 2019, Siler, E.).
Charges brought, legislative background, and case history. Monex sells precious metals to investors through its Atlas Program, whereby investors can purchase commodities on margin, which is also sometimes referred to as a leveraged basis. The CFTC originally filed its complaint against Monex in the Northern District of Illinois in September 2017, charging the defendants with defrauding thousands of retail customers nationwide out of hundreds of millions of dollars while executing thousands of illegal, off-exchange leveraged commodity transactions.
The CFTC’s complaint was based upon provisions contained in the Dodd-Frank Act enacted in 2010 which extended the Commodity Exchange Act (CEA) to commodity transactions offered on a leveraged or margined basis as if they were futures trades. Congress had also carved out an exception providing that the CEA did not apply to leveraged retail commodity sales that result in "actual delivery" within 28 days.
Soon after the CFTC action was filed, Monex filed a motion to dismiss for failure to state a claim. The Illinois district court transferred the case to the Central District of California about one month later. In May 2018, the California district court dismissed the complaint, ruling that Monex’s practice of delivering precious metals to independent depositories within 28 days of their purchase by retail customers on margin fell within the "actual delivery exception" set forth in the CEA. The district court also held that CEA does not prohibit fraud in connection with a contract of sale of a commodity unless the defendant has also attempted to commit market manipulation.
Actual delivery exception does not apply. The panel unanimously held that the actual delivery exception was an affirmative defense for which the broker bore the burden of proof. The panel further held that actual delivery required at least some meaningful degree of possession or control by the customer. In addition, the panel held that here, metals were in the broker’s chosen depository, never exchanged hands, were subject to the broker’s exclusive control, and that customers had no substantial, non-contingent interests. As a consequence, the panel concluded that this affirmative defense did not, on the face of the complaint, bar the CFTC from relief on three counts of the complaint, and the district court erred in dismissing those claims.
Statute does not require manipulation The panel also ruled that the CEA prohibits fraud regardless of whether there has also been market manipulation and that the CFTC is entitled to take appropriate enforcement action when such fraud occurs. Specifically, the court rejected Monex’s assertion that language in the Dodd-Frank amendments to the CEA prohibiting a party from using or employing "any manipulative or deceptive device" actually means "any manipulative and deceptive device." The panel found Monex’s construction to be untenable, reasoning that "When Congress places ‘or’ between two words, we assume that Congress intended the two terms as alternatives."
CFTC leadership speaks out. CFTC Chairman Heath P. Tarbert was pleased with the ruling, stating, "I congratulate our appellate and enforcement teams for their many months of hard work on this case. Not only is this outcome a victory for the victims of this fraudulent scheme—who were in many cases elderly Americans who lost their life savings—it reinforces the broad anti-fraud authority Congress gave our agency under the Dodd-Frank Act." He added, "The CFTC will continue to stand up for everyday Americans who rely on the financial products we regulate."
CFTC Deputy General Counsel for Litigation Robert A. Schwartz, the attorney who argued the case for the Commission, stated, "We are very pleased with the Ninth Circuit’s decision. This is the right result, and it is important for the CFTC’s continuing efforts to protect customers and fight fraud in commodity markets. We look forward to resuming this enforcement action in the district court."
In its continuing litigation, the CFTC seeks disgorgement of ill-gotten gains, restitution for the benefit of defrauded customers, civil monetary penalties, permanent registration and trading bans, and a permanent injunction from future violations of federal commodities laws, as charged. Attorneys: Robert Alexander Schwartz for the CFTC. Neil A. Goteiner (Farella Braun + Martel LLP) for Monex Credit Co.
Companies: Monex Credit Company; Monex Depository Company
The case is No. No. 18-55815.
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