Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-73294/USCOURTS-ca9-13-73294-0/pdf.json

Parties Involved:
Chenli Chu
Petitioner
U.S. COMMODITY FUTURES TRADING COMMISSION
Respondent

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CHENLI CHU,

Petitioner,

v.

U.S. COMMODITY FUTURES

TRADING COMMISSION,

Respondent.

No. 13-73294

CFTC No. 07-R029

OPINION

On Petition for Review of an Order of the

Commodity Futures Trading Commission

Submitted November 17, 2015*

San Francisco, California

Filed May 25, 2016

Before: M. Margaret McKeown, Johnnie B. Rawlinson,

and Andre M. Davis,** Circuit Judges.

Opinion by Judge McKeown

* The panel unanimously concludes this case is suitable for decision

without oral argument. See Fed. R. App. P. 34(a)(2).

** The Honorable Andre M. Davis, Senior Circuit Judge for the U.S.

Court of Appeals for the Fourth Circuit, sitting by designation.

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 1 of 13
2 CHU V. COMMODITY FUTURES TRADING COMM’N

SUMMARY***

Commodity Futures Trading Commission

The panel denied an investor’s petition for review of an

order of the Commodity Futures Trading Commission

(“CFTC”), determining that an independent commodity

trading advisor “had actual knowledge and apparent

authority” to conduct certain trades of commodities futures

on behalf of the investor.

The panel held that it reviews CFTC’s findings under

7 U.S.C. § 9 for substantial evidence. The panel also held

that substantial evidence supported CFTC’s decision that the

independent commodity trading advisor made no material

misrepresentation or omission, that there was no unauthorized

trading, and that the record did not support a finding of fraud.

COUNSEL

Robert E. Thompson, San Francisco, California, for

Petitioner.

Jonathan L. Marcus, General Counsel, Robert A. Schwartz,

Deputy General Counsel, Mary T. Connelly, Assistant

General Counsel, Commodity Futures Trading Commission,

Washington, D.C., for Respondent.

 

*** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 2 of 13
CHU V. COMMODITY FUTURES TRADING COMM’N 3

OPINION

McKEOWN, Circuit Judge:

This appeal arises from the Commodity Futures Trading

Commission’s (“CFTC” or “Commission”) determination

that an independent commodity trading advisor “had actual

and apparent authority” to conduct certain trades of

commodities futures on behalf of an investor. Chenli Chu, a

retiree with significant trading experience, received $500,000

following her husband’s death. After consultation with

Jennifer Huang, her long-time commodity trading advisor,

and James Kelly, an account executive at her futures

commission merchant (“FCM”), Peregrine Financial Group

(“Peregrine”), Chu decided to place the funds in a new

account with Peregrine.1 Chu claims Kelly and Peregrine

disregarded her account instructions and permitted Huang to

conduct unauthorized trades in the account, in violation of

7 U.S.C. § 6b(a) and 17 C.F.R. §§ 166.2–166.3. The initial

decision by the Administrative Law Judge (“ALJ”) was in

favor of Chu, but the CFTC reversed. We deny the petition

for review of the CFTC’s Order.

BACKGROUND

Chu traded commodities with Huang for fifteen years

before she opened the first of six trading accounts at

1 A commodity trading advisor is an individual who, for compensation,

advises others on the trading of commodity futures and other financial

instruments. 7 U.S.C. § 1a(12). An FCM is an entity that solicits or

accepts orders and money for the purchase or sale of commodity futures.

7 U.S.C. § 1a(28); First Am. Disc. Corp. v. CFTC, 222 F.3d 1008, 1010

(D.C. Cir. 2000) (“An FCM is the commodity market’s equivalent of a

securities brokerage house . . . .”).

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 3 of 13
4 CHU V. COMMODITY FUTURES TRADING COMM’N

Peregrine. Huang acted as her trading agent and commodity

trading advisor and dealt with Kelly, a senior vice president

for business development at Peregrine. For her first Peregrine

account, Chu signed a customer agreement and risk

disclosure statement. For the next four accounts, following

standard industry practice, she signed a generic second

account request form that authorized Peregrine “to use the

account forms that [Chu had] already executed [for an older

account] as the account forms for the new account” and

provided that “all statements in those forms shall apply to the

new account as if [Chu] had executed a complete set of new

forms.”

Chu also signed limited power of attorney documents for

two accounts, naming Huang as Chu’s trading agent and

authorizing Peregrine to follow Huang’s instructions in

almost “every respect.” Chu expanded that power of attorney

by granting Huang blanket trading authority on all accounts

with Peregrine, “as well as any future accounts that I might

open.” With those authorizations in place, both Chu and

Huang regularly placed trading orders in Chu’s accounts,

with Chu closely monitoring activity and occasionally

sending Kelly specific instructions.

After the death of her husband, Chu raised the idea of

generating interest from the $500,000 she received. Kelly

advised her that to earn interest, she would have to move

money to one of her existing accounts, or to a new account to

purchase a TreasuryBill (“T-Bill”). On March 18, 2005, Chu

opened the account that is the subject of this appeal. She

signed a standard second account request form, stating that

Peregrine should open the account incorporating forms from

one of her older accounts. On that form she added

handwritten instructions to “move $500K T-Bill” to the

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 4 of 13
CHU V. COMMODITY FUTURES TRADING COMM’N 5

account, though she never ordered a T-Bill. She also wrote

that commissions and fees for trades in the account would be

fifty cents “one way” for each buy or sell order. She further

asked Peregrine to “link margin” for the account and two

others, meaning that Chu authorized Peregrine to move assets

among the three accounts to satisfy margin calls for trading

losses.

On March 21, 2005, $500,000 was transferred to the new

account and multiple transactions were later conducted using

Chu’s unique electronic access key or by Huang via phone. 

Chu disputed only one of the trades at the time. By early

June 2005, Chu had suffered a net loss of over $500,000, and

Huang sent an email to Kelly requesting that the account be

closed.

Two years later, Chu filed an administrative complaint

against Peregrine and Kelly, alleging that she had opened the

account to earn interest, not to trade, and that Kelly and

Peregrine had ignored her instructions and permitted

unauthorized trading. The ALJ agreed, finding that: (1)

Peregrine and Kelly executed unauthorized trades requested

by Huang, who lacked actual and apparent authority; (2)

Peregrine failed to supervise the account; and (3) Peregrine

and Kelly recklessly failed to follow Chu’s instructions and

failed to disclose material facts. Those violations resulted in

a loss to Chu of $500,000.

The CFTC stayed Chu’s claims with respect to Peregrine

pending the outcome of its bankruptcy proceedings.2 The

2 The automatic stay provision of the bankruptcy code, 11 U.S.C.

§ 362(a)(1), was in place because Peregrine filed for bankruptcy while the

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 5 of 13
6 CHU V. COMMODITY FUTURES TRADING COMM’N

CFTC reversed as to Kelly, finding ample undisputed

evidence that Huang had actual and apparent authority to

conduct the trades at issue with funds deposited in the

account. The CFTC further concluded that Kelly had not

misrepresented that a T-Bill would be purchased and that the

funds would remain untraded.

ANALYSIS

I. STANDARD OF REVIEW

We first address the standard of review. When enacted in

1922, 7 U.S.C. § 9 provided that “findings of the commission

as to the facts, if supported by the weight of evidence, shall

in like manner be conclusive.” Grain Futures Act, ch. 369,

§ 6(b), 42 Stat. 998, 1002 (1922) (codified as amended at

7 U.S.C. § 9). This provision was first enacted as part of the

Grain Futures Act. The Commission now referred to in

7 U.S.C. § 9 is the CFTC, a successor of the Grain Futures

Administration. Commodity Futures Trading Commission

Act of 1974, Pub. L. No. 93-463, 88 Stat. 1389 (codified as

amended at 7 U.S.C. § 9). With respect to the CFTC, we

reiterated the evidentiary standard: “[o]n appeal to this court,

the factual findings of the CFTC are conclusive ‘if supported

by the weight of evidence.’” Morris v. CFTC, 980 F.2d 1289,

1292 (9th Cir. 1992) (citing 7 U.S.C. § 9). We interpreted the

“weight of evidence” standard as equivalent to the

appeal before the CFTC was pending. As Chu acknowledges, her claims

against Peregrine are not before this court.

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 6 of 13
CHU V. COMMODITY FUTURES TRADING COMM’N 7

preponderance of the evidence test. Id. (citing DohmenRamirez v. CFTC, 837 F.2d 847, 856 (9th Cir. 1988)).3

In 2010, § 9 was amended by the Dodd-Frank Wall Street

Reform and Consumer Protection Act (“Dodd-Frank”), Pub.

L. No. 111-203, § 753(a), 124 Stat. 1376, 1750–54 (2010). 

The revised section grants the courts of appeals authority to

“affirm, set aside, or modify [an] order of the Commission”

but, unlike the previous iteration, does not specify a standard

of review. See 7 U.S.C. § 9(11)(B)–(C).

Although the text is unambiguous, we note that DoddFrank’s legislative history provides no insight into the

rationale for dropping the “weight of evidence” standard. 

The House version of the legislation did not amend 7 U.S.C.

§ 9 at all. H.R. 4173, 111th Cong. (as passed by House, Dec.

11, 2009). Instead, the text of Section 753 was first

introduced as an amendment to the draft bill in the Senate on

3 Not all circuits agreed that “weight of evidence” equated to the

preponderance standard. Compare Crothers v. CFTC, 33 F.3d 405, 409

(4th Cir. 1994) (“Under this standard we will uphold the Commission’s

findings if we deem them to have been justified.”), Purdy v. CFTC, 968

F.2d 510, 518–19 (5th Cir. 1992) (applying substantial evidence review),

and Gimbel v. CFTC, 872 F.2d 196, 199 (7thCir. 1989) (stating that under

the weight of evidence standard, the court “will uphold the Commission’s

findings if we deem them to have been justified”), with Guttman v. CFTC,

197 F.3d 33, 39 (2d Cir. 1999) (“These liability findings are conclusive if

supported by the weight, or preponderance, of the evidence.”), JCC, Inc.

v. CFTC, 63 F.3d 1557, 1564 (11th Cir. 1995) (“This standard requires

that the factual findings be supported by the preponderance, or greater

weight, ofthe evidence.”), and Monieson v. CFTC, 996 F.2d 852, 858 (7th

Cir. 1993) (relying on the weight of evidence as the standard of review

without further definition, but noting that “[s]everal courts have equated

the ‘weight of the evidence’ standard with the ‘preponderance of the

evidence’ standard used in other contexts”).

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 7 of 13
8 CHU V. COMMODITY FUTURES TRADING COMM’N

May 4, 2010, largely in its final form, but retaining the

“weight of evidence” standard of review. 111 Cong. Rec.

S3100 (daily ed. May 4, 2010) (statement of Sen. Maria

Cantwell). That amending language was adopted in the final

version passed by the Senate on May 20, 2010, again with the

standard of review intact. H.R. 4173, 111th Cong. (as passed

by Senate, May 20, 2010). During the reconciliation process,

however, the standard of review was stripped out. See H.R.

Rep. 111-517, at 386. Not only was the standard deleted, the

Conference Committee also revised the first half of the final

sentence in section 753, from which it deleted the standard of

review, replacing the language that an appropriate court

“shall have jurisdiction to affirm, set aside, or modify the

order of the Commission” with language that a court “may 

affirm, set aside, or modify the order of the Commission.”

Compare H.R. 4173, 111th Cong. at 868 (Conference Report)

(emphasis added), with H.R. Rep. 111-517, at 386 (emphasis

added).

It bears noting that other provisions of Dodd-Frank do

make specific reference to a standard of review. For

example, § 718, which concerns determination of the status

of novel derivative products, states that, on review, “[t]he

court, in considering a petition filed pursuant to paragraph

(1), shall give no deference to, or presumption in favor of, the

views of either Commission.” § 718(b)(3), 124 Stat. at 1654

(codified at 15 U.S.C. § 8306(b)(3)). Section 748 creates a

new CFTC whistleblower program and specifies that courts

of appeals should review award determinations by the CFTC

“in accordance with section 706[] of title 5, United States

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 8 of 13
CHU V. COMMODITY FUTURES TRADING COMM’N 9

Code.”4See § 748, 124 Stat. at 1742 (codified at 7 U.S.C.

§ 26); see also § 922(a), 124 Stat. at 1844 (codified at 15

U.S.C. § 78u-6(f)) (creating a similar program for the

Securities and Exchange Commission and also providing that

awards should be reviewed “in accordance with section 706

of Title 5”).

In light of the plain text of the statute, the precise

revisions of the Conference Committee and Congress’s

inclusion of a standard of review in other parts of the statute,

we read the deletion of the “weight of evidence” standard as

purposeful, not accidental. Thus we have no license to

disregard the plain text of the statute. “Only when it is

patently obvious to a reasonable reader that a draftingmistake

has occurred may a court correct the mistake.” King v.

Burwell, 135 S. Ct. 2480, 2504–05 (2015). Such is not the

case here. It is “‘beyond our province to rescue Congress

from its drafting errors, and to provide for what we might

think . . . is the preferred result.’” Lamie v. U.S. Tr., 540 U.S.

526, 542 (2004) (alteration in original) (quoting United States

v. Granderson, 511 U.S. 39, 68 (1994) (concurring opinion)). 

Where Congress does not specify a standard of review, an

agency’s factual findings are reviewed for substantial

evidence under the Administrative Procedure Act, 5 U.S.C.

§ 706. See Dickinson v. Zurko, 527 U.S. 150, 154 (1999)

(holding that a court reviewing agency action “must apply the

APA’s . . . review standards in the absence of an exception,”

in recognition of “the importance of maintaining a uniform

4 Section 748 states that determinations should be reviewed “in

accordance with section 7064 of title 5, United States Code,” which does

not exist. As noted in the published U.S. Code, the section 7064 reference

“probably should be ‘section 706.’” 7 U.S.C. § 26 (2012).

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 9 of 13
10 CHU V. COMMODITY FUTURES TRADING COMM’N

approach to judicial review of administrative action”);

Ninilchik Traditional Council v. United States, 227 F.3d

1186, 1194 (9th Cir. 2000) (“We read Justice Breyer’s

majority opinion in Dickinson to mean that § 706 of the APA

functions as a default judicial review standard.”); 3 Charles

H. Koch, Jr., Administrative Law and Practice § 8.10 (3d ed.

2010) (“Judicial review of agency action starts with the

judicial review sections of the APA . . . . These provisions

. . . act as an auxiliary to the judicial review expressly

established by that scheme or fill the void where the statutory

scheme fails to provide for review.”).

Section 706 provides that a reviewing court must “hold

unlawful and set aside agency action, findings, and

conclusions found to be . . . unsupported by substantial

evidence in a case subject to sections 556 and 557 of this title

or otherwise reviewed on the record of an agency hearing

provided by statute . . . .” 5 U.S.C. § 706(2). Under well

established principles of administrative law, “[s]ubstantial

evidence means more than a mere scintilla but less than a

preponderance; it means such relevant evidence as a

reasonable mind might accept as adequate to support a

conclusion.” Gebhart v. SEC, 595 F.3d 1034, 1043 (9th Cir.

2010) (citing NLRB v. Int’l Bd. of Elec. Workers, Local 48,

345 F.3d 1049, 1053–54 (9th Cir. 2003)). Although we

interpret § 9 as subject to the substantial evidence standard,

we would deny the petition under the preponderance standard

as well.

II. REVIEW OF CFTC PROCEEDINGS

The essence of Chu’s claim rests on a theory of

unauthorized trading, namely that she never gave permission

for Huang to conduct trades in the account and that Kelly, in

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 10 of 13
CHU V. COMMODITY FUTURES TRADING COMM’N 11

following Huang’s directives, violated 17 C.F.R. § 166.2. 

The regulation prohibits transactions by any futures

commission merchant or its associated persons unless the

customer gives (1) specific authorization, including the

precise interest and exact amount to be purchased or sold, or

(2) written general authorization “to effect transactions in

commodity interests for the account without the customer’s

specific authorization . . . .” 17 C.F.R. § 166.2. The FCM

may “make trades ordered by someone other than the

customer himself when that someone is designated by the

customer to control the customer’s account” or otherwise

“has either actual or apparent authority to make the trades.”

Peltz v. SHB Commodities, Inc., 115 F.3d 1083, 1088 (2d Cir.

1997).

Here, the CFTC’s conclusion that Huang had actual

authority to trade in the account is supported by substantial

evidence. Chu gave Huang blanket trading authority over any

future accounts, and when she opened the disputed account,

incorporated the power of attorney documents from an older

account.5 Those authorizations came in the context of a longstanding relationship between Chu and Huang, with Huang

trading on Chu’s behalf in her other Peregrine accounts. In

addition, close in time to opening the account in dispute, there

was a series of emails between Chu and Huang and Chu and

Kelly in which Chu confirmed that she wanted Huang to keep

trading for her. These affirmative grants of authority easily

 

5 Chu argues that Peregrine never ascertained whether she understood

the account opening documents. However, Chu regularly communicated

with Peregrine and Kelly through Huang and Huang’s staff, who

translated between English and Taiwanese, and Chu never claimed that

she did not understand a document or that something was inaccurately

translated.

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 11 of 13
12 CHU V. COMMODITY FUTURES TRADING COMM’N

fall within the definition of actual authority. Actual authority

“is created by direct manifestations from the principal to the

agent, and the extent of the agent’s actual authority is

interpreted in the light of all circumstances attending these

manifestations, including the customs of business, the subject

matter, any formal agreement between the parties, and the

facts of which both parties are aware.” Id. (citation omitted).

Chu’s fraud allegations fare no better. She claims that

Kelly encouraged her to open the account with the

representation that it would be used to generate interest

through the purchase of a $500,000 T-bill, but then ignored

her instructions and allowed the account to be traded to a total

loss.

Under 7 U.S.C. § 6b(a)(2), it is unlawful for a person to

“cheat or defraud” a customer through trades, or to willfully

“deceive or attempt to deceive the other person . . . .”

Liability under § 6b contains an element of scienter which is

more than “[m]ere negligence, mistake, or inadvertence.” 

Wasnick v. Refco, Inc., 911 F.2d 345, 348 (9th Cir. 1990).

This case appears to be—at worst—one of

misunderstanding on Chu’s part, not Kelly’s intentional

disregard for Chu’s instructions. Chu never ordered a T-Bill,

and had there been one in the account, Peregrine would have

had to cash the bill to satisfy margin calls.6 Chu’s

specification that “margin be linked” among the accounts was

6 Chu argues that the one-page account opening form did not contain a

required risk disclosure statement, but fails to acknowledge that the form

incorporated the risk disclosure statement for an older account. Chu used

the same account opening form for all of her older accounts without

objection.

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 12 of 13
CHU V. COMMODITY FUTURES TRADING COMM’N 13

thus inconsistent with her claim that the account was to be an

interest-only account. Nor did Kelly commit fraud in failing

to inform Chu that Huang was trading in the account. The

Commission noted in its Order that “Chu’s purported desire

to generate interest in the account and use a T-Bill from

another account . . . does not establish that Chu limited

Huang’s trading authority.” None of Chu’s emails to Kelly

reference any trading limitation, nor did the notation about

the T-Bill limit or change Chu’s explicit instructions, as

outlined above, that Huang had blanket trading authority. 

Chu was clearly aware of the ongoing trading, having

objected to one trade in which a risk manager had placed a

stop. Accordingly, substantial evidence supports the CFTC’s

decision that Kelly made no material misrepresentation or

omission, that there was no unauthorized trading, and that the

record does not support a finding of fraud.

PETITION DENIED.

 Case: 13-73294, 05/25/2016, ID: 9990306, DktEntry: 33-1, Page 13 of 13