Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-15-01467/USCOURTS-ca7-15-01467-0/pdf.json

Parties Involved:
Commodity Futures Trading Commission
Appellee
Monex Credit Company
Appellant
Monex Deposit Company
Appellant
Newport Service Corporation
Appellant

Document Text:

In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 15-1467

COMMODITY FUTURES TRADING COMMISSION,

Plaintiff-Appellee,

v.

MONEX DEPOSIT COMPANY, MONEX CREDIT COMPANY, and 

NEWPORT SERVICE CORPORATION,

Defendants-Appellants.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 14 C 6131 — Ronald A. Guzmán, Judge.

____________________

ARGUED SEPTEMBER 16, 2015 — DECIDED JUNE 1, 2016

____________________

Before POSNER, EASTERBROOK, and WILLIAMS, Circuit 

Judges.

EASTERBROOK, Circuit Judge. The Commodity Futures 

Trading Commission regulates contracts concerning commodities for future delivery when offered on margin or another form of leverage. 7 U.S.C. §2(c)(2)(D)(i)(II), (iii), §6, §6b. 

But the statute creates an exception for a contract that “results 

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in actual delivery within 28 days or such other longer period 

as the Commission may determine by rule or regulation based 

upon the typical commercial practice in cash or spot markets 

for the commodity involved”. 7 U.S.C. §2(c)(2)(D)(ii)(III)(aa).

The CFTC opened an investigation to determine whether 

the precious-metals business conducted by Monex Deposit 

Co. and affiliates comes within this exception. Monex refused 

to comply with a subpoena, arguing that since 1987, when it 

adopted its current business model (which it calls the Atlas 

program), the CFTC has deemed its business to be in compliance with all federal rules—and Monex adds that because (in 

its view) it satisfies the exception, the Commission lacks authority even to investigate. The district court enforced the subpoena, however, and Monex turned over the documents. It 

filed this appeal seeking to have them returned, and it also 

wants the court to enjoin the CFTC from using them in any 

enforcement proceeding. These potential remedies mean that 

the proceeding is not moot. See Church of Scientology v. United 

States, 506 U.S. 9 (1992).

It is clear to us, as it was to the district court, that Monex

is using its opposition to the subpoena as a means to get a judicial decision on the merits of its statutory argument, before 

the CFTC makes a substantive decision. That is impermissible. The propriety of an agency’s action is reviewed after the 

final administrative decision. FTC v. Standard Oil Co. of California, 449 U.S. 232 (1980); Army Corps of Engineers v. Hawkes 

Co., No. 15–290 (U.S. May 31, 2016). A contention that the 

agency lacks “jurisdiction” does not change this timing rule. 

Nor does contesting the agency’s jurisdiction change the rules 

for determining when a subpoena must be enforced. See Endicott Johnson Corp. v. Perkins, 317 U.S. 501, 509 (1943); EEOC 

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No. 15-1467 3

v. Sidley Austin Brown & Wood, 315 F.3d 696, 699–701 (7th Cir. 

2002).

An administrative agency is entitled to gather information 

that is “reasonably relevant” to an inquiry within its purview.

United States v. Morton Salt Co., 338 U.S. 632, 652 (1950); see 

also, e.g., EEOC v. Aerotek, Inc., 815 F.3d 328 (7th Cir. 2016). 

The Commission’s subpoena sought from Monex information 

such as how much gold and silver it holds in inventory and 

what portion of its customers accepts delivery within 28 days. 

These and similar facts bear on the statutory exceptions. If 

customers rarely take delivery but instead trade their positions with each other (or sell them back to Monex), then the 

CFTC may be authorized to treat Monex as a futures merchant rather than leave it unregulated as a retail seller of metals. If Monex lacks enough inventory to deliver on all of its

contracts, it may be acting more like a bank in a system of 

fractional-reserve banking (as the Federal Reserve did in the 

days when the United States adhered to the gold standard but 

lacked enough gold to pay off every bit of paper currency). 

Monex tells us that it has on hand metals enough to fulfill all 

contracts, and that its customers always take delivery (at least 

in the sense that metals are transferred to a depository until 

the full price is paid). If so, Monex may prevail in any enforcement action. But it has not given a good reason why the CFTC 

is forbidden even to gather the facts that will show whether

the exception applies.

As Monex sees things, all the Commission is concerned 

about is leverage. Some of its customers sign contracts for the 

delivery of precious metals without paying in full. (The CFTC 

disclaims any interest in contracts that are paid up when entered into.) When a customer pays less than the full price, 

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Monex transfers the metal to a depository that holds it as collateral. This satisfies the requirement of delivery in 28 days, 

Monex submits. If final payment is never made, the customer 

won’t get any metal—but that, Monex insists, does not take it 

outside the scope of §2(c)(2)(D)(ii)(III)(aa). For its part, the 

Commission observes that selling commodities on margin or 

other credit (= leverage) is what brings a business within the 

statute, see §2(c)(2)(D)(i)(II), and that to take advantage of the 

exception the business must deliver to the customer—otherwise, the Commission believes, it is engaged in a form of trading “in the contract” that is similar to futures on the Chicago 

Board of Trade and other exchanges. If the customers can 

trade their entitlements before full payment, and while the 

metals remain on deposit, this may be a form of speculation 

or hedging that the CFTC can regulate. The nature of this toand-fro reinforces our view that the fight over the subpoena 

is just a proxy for the dispute about what 

§2(c)(2)(D)(ii)(III)(aa) means. It would be premature to resolve 

that dispute, which must await the final decision in the Commission’s enforcement proceeding.

That Monex began its Atlas program in 1987 (relying on 

guidance that the agency had provided in 1985), and that the 

CFTC deemed Atlas satisfactory until recently, is not a sufficient answer to the subpoena—or for that matter to an enforcement action. The law changed in 2010, when 7 U.S.C. 

§2(c) was rewritten as part of the Dodd-Frank Act. Pub. L. No. 

111-203 §742, 124 Stat. 1376, 1732–33 (2010). The language 

quoted in this opinion’s first paragraph is from the revision. 

The amendments took effect in 2011, and two years later the 

Commission laid out its views about how they affect retail 

commodity sales. Retail Commodity Transactions Under 

Commodity Exchange Act, 78 Fed. Reg. 52426 (Aug. 23, 2013). 

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Monex insists that it is entitled to prevail under both the statutory text and the CFTC’s published interpretation. Maybe so, 

but the CFTC is entitled to investigate how a change in governing law and its regulatory approach applies to a merchant 

that sells commodities on credit. That’s all it has done—so far. 

To repeat, it is premature to decide whether Monex is right in 

its understanding of the exception in §2(c)(2)(D)(ii)(III)(aa).

We said in Sidley Austin Brown & Wood that the district 

court should resolve a question of statutory coverage before 

enforcing a subpoena, because it was not established that the 

agency had any role to play and thus it was possible that the 

information sought was not relevant. But there is no doubt 

that §2(c)(2)(D)(i) presumptively brings the Atlas program 

within the agency’s remit and so entitles it to information that 

is relevant to resolving a dispute about the exemption in 

§2(c)(2)(D)(ii)(III)(aa).

Throughout this litigation, the Commission has relied on

CFTC v. Hunter Wise Commodities, LLC, 749 F.3d 967 (11th Cir. 

2014), which held that a retail metals dealer that implemented 

a program considerably different from Atlas (Hunter Wise 

did not carry any inventory of metals) was within the scope of 

§2(c)(2)(D)(i) and not excluded by §2(c)(2)(D)(ii)(III)(aa). 

Monex believes that the Commission misunderstands Hunter 

Wise and that the Eleventh Circuit’s decision favors its position. Once again this shows that the parties’ clash is only nominally about the subpoena and actually concerns the merits. In

Hunter Wise a district court issued an injunction blocking the 

trading program. In affirming that injunction, the Eleventh 

Circuit necessarily reached the merits of how the 2010 amendments apply to a metals-trading program in which no metals 

change hands, and all gains and losses depend on trading 

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contracts. Monex may be right that the Atlas program is dispositively different, but that’s a question for an enforcement 

proceeding. The only question before us is whether the information the CFTC wanted (and now has obtained) is relevant 

to such a proceeding. It is.

AFFIRMED

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