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UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

AT TACOMA

UNITED STATES COMMODITY

FUTURES TRADING COMMISSION,

Plaintiff,

v.

JAMES A. MAGGIO; TRADE RISK

MANAGEMENT, LLC (Washington); and

TRADE RISK MANAGEMENT, LLC 

(Oregon),

Defendants.

CASE NO. C05-5766RJB

ORDER DENYING

DEFENDANTS’ MOTION FOR

SUMMARY JUDGMENT AND

DENYING DEFENDANTS’

MOTION TO DISMISS

This matter comes before the Court on the Defendants’ Motion for Summary Judgment

(Dkt. 53) and Defendants’ Motion to Dismiss Pursuant to Fed. R. Civ. P. 9(b) (Dkt. 56). The

Court has considered the pleadings filed in support of and in opposition to the motions and the

remainder of the file herein.

I. FACTUAL AND PROCEDURAL BACKGROUND

According to the complaint, the defendants sell a stock market analysis service known as

Sigma Band Charting through an internet website and materially misrepresent the risk and profitmaking ability of the service. Dkt. 1 at 2. The complaint alleges that the Defendants’ conduct

violates the Commodity Exchange Act, § 1 et seq., as amended, 7 U.S.C. § 1 et seq. (2002) (“the

Exchange Act”) and the Commodities Futures Trading Commission Regulations, 17 C.F.R. § 1 et

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seq. (2004) (“Commission Regulations”). Id. at 7. Specifically, the complaint alleges that the

Defendants’ made the following statements:

• with respect to profit, “That means a 99% chance of success – and profit” and

“What Would it be Worth to YOU, to Know – Not Guess, Not Hope, but Know

You Have a 99% Chance of Making Money, Every Time You Trade?”

• with respect to risk, “Charting Service that gives You the Tools to Trade with

Less Than 2% Risk,” and “Now, for the first time, it means being able to trade

knowing that you have only 1% chance of the market going against you.”

Id. Plaintiff alleges these statement violate Section 4o of the Exchange Act:

It shall be unlawful for a commodity trading advisor, associated person of a commodity

trading advisor, commodity pool operator, or associated person of a commodity pool

operator by use of the mails or any means or instrumentality of interstate commerce,

directly or indirectly--

(A) to employ any device, scheme, or artifice to defraud any client or participant or

prospective client or participant; or

(B) to engage in any transaction, practice, or course of business which operates as

a fraud or deceit upon any client or participant or prospective client or participant.

Exchange Act, § 4o(A), as amended, 7 U.S.C. § 6o(A). Additionally, Plaintiff alleges these

statement are also unlawful advertising under Commission Regulations:

 No commodity pool operator, commodity trading advisor, or any principal thereof, may

advertise in a manner which:

(1) Employs any device, scheme or artifice to defraud any participant or client or

prospective participant or client;

(2) Involves any transaction, practice or course of business which operates as a

fraud or deceit upon any participant or client or any prospective participant or

client;

17 C.F.R. § 4.41(a)

On August 10, 2007, the Defendants filed a Motion for Summary Judgment (Dkt. 53) and

a Motion to Dismiss Pursuant to Fed. R. Civ. P. 9(b) (Dkt. 56).

II. DISCUSSION

A. Summary Judgment

Summary judgment is proper only if the pleadings, depositions, answers to interrogatories,

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and admissions on file, together with the affidavits, if any, show that there is no genuine issue as

to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ.

P. 56(c). There is no genuine issue of fact for trial where the record, taken as a whole, could not

lead a rational trier of fact to find for the non moving party. Matsushita Elec. Indus. Co. v.

Zenith Radio Corp., 475 U.S. 574, 586 (1986) (nonmoving party must present specific,

significant probative evidence, not simply “some metaphysical doubt.”). See also Fed. R. Civ. P.

56(e). Conversely, a genuine dispute over a material fact exists if there is sufficient evidence

supporting the claimed factual dispute, requiring a judge or jury to resolve the differing versions

of the truth. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 253 (1986); T.W. Elec. Serv., Inc. v.

Pac. Elec. Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987).

The determination of the existence of a material fact is often a close question. The court

must consider the substantive evidentiary burden that the nonmoving party must meet at trial –

e.g., a preponderance of the evidence in most civil cases. Anderson, 477 U.S. at 254; T.W. Elec.

Serv., Inc., 809 F.2d at 630. The court must resolve any factual issues of controversy in favor of

the nonmoving party only when the facts specifically attested by that party contradict facts

specifically attested by the moving party. The nonmoving party may not merely state that it will

discredit the moving party’s evidence at trial, in the hopes that evidence can be developed at trial

to support the claim. T.W. Elec. Serv., Inc., 809 F.2d at 630 (relying on Anderson, supra).

Conclusory, non specific statements in affidavits are not sufficient, and missing facts will not be

presumed. Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 888-89 (1990). And, “mere allegation

and speculation do not create a factual dispute for purposes of summary judgment.” Nelson v.

Pima Community College, 83 F.3d 1075, 1081-82 (9th Cir. 1996).

Finally, once the moving party has raised an issue, based on the pleadings, the burden

shifted to the nonmoving party to make a sufficient showing on all essential elements of her claim. 

See Celotex Corp. V. Cartrett, 477 U.S. 317, 323-325 (1985). In addition, “[i]t is not our task,

or that of the district court, to scour the record in search of a genuine issue of triable fact. We rely

on the nonmoving party to identify with reasonable particularity the evidence that precludes

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summary judgment.” Richards v. Combined Ins. Co., 55 F.3d 247, 251 (7th Cir.1995).

Defendants advance six arguments in support of their motion for summary judgment: (1)

Plaintiff lacks evidence that Defendants are Commodity Trading Advisors; (2) Defendants are

exempt publishers under the Exchange Act; (3) Defendants did not have clients to defraud; (4)

Defendants’ statements were not material; (5) Plaintiff lacks evidence that Defendants’ statements

were offered with the intent to deceive, and; (6) Plaintiff lacks evidence that Defendants’

statements effected any of Defendants’ newsletter subscribers. Dkt. 53 at 3-4.

1. Commodity Trading Advisors

A Commodity Trading Advisor is defined as a person who, for compensation or profit,

engages in the business of advising others, either directly or through publications, writings, or

electronic media, as to the value of or the advisability of trading in commodity futures contracts

or commodity options. 7 U.S.C. § 1a(6). 

Defendants argue that Plaintiff has failed to produce evidence that Defendants are

Commodity Trading Advisors. Dkt. 53 at 5. On November 21, 2006, Plaintiff answered

Defendants’ interrogatories by stating that it had not identified any witness in connection with the

allegation that, while acting as Commodity Trading Advisors, Defendants violated the Exchange

Act and the Commission Regulations. Dkt. 54-4 at 13. Plaintiff also answered that it did not

have any additional evidence for this allegation. Id. While Plaintiffs’ lack of effort is not

dispositive, it sets the tone for the remainder of this motion. 

Although Plaintiff does have an obligation under Fed. R. Civ. Pro. 26(e) to supplement its

interrogatory answers, the Plaintiff is not bound to its initial discovery for the purposes of this

motion. See Fed. R. Civ. P. 56(e)(allowing supporting affidavits to supplement party’s

pleadings). Plaintiff did cite to admissions in the Defendants’ answer and attached other evidence

in opposition. Dkt. 59 at 4-6. This evidence creates a question of fact whether Defendants were

acting as Commodity Trading Advisors. Therefore, the Court should decline to grant Defendants’

motion for summary judgment on this issue.

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ORDER 

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2. Publisher’s Exemption

Defendants argue that, even if they are Commodity Trading Advisors, they are exempt

from the Exchange Act under the publisher’s exemption. Plaintiff counters that Defendants do

not qualify for the exemption because the material Defendants publish is more than incidental to

Defendants business.

Exemptions from the Exchange Act include “any news reporter, news columnist, or news

editor of the print or electronic media,” and “the publisher or producer of any print or electronic

data of general and regular dissemination.” 7 U.S.C. § 1a(6)(B). An exemption only applies,

however, “if the furnishing of such services by persons referred to in [the exemption] is solely

incidental to the conduct of their business or profession.” Id. § 1a(6)(C). 

Defendants argue that they qualify for the publisher exemption, citing Lowe v. SEC, 472

U.S. 181 (1985) and Ginsburg v. Agora, Inc., 915 F. Supp. 733 (D.Md. 1995). Dkt. 53 at 7. In

Lowe, the Supreme Court discussed and interpreted similar language regarding the exclusion of

“bona fide publications” from the Investment Advisors Act of 1940. Lowe, 472 U.S. at 207-211. 

While Lowe held that the Investment Advisors Act excluded certain publishers, the Supreme

Court has not considered the exemption of publishers from the Exchange Act. In Ginsburg, the

District Court of the District of Maryland relied on Lowe in holding that the publisher of an

investment newsletter was exempted from the Exchange Act. Ginsburg, 915 F. Supp. at 737. It

does not appear that the 9th Circuit has applied the publisher’s exemption in a factual situation

similar to the one before this Court.

Plaintiff argues that the publisher exemption is limited and that the exemption does not

include publication of trading information that is more than incidental to the Defendants’ business

or profession. Dkt. 59 at 7; see R&W Technical Services, Ltd. v. Commodity Futures Trading

Commission, 205 F.3d 165 (5th Cir. 2000)(software distributor was an impersonal publisher that

fell within the plain meaning of Commodity Trading Advisor). However, the court in R&W

recognized that lower courts are split on the issue of whether impersonal publishers are covered

by the Exchange Act. Id.

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In this case, even if Defendants can be considered impersonal publishers, Defendants have

not shown that their website advice and published information are incidental to their business. 

The website and publications are their business. Defendants’ website offers to subscribers a free

newsletter as well as subscription access to Sigma Band charts. Dkt. 53 at 1-2. The Court is not

persuaded by Defendants’ argument that this service is similar to the impersonal and incidental

advice one would receive from the Wall Street Journal. Dkt. 53 at 7. In summary, Defendants

have not shown that they are entitled to summary judgment on the issue of whether they are

exempt from the Exchange Act under the publisher’s exemption. Therefore, the Court should

deny Defendants’ motion for summary judgment on this issue.

3. Status of Subscribers

Defendants assert that their subscribers are not “clients” as defined in the Exchange Act. 

Plaintiff counters that the statutory term “client” extends to Defendants’ subscribers.

Commodity Trading Advisors are prohibited from either directly or indirectly employing

“any device, scheme, or artifice to defraud any client or participant or prospective client or

participant.” 7 U.S.C. § 4o(1)(A). In addition, Commodity Trading Advisors are prohibited from

engaging, either directly or indirectly, in “any transaction, practices or a course of business which

operated or operates as a fraud or deceit upon any client or participant or prospective client or

participant.” Id. § 4o(1)(B). The Commission Regulations contain nearly identical language and

prohibit Commodity Trading Advisors from advertising in a manner that violates the Exchange

Act. See 17 C.F.R. § 4.41(a)(1) and (2). The term “client” is not defined in either the Exchange

Act or the Commission Regulations. The term “participant” is defined in the Exchange Act and is

limited to large entities with substantial assets. See 7 U.S.C. § 1a(28).

Defendants argue that they are not subject to the Exchange Act because they have no

“clients.” Dkt. 53 at 7. Specifically, Defendants contend that the term “client” requires a more

personal relationship than the relationship Defendants had or have with their e-newsletter

subscribers. Id. at 7-8. Plaintiff not only has conveniently substituted the word “customer” for

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“client” in both the complaint and the opposition brief but also has failed to cite case law

interpreting usage of the term “client.” Dkt. 59 at 9. In fact, Plaintiff cites two cases in which the

court recognized the issue yet refused to rule on the definition of “client.” Id. at 10, citing R&W

Technical Servs. Ltd. v. CFTC, 205 F.3d 165, 173 n.26 (5th Cir. 2000) and CFTC v. Vartuli, 228

F.3d 94, 102 (2nd Cir. 2000). In light of the parties’ arguments, the Court recognizes that the

issue is a mixed question of statutory interpretation and facts relevant to the relationship between

the Defendants and their subscribers. Therefore, because summary judgment is not appropriate

when there remains an outstanding issue of material fact, the Court should deny the Defendants’

motion for summary judgment on this issue.

4. Materiality of Statements

“Whether a misrepresentation is material is ‘a mixed question of law and fact,’ involving

the ‘application of a legal standard to a particular set of facts’.” R&W, 205 F.3d at 169 citing

TSC Indus. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976).

Defendants argue that their statements were not material to the purchase or sale of

commodity futures. Dkt. 61 at 7. Although Defendants do not solicit trades or make buy/sell

recommendations, there are issues of fact as to whether their statements were material to the

purchase or sale of commodity futures. Therefore, the Court should decline to grant Defendants’

motion for summary judgment on this issue.

5. Violation of Exchange Act, Section 4b

The Exchange Act prohibits fraudulent misrepresentation in connection with the making of

a commodity futures contracts on behalf of another person. Exchange Act, § 4b, as amended, 7

U.S.C. § 6b. Defendants contend that the Plaintiff has presented no evidence of the intent to

deceive another person as required by Section 4b. Dkt. 53 at 10. Defendants, however, are

alleged to have violated Section 4o of the Exchange Act, not Section 4b. Dkt. 1; see supra,

section I. Therefore, the Court should decline to grant Defendants’ motion for summary

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judgment on the basis that Plaintiff has failed to present evidence that Defendants violated Section

4b of the Exchange Act.

6. Evidence of Intent to Deceive or Effect of Fraud

To show that the Defendants’ violated the Exchange Act, the Plaintiff may demonstrate

that the Defendants acted with scienter to defraud a client or potential client without

demonstrating an effect on a victim. See Commodity Futures Trading Com'n v. Heffernan, 245

F. Supp. 2d 1276, 1290 (S.D.Ga. 2003); 7 U.S.C. § 6o(1)(A) (commodity trading advisor may

not “employ” a fraud). In the alternative, the Plaintiff may demonstrate that the Defendants,

though not acting with scienter, nonetheless engaged in a transaction, practice, or course of

business that had the effect of a fraud upon a client or potential client. See Heffernan, 245 F.

Supp. 2d at 1290; 7 U.S.C. § 6o(1)(B) (commodity trading advisor may not engage in an act that

“operates” as a fraud).

a. Scienter

The element of scienter must be established by the Defendants’ conduct. A Commodity

Trading Advisor acts with scienter if the conduct was intended to defraud, manipulate, or deceive;

if the conduct was a severe departure from the standards of ordinary care; or if the conduct

involves highly unreasonable omissions or representations that present a danger of misleading

clients. Heffernan, 245 F. Supp. 2d at 1292. Plaintiff argues that Defendants acted with scienter

because they had no reasonable basis to claim that individuals using Sigma Band charts could

trade futures markets with a 99% chance of making a profit and virtually no risk every time they

traded. Dkt. 59 at 13. While there is no question that Defendants made the statements at issue,

there remains a question of whether, at the very least, Defendants’ misled website visitors into

subscribing to the Sigma Band service. Therefore, the Court should deny Defendants’ motion for

summary on this issue.

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b. Effect of Statements

Defendants may violate the Exchange Act by committing actions that have the effect of

fraud upon a client or potential client. 7 U.S.C. § 6o(1)(B). Defendants argue that Plaintiff has

presented no evidence that Defendants’ statement had the effect of fraud upon anyone. Dkt. 53 at

12; Dkt 61 at 8. Plaintiff not only concedes it does not have evidence of reliance but also claims,

without authority, that it is not required under Section 4o(1)(B) of the Exchange Act to provide

evidence that individuals were actually defrauded. Dkt. 59 at 16-17. In other words, Plaintiff

maintains that, even if every one of Defendants’ subscribers actually made money in the

commodities market, the Defendants could still have violated the Exchange Act by making

statements that have the effect of fraud upon Defendants’ website visitors. While it does not

appear that the 9th Circuit has addressed this issue, the 5th Circuit has decided a factually similar

case and stated the following:

In 1974, Congress gave the Commission even greater enforcement powers, in part

because of the fear that unscrupulous individuals were encouraging amateurs to trade in

the commodities markets through fraudulent advertising. Remedial statutes are to be

construed liberally, and in an era of increasing individual participation in commodities

markets, the need for such protection has not lessened.

R&W, 205 F.3d at 173 (footnotes omitted).

There is no question that the Defendants’ posted the statements to their website. There is

a question of whether the statements were factually accurate as to profit and risk. The Court

should deny Defendants’ motion for summary judgment on this issue because a question of fact

remains whether Defendants’ statements had the effect of fraud upon clients or prospective

clients.

B. Motion to Dismiss

Under Rule 9(b) of the Federal Rules of Civil Procedure, “in all averments of fraud or

mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” Fed.

R. Civ. P. 9(b). A motion to dismiss a claim of fraud under Rule 9(b) is the functional equivalent

of a motion to dismiss under Rule 12(b)(6). Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1107

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(9th Cir. 2003). A party may raise a Rule 12(b)(6) defense by a motion under Fed. R. Civ. P.

12(c). Fed. R. Civ. P. 12(h)(2)(B). Moreover, a party may file a motion for judgment on the

pleadings after the pleadings are closed but early enough not to delay trial. Fed. R. Civ. P. 12(c). 

Plaintiff argues that the Defendants’ motion to dismiss is untimely. Dkt. 58 at 2. The

complaint was filed on November 25, 2005. Dkt. 1. The Defendants filed an answer to the

complaint on May 1, 2006. Dkt. 10. The Court ordered the parties to complete discovery by July

16, 2007, (Dkt. 27) and denied Defendants’ motion to extend that deadline (Dkt. 45). The Court

set the trial for November 13, 2007. Dkt. 27. In summary, the Defendant’s filed this motion to

dismiss for failure to plead fraud with particularity almost two years after the complaint was filed,

more than a year after the answer was filed, two months after discovery was completed, and two

months before trial.

Additionally, if the Court granted the motion to dismiss, the case would only be

postponed. When a complaint is dismissed under Rule 9(b), a court should grant leave to amend. 

Vess, 317 F.3d at 1107. Allowing the Plaintiff time to amend the complaint, as well as the

possibility of additional discovery due to the amendments, would more than likely delay trial in

this matter.

Therefore, the Court should deny the Defendants’ motion to dismiss because the motion is

untimely and will delay the trial.

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III. ORDER

Therefore, it is hereby

ORDERED that Defendants’ Motion to Dismiss Pursuant to Fed. R. Civ. P. 9(b) (Dkt.

56) is DENIED and Defendants’ Motion for Summary Judgment (Dkt. 53) is DENIED.

The Clerk of the Court is instructed to send uncertified copies of this Order to all counsel

of record and to any party appearing pro se at said party’s last known address.

DATED this 1st day of October, 2007.

AROBERT J. BRYAN

United States District Judge 

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