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[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

 
                     HEARING TO REVIEW IMPLICATIONS 
                      OF THE CFTC V. ZELENER CASE 

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                        GENERAL FARM COMMODITIES
                          AND RISK MANAGEMENT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              June 4, 2009

                               __________

                           Serial No. 111-17

          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov

                               ----------
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52-664 PDF                       WASHINGTON : 2009 

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Washington, DC 20402-0001 

                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            FRANK D. LUCAS, Oklahoma, 
    Vice Chairman                    Ranking Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN,           RANDY NEUGEBAUER, Texas
South Dakota                         K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin               DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon                BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois       GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER,              BILL CASSIDY, Louisiana
Pennsylvania                         CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho

                                 ______

                           Professional Staff

                    Robert L. Larew, Chief of Staff

                     Andrew W. Baker, Chief Counsel

                 April Slayton, Communications Director

                 Nicole Scott, Minority Staff Director

      Subcommittee on General Farm Commodities and Risk Management

                   LEONARD L. BOSWELL, Iowa, Chairman

JIM MARSHALL, Georgia                JERRY MORAN, Kansas, 
BRAD ELLSWORTH, Indiana              Ranking Minority Member
TIMOTHY J. WALZ, Minnesota           TIMOTHY V. JOHNSON, Illinois
KURT SCHRADER, Oregon                SAM GRAVES, Missouri
STEPHANIE HERSETH SANDLIN,           STEVE KING, Iowa
South Dakota                         K. MICHAEL CONAWAY, Texas
BETSY MARKEY, Colorado               ROBERT E. LATTA, Ohio
LARRY KISSELL, North Carolina        BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi

               Clark Ogilvie, Subcommittee Staff Director

                                  (ii)

                             C O N T E N T S

                              ----------                              
                                                                   Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa, 
  opening statement..............................................     1
    Prepared statement...........................................     2
Moran, Hon. Jerry, a Representative in Congress from Kansas, 
  opening statement..............................................     2
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, prepared statement..................................     3
Walz, Hon. Timothy J., a Representative in Congress from 
  Minnesota, prepared statement..................................     3

                               Witnesses

Obie, Stephen J., Acting Director, Division on Enforcement, 
  Commodity Futures Trading Commission, Washington, D.C..........     4
    Prepared statement...........................................     5
Roth, Daniel, President and Chief Executive Officer, National 
  Futures Association, Chicago, Illinois.........................     7
    Prepared statement...........................................     9
Feigin, Philip A., Attorney, Rothgerber Johnson & Lyons, on 
  behalf of Monex Deposit Company, Denver, Colorado..............    11
    Prepared statement...........................................    13

       HEARING TO REVIEW IMPLICATIONS OF THE CFTC V. ZELENER CASE

                              ----------                              

                        WEDNESDAY, June 4, 2009

                  House of Representatives,
                       Subcommittee on General Farm
                    Commodities and Risk Management
                                   Committee on Agriculture
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:07 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. Leonard 
L. Boswell [Chairman of the Subcommittee] presiding.
    Members present: Representatives Boswell, Marshall, Walz, 
Schrader, Markey, Kissell, Pomeroy, Peterson (ex officio), 
Moran, Conaway, Latta, and Luetkemeyer.
    Staff present: Claiborn Crain, Adam Durand, John Konya, 
Scott Kuschmider, Robert L. Larew, Clark Ogilvie, John Riley, 
Rebekah Solem, Kevin Kramp, and Jamie Mitchell.

OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE 
               IN CONGRESS FROM THE STATE OF IOWA

    The Chairman. Good morning. The hearing of the Subcommittee 
on General Farm Commodities and Risk Management to review 
implication of the CFTC v. Zelener case will come to order. I 
will make an opening statement and invite Mr. Moran to do the 
same and then ask if the rest of the members follow the normal 
procedure and not make opening statements and submit whatever 
they would like for the record, and, of course, participate in 
the question and answer period. So that would be the order of 
how we would like to go. First, I would like to thank all of 
you for joining us here today as we take this examination of 
the implication of CFTC v. Zelener. I would like to give 
special thanks to our witnesses for testifying before the 
committee and to offer their insight into the current issues 
facing the futures market. I very much look forward to hearing 
all your testimony.
    In 2004 the Seventh Circuit Court made a decision in the 
CFTC v. Zelener. It adopted a narrow definition of the term 
``transactions for future delivery.'' What is held is that a 3-
day contract offered to retail customers for foreign currency 
that on its face promised delivery was not a futures contract 
and was, therefore, outside the CFTC's jurisdiction. This was 
even though the contracts operated in practice as futures 
contracts. Following the Zelener decision, many frontsters were 
given a roadmap to evade CFTC jurisdiction and to scam 
customers or consumers. During the 2008 Farm Bill, Congress 
narrowly fixed the Zelener problem as it pertains to foreign 
exchange, forex.
    Today, I am interested in hearing--we are interested in 
hearing if this problem had shifted to other commodities such 
as metals or energy products, as many said it might if Congress 
merely didn't address the problem. To the extent fraudulent 
activity is taking place and hard-working Americans are getting 
taken to the cleaners by shysters, we need to find out if 
Federal regulators have the tools necessary to protect 
consumers. So at this time, I would like to turn it over to my 
good friend and colleague, Congressman Moran from Kansas for 
any remarks he would choose to make.
    [The prepared statement of Mr. Boswell follows:]

      Submitted Prepared Statement of Hon. Leonard L. Boswell, a 
                  Representative in Congress from Iowa
    I would like to thank everyone for joining me here today as we take 
a thorough examination of the implications of CFTC v.Zelener. I would 
like to give a special thanks to our witnesses for testifying before 
the Committee and to offer their insight into the current issues facing 
the future markets. I very much look forward to hearing all the 
witnesses' testimony.
    In 2004, the 7th Circuit Court made a decision in the CFTC vs. 
Zelener. It adopted a very narrow definition of the term `transactions 
for future delivery.' What it held is that a three-day contract offered 
to retail customers for foreign currency that, on its face promised 
delivery, was not a futures contract and was therefore outside the 
CFTC's jurisdiction. This was even though the contracts operated, in 
practice, as futures contracts.
    Following the Zelener decision many fraudsters were given a roadmap 
to evade CFTC jurisdiction and to scam consumers.
    During the 2008 Farm Bill Congress narrowly fixed the Zelener 
problem as it pertains to foreign exchange (forex). Today, I am 
interested in hearing if this problem has shifted to other commodities 
such as metals or energy products as many said it might if Congress 
narrowly addressed the problem. To the extent fraudulent activity is 
taking place and hard-working Americans are getting taken to the 
cleaners by shysters, we need to find out if federal regulators have 
the tools necessary to protect consumers.
    At this time I would like to turn it over to my good friend and 
colleague, Jerry Moran from Kansas for any opening remarks he would 
like to make.

  STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF KANSAS

    Mr. Moran. Mr. Chairman, thank you very much. Thank you for 
the consideration of opening this hearing just a few minutes 
late to adjust to my arrival. As a Kansan, I never take into 
account enough time to get any place in Washington, D.C. I 
thank you for having this hearing. As you said, in 2004 we had 
the Zelener case. We responded. We tried to create CFTC 
jurisdiction for anti-fraud over retail forex transactions that 
were Zelener like. We are here, I think, to determine the 
success of that fix, and I hope we learn that from the CFTC. We 
also are interested in knowing, as you said, whether there is 
an expansion of fraud challenges that the CFTC cannot address. 
I would say that we need to be cautious in addressing what 
could be a small problem. We don't want to excessively regulate 
legitimate market participants that are not causing any harm, 
and I hope that today's witnesses reveal the extent to which 
fraud and futures look alike contracts have moved into other 
commodity markets and potential solutions if that is occurring.
    So it seems like we have been dealing with Zelener for a 
long time. We have been. And I am looking forward to hearing 
whether we are having any success and what more might need to 
be done, and I thank you, Mr. Chairman, for conducting this 
hearing.
    Mr. Boswell. Thank you for your comments. And I have driven 
up and down the streets, so I understand this trying to predict 
how long it takes to get anywhere.
    The chair would request that other Members submit their 
opening statements for the record.
    [The prepared statements of Mr. Peterson and Mr. Walz 
follow:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota
    Thank you, Chairman Boswell, for calling this hearing today.
    Policing fraud in retail foreign currency trading, or forex for 
short, has at times been very difficult for the Commodity Futures 
Trading Commission.
    In 1974, Congress included in the Commodity Exchange Act an 
exemption for contracts based on foreign exchange and Treasury 
securities from CFTC regulation. The idea was that common interbank 
transactions in currency would not get swept up in the web of futures 
regulation.
    While this worked well for a time, a 9th Circuit Court ruling in 
1996 held that the law also protected forex boiler rooms, bucket shops, 
and other scammers that preyed on retail customers.
    The CFTC and Congress addressed this question in 2000 with passage 
of the Commodity Futures Modernization Act, with provisions giving the 
Commission clear authority to police the sales of forex contracts to 
small investors. However, a 2004 court case, CFTC v. Zelener, held that 
certain retail foreign exchange contracts were outside the Commission's 
legal authority. That case involved a boiler room selling off-exchange 
forex contracts with the CFTC powerless to stop them because the 
contracts in question were not futures despite the CFTC's contention. 
Even worse, scam artists used the Zelener decision as a blueprint to 
thread the regulatory loophole and go after unsuspecting retail 
customers with no real risk of being shut down.
    When Congress reauthorized CFTC as part of the Food, Conservation, 
and Energy Act of 2008, we sought to stem the unintended consequences 
of Zelener by clarifying the CFTC's anti-fraud authority over retail 
agreements and contracts in foreign currency.
    Retail foreign exchange dealers now must register with the CFTC and 
are subject to commission rules and anti-fraud authority along with 
Futures Commission Merchants that engage in retail forex transactions.
    Congress also strengthened qualifications and minimum capital 
requirements for FCMs and retail foreign exchange dealers.
    However, because the scope of the Zelener fix was limited to 
foreign exchange contracts, we need to be aware that similar problems 
could arise in other product areas like metals, energy, or any other 
commodity that can be sold to the public without effective regulation.
    The work we did in the Farm Bill restored the CFTC's ability to 
stop unscrupulous persons who write and market contracts in foreign 
currencies that are nothing more than scams to defraud the public. 
However, we are here to learn if there are still problems that exist 
today from the Zelener decision.
    I welcome our witnesses and I hope that they can give us some 
perspective on problem areas that may exist outside of the CFTC's 
enforcement reach.
    I welcome today's witnesses and I look forward to their testimony. 
I yield back my time.
   Submitted Statement of Hon. Timothy J. Walz, a Representative in 
                        Congress from Minnesota
    Mr. Chairman, thank you for holding this hearing today review 
implications of the Zelener case and how that will effect future 
commodity regulation.Since 1974, when the CFTC began to oversee trading 
in derivatives, it has been necessary for the CFTC to strike an 
appropriate balance to find the "sweet spot" of regulation that would 
protect investors but not stifle the industry.
    Three years ago, the Zelener case limited the CFTC's ability to 
address foreign currency fraud and the question of what type of 
authority the CFTC should possess in this area is an important issue 
for many in the forex market. I have met with some of the stakeholders 
who are involved in the forex market and I believe I can speak to the 
perspective of many of them. They do not fear government regulation, 
they welcome it.
    Forex traders realize that there is a role for the government to 
play in creating a level playing field and making sure everyone plays 
by the rules. But what they do not want is heavy-handed regulation that 
will impede development of a new market that is widely used by many 
investors overseas but is just getting its footing in the United 
States.
    I think it is very important that Congress get this question right. 
It should not be our goal to treat every commodity the same when it 
comes to regulation. It should not be our goal to interfere with a 
market that is operating fairly and efficiently.
    Mr. Chairman, I look forward to the opportunity to hear the 
testimony of our witnesses today and the chance to ask them questions 
about how they believe commodity regulation should be addressed.

    We welcome the panel, and we will go from my left to right, 
and ask you to make your 5-minute statement and then be 
available for questions, if you would, so we will start off 
with Mr. Stephen Obie, Acting Director, Division on 
Enforcement, Commodity Futures Trading Commission, Washington, 
D.C. Mr. Obie.

  STATEMENT OF STEPHEN J. OBIE, ACTING DIRECTOR, DIVISION ON 
ENFORCEMENT, COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, 
                              D.C.

    Mr. Obie. Good morning, Chairman Boswell and Members of 
this distinguished subcommittee. I am Stephen Obie, the Acting 
Director of the Division of Enforcement of the United States 
Commodity Futures Trading Commission. My remarks today 
represent my views in my capacity as the Acting Director, and I 
am not testifying on behalf of the Commission. In 2003, the 
CFTC filed what came to be known as the Zelener. The CFTC 
complaint alleged that Michael Zelener operated a foreign 
currency boiler room. Mr. Zelener fraudulently solicited 
millions of dollars from over 200 unsuspecting customers. The 
contracts that Zelener peddled claimed to require delivery of 
currency within 2 days. In reality, the contracts were 
repeatedly rolled over and no delivery of currency was ever 
made.
    Unfortunately, the trial court ruled that the CFTC lacked 
jurisdiction over these rolling spot contracts at issue and the 
Seventh Circuit Court of Appeals upheld that ruling in 2004. 
Recently, Michael Zelener pled guilty to criminal fraud 
charges. Zelener admitted to operating a forex boiler room 
which caused substantial customer harm. Justice will soon be 
served when Zelener is sentenced for his crimes in August. 
Following the Zelener rulings, another Circuit Court of Appeals 
and other trial courts also handed down adverse decisions on 
CFTC jurisdiction. The lasting effect of these decisions set 
the CFTC's Division of Enforcement forex program back half a 
decade. Fortunately, Congress clarified the CFTC's jurisdiction 
over the types of forex contracts sold by Zelener and other 
boiler room operators like him with the passage of the CFTC 
Reauthorization Act of 2008. Since that time, the CFTC has 
aggressively used its clarified anti-fraud authority.
    The CFTC's Enforcement Division has opened 84 
investigations involving foreign currency frauds and has 
already filed nine Federal Court enforcement actions alleging 
that more than $134 million was misappropriated from customers. 
Because the Zelener fix was limited to contracts in foreign 
currency, swindlers have moved on. Fraud schemes through 
marketing of Zelener type rolling spot contracts, which 
actually look like futures contracts, are now occurring in 
other commodities, especially precious metals like gold, silver 
and platinum, thus, the investing public is now being defrauded 
arguably beyond the CFTC's enforcement jurisdiction. Even 
worse, Zelener and the cases that followed provided a roadmap 
to these fraudsters on how to draft their contracts to escape 
prosecution by the CFTC. From my perspective, it appears that 
these Zelener type contracts are proliferated and mailer 
fraudsters are offering these contracts, which they believe are 
out of the CFTC's anti-fraud jurisdiction.
    Since the enactment of the farm bill, the CFTC has received 
more than 50 complaints from the public relating to potential 
boiler room frauds involving commodities other than foreign 
currency. In addition, the National Futures Association has 
identified approximately 30 farms offering potentially too good 
to be true investments and purportedly spot metals and energy 
contracts. Unfortunately, the Zelener decision remains a 
profound impediment to the CFTC's ability to prosecute these 
firms and protect the public from alleged wrongdoing. I also 
know from the NFA which handles the registration of forex firms 
that there has been an increase of registered forex dealer 
members who have begun to sell non-forex Zelener-type contracts 
to retail customers. Currently, seven such firms have been 
identified.
    Protecting the public from commodity fraud and preserving 
the integrity of the commodity markets through swift and 
decisive action are critical missions of the CFTC's enforcement 
program. The farm bill has made that job easier in the forex 
area and I applaud this Subcommittee's work in that regard. The 
CFTC will continue to root out these fraudulent enterprises and 
other Ponzi schemers who prey on innocent Americans. Thank you, 
Chairman Boswell, and Members of the distinguished 
Subcommittee. I look forward to answering any questions you may 
have.

    [The prepared statement of Mr. Obie follows:]

Prepared Statement of Mr. Stephen J. Obie, Acting Director, Division on 
  Enforcement, Commodity Futures Trading Commission, Washington, D.C.
    Good morning, Chairman Boswell and Members of this distinguished 
subcommittee. Thank you for the opportunity to appear before you today 
to testify regarding the continuing implications of the CFTC v. Zelener 
case. I am Stephen Obie, the Acting Director of the Division of 
Enforcement of the United States Commodity Futures Trading Commission. 
My remarks today represent my views in my capacity as the Acting 
Director, and I am not testifying on behalf of the Commission.
    As Acting Director, I oversee 120 attorneys and investigators in 
four offices who investigate and litigate enforcement cases in 
administrative forums and in federal district courts. The Division of 
Enforcement investigates and brings cases in a wide range of areas 
including trade practice violations, manipulations, and fraud. Until a 
few years ago, a sizeable number of the Division's matters involved 
retail fraud in the area of foreign currency (also called "forex"), 
many of them involving boiler room operations. ``Boiler rooms'' are 
operations that use high-pressure sales tactics, usually including 
false or misleading information, to solicit generally unsophisticated 
customers.
    In 2003, the CFTC filed what came to be known as the Zelener case. 
The CFTC complaint alleged that over a two-year period, Michael Zelener 
operated a foreign currency boiler room that fraudulently solicited 
millions of dollars from over 200 unsuspecting customers in violation 
of the Commodity Exchange Act. Although the contracts that Zelener was 
peddling purported to require delivery of currency within two days, in 
reality, the contracts were repeatedly rolled over and no delivery of 
currency was ever made. The CFTC contended that these contracts were, 
therefore, futures contracts, but the trial court ruled that the CFTC 
lacked jurisdiction over the contracts because Zelener's ``customers 
were not trading in futures contracts; rather they were speculating in 
spot contracts.'' \1\ The trial court's ruling that the CFTC lacked 
jurisdiction over the ``rolling spot'' contracts at issue in the 
Zelener case was upheld by an appellate court in 2004. \2\
---------------------------------------------------------------------------
    \1\  CFTC v. Zelener, [2003-2004 Transfer Binder] Comm. Fut. L. 
Rep. (CCH) para. 29,621 (D. N.D. Ill. Oct. 3, 2003); No. 1:03CV04346, 
2003 WL 22284295 at *5; 2003 U.S. Dist. LEXIS 17660 at *14.
    \2\  CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004).
---------------------------------------------------------------------------
    Recently, Michael Zelener pled guilty to criminal fraud charges 
based on the same facts that were alleged in the CFTC civil complaint. 
In his plea agreement, Zelener admitted that he lied when he told 
potential customers that they could earn 120% annual returns with 
almost no risk even after he knew that almost every one of his 
customers had lost money; he was paid a total of $ 1.4 million in mark 
ups and he used false account statements to conceal these mark ups; and 
he operated a forex boiler room for two years causing customers to 
suffer losses totaling $2 million. Justice will soon be served when 
Zelener is sentenced for his crimes in August.
    After the appellate ruling in the Zelener case, the CFTC brought 
other cases and received similar adverse rulings from another Circuit 
Court of Appeals \3\ and other trial courts. The case law spawned by 
the Zelener decision appeared to narrow the CFTC's reach in the area of 
foreign currency and created uncertainty as to the CFTC's antifraud 
jurisdiction over contracts in related areas where the line between 
futures contracts and spot contracts could be blurred. As a result of 
these adverse court decisions, the Division of Enforcement's case load 
in the area of foreign currency diminished, as we could not justify the 
expenditure of scarce resources to fight jurisdictional battles rather 
than pursuing wrongdoers in other areas where our jurisdiction was 
clear. But the lasting effect of the Zelener decision, putting this 
specific activity out of our jurisdictional reach, set the CFTC's 
Division of Enforcement forex program back a half a decade.
---------------------------------------------------------------------------
    \3\  CFTC v. Erskine, 512 F.3d 309 (6th Cir. 2008).
---------------------------------------------------------------------------
    Fortunately, Congress clarified the CFTC's jurisdiction over the 
types of forex contracts sold by Zelener and other boiler room 
operators like him with the passage of the CFTC Reauthorization Act of 
2008 (Title 13 of the farm bill). I applaud this subcommittee's efforts 
in drafting that much-needed legislation in the forex area. Since that 
time, the CFTC has aggressively used its clarified antifraud authority. 
I am proud to report to this subcommittee that the CFTC's Enforcement 
Division has opened 84 investigations involving foreign currency 
frauds, which are pending, and has already filed 9 federal court 
enforcement actions alleging that more than $134 million was 
misappropriated from customers.
    The changes in the Farm Bill have been extremely helpful to the 
Enforcement Division in policing the forex markets. However, because 
the Zelener-fix was limited to contracts in foreign currency, swindlers 
have moved on to perpetuate their fraud and are marketing Zelener-type 
``rolling spot'' contracts in other commodities, especially precious 
metals like gold, silver, and platinum, and, thus, are defrauding 
customers beyond the CFTC's antifraud jurisdiction. Even worse, Zelener 
and the cases that followed provided a road map to these fraudsters on 
how to draft their contracts to escape prosecution by the CFTC. 
Customer agreements appear to have been drafted specifically with the 
Zelener decision in mind and language chosen so that, under the 
analysis in those decisions, the contracts at issue are argued to be 
spot contracts outside of CFTC jurisdiction and not futures contracts 
covered by the Commodity Exchange Act.
    From my perspective, it appears that these Zelener-type contracts 
have proliferated and more fraudsters are offering these contracts, 
believed to be out of the reach of the CFTC's antifraud jurisdiction. 
Since the enactment of the Farm Bill, the CFTC has received more than 
50 complaints from the public relating to potential boiler room frauds 
involving commodities other than foreign currency. In addition, the 
National Futures Association has identified approximately 30 firms 
offering potentially ``too-good-to-be-true'' investments in purportedly 
spot metals and energy contracts. Unfortunately, the Zelener decision 
remains a profound impediment to the CFTC's ability to prosecute these 
firms and protect the public from alleged wrongdoing. Consequently, the 
CFTC has had to refer these matters to state law enforcement 
authorities and other federal agencies.
    I also know from the NFA, which handles the registration of forex 
firms, that there has been an increase in registered forex dealer 
members who have begun to sell non-forex Zelener-type contracts to 
retail customers. Currently, seven such firms have been identified.
    Protecting the public from commodity fraud and preserving the 
integrity of the commodity markets through swift and decisive action 
are critical missions of the CFTC's enforcement program. The Farm Bill 
has made that job easier in the forex area. Should Congress see fit to 
expand the CFTC's authority over boiler rooms offering metal, energy, 
and other commodity contracts to retail customers, we will utilize that 
authority -- as we have with the Zelener-fix provided by the Farm Bill 
for foreign currency -- to shutter those boiler rooms and protect the 
American public. With new authority, I can assure this subcommittee 
that the CFTC will continue to root out these fraudulent enterprises 
and other Ponzi schemers who prey on innocent Americans.
    Thank you Chairman Boswell and Members of this distinguished 
subcommittee. I look forward to answering your questions.

    Mr. Boswell. Thank you. I would now like to recognize Mr. 
Roth, President and Chief Executive Officer, National Futures 
Association, Chicago, Illinois. Welcome.

         STATEMENT OF DANIEL ROTH, PRESIDENT AND CHIEF 
   EXECUTIVE OFFICER, NATIONAL FUTURES ASSOCIATION, CHICAGO, 
                            ILLINOIS

    Mr. Roth. Thank you, Mr. Chairman. My name is Dan Roth, and 
I am the President of NFA, and thanks very much for the 
opportunity to appear here today to talk about Zelener once 
again. Over the last year, obviously this Committee has spent 
an awful lot of time and energy focusing on OTC derivatives. 
Particularly OTC derivatives that are aimed at sophisticated 
institutional type customers, and that is a commendable offer 
and it is entirely appropriate given the systemic risk issues 
that those types of instruments compose. We just wanted the 
Committee to be aware that there is a burgeoning OTC 
derivatives market, completely unregulated markets, aimed at 
retail customers. And although these markets don't pose the 
sorts of systemic risk issues that credit default swaps and 
other OTC instruments do, it is a growing area of customer 
concern.
    What I would like to take a minute to talk about a little 
bit of the history of how we got where we are, describe the 
nature of the problem, and describe what we think we can do 
about it. Back in 1974 when Congress was about to create the 
CFTC and expand Federal regulation of futures markets, the 
Treasury Department came forward and pointed out that there was 
a thriving interbank market involving foreign currencies and 
that those banks were all regulated, and that we didn't need 
the CFTC to insert itself into that arena. So Congress adopted 
the Treasury Amendment which provided in part that nothing in 
the Act applies to transactions in foreign currencies. Well, 
predictably enough, boiler rooms started popping up trying to 
take advantage of that loophole, and the CFTC was very 
successful in going to court and shutting down these retail 
bucket shops that were selling foreign currency products.
    The CFTC argued that the Treasury Amendment was never 
intended to apply to transactions involving retail customers, 
and that worked just fine until 1996 when the Circuit Court of 
Appeals in the Frankel Bullion case ruled that the Treasury 
Amendment means what it says and that the Commodity Exchange 
Act doesn't apply even if the transaction involves foreign 
currencies. Well, that is why Congress in 2000 with the CFMA 
attempted to address that issue. Congress basically stated 
that, yes, the Commodity Exchange Act does apply to foreign 
currency futures transactions with retail customers unless the 
counter party is an otherwise regulated entity. No sooner had 
we fixed that problem than another one popped up and that is 
the Zelener decision.
    In the Zelener case, just as Steve said, the court there 
said we don't even have to worry about the Treasury Amendment 
because these things aren't futures contracts to begin with. 
Prior to Zelener, what the courts had always said was that in 
determining whether a contract offered to a retail customer is 
a futures contract, the court said what you have to do is look 
at the underlying purpose of the transaction and if the 
underlying purpose is to speculate price swings and that there 
is no expectation of delivery then it is a futures contract 
regardless of what the parties call it.
    The Zelener court just went away from that approach 
completely and said no, no, no, no, what you have to look at is 
the written agreement between the scammer in this case and the 
customer. And if that written agreement calls the contractor 
rolling spot and if that written agreement in its fine print 
does not guarantee a right of offset, well, then it is not a 
futures contract and I don't care whether it looks like a 
futures contract, is sold like a futures contract, or acts like 
a future contract. It is not a futures contract, and the CFTC 
has no jurisdiction. Well, this was a huge blow. This was worse 
than Frankel Bullion because this affected the CFTC's ability 
to protect retail customers from off exchange unregulated 
futures contracts, not just for foreign currencies but for 
everything. It was a real blow.
    So in the last reauthorization process, as Steve mentioned 
and as the Chairman mentioned, Congress debated how best to 
address Zelener, and we advocated what was called a broad fix 
so that it would affect all commodities. Congress basically 
decided that the current problem was foreign currency so they 
focused on foreign currency and adopted the narrow fix. Since 
then, just as Steve mentioned, we have seen this proliferation. 
Just in our routine day-to-day auditing or surveillance of the 
Internet we have become aware of dozens of these web sites, 
dozens of these Zelener type markets that are offering retail 
customers completely unregulated futures look-alikes. So with 
these contracts there is no registration requirement for 
anybody, so we have got people that we have booted out of the 
futures industry for fraud that cross the street and start 
selling Zelener contracts. We have seen familiar names. Guys 
that we have tossed are now selling this things because in this 
unregulated world there is no registration requirement, there 
is no capital requirement, there are no sales practice 
standards, there is no risk disclosure -- there is no nothing.
    And customers are getting hurt. We get customer complaints 
at NFA from people that have lost their life savings in these 
different types of scams. It is not right. We have to do 
something about it. These customers, some of them are subject 
to high pressure sales, some of them don't understand the 
nature of the transaction, they don't understand the fees that 
they are paying. There is no adequate disclosure. So I am 
almost over my time, but the point, I guess, is that I think it 
is time to do something with a broad Zelener fix, and in our 
view that fix has to accomplish three things. Number one, it 
has to make sure that scammers can't sell off exchange futures 
contracts simply by disguising it to look like something else.
    Number two, the fix should not in any way impair or 
interfere with the legitimate spot market. If there is actual 
delivery of the contract, we don't want to deal with it. If the 
customer is a commercial interest, he has a commercial interest 
in the product and might take delivery, we don't want to deal 
with it. We don't want to interfere with the spot market. And, 
number three, I think it is important to bear in mind that it 
is not enough just to give the CFTC anti-fraud authority over 
these contracts. Anti-fraud authority is no substitute for 
regulation. It is not good enough to come in after the fraud 
occurred. All the things I have talked about, the registration, 
the capital, the risk disclosure, the audits, all those things 
are designed to protect customers to prevent fraud rather than 
prosecute it.
    Giving the CFTC simply anti-fraud authority is no 
substitute for the regulatory protections under the Act, and 
neither, by the way, is the Model State Commodity Code. If some 
state regulator has the authority to close one of these bucket 
shops, well, God bless. however, the authority to close it down 
after the fraud has occurred is no substitute for the 
regulatory protections of the Commodity Exchange Act which is 
why the Model Code expressly excludes transactions covered by 
this Act. So, Mr. Chairman, I am way over my time and I will be 
quiet now. But we have talked about this for a long time and we 
look forward to working with the Committee and the staff and 
look forward to this possibly being the last time I have to 
testify about Zelener, which would be nice for all of you too.

    [The prepared statement of Mr. Roth follows:]

 Submitted Statement of Mr. Daniel Roth, President and Chief Executive 
        Officer, National Futures Association, Chicago, Illinois
    My name is Daniel Roth, and I am President and Chief Executive 
Officer of National Futures Association. Thank you Chairman Boswell and 
members of the Subcommittee for this opportunity to appear here today 
to present our views on closing a regulatory gap that allows fraudsters 
to sell unregulated OTC derivatives to retail customers.
    Since 1982, NFA has been the industry-wide self-regulatory 
organization for the U.S. futures industry, and in 2002 it extended its 
regulatory programs to include retail over-the-counter forex contracts. 
NFA is first and foremost a customer protection organization, and we 
take our mission very seriously.
    Congress is currently expending significant time and resources to 
deal with systemic risk and to create greater transparency in the OTC 
derivatives markets. Those are important economic issues, and we 
support Congress' efforts to address them. Understandably, most of the 
debate centers around instruments offered to and traded by large, 
sophisticated institutions. However, there is a burgeoning OTC 
derivatives market aimed at unsophisticated retail customers, who are 
being victimized in a completely unregulated environment.
    For years, retail customers that invested in futures had all of the 
regulatory protections of the Commodity Exchange Act. Their trades were 
executed on transparent exchanges and cleared by centralized clearing 
organizations, their brokers had to meet the fitness standards set 
forth in the Act, and their brokers were regulated by the CFTC and NFA. 
Today, for too many customers, none of those protections apply. A 
number of bad court decisions have created loopholes a mile wide, and 
retail customers are on their own in unregulated, non-transparent OTC 
futures-type markets.
    The main problem stems from a Seventh Circuit Court of Appeals 
decision in a forex fraud case brought by the CFTC. In the Zelener 
case, the District court found that retail customers had, in fact, been 
defrauded but that the CFTC had no jurisdiction because the contracts 
at issue were not futures, and the Seventh Circuit affirmed that 
decision. The "rolling spot" contracts in Zelener were marketed to 
retail customers for purposes of speculation; they were sold on margin; 
they were routinely rolled over and over and held for long periods of 
time; and they were regularly offset so that delivery rarely, if ever, 
occurred. In Zelener, though, the Seventh Circuit ignored these 
characteristics and based its decision on the terms of the written 
contract between the dealer and its customers. Because the written 
contract in Zelener did not include a guaranteed right of offset, the 
Seventh Circuit ruled that the contracts at issue were not futures. As 
a result, the CFTC was unable to stop the fraud.
    Zelener created the distinct possibility that, through clever 
draftsmanship, completely unregulated firms and individuals could sell 
retail customers forex contracts that looked like futures, acted like 
futures, and were sold like futures and could do so outside the CFTC's 
jurisdiction. For a short period of time, Zelener was just a single 
case addressing this issue. Since 2004, however, various Courts have 
continued to follow the Seventh Circuit's approach in Zelener, which 
caused the CFTC to lose enforcement cases relating to forex fraud.
    A year ago, Congress closed the loophole for forex contracts. 
Unfortunately, the rationale of the Zelener decision is not limited to 
foreign currency products. Customers trading other commodities-such as 
gold and silver-are still stuck in an unregulated mine field. It's time 
to restore regulatory protections to all retail customers.
    In testimony before this Subcommittee in 2007, I predicted that if 
Congress plugged the Zelener loophole for forex but left it open for 
other products, the fraudsters would simply move to Zelener-type 
contracts in other commodities. That's just what has happened. We 
cannot give you exact numbers, of course, because these firms are not 
registered. Nobody knows how widespread the fraud is, but we are aware 
of dozens of firms that offer Zelener contracts in metals or energy. 
Recently, we received a call from a man who had lost over $600,000, 
substantially all of his savings, investing with one of these firms. We 
have seen a sharp increase in customer complaints and mounting customer 
losses involving these products since Congress closed the loophole for 
forex.
    NFA and the exchanges have previously proposed a fix that would 
close the Zelener loophole for these non-forex products. Our proposal 
codifies the approach the Ninth Circuit took in CFTC v. Co-Petro, which 
was the accepted and workable state of the law until Zelener. In 
particular, our approach would create a statutory presumption that 
leveraged or margined transactions offered to retail customers are 
futures contracts unless delivery is made within seven days or the 
retail customer has a commercial use for the commodity. This 
presumption is flexible and could be overcome by showing that delivery 
actually occurred or that the transactions were not primarily marketed 
to retail customers or were not marketed to those customers as a way to 
speculate on price movements in the underlying commodity.
    This statutory presumption would not affect the interbank currency 
market dominated by institutional players, nor would it affect 
regulated instruments like securities and banking products. It would 
also not apply to those retail forex contracts that are already covered 
(or exempt) under Section 2(c). It would, however, effectively prohibit 
leveraged non-forex OTC contracts with retail customers when those 
contracts are used for price speculation and do not result in delivery.
    I should note that NFA's proposal does not invalidate the 1985 
interpretive letter issued by the CFTC's Office of General Counsel, 
which Monex International and similar entities rely on when selling 
gold and silver to their customers. That letter responded to a factual 
situation where the dealer purchased the physical metals from an 
unaffiliated bank for the full purchase price and left the metals in 
the bank's vault. The dealer then turned around and sold the gold or 
silver to a customer, who financed the purchase by borrowing money from 
the bank. Within two to seven days the dealer received the full 
purchase price and the customer received title to the metals. In these 
circumstances the metals were actually delivered within seven days, so 
the transactions would not be futures contracts under NFA's proposal.
    In conclusion, while NFA supports Congress' efforts to deal with 
systemic risk and create greater transparency in the OTC markets, 
Congress should not lose sight of the very real threat to retail 
customers participating in another segment of these markets. This 
Subcommittee can play a leading role in protecting customers from the 
unregulated boiler rooms that are currently taking advantage of the 
Zelener loophole for metals and energy products. We look forward to 
further reviewing our proposal with Subcommittee members and staff and 
working with you in this important endeavor.

    Mr. Boswell. We are not going to require you to be quiet. 
We are just going to penalize you. Thank you, Mr. Roth. I 
appreciate your comments. And now we would like to call on Mr. 
Feigin, Attorney, Rothgerber Johnson & Lyons, on behalf of 
Monex Deposit Company, Denver, Colorado. Mr. Feigin, welcome.

 STATEMENT OF PHILIP A. FEIGIN, ATTORNEY, ROTHGERBER JOHNSON & 
               LYONS, ON BEHALF OF MONEX DEPOSIT 
                   COMPANY, DENVER, COLORADO

    Mr. Feigin. Good morning, Mr. Chairman, and Members. My 
name is Philip Feigin. I am an attorney in private practice in 
Denver and appear today on behalf of Monex Deposit Company, the 
largest vendor of precious metals to retail customers in the 
United States. Before starting my current practice, I was 
Executive Director of the North American Securities 
Administrator's Association and before that I spent 10 years as 
Securities Commissioner for the State of Colorado. While 
commissioner, I also served as NASAA's President in 1994 and 
1995 though I obviously speak today for Monex, not my former 
regulatory colleagues. My regulatory career is focused on 
enforcement and investor protection. I played an active role in 
drafting various investor protection statutes, including the 
Uniform Securities Act, and the Model State Commodity Code back 
in 1985, which I will discuss in my testimony today.
    I believe my background puts me in an excellent position to 
provide the Subcommittee with perspective on whether a Federal 
fix is necessary for the retail spot precious metals 
transactions discussed. I believe the state regulation through 
the Model Code is the best way to address that market, a spot 
market that Congress has historically not placed under CFTC 
jurisdiction. The Model Code has been in effect in 22 states 
for the better part of 20 years. Monex Deposit Company operates 
a cash market which customers take physical delivery of gold, 
silver, and other precious metals. Buyers may wish to hold gold 
or other precious metals as a store of value, a hedge against 
inflation, or an avenue to generate positive investment 
returns. Monex is located in Newport Beach, California and has 
been in business more than 20 years. Monex and its affiliates 
has over 200 employees. On average, the company buys and sells 
more than 2 billion in physical precious metals with over 
10,000 customers each year.
    When a customer purchases gold from Monex, the full amount 
of the gold purchased is delivered either to the customer 
itself or a depository. Under the Model Code delivery must 
occur in no more than 28 days. The customers either pay cash or 
finance their purchase through a Monex affiliate with at least 
a 20 percent down payment. About 20 percent of Monex's 
customers use this financing. Like any business dealing with 
the retail public, Monex has received some complaints over the 
years. Most are resolved with an explanation or simple 
logistical solution. Of the more than 100,000 customers that 
Monex has dealt with over the past 20 years only 82 brought 
claims against Monex in court or arbitration and of those Monex 
has lost only one case for a total award of $270.
    My written testimony provides a short history of the 
development of the Model State Commodity Code that also 
reflects my experiences in enforcing investor protection laws 
at the state level. In 1975, as Mr. Roth discussed, a 
significant increase in commodities trading was accompanied by 
a rise in bucket shops and other abusive companies. The newly 
created CFTC was understaffed and overwhelmed and the states 
were frustrated in going after many of these scam operators 
because they were pre-empted by Federal law. Eventually 
Congress changed the law to allow states a greater enforcement 
role. However, this did not mean the states had the law on 
their books to take advantage of the new authority. The need 
for a model statute was apparent, and we state regulators spent 
2 years working with the CFTC and the NFA studying the problems 
and drafting what eventually became the Model Code in 1985.
    This is the statute under which Monex operates under the 
supervision of the California Department of Corporations, and 
it has been enacted by 21 other states. The code has many 
provisions, but among the most important is its concept of a 
commodity contract, an arrangement that cannot be sold unless 
it meets standards set out in the code. One of those, which I 
mentioned earlier, is the requirement that the purchaser 
receive the physical delivery of his purchase within 28 days of 
payment of any part of the purchase price. The code was 
designed as a modern bucket shop law. It allows regulators and 
prosecutors, and I want to emphasize this, to analyze a 
contract or transaction quickly to determine if it is lawful. 
They avoid the often complicated and uncertain task of 
attempting to establish the presence of futures contract under 
current law.
    In my written statement, I quoted the NFA's and the CFTC's 
testimony in support of the code. I have also cited several 
examples of the code's use against scam artists in which states 
such as Missouri, Maine, and Colorado used it very well. The 
code is an efficient and effective law enforcement tool. In 
order to operate lawfully under the code, the purchaser or his 
recognized depository must receive delivery of his commodities 
within 28 days of the payment of any part of the purchase 
price. This is a significant deterrent and it is at the heart 
of the code. There is a case to be made for additional Federal 
regulation at both on exchange futures markets and off exchange 
slot markets where we have seen exaggerated commodity price 
movement and where over the counter trading may have 
contributed to systemic risk in the world economy.
    This committee passed H.R. 977 to deal with these issues 
but no one to my knowledge has argued that the retail metals 
trading poses a systemic financial risk or distorts market 
prices. Customer protection is the focus of the proposed 
Zelener fix, but we suggest the Model Code has served that 
purpose for precious metals investors for well over 20 years. 
If it is the decision of the Congress that Federal action is 
necessary, we are more than willing to participate on the 
development of the approach and share our experience in dealing 
with both the underlying premises and applications of our 
approach to policing the off exchange spot market transactions. 
Thanks for the opportunity to testify. I will be happy to 
respond to any questions.

    [The prepared statement of Mr. Feigin follows:]

   Prepared Statement of Mr. Philip A. Feigin, Attorney, Rothgerber 
 Johnson & Lyons, on behalf of Monex Deposit Company, Denver, Colorado
    Good morning, Mr. Chairman and committee Members. My name is Philip 
A. Feigin. I am an attorney in private practice with the law firm of 
Rothgerber Johnson & Lyons in Denver, Colorado. Prior to joining the 
firm, I served as Executive Director of the North American Securities 
Administrators Association (``NASAA'') in 1998 and 1999. NASAA 
represents the state and provincial securities agencies of the 50 
states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, 
the provinces and territories of Canada, and the Republic of Mexico. It 
is the oldest international organization devoted to investor 
protection. Prior to my time in Washington, I served as the Securities 
Commissioner for the State of Colorado for 10 years, Deputy 
Commissioner for seven and Chief Enforcement Attorney for the Wisconsin 
Securities Commissioner for almost four years before that. While 
Colorado Securities Commissioner, I served as the President of NASAA in 
1994-95, and as a member of NASAA's board of directors for seven years. 
I also served as Chair of NASAA's Enforcement Section and its 
Commodities Committee for several years.
    My regulatory career was focused on enforcement and investor 
protection. I chaired or participated in multistate enforcement efforts 
involving Lloyds of London, securities day trading abuses, the Moser 
case at Salomon Brothers, precious metals boiler rooms in South Florida 
and Orange County and penny stock swindlers in Denver. I pioneered the 
development of NASAA's coordination of multistate enforcement projects. 
I also spearheaded the creation and funding of a permanent Securities 
Fraud Prosecution Unit at the Colorado Attorney General's office.I was 
active in crafting a new regulatory regime for Colorado. I participated 
in the drafting and led enactment of the Colorado's Securities Act, 
Commodity Code, Municipal Bond Supervision Act, local government 
investment pool trust fund regulation, and provisions under which the 
state's investment advisers and investment adviser representatives are 
regulated. I was also actively involved in the drafting of the national 
Uniform Securities Act (2002) as a model for all state securities 
regulation.
    I was privileged to serve for several years on the Commodity 
Futures Trading Commission's (``CFTC'') Advisory Committee on Federal-
State Cooperation. I have testified on numerous occasions before 
committees of both the U.S. House of Representatives and the Senate on 
securities, banking, commodities regulation and investor protection 
issues as well as various committees of the Colorado General Assembly 
and other state legislatures. I have also served as an expert witness 
for the U.S. Attorney, the Securities and Exchange Commission 
(``SEC''), states attorneys general and district attorneys in several 
states in many federal and state criminal investment fraud cases.
    I have gone through my background in detail in an effort to 
establish my credentials as one who has spent virtually his entire 
career in investment law enforcement and investor protection. I am here 
today to speak on behalf of Monex Deposit Company, specifically with 
regard to the issues presented by the holding in CFTC v. Zelener and 
whether a federal ``fix'' is needed with regard to the sort of retail 
spot precious metals transactions in which Monex engages. I submit to 
you that current regulatory standards provide all necessary customer 
protections. I also suggest that Congress has historically chosen not 
to regulate spot commodity markets for good reasons, and that no case 
has been made that spot metals trading poses the type of systemic risk 
that might justify the application of a broad new regulatory scheme.
MONEX
    Monex Deposit Company is the largest vendor of precious metals to 
retail customers in the United States. Purchasers may wish to hold gold 
or other metals as a store of value or hedge against inflation or 
against changes in the value of the dollar or other assets that may 
have negative correlation with precious metals. They may also wish to 
trade the value of precious metals in hopes of attaining positive 
returns.
    Monex Deposit Company is located in Newport Beach, California, and, 
together with several affiliated companies, has over 200 employees. 
Monex routinely buys and sells in excess of $2 billion in physical 
precious metals with over 10,000 customers annually. Customers may pay 
in full and take personal delivery or store their goods through Monex 
in an independent depository. They may also finance their purchases 
through Monex's affiliate, Monex Credit Company, with a minimum down 
payment of 20%. The maximum loan is 80% of the purchase price. The 
precious metals owned by the customer is the collateral for the loan. 
Historically, the average loan is about 50% of the collateral value.
    In all transactions, title to the full amount of the metals 
purchased passes to the customer and delivery is made, either to the 
customer or his designated depository, within 28 days, or such shorter 
period as may otherwise be required by law, upon receipt of full or 
partial payment of the purchase price, as applicable. Monex Credit 
Company also lends precious metals to customers who wish to take a 
short position in the market. All transactions with the Monex companies 
are self-directed by the customer. There are no managed accounts. 
Approximately 20% of Monex customers finance their purchases.
    Monex Deposit Company and Monex Credit Company have been in 
business for over 20 years and conduct their business in compliance 
with the requirements of the Model State Commodity Code, as adopted in 
22 states, including California, where the Monex companies are located. 
The companies' principals have been in the retail precious metals 
investment business since 1967.
    Monex Deposit Company and Monex Credit Company are registered with 
the California Department of Corporations, respectively, as a 
telephonic seller and finance lender. The risk disclosures included in 
the Monex account agreements are the most extensive available to retail 
commodity investors.
    The number of customer complaints received by Monex is very low, 
generally no more than two or three per month, compared to the 
thousands of customers and transactions that we handle annually. Most 
complaints are of a minor nature and are resolved by an explanation or 
a logistical solution. Serious complaints result in reimbursement or 
are settled if they appear meritorious. In the last 20 years, Monex has 
been involved in 82 customer litigation and arbitration matters. Ten 
are still pending. Of those resolved, Monex has lost only one case, 
which resulted in an award of $270.
BRIEF HISTORY
    In 1974, Congress enacted the Commodity Futures Trading Commission 
Act. In so doing, Congress created the CFTC. In addition to instituting 
the first meaningful federal comprehensive regulatory scheme for the 
commodity futures industry, Congress preempted the states (primarily 
state securities regulators) from applying their laws to persons and 
transactions within the jurisdiction of the Commodity Exchange Act 
(CEA).
    The creation of the CFTC coincided with an enormous increase in 
commodities trading as the Vietnam era inflationary cycle, the oil 
crunch and many other factors caused upheavals in the economy. In 
addition, the early 1970s marked the first time since World War I that 
Americans could own gold bullion. As is all too often the case, 
expansion of legitimate markets was accompanied by expansion of illegal 
activity as well.
    Commodity-theme boiler rooms proliferated around the country, 
mostly in Boston, New York and South Florida, purportedly selling 
contracts involving everything from gasoline stored in tankers moored 
in Maracaibo Bay, to gold and silver, to aluminum stored in caverns 
beneath the Isle of Jersey and coal in the hills of Tennessee. The CFTC 
was grossly understaffed to deal with off-exchange commodities fraud. 
The entire Enforcement Division had less than 125 people. The CEA was 
crafted to regulate the established exchange-based commodity futures 
market, but was extremely complicated and ill-suited to deal with off-
exchange problems. Hundreds of millions of dollars were lost by 
unsuspecting victims. The states were virtually powerless to attack the 
scams. Even if a state had the resources and evidence to proceed, the 
CEA preempted state intervention. In fact, in one infamous case arising 
in Arkansas, the Arkansas Securities Commissioner took action against a 
commodities boiler room under the Arkansas Securities Act in defiance 
of the preemption. The CFTC actually intervened on behalf of the boiler 
room to assert the position that Arkansas was preempted from acting, 
but took no action of its own against the fraudster. This was the low 
point in relations between the states and the CFTC.
    By 1978, it was clear that something was very wrong. Millions of 
dollars had been lost to scammers. The CFTC proved out-gunned in its 
efforts to address the problem. Congress determined that the states 
should be allowed into the enforcement effort, and enacted Section 6d 
of the CEA providing the states with the authority to enforce state 
laws "of general criminal application" (not securities laws) against 
violators, and allowing states to enforce the CEA in federal court 
themselves. Although a move in the right direction, Section 6d was not 
particularly well received by the states or successful in achieving the 
desired goal. States were unfamiliar with the CEA and the federal 
forum, not many cases were brought in cooperation with the CFTC and 
none were brought by states acting alone.
    Matters came to a head in 1983. An outfit in Fort Lauderdale called 
International Gold Bullion Exchange had been advertising in the Wall 
Street Journal for over a year, offering to sell gold at below the spot 
price if purchasers would agree to store the metal at IGBE for a year. 
The company would pay them 5% interest a year. Over 425,000 investors 
across the country, including many in Colorado, sent IGBE a total of 
more than $140 million to buy gold. When authorities entered the vault 
in 1983, they found 50 pieces of wood painted gold. The money was all 
gone and there was no gold. \1\
---------------------------------------------------------------------------
    \1\  Coloradans Caught in Gold Scandal, Bruce Wilkinson, Denver 
Post, August 18, 1983
---------------------------------------------------------------------------
    Just as IGBE's fraudulent operations neared their peak, in 1982, 
Congress enacted the so-called "open season" provision of the CEA, 
Section 12(e). Under this new provision, the states were authorized to 
enforce any applicable law against any person who had to be registered 
with the CFTC to engage in particular conduct but failed to do so, and 
any transaction that had to be effected on a contract market or 
exchange under the CEA but was not.
    Enactment of the ``open season'' provision did not mean that states 
had applicable laws on their books providing jurisdiction to take 
advantage of it. This led to the initiation of a multi-jurisdictional 
project to draft a model statute that states could enact to utilize 
against off-exchange commodity-theme frauds. State securities 
regulators, the CFTC and the National Futures Association (``NFA'') 
joined forces to create the Model State Commodity Code (``Model Code'' 
or ``Code''). It took two years of drafting, including public releases, 
comment periods, review of responses, meetings with industry and a 
public hearing before the New York Commodities Bar. In testimony 
presented to the Washington State legislature in support of its Code 
legislation in 1985, CFTC Commissioner Fowler C. West described the 
working group's efforts.

    Two drafts were circulated for public comment. The working group 
        received and assessed a great number of comments on these 
        drafts and held meetings with representatives of the 
        commodities industry in order to assure that the Code did not 
        unnecessarily curb legitimate business interests. Those efforts 
        culminated in a final version of the Model Code, finalized in 
        April 1985. . . \2\

    \2\  Testimony of The Honorable Fowler C. West, Commissioner, U.S. 
Commodity Futures Trading Commission, In Support of Senate Bill 4527 
Before the Senate Financial Institutions Committee, The Honorable Ray 
Moore, Chairman, February 4, 1986, at p. 3.
---------------------------------------------------------------------------
    With Monex's support and assistance, the Model Code was adopted in 
California and Colorado. It has also been enacted in Georgia, Idaho, 
Indiana, Iowa, Kansas, Maine, Mississippi, Missouri, Nebraska, Nevada, 
New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, South 
Carolina and Washington, and its substantive provisions were 
incorporated into the state securities laws of Arizona, Montana, and 
Utah. Florida enacted provisions dealing with the problem using a 
different but effective approach.
WHAT THE CODE DOES
    The preamble to the Model Code begins by stating that the Code is a 
``modern bucket shop law.'' It is essential to understand that the Code 
is not meant to regulate commerce; it is an enforcement statute.
    In its deliberations, the Code's drafters examined existing state 
laws to determine if any other law provided the jurisdiction necessary 
to take action against the schemes and frauds being perpetrated under 
the generic commodities theme. Traditional securities laws were deemed 
to be inadequate; it proved very difficult to establish that the 
agreements were "investment contract" securities, as would be required 
under those statutes. In order to make such a case, we needed vast 
amounts of documentary evidence and analysis, and the firms were most 
often located in another jurisdiction beyond the reach of state 
administrative subpoenas. Even if we could acquire such data, by the 
time a case was prepared, the boiler room was long gone.
    There were two fundamental fraudulent patterns of conduct that 
showed up most frequently: (i) consumers were being sold commodities on 
a down-payment basis for speculative purposes-delivery was not required 
for many months (there were no commodities and the company vanished 
with the money that the customer had paid); and (ii) consumers were 
buying precious metals from out-of-state companies promising to store 
the metal for them, but the companies never bought the metal and 
squandered the cash. Proving jurisdiction under the CEA in off-exchange 
cases often was (and remains) less a legal enforcement action and more 
all but metaphysical exercise in quantum economics and semantics, 
requiring reams of evidence, expert testimony from economists, and even 
then a measure of luck. Back then and to this day, enforcement 
authorities charged with protecting customers from fraud need a quick 
recognition, simple litmus test to give them the basis to take prompt 
action in response to a newspaper ad or an infomercial. Months, even 
years later is far too late. We needed a new approach.
    Under the Code, we prohibited both of those fraud themes, on sight. 
We created a new concept, the "commodity contract," defined as a 
contract for the purchase or sale of commodities, primarily for 
speculative or investment purposes, and not for use or consumption by 
the offeree or purchaser. We crafted a presumption that, in the absence 
of evidence to the contrary, such contracts are for speculative or 
investment purposes. Under the Code, the offer or sale of such 
"commodity contracts" is strictly prohibited. Excluded from this 
prohibition-and therefore unaffected by the Code-are contracts or 
transactions:

      under which is required, and where the purchaser actually 
receives, within 28 days [or other period determined by a state] of the 
payment in good funds of any portion of the purchase price, physical 
delivery of the total amount of each commodity purchased;

      offered, sold or purchased by CFTC, SEC or state 
registrants, and financial institutions;

      within the exclusive jurisdiction of the CFTC; or

      involving the purchase of precious metals, under which it 
is required and where the purchaser or his/her designated and 
authorized depository receives, within 28 days of payment by the 
purchaser in good funds of any portion of the purchase price, physical 
delivery of the precious metals purchased-and the depository (or 
another approved depository) delivers a document to the purchaser 
confirming that the metals are being held by the depository on the 
purchaser's behalf.

    Given this new formulation, we could examine a contract or 
transaction and determine quickly whether it was lawful under the Code. 
That was the key element. If delivery was not required or did not 
actually occur within 28 days of any payment, it was illegal and we had 
the grounds to proceed immediately under the Code, with cease and 
desist orders, injunctions or even referrals for criminal action. No 
experts, no reams of documentation, no six months to work up the case 
while our citizens were defrauded. All we needed was a look at the ad 
or contract and a calendar.
    In 1989 written testimony on the Model Code presented to the 
Colorado General Assembly, the NFA stated:

    There should be no question as to NFA's support of the Model State 
        Commodity Code now--or in the future.

    The thrust of the Model Commodity Code is really to act as a modern 
        bucket shop law, and goes straight to the heart of this 
        regulatory problem--it will prohibit the very type of 
        transactions which have been fraught with customer abuses. 
        These are contracts which fall into a regulatory abyss. 
        Commodity futures contracts traded on exchanges by registered 
        professionals are already regulated. Commodity option 
        contracts, as allowed to be traded pursuant to the Acts and 
        Regulations promulgated thereunder, are not the problem. 
        Leverage contracts traded pursuant to CFTC regulations are not 
        the type of problem you are being asked to address. Regulatory 
        mechanisms exist which can deal with those aspects of the 
        industry. The real problems are the lookalikes, the tag-alongs-
        -contracts which should be designated by the CFTC but are not; 
        contracts which should be regulated but are not; contracts 
        which are non-futures, non-options, non-leverage; commodity 
        contracts in which the dealer says he's got it (maybe in a 
        warehouse in Mozambique) but is usually gone when the customer 
        wants to get it. If states, such as Colorado, outlaw this type 
        of activity, that activity which requires registration but is 
        not registered, swift, effective enforcement action can be 
        taken at the State level much more efficiently than has been 
        done in the past. \3\
---------------------------------------------------------------------------
    \3\  Statement of National Futures Association In Support of 
Pending Legislation H.B. 1130 Colorado Commodity Code, In the State of 
Colorado, at p. 8, January 20, 1989

    The Code has worked very well in the many states where it has been 
adopted. The jurisdictional hurdles confronting state regulatory 
authorities attempting to classify commodity-theme frauds as selling 
securities are no longer of concern in Code states. They can react 
quickly and effectively to protect their citizens. For example, 
Missouri used the Code in a criminal case involving a multi-million 
dollar platinum fraud that might have been difficult to pursue under 
traditional securities theories. In a commodities boiler room raided by 
New Jersey officials, warnings were discovered that salespeople should 
not call into Maine (presumably because Maine has the Code). Colorado 
had a similar experience in another case.
    The Code approach works. I would be remiss if I did not add that, 
given my understanding of the facts in Zelener, the rolling Forex 
contracts were illegal ``commodity contracts'' under the Code. Although 
the contracts called for delivery within 28 days, in this case, 48 
hours, actual delivery of the currency was not made to the investors. 
Purchases and sales were netted out. The Code was also strongly 
endorsed by the Futures Industry Association. Real commerce between 
real merchants, investments offered and sold by regulated entities and 
transactions lawful under the CEA are in no way prohibited under the 
Code.
    Again, in its Colorado testimony, the NFA stated:
    The Model Commodity Code will not outlaw legitimate commodity 
        activity, it will not outlaw or impede in any way transactions 
        between commercial interests nor will it outlaw or in any way 
        inhibit cash sales transactions. If delivery is made within the 
        specified period, FINE! But this will proscribe the activity 
        wherein your citizens have purportedly purchased such things as 
        gold bullion for delivery in 9 months from an unregistered 
        firm, only to find out 6 months later that their ``gold 
        bullion'' was merely a vault full of two-by-fours painted gold. 
        \4\
---------------------------------------------------------------------------
    \4\  NFA Testimony, id. at p. 9.

    Further, in Commissioner West's Washington testimony, he went on as 
follows:
    Let me briefly state what the Model Code does and does not do. 
        While the Code bans [the] types of transactions that have been 
        fraught with abuse, the Code does not interfere with legitimate 
        business. \5\
---------------------------------------------------------------------------
    \5\  West Testimony, id. at p. 3.

    Since 1985, the CFTC has scrutinized Monex's products on at least 
two occasions, determining in each instance that no futures, commodity 
options or leverage transactions were involved and took no enforcement 
action of any kind against the Monex companies. Monex Deposit Company 
and Monex Credit Company have never been the subject of any 
governmental sanction relating to their business dealings with 
customers.
THE ISSUE TODAY
    There is a long history of not regulating spot markets under the 
CEA. To subject spot metals markets to CFTC oversight would set a 
precedent for also regulating other spot markets. Such an expansion of 
the CFTC's role would prove impracticable and would have undesirable 
market impacts. The CEA has always been intended to apply to futures 
contracts and related instruments. It does not and never has controlled 
cash market transactions unrelated to futures activities. In 1985, the 
CFTC acknowledged its lack of jurisdiction over retail precious metals 
transactions in which delivery is effected to purchasers by the prompt 
transfer of title to metals stored in a depository (See Interpretive 
Letter 85-2, CFTC Office of General Counsel, ['84-'86 Binder] CCH Comm. 
Fut. L. Rep. para. 22,673 (August 6, 1985). The Code was drafted to 
complement the Federal commodities laws and permit public investment in 
legitimate off-exchange commodity transactions, most specifically in 
cash market precious metals.
    One reason that Congress is considering additional regulation of 
financial markets and instruments is the systemic economic and 
financial risk posed by some products and market structures that became 
prevalent over the past two decades. In retrospect, it has become clear 
that even if transactions are limited to large, well-capitalized 
counterparties, they can-and did-create unanticipated risks that 
threaten all American citizens. No one has alleged that to be the case 
here: it has not been charged or demonstrated that off-exchange spot 
precious metals transactions pose a systemic risk. Retail metals 
trading involves individual investors, not large institutions whose 
failure could create systemic financial risk. Moreover, prices of 
metals are largely determined by the much-larger exchange futures 
markets, so any potential for price manipulation in retail markets is 
minimal.
    Concerns have also been raised about the use of leverage, but the 
mere fact that a seller extends credit to a buyer does not 
automatically mean that the transaction should be regulated under the 
CEA. By this logic, any product purchased with a down payment and the 
use of credit would be considered ``leveraged'' and ripe for CFTC 
regulation.
    In H.R. 977, passed earlier this year by the Committee on 
Agriculture, Congress is in the process of giving CFTC major new 
responsibilities to establish agricultural and energy speculative 
position limits; re-visit earlier hedging exemptions in many 
commodities; collect and interpret large volumes of previously 
undisclosed and unreported information about the swaps market; and 
establish and enforce a new regulatory regime for clearing swaps. The 
Committee has ably made the case for these new responsibilities, but I 
would suggest that this is not the time to add even more tasks to an 
already-overburdened agency in the absence of a clear and compelling 
case for the need to do so. Nor should major market participants on 
futures exchanges and in the off-exchange swap markets be allowed to 
divert attention from last year's huge commodity bubble and the damage 
it did to our economy by trying to divert Congress's focus to a few 
retail metals dealers.
CONCLUSION
    Congress' focus should remain fixed on last year's huge commodity 
bubble and the damage done to our economy by major market participants 
on futures exchanges and in the off-exchange swap markets. The retail 
metals market is in fine shape.
    The Model State Commodity Code was born of the need for an 
effective state investor protection tool in the absence of federal 
oversight. It has served its purpose well, nationwide, as a stand-alone 
statute. There have been no unintended consequences. If problems arise 
in states that have not yet adopted the Code, one must presume they 
will address them under some other statutory approach or adopt the Code 
as have their sister states. As it is, the presence of the Code in 22 
states suppresses fraud in all. There has been no resurgence of 
precious metals fraud since the adoption of the Code, even with the 
recent run-up in the price of gold. To attempt to contort the CEA to 
provide jurisdiction to any already overtaxed CFTC would risk 
unintended consequences of futures-style regulation of spot market 
commerce. I believe this approach is ill-conceived and unwarranted. 
Thank you.

    Mr. Boswell. Well, thank you. We will start the questions. 
I will just be very brief. But since this narrow Zelener fix in 
the 2008 Farm Bill, should this be extended to other 
commodities besides foreign currency? I think you have 
addressed that a little bit, but I will let you respond first, 
Mr. Feigin, then the rest of you may make a comment. Mr. 
Feigin.
    Mr. Feigin. I harken back to the late 1980's after the 
states had become very active in attacking precious metals 
frauds. As soon as gold and silver went out of favor, the 
scammers turned to strategic metals. Some metals I had never 
heard of harkening back to high school chemistry. They were 
selling chromium because it was being used in catalytic 
converters. And there were also scams that I am sure my 
colleagues remember regarding coal, aluminum, all sorts of 
things, and the scammers will go to the path of least 
resistance, so this has to be a broad-based remedy that is not 
a rifle shot, but more a shotgun approach.
    Mr. Boswell. Mr. Roth or Mr. Obie, either one.
    Mr. Roth. I do think further action is required, Mr. 
Chairman, for the reasons that I outlined, and to just repeat 
them briefly. We have seen the migration of abusive practices 
away from the foreign currency trade to the unregulated, right 
now it is precious metals, tomorrow it might be something else. 
But we have seen these web sites, 30 of them, that have this 
unregulated; futures market even though they call it something 
else. So the point that I made earlier was that anti-fraud 
authority is not enough. The whole point of the Commodity 
Exchange Act is that retail customers need regulatory 
protection when they are trading futures contracts, and that 
goes beyond anti-fraud authority. We are trying to prevent the 
fraud, not just prosecute it.
    And that is why under the Act when a retail customer is 
doing a futures contract it has to be on a transparent, open 
and regulated exchange. The customer has to have a risk 
disclosure. There are regular audits of the member to make sure 
that they have the financial capital to meet their obligations. 
None of those protections apply in the current, unregulated 
environment. Like I said, it is distressing to work hard to 
throw a guy out of the futures industry and then get a customer 
complaint 2 weeks later from someone who says the same guy is 
now selling Zelener gold. The customer doesn't say Zelener gold 
but that is what it is. So if the question is do we need 
further action to address Zelener my answer is most certainly, 
yes, because the migration that we feared would happen has 
happened. We have got retail customers in an unregulated 
futures market, and the fact that the scammer calls it 
something else shouldn't be enough to defeat CFTC jurisdiction.
    Mr. Boswell. Mr. Obie.
    Mr. Obie. And equally frustrating, Chairman, is to bring 
actions in the foreign currency area and then see folks think 
that they can sell the same exact contracts and gold, precious 
metals, and other commodities, and so, you know, from the CFTC 
standpoint customers who have been harmed here in these Zelener 
futures look-alikes and other commodities reach out to us to 
complain, and we know that we are not able to help them. We are 
not able to bring actions. We are not able to use the 
enforcement powers that we have in this area, and so I think it 
is important for the Committee to know that we are seeing an 
increase in this area and that this is an opportunity to really 
nip this fraud in the bud.
    Mr. Boswell. Thank you. Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you. Mr. Roth, what Mr. 
Feigin is saying, you disagree with, and is the disagreement 
what you just described in that it is only anti-fraud 
provisions that are covered by the state statutes so we are 
responding after the fact under the Uniform Act? Is that the 
distinction between what is not happening today and what you 
would like to see happen? Mr. Feigin's argument is this ought 
to be taken care of, as I understand your argument, it should 
be taken care of at the state level. We have a Uniform Model 
Act in place. Twenty-two states have that. But your concern is 
that it is after the fact?
    Mr. Roth. Right. The Model Commodity Code specifically 
excludes from this coverage anything that is covered by the 
Commodity Exchange Act. It doesn't cover futures contracts, 
which is what these are. And my point is that the Model State 
Commodity Code or CFTC anti-fraud authority is not a substitute 
for the network of regulatory protections that the Commodity 
Exchange Act has historically provided to retail customers 
trading futures.
    Mr. Boswell. Mr. Feigin, your response?
    Mr. Feigin. Pointing to the Zelener case, the court with 
respect said that they were not futures contracts, so I think a 
different fix is required, and the Model Code poses an easily 
identifiable tool to allow the regulators and law enforcement 
to shut these things down on site. We found that they were 
inherently fraudulent, that there was no retail participation 
in the spot market. Some people wanted to buy gold, yes, and we 
provided for that and protected them by setting a 28-day 
physical actual delivery requirement, but in other ways we 
found there was no retail, honest retail, participation in the 
spot markets, and, therefore, we didn't want to regulate it. We 
wanted to stop it. We wanted to find an easy way to simply shut 
it off. If they are futures contracts certainly they ought to 
be regulated under the Commodity Exchange Act. But if they try 
to escape, try to sell off exchange the Model Code mechanism 
provides a way for law enforcement to simply close them down on 
site, not requiring further analysis.
    Mr. Moran. What would be the consequences to Monex's 
business if Congress adopted the suggestion of a broad Zelener 
fix?
    Mr. Feigin. Well, obviously it would depend what it is but 
Monex has been working under and operating under the Model Code 
precepts for 20 years. And I want to make clear we are not in 
dispute with the NFA, and I don't think the NFA is seeking here 
to shut Monex down. I think we have a common ground in that we 
both want to see these off exchange scams shut down as fast as 
possible.
    Mr. Moran. Mr. Roth, let me ask you a question before my 
time expires, and then you can respond to Mr. Feigin. But we 
have been through this a long time. We have had a long 
conversation and discussion in Congress about a broad Zelener 
fix. A conclusion was reached in the 2008 Farm Bill for a 
narrow fix. Describe to me why that was the conclusion. What 
are the forces at work out here that prevented what I think 
many of us thought was an important direction to go.
    Mr. Roth. I can tell you what I think was going on, and 
that before when Zelener always came up, it always came up in 
the context of reauthorization, and when you are talking about 
reauthorization, you are talking about roughly 2,000 other 
issues that come up. And there is necessary compromise. You 
need to move the legislation forward. We need to get the CFTC 
reauthorized. I feel silly telling you about the political 
process but compromises are reached, and we were always 
frustrated that we couldn't prevail in our position but we 
understood the necessity of moving the legislation. So from my 
perspective, it was largely a political sort of process and the 
President's working group and Mr. Greenspan felt that we should 
really focus on the problem at hand and that was foreign 
currency.
    Mr. Moran. Did you have something you wanted to respond to 
other than my question?
    Mr. Roth. Mr. Feigin's point that the Zelener court ruled 
that these weren't futures contracts, well, that is the 
problem. That is the point. That in reaching that decision this 
court decided to exalt form over substance and say we are going 
to look at the four corners of the written agreement and if 
that customer got trapped by clever draftsmanship, well, that 
is just too bad. And I recognize that the Model Code gives the 
states a vehicle to approach and attack that type of problem, 
and that is great. But, as I said, it is no substitute for the 
regulatory protections designed to prevent fraud, and that is 
what we are looking for.
    Mr. Moran. Mr. Obie.
    Mr. Obie. Looking forward giving the markets and the state 
that they are in at this moment, I think gold, silver and other 
precious metal frauds are attractive at this time. Previously, 
I think foreign currency was the fraud de jeur, and now given 
the state of the economy and the state of the markets, I think 
you are seeing this increase in gold and precious metals for a 
reason. But not just in those commodities. We are also seeing 
it in energy commodities, and I am aware of at least a couple 
orange juice potential fraud boiler rooms.
    Mr. Moran. Thank you very much. Thank you, Mr. Chairman.
    Mr. Roth. Mr. Chairman, if I could add one more thing with 
respect to Mr. Moran's question about how our approach would 
effect----
    Mr. Boswell. We will get to that in just a minute.
    Mr. Roth. Thank you, sir.
    Mr. Boswell. Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman. Just continuing this 
line of discussion here, the Model Commodity Act, is that what 
it is called?
    Mr. Feigin. The Model State Commodity Code.
    Mr. Marshall. Model State Commodity Code is in 22 states 
now?
    Mr. Feigin. Yes, sir.
    Mr. Marshall. So does that mean that somebody can locate in 
another state that doesn't have the code and effectively 
proceed to engage--because a bucket shop can be anywhere. It is 
just a telephone and the Internet communication. And 
effectively proceed to conduct the scam operation and be fairly 
safe from anybody coming after them?
    Mr. Feigin. Certainly a boiler room could locate, for 
instance, in Pennsylvania, and sell into Idaho or Montana. Of 
course, they have the code so they would have to pick another 
state, South Dakota, perhaps. But, more importantly, bucket 
shops have tended to locate in southern California, south 
Florida, Scottsdale, Arizona, and some in New York.
    Mr. Marshall. Is that because those are places where people 
are instinctively fraudulent kind of characters?
    Mr. Feigin. If you are making a million dollars a month, I 
guess it is more fun to be in South Beach than Bismarck with 
all due respect to North Dakota. But I think that has been the 
reason, and so that seemed to be very effective when those 
states took action. It seemed to stem the tide of the problem 
back in the 1980's.
    Mr. Marshall. Mr. Roth, Monex representatives and I had a 
discussion yesterday about their operation, and they sound like 
they are pretty straightforward and that you wouldn't have a 
problem with what they do, is that correct?
    Mr. Roth. Well, the fix that we have been proposing would 
not affect any contracts in which there is actual delivery. We 
are not trying to regulate the spot market. We are just trying 
to prevent people from disguising futures contracts by calling 
them spot contracts, so I don't think we would have any--from 
our point of view, the proposal that we have been advocating 
would not affect Monex.
    Mr. Marshall. Let us say we stay with just the state 
regulatory scheme, you say that that is no substitute for the 
Federal scheme, the way the CFTC and NFA goes about protecting 
people from these kinds of scams. Could you elaborate a little 
bit about that or, Mr. Obie, could you elaborate how do you 
all--after the fact, closing down a Ponzi operation scheme 
after the fact really doesn't help a whole lot of people out 
because typically they don't have any money. It may be that you 
go back and try and collect from individuals who benefited from 
the scheme and then trying to distribute money, but that is 
very difficult to do. And largely there is no remedy at that 
point except the satisfaction of seeing somebody go to jail.
    Mr. Roth. Closing down a Ponzi scheme has a positive 
benefit if you close it early because you close it before all 
the other people get taken in. Your ability to close a Ponzi 
scheme early is greatly enhanced if you have the authority to 
conduct regular on-site examination of the person conducting 
the Ponzi scheme. If they are on your radar screen----
    Mr. Marshall. So the basic idea here is we expand the class 
of transactions that are covered by the CFTC's authority and 
individuals selling those kinds of products have to register 
and consequently they are subject to regular oversight, review, 
et cetera, so that their little Ponzi operation can't grow to a 
large----
    Mr. Roth. Correct. And the only quibble I would have with 
you would be that in my view we are not expanding the CFTC's 
authority or jurisdiction. We are restoring it.
    Mr. Marshall. We are correcting an aberration, what you 
would say is an improper reading of what congressional intent 
was in the statute. Mr. Feigin, your response? How is it that 
Mr. Roth and Mr. Obie suggest to us that a lot of people will 
be protected from Ponzi schemes if this authority is given and 
Monex won't be hurt at all, so why not go ahead and permit it 
so that we fill this gap and protect these folks and you all 
aren't harmed?
    Mr. Feigin. We have not quibbled with the idea that futures 
contracts and futures trading ought to be regulated and----
    Mr. Marshall. What we are talking about here though is 
expanding the--well, correcting would be the argument the 
Zelener interpretation of what a futures contract is. If in 
substance it is a futures contract, it is going to be 
regulated. It doesn't matter how clever your draftsmanship is. 
That is all they are saying.
    Mr. Feigin. But we don't believe these off exchange futures 
contracts have any validity at all. We think they ought to be 
banned, and, therefore, we found not regulated, banned.
    Mr. Marshall. Well, but they are not at the moment and 
isn't that just a decision that the CFTC and NFA should make 
themselves?
    Mr. Feigin. So at that point if a Federal fix is warranted, 
we heartily recommend a quick trigger mechanism to shut them 
down, not to regulate them and allow them to continue to 
operate and develop. We think they should be shut down 
immediately.
    Mr. Marshall. I am out of time, but you want to respond, 
Mr. Roth.
    Mr. Roth. That mechanism already exists in the act. The act 
prohibits off exchange futures contracts for retail customers, 
so when you make the determination that these things are 
futures contracts, they are per se illegal.
    Mr. Feigin. That is the problem. It is almost a Talmudic 
decision as to whether something is a futures contract as is 
seen in Zelener. You often need an economist to try to testify 
that something is a futures contract. To prove something is a 
commodity contract and therefore banned under the Model Code--
--
    Mr. Marshall. If we simply say it is to be delivered and 
then the pattern is that there is delivery, doesn't that take 
care of your worries? Would it matter what the writing said?
    Mr. Feigin. All you need is the contract and a calendar and 
then the evidence whether the commodity was delivered in 28 
days or not. If the contract didn't call for delivery, require 
it, and delivery wasn't in fact made within 28 days, it is 
simply illegal.
    Mr. Boswell. I am letting you have a little extra time 
here, Mr. Marshall, because this, I think, pertains to what we 
are talking about. So, Mr. Roth, I will give you one last 
moment here.
    Mr. Roth. With respect to the decision about whether--I 
think it was referred to as a Talmudic decision as to whether 
something is or isn't a futures contract. Well, from 1974 to 
the Zelener case it wasn't a problem. Courts dealt with this 
just fine by looking at the underlying purpose of the 
transaction when it was a retail customer. It wasn't until 2004 
that the Zelener court said that we should just look at the 
four corners of the written agreement, so I know it is at times 
a complex issue but really things worked just fine from 1974 to 
2004, and all we are trying to do is sort of restore that rule 
of law.
    Mr. Boswell. Mr. Feigin, last remark on Mr. Marshall's 
point.
    Mr. Feigin. I think it is a question of an enforcement 
tool. I think the Model State Commodity Code and I think the 
three of us work together to formulate this response it is much 
easier to determine something is an illegal commodity contract 
under the code than it is, and I submit, there were other very 
complex decisions and analyses of whether something is or isn't 
a futures contract. And it is a lot easier to prove something 
under the code than it is under the Commodity Exchange Act.
    Mr. Marshall. If we adopted a definition, which essentially 
broadened, you know, got rid of the Zelener decision and sort 
of went back to the pre-Zelener era where the CFTC and NFA 
could step in there and try and stop these Ponzi schemes that 
are operated on a retail level and admittedly all three of you 
acknowledge hurting the hell out of people who just are suckers 
and they get caught up in this, and we simply said if your 
operation is one that is designed to comply with the Commodity 
Code and delivery does occur, two things, in fact, delivery is 
occurring in your operation, and that is accepted, would that 
work? Wouldn't that fill the gap right there, and you would be 
able to--CFTC, NFA would be able to go after the Ponzi schemes 
that are now popping up all over the place in these different 
commodities and Monex and others who are operating underneath 
and actually delivering would be okay and they wouldn't have to 
fool with you guys.
    Mr. Roth. I think that is right, Congressman. We are 
looking to effect leverage contracts offered to retail 
customers where there is no expectation of delivery, and that 
is what we are trying to reach and that restores the law to, I 
think, its pre-Zelener state.
    Mr. Marshall. It sort of sounds to me like the three of you 
could get together and come up with something that would guide 
us that would protect the legitimate commodity traders at the 
retail level who do deliver their spot contracts, they do 
deliver, and at the same time expand the jurisdiction so we get 
rid of these Ponzi schemes.
    Mr. Boswell. This has been a good discussion. Thank you. I 
only gave you double time there, Mr. Marshall, but it was a 
good discussion, and Mr. Moran and I agreed on that. So Mr. 
Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. I certainly 
appreciate you allowing Mr. Marshall to continue there. That 
was an interesting discussion and quite educational for me. Mr. 
Feigin, you made a statement a while ago and made a comment 
about a bucket shop. Can you explain or define what that is for 
me?
    Mr. Feigin. Bucketing is the idea of selling something to a 
speculator and then taking an offsetting transaction in that 
alleged good but you never have it so it is naked speculation.
    Mr. Luetkemeyer. That is an empty bucket, isn't it?
    Mr. Feigin. That is the idea. And they evolved along with 
telephones and the like where you could just bet with somebody 
although they didn't know they were betting. They could own 
something for a while, sell it, but you never owned it. So the 
term evolved as bucketing, and there were a lot of anti-
bucketing laws in the 1960's, but they were very limited.
    Mr. Luetkemeyer. Okay. Thank you. Mr. Roth, you made a 
couple comments with regards to the development of some of the 
rules and laws. I was very interested in the exchange with Mr. 
Marshall. I think you made a comment one time about something 
about not just enforcement but we also need to do something 
prior so that we define what a contract is and set up some 
rules as to how it be framed, and you said something about the 
four corners of an agreement. Can you explain what that is for 
me, please?
    Mr. Roth. The Zelener court basically said that in 
determining whether a contract with a retail customer is a 
futures contract, you have to look at the four corners of the 
document and only the four corners of the document.
    Mr. Luetkemeyer. What are the four corners, I guess is the 
question.
    Mr. Roth. The written document itself, just the written 
page.
    Mr. Luetkemeyer. Okay.
    Mr. Roth. And that if certain language was included 
notwithstanding the substance of the transaction it would be 
considered not a futures contract and therefore beyond the 
Commodity Exchange Act.
    Mr. Luetkemeyer. Okay. So when you say four corners, it is 
not four tenets of a contract that you have to have in order to 
be able to be judged a futures contract. It is just the 
definition of a written contract.
    Mr. Roth. It is the written contract itself.
    Mr. Luetkemeyer. Okay. Very good. Thank you. Mr. Obie, you 
made a comment also about enforcement. What are the tools that 
you need to be able to do your job? I know we talked about a 
number of things here. What other things do you see that you 
need to be able to broaden your scope to be able to prevent 
some of these things from happening?
    Mr. Obie. Obviously, we have to get over this 
jurisdictional hurdle. We have the ability to move quickly to 
freeze funds. We work very closely with criminal authorities. 
We have trading bans. We got registration bans. And we put 
these folks down and we try to help the American public.
    Mr. Luetkemeyer. You don't have the ability to do those 
things right now?
    Mr. Obie. Not in this area.
    Mr. Luetkemeyer. Not in this area. Okay. Very good. Thank 
you. Mr. Chairman, I yield back the balance of my time. Thank 
you.
    Mr. Boswell. Thank you. Mr. Walz.
    Mr. Walz. Thank you, Mr. Chairman, and thank you all for 
being here today and help us understand this issue. I am going 
to ask you be somewhat subjective here. Did the Seventh Circuit 
rule wrong on Zelener, can I ask each of you in your opinion?
    Mr. Roth. Dead bang.
    Mr. Feigin. Absolutely.
    Mr. Obie. And we obviously are litigating that. We were 
telling the court how to rule and it ruled against us.
    Mr. Walz. Is that the proper fix then to go back and appeal 
that decision that way or is the proper--it is done, so there 
is nothing else that can be done that way, that is why you come 
this way?
    Mr. Obie. That is right. And other circuit courts look 
towards Zelener in reaching decisions, so we have lost a line 
of progeny there.
    Mr. Walz. Okay. Did we make the right fix, albeit narrow, 
in the Farm Bill fix on that?
    Mr. Obie. In bringing the nine cases that we brought so 
far, we have not seen jurisdictional obstacles, and so in 
foreign currency we believe we have the tools to aggressively 
prosecute these bucket shops and Ponzi schemes.
    Mr. Roth. With respect to foreign currencies, the farm bill 
extended the commission's anti-fraud authority to these type 
contracts for foreign currencies. What I stated before is that 
anti-fraud authority is no substitute for regulatory 
protections. At the same time, I recognize, and this is why I 
went into it in my testimony, foreign currencies have been 
treated differently since 1974, so I understand why Congress 
may have taken this act in the farm bill and just extended the 
anti-fraud authority with respect to foreign currencies. I 
would hate to see that carried further into other commodities 
where it was only anti-fraud authority because I don't think 
that is a substitute for regulatory protections.
    Mr. Feigin. Unless I am wrong, I think that the idea that 
forex had to be traded through an SCM creates a fairly quick 
trigger identification mechanism so that if you see somebody 
trading in forex instruments, and they are not registered as an 
SCM that provides a quick trigger. As to whether they are doing 
it lawfully after being registered as an SCM, that is another 
question. I want to point to this distinction, this anomaly 
that was created with the Treasury Amendment. There should not 
be any off exchange futures trading. It just should not be. It 
should be banned. And to the extent that jurisdictional 
anomalies have allowed it to proceed in one way or another, we 
have to accommodate. But we should not give rise or accommodate 
the development of off exchange futures trading, so what we are 
offering, what we are suggesting, is that this quick fix gives 
everybody a chance to just shut it down, not to develop. That 
is why I make the distinction between this should not be 
regulated. This should be shut down.
    Mr. Walz. And I would ask, and Mr. Feigin had brought it up 
to the next question on this that I am interested in but I know 
I may not have the right people here. Maybe, Mr. Obie, you are 
the best to engage this. What has happened on legitimate forex 
trading? I know you said there has been 84 investigations or 
whatever. Can you speak to anything what happened in that 
regard?
    Mr. Obie. It is very hard to say legitimate forex trading 
because historically off exchange futures contracts were 
illegal. We have this special animal that retail forex 
contracts have been allowed through off exchange model but we 
have tried to--Congress has tried to come with a new regime by 
having registered forex dealer members, but historically these 
leveraged contracts which harm the economy were never allowed 
to be marketed to the retail public, and so that is where we 
have seen the greatest fraud. And in the exchange area, we see 
much fewer complaints in the forex area or anything else, so if 
I had to compare we have many more frauds off exchange, very 
few frauds on exchange.
    Mr. Walz. Okay. Thank you, and I yield back, Mr. Chairman.
    Mr. Boswell. Thank you. We will recognize Mr. Schrader.
    Mr. Schrader. Thank you, Mr. Chairman. I am again still 
trying to get clarity on the differences of opinion if there 
are any here, Mr. Feigin, I guess the bottom line is at this 
point your contention is that the metals trades that are 
referred to by Mr. Roth and Mr. Obie are not really futures 
contracts, would that be correct?
    Mr. Feigin. They may be, they may not be. I think that the 
identification of a futures contract has proven to be a more 
problematic issue in court than has the more physical 
identification mechanism that has been used under the Model 
Code. So I don't think we disagree. I think Mr. Obie would be 
thrilled if there was an easier way to identify these and 
eliminate legal issues to be able to shut the off exchange 
things down. They may be futures contracts, but they may not, 
but they are certainly off exchange and in the fact that they 
are off exchange they ought to be shut down unless they end all 
forex and a few precious metals dealers who deliver.
    Mr. Schrader. Mr. Roth, I assume you believe they are 
futures contracts? Mr. Feigin is not sure.
    Mr. Roth. I certainly believe that the contracts that were 
at issue in the Zelener case were futures contracts. I believe 
that the 30 or so web sites that are offering these contracts 
to retail customers for precious metals are futures contracts. 
I think most of the problematic issues that have come up in 
defining a futures contract involve where there is a commercial 
user or an institutional user and not as much in the retail 
sector. And Steve can speak to this better than I, but I think 
from 1974 until the Zelener decision the commission seldom lost 
on jurisdictional grounds when fighting retail bucket shops.
    Mr. Obie. And Mr. Roth is absolutely right in that regard, 
and we don't see an issue where delivery is occurring. Our 
middle name is futures. What we are saying is that these 2 day 
rolling spot contracts and other crafty arguments that are used 
to defeat the futures jurisdiction has impeded our ability to 
stop fraudsters and Ponzi schemers.
    Mr. Schrader. And I assume, Mr. Feigin, you would rather 
have the states deal with these issues under the Model Code 
that you have referenced?
    Mr. Feigin. Yes, sir.
    Mr. Schrader. Is it a fair statement, Mr. Feigin, that you 
believe that it is better to deal with these as fraud issues 
rather than prevention regulation issues as asked for by Mr. 
Roth?
    Mr. Feigin. I believe all three organizations back in the 
1980's made the determination that there was no lawful or 
legitimate reason for these contracts to be permitted nor was 
there any useful purpose, that they were inherently fraudulent 
and ought to be prohibited, and then we looked very carefully 
and determined whether we were stepping on any legitimate toes 
and carved out those few issues where there were legitimate 
companies operating. We made sure there were consumer 
protections there. So we were very careful, and I think it is 
important not to try to create a new market. If they are 
futures contracts, they ought to be shut down because they are 
off exchange.
    Mr. Schrader. But if we are not sure they are futures 
contracts, you are not sure, then we ban them?
    Mr. Feigin. Then, in essence, as we are all agreeing, the 
requirement for delivery, for actual delivery of the commodity 
that you are purchasing within a brief period of time is the 
trigger mechanism. The bucket shops don't have the stuff to 
deliver nor do they actually deliver it, so delivery is the key 
and was the key in the operation of the----
    Mr. Schrader. So in your testimony, you have talked about 
the 28 deliveries that currently exist, and I think it was Mr. 
Roth in his testimony referenced that is a little too long in 
the rolling contracts, and perhaps a 7 day period would be 
better. And I assume you object to that and I would like Mr. 
Roth to respond too.
    Mr. Feigin. The Model Code started with the 7 day delivery 
period and after some testimony from an outfit that I don't 
think is around anymore called the Industry Council for 
Tangible Assets the NASAA people were convinced to extend it to 
28 days for various circumstances. That number, it is in there. 
That is less of a problem than the concept in itself.
    Mr. Roth. Congressman, we have no problem with 28 days. We 
picked 7 days. If it was 28 days, I think it would achieve the 
same effect what we are trying to achieve. If I could just draw 
one distinction. I think why I say anti-fraud is no substitute 
for regulatory protection, and then we get into the distinction 
that should we ban off exchange futures or regulate them. There 
is no real disagreement here. My point is that if it is an off 
exchange futures contract, it is banned, and if they are going 
to offer futures contracts, they have to become a contract 
market, and once they are a contract market then they are fully 
regulated and we have all the regulatory protections. So I 
certainly don't mean to suggest that we should regular off 
exchange futures contracts for things other than foreign 
currency. They should all be on exchange. I agree with that.
    Mr. Schrader. So trying to get a handle, which I have not 
yet, is that apparently the bottom line difference would be 
defining what a futures contract is. Obviously, some 
misunderstanding, disagreement, whatever, on what a futures 
contract is because if you could do that then we would just all 
agree happily that we should ban those.
    Mr. Roth. And I think the uncertainly that we are talking 
about in the definition of futures contract was injected and 
created by the Zelener decision, and so the legislation that we 
are trying to craft that we are drafting is hopefully to 
restore the law to its pre-Zelener state.
    Mr. Schrader. Mr. Feigin, last comment.
    Mr. Feigin. The pre-Zelener state dealt with issues of 
whether it was for speculative or investment purposes. I think 
that goes to the mental state of the parties as opposed to 
whether or not you have to deliver in 28 days. Like I said, all 
you need is the contract and a calendar as opposed to delving 
into the mental state of the parties or the intent. That is 
subjective. Twenty-eight days is not----
    Mr. Schrader. Thank you. Thank you, Mr. Chairman.
    Mr. Boswell. Thank you. Mr. Kissell.
    Mr. Kissell. Thank you, Mr. Chairman. I would like to yield 
time to begin with to Mr. Walz for a question.
    Mr. Walz. I thank the gentleman, and this is, Mr. Obie, I 
am still trying to get a handle on this. Can you tell me from 
CFTC's perspective--I could have had my legal scholar, Mr. 
Marshall, help me. He was gone here in just a minute. What 
happened in the appeal to the Supreme Court on this because it 
is a palatable feeling here that this was a bad, bad decision? 
Can you tell me the history from CFTC what happened there just 
for my background? And I thank the gentleman for yielding me a 
minute.
    Mr. Obie. We consulted with the solicitor general and there 
was no appeal to the Supreme Court from the Zelener decision.
    Mr. Walz. Do you have any idea why that was?
    Mr. Obie. I do not. I can get you that information.
    Mr. Walz. That is fine. We can do the research too. But, 
thank you. Thank you, Mr. Kissell.
    Mr. Kissell. And that is kind of a question I had too. Mr. 
Obie, if things worked well from 1974 to 2004, and all of a 
sudden the courts say within the four corners it is no longer 
going to work, what do we need to change within those four 
corners to make it work because it seems like to me that if we 
try to do it with regulations these guys are always going to 
figure out a way to get ahead of us and look for the loopholes. 
So what within those four corners needs to be changed?
    Mr. Obie. I think this committee has already done that with 
regard to foreign currency. We know that these rolling spot 
contracts are look-alike futures contracts, and what has 
happened is foreign currency is just not as attractive to have 
a fraud in, so those contracts that were right on the web site 
have just been picked up and foreign currency has been changed, 
and now you see orange juice, you see precious metals, and you 
see other commodities entered in, and those are arguably 
outside our jurisdiction. The Zelener fix gives us the roadmap 
to extending that to other commodities.
    Mr. Kissell. So we could follow this same premise of the 
narrow fix and broaden it and you feel like that would take 
care of it?
    Mr. Obie. And once you do that what happens is that there 
are other provisions under the Commodity Exchange Act that 
would apply and say that off exchange futures contracts are 
illegal, so that we wouldn't have an off exchange market in 
orange juice dealing with futures contracts. We wouldn't have 
off exchange orange juice. It would be up to the commission in 
that regard, but the operative effect of the law would be that, 
and I think we are all in agreement, that we wouldn't have off 
exchange futures as a result.
    Mr. Kissell. Thank you, sir. Mr. Roth, you mentioned 
something about 30 Internet sites that advertise this type of 
transaction. Of those 30, how many do you think are not 
legitimate in terms of fraudulence that may exist?
    Mr. Roth. I can tell you that virtually none of them are 
registered with the CFTC. Some of them, when you look at them 
and you can look at the web site and see some misleading 
information, but one of the things that happens with these 
electronic trading platforms is sometimes you can only see the 
fraud by looking at the actual trading on the trading platform 
and see how the trading platform can be manipulated by the 
owner of the platform to put customers at a huge disadvantage. 
And you can't see that without getting in to do an audit and an 
examination, and because these firms aren't registered and they 
are not members they are escaping that sort of scrutiny. So 
just looking at the web site, certainly some of them are very 
troubling as far as their sales practices, but where the real 
heart of the fraud might be is something you would only get 
into and know the full extent of it after you do an 
examination. And right now we can't do that examination because 
we don't have jurisdiction.
    Mr. Kissell. And, Mr. Obie, that brings me back to another, 
just curiosity. The people that the fraudulence is being 
imposed upon, is there a generality as to how these people get 
in touch with them? What makes them subject themselves to 
fraudulence? Is there a commonality there that, gee, I should 
know better. What is the pattern there? What are the people 
that are getting caught up in this like?
    Mr. Obie. I have seen it in several instances. One category 
is affinity fraud, and that is where you know someone who tells 
you, hey, I have an investment and it has been doing really 
well, and you usually find that from a fraudster who either has 
the same ethnic background or is a member of your church, or 
recently we had someone who was a school board member and was 
well respected in the community and was operating a Ponzi 
scheme of many millions of dollars in Philadelphia. We also see 
it though with regard to folks who know with the stock market 
collapsing that they need to save for retirement, and so they 
are looking for other alternative investments. And the Ponzi 
schemers just prey on these folks. They are average Americans, 
many of whom are blue collar who are just looking to find an 
investment that will enable them to retire and have a 
comfortable living.
    The poor folks that we have to deal with, I can tell you 
about the Agape case that was up in Long Island. It had 
thousands of victims and involved hundreds of millions of 
dollars that were defrauded. And the folks there were average 
Americans who lost substantially all of their investment.
    Mr. Kissell. Thank you, Mr. Chairman.
    Mr. Boswell. Thank you. I see Mr. Pomeroy has joined us. 
Mr. Pomeroy, I hate to bother you at this crucial moment here. 
Did you have a question or should we come back to you in just a 
moment?
    Mr. Pomeroy. If there is someone else to inquire, I will be 
happy to defer to them.
    Mr. Marshall. This is not your time, Mr. Pomeroy. The Chair 
is going to yield----
    Mr. Boswell. No, I will make that decision.
    Mr. Marshall. We might infer that this be your time. The 
fix that we initially proposed in 2005 and then stuck into the 
2008 act, we are not necessarily wed to that as the concept for 
moving forward, it seems to me. And it also seems to me based 
on the conversation that we had here today as I mentioned 
earlier that you all should be able to get together and give us 
some guidance how to move forward in a way that will close the 
gaps in regulation so that these folks, you know, as soon as 
they pop up on your web site you are able to call them up and 
say, hey, what are you doing? By the way, either one, you can't 
do it at all or, two, you are going to have to do an exchange, 
or, three, I don't know what the three is, frankly, because the 
way it works right now you are either doing it on exchange as 
retail or you don't do it at all.
    And so I think that satisfies your need, Mr. Feigin, and at 
the same time we ought to be able to figure out some way to not 
have you burdened, your operations burdened by excessive 
regulations. Certainly, the regulation would be pretty minimal 
in your case. So I am hoping that you can come up with 
something, and I am just suggesting that we are not necessarily 
wed to what we have done in 2008. If there is a better way to 
describe this to accomplish the objective, we are all ears. And 
I could yield back. I could keep on and then you would just 
have less and less time.
    Mr. Boswell. Mr. Pomeroy.
    Mr. Pomeroy. Thank you, Mr. Chairman. I have never seen 
Brother Marshall run out of words before so quickly so this has 
been a stunning development. I apologize for missing this 
hearing, which I looked forward to, but I do have--the question 
I wanted to bring to this hearing involves the issue of, I 
guess, functional versus identify a specifically identified 
item for regulation. And it looks to me like some of the 
discussion between Mr. Feigin and Mr. Obie involves this issue. 
Specifically, what I mean is it has been suggested that a State 
securities regulatory type approach that would identify a 
particular practice, prohibit it very clearly, very clean, but 
it would allow just some other instrument, some other product 
to be gamed in a way that wouldn't be addressed by the State 
prohibition. Mr. Feigin, can you explain how your approach 
would be sufficiently encompassing so that we wouldn't have to 
chase the scam with new rules every time?
    Mr. Feigin. Sure. I am going to start by saying that I 
believe the Zelener--I wasn't involved in it obviously, but I 
believe the Zelener contract violated the Model Code, and would 
have been illegal on site. The Model Code applies to anything 
in commerce. It could be sweaters. It could be bars of gold. It 
could be rolls of aluminum. It could be anything. If you sell 
it, it is presumed to be for investment purposes and if the 
contract doesn't require delivery, and if, in fact, delivery is 
not made within 28 days it is illegal. And so it would apply to 
all commodities, and I strenuously urge, I think, with my 
fellow panel members that whatever you do this fix not be 
limited to precious metals. If you proceed with it, that has no 
meaning. They will just go do something else.
    So the Model Code applies to everything just as the 
Commodity Exchange Act applies to any commerce except onions. I 
am waiting for the next onion scam to come up, but at least for 
both statutes its coverage is universal.
    Mr. Pomeroy. An onion scam brings tears to my eyes. Mr. 
Roth, would you care to comment?
    Mr. Roth. The point that we made earlier was that what we 
are looking for is a fix which--the Model State Commodity Code 
doesn't apply to futures contracts that are regulated under the 
Commodity Exchange Act. We are concerned that people under the 
Zelener decision, people can simply cosmetically disguise 
futures contracts as something else to try to evade the 
jurisdiction of the CFTC. The fact that the Model Code may 
allow a state's securities regulator to close the firm down in 
our view is not a substitute for preventing the fraud in the 
first place by requiring these entities to be on exchange. I 
would note that of the 30 web sites that we cited in our 
Internet surveillance, we have made referrals on all 30 of them 
to the appropriate states, and not a single case has been 
brought, and the states have plenty to do. And historically it 
has been a tough sell.
    Maybe Steve can discuss this further, but make more 
referrals to states and getting states to take an affirmative 
prosecutorial stand in these cases hasn't been the easiest 
thing in the world to do, and these futures contracts typically 
lie within the expertise of the futures regulators, and that is 
where I think they ought to be dealt with.
    Mr. Obie. We do have expertise in this area, and we have 
lent our assistance wherever we are needed, but clearly this is 
a complex area, and that is where the Division of Enforcement 
has the expertise and we have been able to prosecute the 
foreign currency scammers that we have seen. We have 84 active 
investigations. We have already brought nine cases. That is 25 
percent of our current litigation so far this year with that 
perspective. We have already filed approximately 36 cases this 
year. All of fiscal year 2008, we filed a total of 40. So we 
are on pace to use the clarified authority that you have given 
us.
    Mr. Pomeroy. So is it your position if something for 
delivery within 28 days, physical delivery, is some kind of 
loophole if that is regulated under----
    Mr. Obie. No. The proposals, I think we are in agreement. 
We are hearing as a panel that is in agreement here that 
regulating the spot market is not something we are interested 
in. We are looking at the look-alike paper contracts. These 
have been crafty contracts that were drafted by high-powered 
lawyers to evade jurisdiction. We are not looking at where 
tangible products are delivered.
    Mr. Pomeroy. Thank you. My question is probably a little 
out of left field given my missing the testimony in the first 
place, but thank you very much. It has been clarified somewhat 
for me. Thank you, Mr. Chairman.
    Mr. Boswell. Thank you very much. Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you. What seems to be 
developing, and, in fact, we have talked here among ourselves 
that if we put the three of you in a room we would have a 
broader Zelener fix. My question goes back to one I raised with 
Mr. Roth earlier. We had this opportunity for a broader Zelener 
fix in the Farm Bill and previous to that. We have debated 
fixing Zelener for a long time. Who are we missing a the table 
this morning that if we put them in the room with you would 
cause the deal to fall apart? What is the argument against this 
broader fix other than, I guess, Mr. Roth was telling us the 
Treasury Department said that we don't need to focus on it at 
the moment. But within the industry there is not unanimity of 
agreement that seems like something is missing here in this 
morning's discussion?
    Mr. Roth. Well, if you want to know who objects to what we 
are proposing besides the people we are trying to reach, the 
concern I always heard from certain aspects of the regulated 
industry was a concern that anything that appeared to give the 
CFTC jurisdiction over anything that is called an OTC 
instrument caused tremors and made people nervous, and it was 
the old camel's nose type of an argument that my God, anything 
that gets into OTC is bad. And our counter was but these are 
futures contracts aimed at retail customers, but I think there 
was just such concern about CFTC jurisdiction extending to OTC 
instruments that people got very, very nervous.
    Mr. Moran. Let me make sure, Mr. Roth, you said there is no 
real disagreement between 7 and 28 days.
    Mr. Roth. Yes.
    Mr. Moran. Okay. We also did the fix as it related to 
foreign currency exchange, and you all, particularly you, Mr. 
Roth, in your history have described the uniqueness of the 
regulatory framework toward foreign currency. It reminded me of 
the history of that. Why is it treated uniquely, and is there 
something unique about it that again suggests that we ought to 
have a narrow fix?
    Mr. Roth. And the reason foreign currencies are treated 
differently under the Act, foreign currency and onions, I 
guess, but focusing on foreign currencies, again I think it 
stems from the fact that just as the CFTC was being created the 
Treasury Department was concerned that if this interbank 
foreign currency market that they were involved in the 
regulation of, that they didn't want the CFTC interfering with 
that interbank market. And that is why the Treasury Amendment 
was created in 1974, and where it becomes difficult is when you 
start having foreign currency transactions involving not the 
interbank market but retail customers.
    Mr. Moran. Thank you for the reminder. I remember you 
saying that now, and so there is no fundamental difference 
other than bank regulation, the treasury regulation of 
commercial banks, for example, in comparison to metals. The 
consequence to the consumer, to the participant in the market 
is the same.
    Mr. Roth. Exactly.
    Mr. Moran. Okay. Thank you, Mr. Chairman.
    Mr. Boswell. I think that brings us to a point unless 
somebody has something they want to ask. You know, Mr. Moran 
and I have been talking about it, and Mr. Marshall as well, I 
think the three of you, if you had the time to do it and would 
do it could sit down and work out something that would be 
workable. I am going to ask you to consider that, and I am 
going to instruct Mr. Ogilvie, to contact you and see if there 
is a time you could come together and sit down and give us a 
draft that we could take a serious look at. I appreciate what 
you have done this morning. I don't think there is any point in 
us dragging this out any further. Do you have any closing 
remarks you want to make?
    Mr. Moran. I do not, Mr. Chairman. Thank you for allowing 
me a second round of questions.
    Mr. Boswell. You are welcome. I think we have learned 
something here this morning. I think you have made a 
contribution. We appreciate it. I also think there is a 
solution, and I think I am looking at the people who can put it 
together if you will sit together and give and take a little 
bit and let Clark with you. We can either decide to do 
something or leave it alone. That is where we are going to stop 
at that point right there unless somebody else has anything 
else they want to say. I thank you very much for your 
participation today, and the usual applies, and this hearing 
has come to a close. Thank you.
    [Whereupon, at 11:20 a.m., the Subcommittee was adjourned.]

                                  
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