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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 

COMMITTEE ON AGRICULTURE 

COLLIN C. PETERSON, Minnesota, Chairman 

TIM HOLDEN, Pennsylvania, 

Vice Chairman 

MIKE MCINTYRE, North Carolina 

LEONARD L. BOSWELL, Iowa 

JOE BACA, California 

DENNIS A. CARDOZA, California 

DAVID SCOTT, Georgia 

JIM MARSHALL, Georgia 

STEPHANIE HERSETH SANDLIN,

South Dakota 

HENRY CUELLAR, Texas 

JIM COSTA, California 

BRAD ELLSWORTH, Indiana 

TIMOTHY J. WALZ, Minnesota 

STEVE KAGEN, Wisconsin 

KURT SCHRADER, Oregon 

DEBORAH L. HALVORSON, Illinois 

KATHLEEN A. DAHLKEMPER, 

Pennsylvania 

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 

FRANK D. LUCAS, Oklahoma,

Ranking Minority Member 

BOB GOODLATTE, Virginia 

JERRY MORAN, Kansas 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

MIKE ROGERS, Alabama 

STEVE KING, Iowa 

RANDY NEUGEBAUER, Texas 

K. MICHAEL CONAWAY, Texas 

JEFF FORTENBERRY, Nebraska 

JEAN SCHMIDT, Ohio 

ADRIAN SMITH, Nebraska 

ROBERT E. LATTA, Ohio 

DAVID P. ROE, Tennessee 

BLAINE LUETKEMEYER, Missouri 

GLENN THOMPSON, Pennsylvania 

BILL CASSIDY, Louisiana 

CYNTHIA M. LUMMIS, Wyoming 

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 

BRAD ELLSWORTH, Indiana 

TIMOTHY J. WALZ, Minnesota 

KURT SCHRADER, Oregon 

STEPHANIE HERSETH SANDLIN,

South Dakota 

BETSY MARKEY, Colorado 

LARRY KISSELL, North Carolina 

DEBORAH L. HALVORSON, Illinois 

EARL POMEROY, North Dakota 

TRAVIS W. CHILDERS, Mississippi 

JERRY MORAN, Kansas,

Ranking Minority Member 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

STEVE KING, Iowa 

K. MICHAEL CONAWAY, Texas 

ROBERT E. LATTA, Ohio 

BLAINE LUETKEMEYER, Missouri 

CLARK OGILVIE, Subcommittee Staff Director

(II) 

(III)

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

(1)

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, 

2

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 

3

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 

4

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 

5

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 

6

1 CFTC v. Zelener, [2003-2004 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 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). 3 CFTC v. Erskine, 512 F.3d 309 (6th Cir. 2008). 

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

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. 

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 

7

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 

8

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 dayto-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 

9

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. 

10

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. Re- cently, 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 

11

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. 

12

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.

13

[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. 

14

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 

15

1 Coloradans Caught in Gold Scandal, Bruce Wilkinson, Denver Post, August 18, 1983

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. 

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

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

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 

16

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

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 tagalongs--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

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 

17

4 NFA Testimony, id. at p. 9. 5 West Testimony, id. at p. 3.

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

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

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. ¶ 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 unreVerDate 0ct 09 2002 11:23 Oct 14, 2009 Jkt 041481 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 I:\DOCS\111-17\52664.TXT SGINA
18

ported 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 

19

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 lookalikes 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 

20

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. 

21

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. 

22

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 

23

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 inVerDate 0ct 09 2002 11:23 Oct 14, 2009 Jkt 041481 PO 00000 Frm 00027 Fmt 6633 Sfmt 6601 I:\DOCS\111-17\52664.TXT SGINA
24

teresting 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. 

25

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 

26

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. 

27

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 

28

Zelener decision, and so the legislation that we are trying to craft 

that we are drafting is hopefully to restore the law to its preZelener 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 opVerDate 0ct 09 2002 11:23 Oct 14, 2009 Jkt 041481 PO 00000 Frm 00032 Fmt 6633 Sfmt 6601 I:\DOCS\111-17\52664.TXT SGINA
29

erative 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. 

30

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. 

31

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. 

32

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 

33

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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