1 Theodore Purdy Sr. will be referred to as "Purdy." Teddy Purdy Jr. will be "Theodore Purdy,

Jr." The two combined will be "Purdys." United States Court of Appeals,

Fifth Circuit.

No. 91–4454.

Theodore PURDY, et al., Petitioners,

v.

COMMODITY FUTURES TRADING COMMISSION, Respondent.

Aug. 17, 1992.

Appeal from a decision of the Commodity Futures Trading Commission.

Before BROWN, KING and WIENER, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

This dispute arose from a complaint to the Commodity Futures Trading Commission ("CFTC"

or "Comm

issio n") by an elderly investor who lost a fortune investing (one might say gambling) in

precious metal leverage contracts. After a judgment for the broker house by an Administrative Law

Judge ("ALJ"), and subsequent summary affirmation by the Commission, the investor appeals to this

court. Finding his complaints more at issue with the present state of the law, and not with any actual

violations, we affirm the decision of the Commission.

The Road to Las Vegas

Theodore Purdy Sr. 1 is a self-emp l oyed businessman who sold his fifty-year-old auto parts

business and retired in 1983. At the time of his retirement, Purdy's business grossed $1.5 million

annually, and he paid himself approximately $150,000 a year. Both he and his son, Theodore Purdy,

Jr., have high school educations and, prior to their first dealings with Monex International ("Monex"),

had no investing experience.

In 1972, Purdy started buying Krugerrands from Monex with cash, and stored the coins under2 See Hearings on S. 2485, S. 2837, and H.R. 13113 Before the Senate Comm. on Agriculture,

Nutrition, and Forestry, 93d Cong.2d Sess., pt 3 at 748 (1974) (Statement of M. Martin Rom,

Chairman, International Precious Metals Corporation).

3 Hearings on S. 2391 Before Subcomm. on Agricultural Research and General Legislation of

the Senate Comm. on Agriculture, Nutrition, and Forestry, 95th Cong., 2d Sess. 625 (1978)

(statement of International Precious Metals Corporation). Hearings on H.R. 10285 Before the

Subcomm. on Conservation and Credit of the House Comm. on Agriculture, 95th Cong., 2d Sess.

719 (1978) (statement of International Precious Metals Corporation).

4 Id.

5 Commodity Exchange Act, ch. 369, § 1, 42 Stat. 998 (1922); ch. 545, § 1, 49 Stat. 1491

(1936) (codified as amended at 7 U.S.C.A. §§ 1–24 (West 1980)).

6 Commodity Futures Trading Commission, Pub.L. No. 93–463, 88 Stat. 1389 (codified as

amended in scattered sections of 5 U.S.C.A. (West 1980) and 7 U.S.C.A. (1980)). his kitchen sink. By 1980, he had purchased over 1,100 Krugerrands and some silver bars, all stored

under the sink. At this time John Mullins, one of Monex' account representatives, informed Purdy

about precious metal leverage accounts.

The Rules of the Game

Leverage contracts arrived in the late 1960s and early 1970s as a way for individual investors

to purchase precious metal coins or bars from coin dealers on a credit basis. 2 An investor paid down

20–30 percent of the full purchase price plus sales commissions, and signed a credit agreement for

the balance, which stipulated interest rates and the possibility of margin calls if the commodity price

dropped. 3

Investment houses prom oted leverage contracts as a hedge against inflation for individuals

who found futures markets undesirable. Futures require larger investments, are more volatile, and

are short-term in nature. 4

In 1974, Co ngress amended the Commodities Exchange Act 5 ("CEA" or "the Act") to

establish the CFTC. 6 The CFTC received exclusive jurisdiction over transactions involving "contracts

of sale of a commodity for future delivery." 7 U.S.C.A. § 2 (West Supp.1992). This exclusive7 Futures Trading Act of 1978, Pub.L. No. 95–405, § 23, 92 Stat. 865, 876–877 (1978). The

Senate Report accompanying the bill that was eventually enacted identified the following

characteristics of leverage contracts:

(1) standard units, quality, and terms and conditions; (2) payment and

maintenance of "margin"; (3) closeout by an offsetting transaction or by delivery,

after payment in full; and (4) no right or interest in a specific lot of the

commodity. The leverage dealer is the principal to every transaction and functions

as a market maker. The leverage dealer, however, does not guarantee a

repurchase market and further reserves the right to cease operating as a market

maker or broker for the customer. Most customer commitments are covered or

"hedged" in futures, forwards, or physical inventory; most physical inventory,

however, is encumbered through bank loans. Leverage contract bid/ask prices are

determined by dealer adjustments to spot and futures market quotations.

S.Rep. No. 850, 95th Cong., 2d Sess. 26 (1978), reprinted in 1978 U.S.C.C.A.N. 2087,

2114.

8 The rule states in relevant part:

It shall be unlawful for any person ... (a) To employ any device, scheme, or artifice

to defraud, (b) To make any untrue statement of a material fact or to omit ... a

material fact necessary in order to make the statements made in the light of the

circumstances ... not misleading, or (c) To engage in any [conduct] which operates

... as a fraud ... in connection with (1) an offer to make or the making of, any

transaction for the purchase, sale or delivery of [gold and silver bullion or bulk

coins] ... pursuant to ... a margin account, margin contract, leverage account, or

leverage contract ... or (2) the maintenance or carrying of any such contract. jurisdiction included regulation of leverage transactions in gold and silver bullion and bulk coins. 7

U.S.C.A. §§ 2, 1 5a (§ 15a repealed 1978) (West Supp.1992). Additionally, 7 U.S.C.A. § 15a

allowed the Commission to regulate any leverage contract it determined to be a contract for future

delivery.

In 1978 Congress replaced 7 U.S.C.A. § 15a with 7 U.S.C.A. § 23(b) (West 1980), amended

by 7 U.S.C.A. § 23(b) (West Supp.1992). 7 This legislation reinforced the Commission's authority

to regulate, as futures, any leverage transaction it determined to be a futures contract. 7 U.S.C.A.

§ 23(d) (West 1980), amended by 7 U.S.C.A. § 23(b) (West Supp.1992).

The Commission has periodically exercised its regula t ory powers over leverage contracts.

In 1975, it adopted Rule 30.03 (now Rule 31.3) to prohibit fraud in leverage transactions. 8 In 197917 C.F.R. § 31.3.

9 All references to 17 C.F.R. are to the 1986 edition unless noted otherwise, as this edition

contains the applicable CFTC rules relevant to this dispute.

10 Futures Trading Act of 1982, Pub.L. No. 97–444, § 234, 96 Stat. 2294 (codified as amended

at 7 U.S.C.A. § 23 (West Supp.1992)).

11 Id.

12 "Leverage transaction merchant" is defined in 17 C.F.R. § 1.3(oo) as "any individual,

association, partnership, corporation, trust or other person that is engaged in the business of

offering to enter into, entering into or confirming the execution of leverage contracts, or soliciting

or accepting orders for leverage contracts and who accepts leverage customer funds (or extends

credit in lieu thereof) in connection therewith."

A "Leverage contract" is defined in 17 C.F.R. § 31.4(w) as:

a contract, standardized as to terms and conditions, for the long-term (ten the Commission imposed a moratorium on the entry of new firms offering l everage contracts. 17

C.F.R. §§ 31.1, 31.2 (1986). 9 Firms actively selling leverage contracts prior to June 1, 1978 were

allowed to continue. Id.

In 1982, Congress amended the Act, directing the Commission to estab lish regulations for

" leverage transaction merchants" handling gold and silver bullion and bulk coin transaction s. 1 0

Congress also required the Commission to regulate leverage contracts as an entirely separate class

of transactions, distinct from futures contracts. 11

In 198 4, the Commission adopted their final rules, codified at 17 C.F.R. Part 31. Part 31

defined a leverage contract, and also prescribed disclosure, minimum net capital, and cover

requirements. The Commissio n also continued the moratorium on the entry of new firms, and

required registration of existing firms, including Monex.

The Casino

Monex is a registered leverage transaction merchant ("LTM") and commodity trading advisor

("CTA"). John Albrecht is a registered associated person ("AP") of Monex. 12 Monex has activelyyears or longer) purchase ("long leverage contract") or sale ("short

leverage contract") by a leverage customer of a leverage commodity which

provides for:

(1) Participation by the leverage transaction merchant as a principal in

each leverage transaction;

(2) Initial and maintenance margin payments by the leverage customer;

(3) Periodic payment by the leverage customer or accrual by the leverage

transaction merchant of a variable carrying charge or fee on the unpaid

balance of a long leverage contract, and periodic payment or crediting by

the leverage transaction merchant to the leverage customer of a variable

carrying charge or fee on the initial value of the contract plus any margin

deposits made by the leverage customer in connection with a short leverage

contract;

(4) Delivery of a commodity in an amount and form which can be readily

purchased and sold in normal commercial or retail channels;

(5) Delivery of the leverage commodity after satisfaction of the balance due

on the contract; and

(6) Determination of the contract purchase and repurchase, or sale and

resale prices by the leverage transaction merchant.

"Commodity trading advisor" is defined in 17 C.F.R. § 1.3(bb) as "any person

who, for compensation or profit engages in the business of advising others as to the value

of or the advisability of trading in any [futures contract] ... or any leverage transaction ...

or who for compensation or profit, and as part of a regular business, issues or promulgates

analyses or reports concerning any of the foregoing."

"Associated person" of an LTM is defined in 17 C.F.R. § 1.3(aa)(5) as an

employee or agent "in any capacity which involves: (i) the solicitation or acceptance of

leverage customers' orders ... for leverage transactions...." (emphasis added).

"Carrying charges for a leverage contract" are defined in 17 C.F.R. § 31.4(1) as:

"all service and interest

changes (sic) paid periodically by a leverage customer to a

leverage transaction merchant, while a long leverage contract remains open."

13 For a general description of Monex's business operations similar to the operations here at

issue, see Moody v. Monex Int'l, Ltd. [1980 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 97,714,

1980 WL 1467 (D.Utah 1980). bought and sold leverage contracts on precious metals since 1967. 13 Monex operates like a typical

LTM as regulated by the Act. It buys and sells precious metals for individuals, either on a credit or

cash basis. Monex acts as a principal, not broker, for these transactions, and bases its prices on world

market conditions. If a buyer pays full price, then Monex delivers the actual precious metals to the

customer. If, however, the buyer elects a credit plan, t hen Mo nex establishes a ten year purchase14 This was in no sense a sinking fund. Rather it was the customary storage place for Purdy's

securities, metals, etc. contract; financing the balance while the buyer pays periodic interest charges. Monex covers its

physical delivery obligations by maintaining inventory, and trading in the futures market.

M onex operat ed as an LTM prior to June 1, 1978; therefore it was not affected by the

moratorium on new firms selling leverage contracts. In 1984, when registration became a

requirement, all existing LTM's had to apply for registration before April. Monex filed its registration

application in August. The CFTC instituted action against Monex to enforce the application

requirement. While the CFTC reviewed Monex' application, it granted Monex the privilege of

continuing to operate as a n LTM. This was standard practice while the Commission made a final

determination on an LTM's registration application. Albrecht, as an AP, also filed a tardy registration

application, and the Commission treated him in the same manner as Monex.

The Play

In 1980, Purdy began leveraged investing with Monex. At that time, John Mullins handled

Purdy's accounts. For each leveraged transaction made, Purdy received a Commodity Account

Agreement, which he signed and returned to Mon ex, and an Offering Statement (essentially a risk

discl o sure statement). He bought silver bars on the margin, and within two months, he lost about

$14,000. He closed out these accounts, but continued to buy metals from Monex at full price. In

1982, John Albrecht began handling Purdy's accounts for Monex.

Purdy sold his business in 1983, and decided to use all or some of the proceeds to purchase

leverage contracts from Monex again, although this time on a much larger scale. Purdy believed that,

despite his early losses, precious metals provided the best hedge against the inflationary times that

certainly would prevail in the 1980's. His strategy was to use some precious metals stored under the

sink 14 as starting capital. He then could invest in as much gold and silver as possible by trading on15 From 1980 until 1985, when he stopped investing, Purdy opened twelve accounts with

Monex. The record reflects that for each one, he received and signed a Commodity Account

Agreement, and received the current Offering Statement. Executing these signed Commodity

Account Agreements was a prerequisite to Monex's dealing with Purdy; if Purdy would not sign

and return them, Monex would not sell to Purdy. Purdy had total control over each account, and

made all investment decisions, sometimes after consulting with family.

16 The record conflicts as to the exact amount of these losses, but they were at least as high as

$75,000 and may have been in excess of $290,000.

17 Prior to 1985, Purdy purchased long leverage contracts. In layperson's terms, "long" means

the investor speculates that the price will go up over time. The investor hopes to buy low now,

and sell high later, although not necessarily ten years later as is the term for a standard leverage

contract at Monex. "Short" means the investor wants the price to go down over time. The

investor then "sells" a leverage contract to Monex, and "buys" it back at a lower price later, thus

making a profit (assuming the price did actually decrease over time). the margin, thus maximizing profits. The money saved by leveraging, and t he pro ceeds thereof,

would support his living expenses, he contemplated.

Purdy opened twelve accounts for the purpose of executing his investment plan. 15 Some he

bought on the margin. Others he paid full price for the met al, then immediately used the metal as

collateral for a loan from Monex, effectively turning these transactions into margin accounts as well.

Early in 1983, he suffered huge losses in three days when the price of silver dropped by fift y percent

overnight. 16 Rather than cut his losses, Purdy continued to invest heavily; delving deeper into his

metals stored at home unde r t he sink and obtaining loans from Monex on other, more profitable,

accounts. Purdy testified that he believed "the metal market will come back," and he felt that "[i]f

I get something I believe in I will stay with it." Throughout 1983 and 1984, Purdy continued to lose

money.

When 1985 began, losses in Purdy's accounts exceeded $1,250,000. Purdy asked Albrecht

what could be done to stop the financial hemorrhage. Albrecht suggested hedging long investments

with short investments, but tempered his advice with the caveat that although short postures would

stop losses, they would prevent gains as well. 17 Purdy then bought some short contracts.18 Purdy v. Monex Int'l, Ltd., CFTC Docket No. 86–R244, 1988 WL 228733 (June 29, 1988).

In March of 1985, news wire services reported the possibility of Brazil's default on foreign

bank loans. Albrecht called Purdy and stressed to him that Brazil's default could increase the price

of silver. Albrecht explained t hat Purdy's short positions would inhibit profits should the price of

silver rise due to Brazil's default. Purdy authorized Albrecht to sell most of the short contracts, but

when Brazil did not default, Purdy did not immediately reinstate his short hedges. Purdy bought short

again in July 1985, but then closed all accounts with Monex in September 1985.

In sum, from 1980 through 1985 Purdy sent $1,313,323 to Monex, but he withdrew $675,614

in t he fo rm of precious metal or funds. Monex charged him $217,934 in interest for the leverage

accounts he maintained at Monex.

Almost a year after closing his accounts Purdy filed a r eparat ion complaint with the

Commission. After two failed attempts to file a complaint that alleged a specific violation and actual

damages suffered, Purdy o b tained new counsel through the assistance of the Commission. The

second amend ed complaint charged Monex with bucketing, fraud, and numerous violations of the

CEA and the Rules of the CFTC.

After Herculean discovery efforts by both sides, a hearing was held before an ALJ in Houston,

Texas, in December 1987. Counsel represented both sides; presenting evidence and cross-examining

witnesses. The ALJ issued his Initial Decision ("ID") on June 29, 1988, 1 8 concluding that Purdy failed

to establish by a preponderance of the evidence any actual violations by Monex. The ALJ

summarized the case as follows:

In truth, Purdy knew at all times that he could simply exit the market and stop his losses. But

Purdy wanted to remain in the "game." Purdy knew as early as March 1983 that he had lost

substantial sums of money. Later he increased his exposure to risk. Nothing in this record

shows t hat his account executive, Albrecht, or any other employee or officer of Monex

exerted undue pressure on Purdy to maintain his positions with Monex. To his credit, Purdy19 The Commission's Order in relevant part states:

Review of the record and the briefs submitted by the parties establishes that

the result reached in the initial decision is substantially correct. Because we also

conclude that the parties have not raised important questions of law or policy that

merit discussion, we are affirming the initial decision without opinion. In taking

this action, we do not endorse either the precise legal theory applied by the

presiding officer or the specific reasoning reflected in the initial decision.

Accordingly, the initial decision shall neither be cited as Commission precedent in

any Commission proceeding nor deemed an expression of the Commission's views

on the issues raised in this case.

20 Words identical to these are found in other laws allowing judicial review of administrative

proceedings. See, e.g., 15 U.S.C.A. § 45(c) (West 1973); ("The findings of the Commission as

to the facts, if supported by the evidence, shall be conclusive."), 29 U.S.C.A. § 210(a) (West

Supp.1992); ("[F]indings of fact ... when supported by substantial evidence shall be conclusive."),

29 U.S.C.A. § 160(e) (West Supp.1992); ("[F]indings of the Board ... if supported by substantial

evidence ... shall be conclusive."). has made it clear throughout this proceeding that he made all of the decisions regarding

trading on the accounts.

The truth is Purdy believed precious metals prices would escalate in the 1980's. And

had precious metals prices soared in 1983, 1984, and 1985, thi s case would not be i n litigation. Purdy would have recovered his losses, and might well have made a substantial

profit.

Purdy filed a proper and t imely notice of appeal with the Commission in July of 1988. On

May 20, 1991 the C o mmission affirmed the ID without opinion, as allowed by 17 C.F.R. §

12.406(b). 19 Purdy then filed a timely petition for review with this court. 7 U.S.C.A. §§ 6(b), 9, and

18(e) (West Supp.1992).

Standard of Review:

Section 18(e) of Title 7, U.S.C.A., states that rev iew o f any o rder from the Commission

"shall be reviewable on petition

... by the United States Court of Appeals. 7 U.S.C.A. § 18(e) (West

Supp.1992). The court will then have the power to "affirm, to set aside, or modify the order of the

Commission, and the findings of the Commission as to the facts, if supported by the weight of

evidence, shall

... be conclusive." 7 U.S.C.A. § 9 (West Supp.1992). 2 0 The question thus arises:

what level of appellate scrutiny do we apply to the Commission's order?21 In general, judicial review of the Commission's final rulings are governed by the

Administrative Procedures Act ("APA"). The APA applies to all administrative agencies,

including the Commodity Futures Trading Commission. 5 U.S.C. § 701 (West 1977). When a

court reviews agency action, the court shall "(2) hold unlawful and set aside agency action,

findings, and conclusions found to be ... (E) Unsupported by substantial evidence in a case subject

to sections 556 and 557 of this title." 5 U.S.C.A. § 706 (West 1977). A hearing before an ALJ is

controlled by 5 U.S.C.A. §§ 556 and 557 (West 1977). The Supreme Court has held such language to require support by "substantial evidence."

Washington, Va., Md. Coach Co. v. NLRB, 301 U.S. 142, 147, 57 S.Ct. 648, 659, 81 L.Ed. 965, 970

(1936). 21 This means that the relevant evidence would suffice so that "a reasonable mind might

accept [it] as adequate to support a conclusion." C onsolidated Edison Co. v. NLRB, 305 U.S. 197,

229, 59 S.Ct. 206, 216, 83 L.Ed. 126, 140 (1938).

Recent decisions have held the standard to be a "preponderance" or "greater weight " t est

.

Kent v. Hardin, 425 F.2d 1346, 1349 (5th Cir.1970), Haltmier v . CFTC, 554 F.2d 556, 560 (2d

Cir.1977), Dohmen–Ramirez v. CFTC, 837 F.2d 847, 856 (9th Cir.1988). This does not suggest that

an appellate court should reweigh the evidence to see which party the evidence favors. Instead the

court should "review the record with t he purpose of determining whether the finder of fact was

justified, i.e. acted reasonably in concluding that the evidence, including the demeanor of the

witnesses, the reasonable inferences drawn therefrom and other pertinent circumstances, supported

his findings." Haltmier, 554 F.2d at 560.

Both the "substantial evidence" and "preponderance" tests require es s entially the same review.

A court of appeals does not re-evaluate the evidence , but goes bey ond the "scintilla" test,

Consolidated Edison, 305 U.S. at 229, 59 S.Ct. at 217, 83 L.E d. at 140, to determ i ne i f the

Commission's (or its designee, the ALJ's) conclusions based on the facts were justified.

Petitioner contends de novo review is required because the Commission did not expre ssly

adopt the ALJ's opinion and findings, see supra note 19; therefore t he Commission's summary

affirmance doesn't have the status of a final decision. This contention is groundless simply becausethe APA states that "an init ial decision

... becomes the decision of the agency." 5 U.S.C.A. § 557(b)

(West 1977).

In addition, the CFTC rules say if the Commission summarily affirms the initial decision of

the ALJ, as it did here, then it may order without opinion, and the order becomes the Commission's

final decision. 17 C.F.R. § 12.406(b).

Purdy further asserts that because the Commission declined to review the ALJ's decision, we

should do so de novo. This argument lacks fo undation as well since the Commission's order of

summary affirmance states " [r]eview of the record and the brief

... establishes that the result reached

... is substantially correct." (emphasis added) Although the Commission did not endorse "the precise

legal theory" or "specific reasoning" of the ALJ's ID, the Commission held the legal and policy issues

to be undeserving of further discussion. The Commission, therefore, affirmed without an opinion,

pursuant to 17 C.F.R. § 12.406(b).

Lastly, despite Purdy's claim that de novo review is warranted because t he ALJ wholly

adopted the Respondent's proposed findings of fact, we find the record reflects ample examples of

the ALJ's independent findings of fact. Petitioner labels such wholesale adoption o f Respondent's

proposed fi n dings of fact as arbitrary and capricious. He cites P ennzoil v. FERC, 789 F.2d 1128,

(5th Cir.1986) and NLRB v. Brooks Cameras, 691 F.2d 912 (9th Cir.1982) to support his contention

that when an agency fails to consider all factors and provide a reasone d basis for the agency's

decision, de novo review is warranted. These cases, however, ruled on facts where the Commission's

findings did not agree with the ALJ's. In such a case, the appellate court should make a more

searching review. Here, the ALJ and Commission agree on the findings, and so a substantial evidence

review is warranted.

Substantial evidence reflects deference to the expe rt ise of an administrative agency in the22 Other courts hold to similar definitions. The Ninth Circuit interpreted causation in the

context of the Home Owners' Loan Act (HOLA) of 1933 (as amended in 1982: "Any person may

sue for and have injunctive relief ... against threatened conduct that will cause loss or damage...."

12 U.S.C.A. § 1464(q)(2)(A) (West 1989) (emphasis added)) as "requir[ing] that the wrongful

conduct be both the factual and legal cause of the injury." Sundance Land v. Community First highly comple x area of commodities regulation. Such review is somewhat comparable to the

deference given to a jury. "In the case of the jury, it offers the common wisdom of numbers—large

numbers of decision makers not jaded by formal daily contact with the law. The agency offers the

specialized wisdom of expertise—decision makers supposedly expert in the minutiae of the immediate

subject matte r." 2 St even A. Childress & Martha S. Davis, S tandards of Review § 15.4, at 273

(1986).

We view our task here as a search for substantial evidence in the record that would reasonably

uphold the factual findings of the ALJ.

Proximate Cause

The CFTC designated the ALJ to hold a hearing for reparations regarding Purdy's complaint.

Reparation proceedings are for "[a]ny person complaining of any violation of any provision,

... rule,

regulation, or o rder issued pursuant to this chapter, by any person who is registered under this

chapter." 7 U.S.C.A. § 18(a) (West Supp.1992). The complainant may "at any time within two years

after the cause of action accrues, apply to th e Co mmission for an order awarding a ctual damages

proximately caused

by such violation." 7 U.S.C.A. § 18(a) (West Supp.1992) (emphasis added).

Although not defined in the statute, majority common law (including Texas, Purdy's residence

at the time of the transactions at issue here), defines proximate cause as: (1) cause in fact ("but for"

causation), and ( 2) foreseeabil ity

. I n re Air Crash at Dallas/Fort Worth Airport, 919 F.2d 1079,

1085 (5th Cir.1991), cert. denied sub nom. Connors v. United States,

––– U.S.

––––, 112 S.Ct. 276,

116 L.Ed.2d 228 (1991), Urbach v. United States, 869 F.2d 829, 831 (5th Cir.1989), Pope v. Rollins

Protective Serv. Co., 703 F.2d 197, 202 (5th Cir.1983). 22Fed. Sav. & Loan, 840 F.2d 653, 662 (9th Cir.1988) (emphasis added). The Eighth Circuit says

proximate cause "exists if injury would not have occurred but for negligence, injury was natural

and probable result of negligence, and there was no efficient intervening cause." Rule by Rule v.

Lutheran Hosp. & Homes Soc. of Am., 835 F.2d 1250, 1251 (8th Cir.1987).

23 "Report for the CFTC: Trading at Leverage Contracts for Gold and Silver" Project 217

(April 18, 1975). The study and its findings have never been adopted by the CFTC, or used as

grounds for any ALJ or Commission decision. The ALJ was the designated fact finder for Purdy's reparation proceeding. Thus, under the

substantial evidence standard of review, if the ALJ found Purdy sustained no injuries caused in fact

by the respondent-intervenor's alleged CEA violations, then we must find substantial evidence to

support the ALJ's findings as to proximate cause.

The ALJ based much of his decision on weighing the conflicting testimony given by both

Monex and the Purdys. As finder of fact, he sat in the best position to evaluate the credibility of the

witnesses, their demeanor, and their testimony. After hearing all the oral statements, and reviewing

a "huge record," the ALJ came to a crucial core conclusi o n which permeates this entire case:

"Complainant's losses were not caused by any wrongdoing on the part of Respondents. Rather, those

losses resulted from Complainant's intractable belief that precious metals prices would increase in the

1980's." In order to evaluate the ALJ's conclusions on causation and breach of statutory

requirements, we will now review the evidence regarding Petitioner's specific allegations.

Interest

Purdy contends Monex fraudulently charged interest, resulting in Monex' unjust enrichment.

Purdy relies on a CFTC staff study characterizing interest on unpaid margin balances as

"preposterous" because no loan is made to company customers. 23

Furthermore, Purdy characterizes his debt to Monex as a demand obligation which therefore

precludes interest charges. S teingut v. Guaranty Trust Co. of N.Y., 161 F.2d 571 (2d Cir.1947) cert.

denied 332 U.S. 807, 68 S.Ct. 106, 92 L.Ed. 385 (1947). However, in S teingut, the interest paid ondemand deposits was prohibited by statute. 12 U.S.C.A. § 371(a) (West 1989). No such statutory

prohibition exists here. In fact, Congress has implicitly allowed LTM's to charge interest. S ee supra

note 2. In addition, the Commission's rules recognize interest charges in leverage contracts. S ee

supra note 12. Monex' interest charges were consistent with Congress' intentions prior to t he

implementation of the CFTC rules, and they were in compliance with the rules when they came into

effect in 1984. Since Monex did not violate either Congressional intent or the Commission's rules,

the interest charges can not be a cause in fact of Purdy's damages.

Bucketing

Purdy alleges that Monex operated as a bucket shop. The Supreme Court in 1906 defined

a bucket shop as:

an establishment, nominally for the transaction of a stock exchange business, or business of

similar character, but really for the registration of bets, or wagers, usually for small amounts,

on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of

the stock or commodities nominally dealt in.

Gatew ood v. North Carolina, 203 U.S. 531, 536, 27 S.Ct. 167, 168, 51 L.Ed. 305, 307 (1906).

A more recent decision invo lving the Chicago Board of Trade defined a "bucket shop" as "a

place where bets [are] placed on the commodity prices. The bets are not executed as contracts on

any legitimate exchange, but rather, a bet is placed on the bucket shop's books." U .S. v. Sanders, 696

F.Supp. 327, 330 (N.D.Ill.1988).

In 1936, Senator Pope recited what is now the generally accepted definition of bucketing in

futures trading:

[The] method of doing business wherein orders of customers for the purchase or sale

of commodities for future delivery, instead of being executed by bonafide purchases and sales

with other traders, are simply matched and offset in the soliciting firm's own office and the

firm itself takes the opposite side of customers' orders.24 The Monex Offering Statement sent to all customers states in relevant part: "Monex acts as

a principal and as such sells to and buys from customers and dealers on its own behalf. It does

not have members, perform a clearing house function, or serve as an auction marketplace....

[P]rices ... are established by Monex...."

25 The Trade Eagle is a trading coin of solid gold or silver minted exclusively by Monex for sale

to it's customers. Customers who pay full price for Trade Eagles may sell them to a third party. 80 Cong.Rec. 8,088 (May 27, 1936) (remarks of Senator Pope). Leverage contracts, as intended by

Congress when passing the Futures Trading Act of 1978, specify the LTM to be a principal to the

customer's contract. S ee supra note 5. Furthermore, the LTM is the market maker, and, as principal,

has no requirement to execute customer orders with other traders on any exchange.

Purdy knew that Monex operated that way, or at least he s hould have. The Com m odi ty

Account Agreements and Offering Statements outlined the characteristics of his leverage contracts

with Monex. His long prior dealings with Monex, and the clear wording of the account documents

he signed, are evidence that the terms of the margin contracts should have been clear to him. 24

Finally, bucketing is not listed as a prohibited conduct for an LTM. Bucketing is expressly

forbidden in commodity transactions, 17 C.F.R. § 30.02(d) (1986), but not in leverage transactions.

17 C.F.R. § 31.3 (1986). We hold the above evidence as substantial enough to support the ALJ's

findings that bucketing violations did not exist, and therefore could not be a cause in fact of Purdy's

losses.

Fraud

Purdy contends that Monex engaged in several fraudulent practices. He alleges Monex failed

to disclose material facts regarding the risk associated with leverage contracts and Trade Eagles. 25

Purdy also alleges a failure to disclose Monex' existing liti gat io n, and lapses in both Monex's and

Albrecht's registration status. Finally, Purdy claims Monex breached a fiduciary duty by failing to

disclose the above facts.26 The Offering Statements say, in LARGE BOLD PRINT under the heading "Margin

Transactions": "In credit transactions it is possible to gain or lose more than one's initial

investment." (emphasis added) The Trade Eagle Disclosure Statements states under "Terms of

Purchase": "It is possible to receive a margin call for additional funds and to lose more than

one's initial investment." (emphasis added) Monex maintains it made all the appropriate disclosures in the Offering Statements required

by law current at the time. Disclosure literature accompanying the initiation of an account satisfies

a firm's disclosure obligations unless conduct which discoun t s o r minimizes the importance of the

disclosures, Reed v. Sage Group, Inc

., [1987–1990 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶

23,943 at 34,299 (CFTC Oct. 14, 1987); C layton Brokerage Co. v. CFTC, 794 F.2d 573, 580 (11th

Cir.1986), or any factual misrepresentations exist.

P urdy testified that he only looked at the first page of the disclosure statements. This

admission precludes an easy road ahead for Purdy to show any misrepresentation or nondisclosure

to be the cause in fact of Purdy's losses. Nevertheless, we will review the evidence for substantiality.

a. Enterprise Risk

Purdy had been speculating in precious metals since 1972, had read at least two treatises on

investing by a recognized financial author, and read related periodicals at least once a week. Despite

Purdy's testimony to t he co nt rary at the hearing, the ALJ, based on Purdy's 650+ page deposition

(and earlier pleadings), found him to be well versed in the nuances of margin and leverage contracts:

the risk involved, and the extent of his exposure to that risk.

Furthermore, the promotional literature for the Trade Eagles explains that "relatively small

movements in price [of the gold or silver] will amplify the potential gain or loss on your investment."

(emphasis added) The promotional literature also stipulates any purchase as subject to the Monex

Offering Statement and Trade Eagle Disclosure Statement. These statements explicitly discuss risk. 2 6

The substantial testimonial and written evidence in the record leads us to support the ALJ's27 This initial decision was pending Commission review, and was subsequently reversed. See In

re First Nat'l Monetary Corp., [1982–1984 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 21,707

(Apr. 29, 1983) reversed and dismissed [1984–1986 Transfer Binder] Comm.Fut.L.Rep. ¶ 22,698

(CFTC Aug. 7, 1985).

28 "The initial decision shall not become the final decision as to a party who shall have timely

filed and perfected an appeal thereof to the Commission...." 17 C.F.R. § 12.314(d)(1). and Commission's conclusion that Monex adequately represented and disclo sed t he risks involved

with leverage contracts.

b. Existing Litigation

Purdy insists knowledge of pending litigation between Monex and the CFTC, and of a 1983

init ial decision aga inst Monex, 2 7 would have forewarned him about investing with Monex. This

reasoning fail s on several grounds. First, the CFTC has held that an initial decision pending

Commission review is not a "judgment" which must be disclosed since issues of law remain unsettled.

In re Luizzi, [1982–1984 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 21,833 (CFTC Jan. 27, 1981).

Secondly, the rules relating to reparation proceedings are clear that an init ial decision pending review

is not a final order of the Commission, 28 and thus are unenforceable.

Although a ruling without the force of law may be material to a reasonable i nvestor, the

record reveals Purdy received the May 1984 Offering Statement, disclosing the 1983 init ial decision

against Monex. Purdy received it in a timely manner, yet continued to invest. The ALJ therefore

ruled the action pending review by the CFTC against Monex could not have been material to Purdy.

Thirdly, a previous ruling by the Commission held Monex has no duty to disclose CFTC

complaints against it. D avis v. Monex Int'l, Ltd., [1988 Transfer Binder] Comm.Fut.L.Rep. (CCH)

¶ 24,279, at 35,225 (CFTC Jul. 7, 1988). Such disclosure is required only when the customer has

given discretionary authority to Monex. The record clearly indicates Purdy gave no such authority

to Monex.29 The CFTC subsequently amended their rules to reflect the requirement, and outlined

procedures therein. See 17 C.F.R. § 31.5.

30 See In re Monex Int'l, Ltd., [1984–1986 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 22,413

(CFTC Nov. 8, 1984). c. Late Registration

Registration of Monex and its account represent at ives became mandatory under the 1984

amendment to the CEA. 7 U.S.C.A. § 23 (West Supp 1992). 2 9 Once the CFTC began enforcement

action against Monex for failure to apply for registration, Monex paid a fine to settle the action, and

filed registration papers in accordance with the settlement order. 30 Monex disclosed the registration

act io n to customers in its December 1984 Offering Statement, which Purdy testified he received.

Disclosure of failure to register is only material if Monex was trying to solicit business from Purdy.

Hall v. Paine Webber Jackson & Curtis, Inc. [1986–1987 Transfer Binder] Comm.Fut.L.Rep. (CCH)

¶ 23,317, at 32,889 (CFTC Oct. 8, 1986). However, Monex was not soliciting Purdy's business when

the registration rules became enforceable. Nor did Monex fail t o register; it failed to a pply for

registration. Purdy had dealt with Monex for twelve years prior to any registration requirement. He

suffered the bulk of his losses in 1983, before the CFTC required registration. The ample evidence

supports the ALJ's conclusion Monex' tardy registration application could not be construed as a cause

in fact of Purdy's losses.

Albrecht's late registration filing could not be a cause in fact either. Purdy testified that he

only relied on Albrecht's suggestions once, during the rumored Brazil default. That occurred after

the December 1984 disclosure.

d. Fiduciary Duty

P urdy contends, and Monex admits, that a fiduciary relationship existed between them.

However, Purdy avers Monex violated its duty by no t disclo sing material facts regarding interest

charged, margin risks, and existing litigation. As we have stated above, these were adequately

disclosed (if only Purdy had read them), and therefore no violation of fiduciary duty exists in this case.In sum, the record reveals Purdy felt the tardy registration applications were "no big deal."

In fact, he testified he would invest with the Hunt brothers, even if he knew they we re under

investigation by the Government. His previous pleadings and testimony indicate his understanding

of margin contracts and their risk. Furthermore, he signed the Offering Statements, which disclosed

what was required by law, without reading them. We find substantial evidence to support the ALJ's

and Commission's findings that no fraud existed and therefore could not have been the cause in fact

of his losses.

Conclusion

While we sympathize with Mr. Purdy's extensive losses so late in his life, the evidence here

compels us to agree with the Commissio n's accept ance of the ALJ's actions and findings. To do

otherwise might encourage other market bulls to seek refuge in the courts for judicial licking of their

wounds after suffering at the claws of a bear market. We therefore hold the order of the CFTC was

correct. A FFIRMED

.