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Commodity Futures Trading Commission 

CEA CASES 

NAME: RAWLIN L. STOVALL AND STOVALL & STOVALL INC. 

DOCKET NUMBER: 75-7; 206 

DATE: MAY 6, 1977 

DOCUMENT TYPE: INITIAL DECISION 

NOTE: FORMERLY CEA DOCKET # 206; SUMMARY OF DOCUMENT IS AVAILABLE IN THE CCH 

COMMODITY FUTURES LAW REPORTER, P20, 420 [1977-1980 TRANSFER BINDER]. 

UNITED STATES OF AMERICA 

BEFORE THE 

COMMODITY FUTURES TRADING COMMISSION 

In re Rawlin L. Stovall and Stovall & Stovall, Inc., Respondent 

CFTC Docket No. 75-7 

(Formerly Styled CEA Docket No. 206) 

Initial Decision 

Preliminary Statement 

This is an administrative proceeding under the Commodity Exchange Act, as 

amended (7 U.S.C. § 1 et. seq., hereafter referred to as the "Act"), initiated 

by a complaint and notice of hearing filed on January 22, 1973, by the Assistant 

Secretary of Agriculture. n1 

n1 The Commodity Futures Trading Commission ("the CFTC") is an 

independent federal regulatory agency which began operation on April 21, 

1975, pursuant to the Commodity Futures Trading Commission Act of 1974, 

Pub. L. 93-463, 88 Stat. 1389 (October 23, 1974). Prior to the 1974 

amendments, the Commodity Exchange Act was administered by the Commodity 

Exchange Authority (the "CEA") of the Department of Agriculture. Futures 

trading was then regulated in certain specifically-enumerated agricultural 

commodities, which are the commodities involved in the instant case. The 

CFTC took jurisdiction of this matter from its predecessor, the CEA, under 

authority of Sections 411 and 412 of Pub. L. No. 93-463. (Tr. 219) 

The complaint charged that on various dates during the period May to December 

1972, Rawlin L. Stovall, under the appearance of trading in cash 

commodities, solicited and accepted customers' orders for futures transactions 

without being registered as a futures commission merchant under the Act, in 

violation of Sections 4 and 4d(1) of the Act (7 U.S.C. §§ 6 and 6(d)(1)). The 

complaint also charged that Stovall bucketed his customers' orders and entered 

into fictitious transactions in violation of Sections 4b(D) and 4c(A) of the Act 

(7 U.S.C.§§ 6b(D) and 6c(A)) and Section 1.38 of the regulations promulgated 

pursuant to the Act (17 CFR § 1.38). 

In addition, the complaint charged that Stovall failed to make his records 

available for inspection by the Department of Agriculture, in violation of 

Section 1.35(a) of the regulations promulgated pursuant to the Act (17 CFR §§ 

1.35(a)). The corporation of Stovall & Stovall, Inc., of which Stovall was 

president, was charged with being unfit to engage as a futures commission 

merchant, as contemplated by Section 8a(3) of the Act (7 U.S.C. § 12a(3)). 
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Respondents filed an answer on February 7, 1973, which raised certain 

affirmative defenses, and admitted and denied the material allegations of the 

complaint. n2 

n2 The pleadings were not amended by the parties. At one point in the 

proceedings respondents moved and were granted leave to amend the answer 

(Tr. 706-716), however the motion to amend was abandoned (Tr. 811-812). 

On January 13, 14 and 15, 1975, the first session of the hearing in this 

matter was held in Chicago, Illinois. Richard W. Davis, Jr., Esq. appeared on 

behalf of the Complainant, and Robert P. Howington, Jr., Esq. and J. Gerard 

Bambrick, Jr., Esq. appeared on behalf of Respondents. On April 27, 1976 and 

September 20, 21, 22 and 23, 1976 further sessions of the hearing in this matter 

were held in Chicago, Illinois. Richard A. Levie, Esq. appeared on behalf of 

the Complainant and Gordon J. Arnett, Esq. appeared on behalf of Respondents. 

At the conclusion of the hearing the time was set for the filing of briefs. 

Thereafter oral argument was heard on April 19, 1977. n3 The transcript of 

hearing consists of 816 pages. During the course of the hearing Complainant 

called 10 witnesses and Respondent called two witnesses. 

n3 Where cited "Tr.", "CX", "RX", "R.A." and "Or" refer, respectively, 

to the transcript of the hearing, complainant's exhibits, respondent's 

exhibits, respondent's answer to the complaint, and transcript of oral 

argument. 

 

Findings of Fact 

I. Identity of Parties 

1. Rawlin L. Stovall (hereafter referred to as "Stovall"), is an individual, 

whose business address is 141 West Jackson Boulevard, Chicago, Illinois, with a 

residence address at 8315 S.W. 72nd Avenue, Miami, Florida. Stovall was at all 

times material herein n4 a floor broker registered under the Commodity Exchange 

Act, a member of the Chicago Board of Trade and a member of the Chicago Open 

Board of Trade(now known as the Mid-America Commodity Exchange). These Boards 

of Trade are now and were at all times material herein boards of trade and duly 

designated contract markets under the Act. 

n4 The time period material to this case as alleged in the complaint was 

from May to December 1972. 

2. At all times material herein, Stovall was doing business under the name R. 

L. Stovall, Sole Proprietor, Principal in Cash Commodities. Neither Stovall as 

an individual nor Stovall doing business under the name, R. L. Stovall, Sole 

Proprietor, Principal in Cash Commodities, was a futures commission merchant 

registered under the Act. 

3. At all times material herein, Stovall was the president and principal 

stockholder of Stovall and Stovall, Inc., an Illinois corporation with its 

principal office and place of business at Room 2014, 141 West Jackson Boulevard, 

Chicago, Illinois 60604. The corporation was a registered futures commission 

merchant under the Act. 

II. Respondent's Inquiry, Commencement of Investigation, and Refusal to 

Produce Records 

4. Called as a witness by respondent, Clarence Hill, an auditor for 

complainant, testified that Stovall came to the offices of the CEA in April 1971 

and asked if the Commodity Exchange Authority (CEA) "had jurisdiction over the 

cash grain operation per se." Hill read Stovall Section 4 of the Act and then 

took Stovall to see Don Smith, Hill's supervisor. Hill felt he lacked 

sufficient experience in the cash grain field to give Stovall an accurate 
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response to his inquiry. According to Hill's testimony, Stovall merely stated 

to Smith that he (Stovall) was going into the cash grain business and wanted to 

know what he had to do. 

To the best of Hill's knowledge, Smith, after listening to Stovall, said 

"that he did not feel that the cash grain operation as stated was within his 

jurisdiction. . . ." The witness did not recall any other conversation at that 

meeting which elaborated on what Stovall meant by "cash grain operation". 

5. Subsequently, on December 6, 1972, Daniel Vaccaro came to the CEA offices 

and spoke with G. Edward Piala, Deputy Director of the Central Region, regarding 

his trading with Rawlin L. Stovall. Vaccaro explained that he had traded with 

Stovall in cash commodities for approximately one year and had neither made nor 

taken delivery of any actual cash commodity. Vaccaro stated that he had no 

interest in any actual cash commodity or the making or taking of delivery of any 

actual cash commodity and indicated that his only interest was speculating in 

cash commodities. Believing Vaccaro's information was not indicative of cash 

commodity trading, Piala telephoned and then met with Stovall on the same date. 

At this meeting Stovall stated that his activities were "cash contracts for 

deferred delivery" and as such beyond the purview of the Commodity Exchange Act. 

Piala quoted portions of the Act to Stovall and requested Stovall to make 

available his books and records for examination. 

6. Following Piala's meeting with Stovall on December 6, 1972, Henry Matecki, 

a CEA auditor-investigator, went to Stovall's office and received from Stovall 

copies of a customer agreement, trading authorization, management contract and 

statement of salesman presentation used by Stovall in his business (CX5). The 

"sales agreement" provided, inter alia, that the customer would deposit with 

Stovall such monies as Stovall might demand. The "trading authorization' gave 

the trading agent complete discretion to 

make all trades for a customer and to buy or sell contracts on margin. The 

"management contract" noted the customer's desire to buy and sell "cash 

contracts for deferred delivery" and the customer's deposit of monies to open an 

account with Stovall. 

7. Stovall having agreed on December 6 to provide records which would prove 

that his business did not come within the jurisdiction of the CEA, Matecki and 

another CEA auditor, William Pollack, later visited Stovall's office on December 

8 to obtain such records. At the meeting Stovall produced copies of customer 

statements for two individuals, Rutherford and Gerber. The Rutherford file 

revealed that a delivery might have been made but Stovall was unable to produce 

warehouse receipts or similar documentation to substantiate delivery. Matecki 

requested the production of additional customer data to determine the number of 

customers who made or took delivery of any commodities but the additional data 

was not furnished. 

During this December 8 meeting Stovall stated that he solicited and obtained 

accounts through referrals and advertising and was on the opposite side of all 

his customers' transactions. Stovall also told Matecki that he solicited money 

from customers. 

8. After receiving a letter dated December 6, 1972 from Stovall indicating 

that he was no longer in the cash commodity business as of that date (CX2), 

Robert Clark, Director of the CEA Central Region, met with Stovall on December 

14, 1972, orally requested access to Stovall's records, and handed Stovall a 

letter (CX3) making a similar request for records. On December 18, 1972, 

another letter by Clark requesting production of Stovall's books and records was 

delivered to Stovall (CX4). 

9. On December 19, 1972 Stovall and his attorney, David Romoser, Esq., met 

with Piala and produced for Piala's inspection, purchase and sale statements 
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("P&S") of Stovall's personal futures trading accounts. These records were not 

material to Piala's inquiry and he so informed Stovall and his counsel. The 

following day Piala wrote a letter to Stovall and his attorney again seeking 

production of all books and records relating to Stovall's "cash commodities" 

business. 

10. No records were produced by Stovall following the December 19 meeting. 

The books and records requested for production were considered essential by CEA 

personnel to determine whether Stovall's business was a true cash commodities 

business or in reality futures trading. 

Stovall was informed of the statutory authority for requesting production of 

his "cash commodities" business records orally by Piala and in the letters sent 

Stovall by Piala and Clark. 

11. The investigation by CEA personnel of approximately 25 to 30 of Stovall's 

customers revealed an absence of delivery of the cash commodities purportedly 

traded in Stovall's program, a lack of any interest in delivery of the actual 

commodity because the persons in the program were not in the business of 

merchandising the actual commodities, and a lack of intention to make or take 

delivery of the actual commodities. With the qualified exception of Mr. 

Rutherford (discussed more fully, findings 20 and 21 infra.) none of the records 

of Stovall's customers examined by CEA personnel showed the making or taking of 

delivery of any cash commodity. Prior to the filing of the complaint in this 

proceeding, Matecki did not have a list of all of Stovall's salesmen, or a list 

of all of Stovall's customers. 

III. Promotion of Stovall's Program 

12. Between May and December 1972 Stovall employed salesmen also known as 

"independent contractors" to solicit business and accounts from the public. 

After responding to an advertisement in the Wall Street Journal Douglas Newkirk 

became a salesman for Stovall. Newkirk then hired one of his friends, Vernon 

Henrichs to work for Stovall. Once affiliated with Stovall the salesmen were 

paid a commission for securing new business and customers. The salesmens' 

duties included talking with prospective customers, obtaining money from the 

prospective customers obstensibly to be used as deposits for trading in cash 

commodities for deferred delivery, and forwarding the money and customer 

agreements to Stovall. 

13. To facilitate the acquisition of new customers Stovall provided his 

salesmen with written promotional materials for dissemination to prospective 

customers. A salient feature of the promotional materials and customer 

agreements was the repetition of the speculative nature of investing in 

Stovall's program. In his sales agreement (CX5) Stovall noted that the "client 

fully understands the high leverage speculative potential for profits and/or 

losses from the ownership of cash commodities." In a promotional brochure (CX8) 

it was stated that: "cash commodities by their 

 

nature, can properly be called a speculative medium . . ." A similar 

representation regarding the speculative nature of cash commodities was found in 

yet another brochure (CX 51). 

The promotional materials also listed the commodities in which Stovall 

claimed he traded, the amount of deposits required, the handling fees, and 

sample P&S statements (CX 53, 54, 55). In addition such materials stressed the 

existence of a trading plan, based on an analysis of a variety of factors, which 

offered high profit potential and the attraction of avoiding payment of taxes on 

profits for 2 years, because profits could not be withdrawn from the customers' 

account (CX 8, 51). Absent from these promotional materials and customer 

agreements was a clear explanation of Stovall's function as a principal or any 
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clear disclosure that Stovall was on the opposite side of the transactions into 

which the customers purportedly entered. 

14. When Newkirk first contemplated employment as a salesman for Stovall they 

met in Chicago where Stovall took Newkirk onto the trading floor of the Chicago 

Board of Trade ("CBT") and spoke of selling accounts for investment or 

speculation in cash commodities. As a result of his conversations with Stovall, 

Newkirk believed that the cash commodities were traded by Stovall on the floor 

of the CBT. Moreover, as a result of his conversations with Stovall, Newkirk 

understood that Stovall managed the money on the CBT and controlled the trading. 

Following commencement of his activities as a client of and salesman for 

Stovall, Newkirk solicited and obtained 12 customers for Stovall's operation. 

Most of the customers Newkirk obtained were personal friends, and he maintained 

close contact with these customers and their business conducted with Stovall. 

15. Like Newkirk, Henrichs contracted prospective customers, explained the 

type of trading, and obtained a signed contract for Stovall with a check payable 

to Stovall. Henrichs obtained 7 customers, in addition to himself, for 

Stovall's operation. 

16. In mid-1972 Stovall met with Henrichs, Newkirk and several present and 

prospective customers at Newkirk's home in Michigan. At that meeting Stovall 

stated that he would buy and sell contracts in cash commodities for deferred 

delivery in the name of the various clients, that he would be doing the trading, 

and that he would report to the clients the trades made and any resulting profit 

or loss. Stovall explained that at no time would the clients be expected to 

receive or make delivery of any of the commodities. He stated further that 

arrangements for delivery of a specific commodity could be arranged if the 

customer desired but that the normal operation of the business did not involve 

taking or making deliveries of the commodities. 

IV. Delivery of Commodities n5 

n5 See also: findings 26, 27, 28, infra. 

17. Consistent with his understanding of the program as explained by Stovall, 

Newkirk never took or made delivery of any cash commodity nor was he engaged in 

a business requiring the use of any of the cash commodities purportedly traded 

by Stovall. Because most of the persons Newkirk obtained for Stovall's program 

were his personal friends with whom he maintained close contact, Newkirk 

testified that to the best of his knowledge none of these individuals ever took 

or made delivery of any cash commodity. Similarly none of the persons recruited 

by Newkirk had any need for the cash commodities purportedly traded by Stovall 

and none ever told Newkirk that they were interested in receiving delivery of 

any commodity. 

18. Between May and December 1972, Newkirk received by mail copies of P&S 

statments sent by Stovall to the customers recruited by Newkirk. The P&S 

statements showed: transaction date, quantity bought or sold, shipment dates, 

grade and type of commodity, place of delivery, trade price, handling fees, 

opening and closing balances, and open positions on previous transactions. 

 

These statements were used to confirm the purported execution of customer trades 

and to show open positions. Examination of the P&S statements (CX 15, 16) 

corroborates Newkirk's testimony that neither he nor the persons he recruited 

for Stovall's program made or took delivery of any cash commodity. All 

purchases were closed out by offsetting sales and any sales were terminated by 

offsetting purchases. 
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19. As with Newkirk, when Stovall executed a transaction for a customer 

recruited by Henrichs, Henrichs received a copy of the P&S statement for the 

transaction. Based upon the P&S statements sent by Stovall to the customers he 

recruited, Henrichs testified that there was no indication that any of these 

persons made or received delivery of any cash commodities. Further none of 

these persons ever informed Henrichs that they had made or received delivery of 

any cash commodities. 

Henrichs stated that he had no use for any cash commodities or any desire to 

make or take delivery of the cash commodities in which he thought he was trading 

in Stovall's program. To Henrich's knowledge neither he nor any of the persons 

he recruited made or received payment for taking or making delivery of any cash 

commodities. The only payment made was the original deposit sent to Stovall. 

Examination of the P&S statements (CX 15, 16) corroborates Henrich's testimony 

that neither he nor the persons he recruited for Stovall's program made or took 

delivery of any cash commodity. 

20. Donald Rutherford, called as a witness by respondents testified that in 

1971 he was a farmer and commenced dealing in cash commodities with Stovall in 

1970. Complainant's exhibits 18-48 were identified by Rutherford as P&S 

statements of cash commodity contracts for deferred delivery between himself and 

Stovall. To the best of Rutherford's knowledge CX 18-48 represented all 

confirmations and P&S statements received by him from Stovall. 

21. Counsel for both parties stipulated that CX 18-48 were prepared by or 

under the control of Stovall, were sent through the mail, received by 

Rutherford, and that the contents of those exhibits were true, correct and 

accurate. 

Using all of Rutherford's P&S statements of cash commodity transactions for 

deferred delivery with Stovall, Matecki computed the percentage of transactions 

which were settled by offset and those settled by delivery. Of the 18 total 

purchases made by Rutherford from Stovall, all the transactions were settled by 

offset (100%) and none settled by deliver); of the 22 total sales by Rutherford 

to Stovall 6 (27.3%) were settled by delivery and 16 (72.7%) were settled by 

offset. (CX 56 A&B) 

V. Mechanics of Stovall's Trading 

22. As a result of his conversations with Stovall, Newkirk understood that 

Stovall controlled all the trading in the program, and Stovall 

 

was the only one authorized to trade for Newkirk. In addition, Newkirk did not 

know who was the opposite party in the trades in which Stovall purportedly 

engaged on Newkirk's behalf. Likewise Stovall told Henrichs that he (Stovall) 

would control the trading, and Henrichs never placed an order with Stovall or 

any person to buy or sell any cash commodities. Generally the customers did not 

know what trades were made for their accounts until they received their P&S 

statements. 

The contracts and agreements signed by customers entering Stovall's program 

gave a trading agent authority to act on the customers' behalf in all 

transactions (CXS). One item of promotional literature (CX 51, P5) refers to 

Stovall acting as trading agent for the customer to "buy and sell orders". The 

management contract employed by Stovall specifically gave the "agent power and 

authority to place orders for the buying and selling of cash commodity contracts 

for deferred delivery for clients' account . . ." (CX 5, management contract, 

paragraph 2). 

23. In approximately July 1972 Stovall approached Frank Hackbarth regarding 

the employment of Hackbarth as a trading agent for Stovall's customers. He told 

Hackbarth he wanted to interject a third person who would trade with Stovall on 
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behalf of Stovall's customers. Frank Hackbarth was a stockholder and president 

of International S.C.O.P.E.S., 

 

a company which provided Stovall with computer services. Upon receipt of source 

data from Stovall, such as customer and trade information, the company produced 

computerized P&S statements (CX 15, 16). 

From the commencement of his duties as trading agent in July 1972 until 

September 1973, Hackbarth in his individual capacity received no compensation 

from Stovall for acting as trading agent. Hackbarth's company, International 

S.C.O.P.E.S., received compensation for producing the computerized P&S 

statements. At the time Hackbarth assumed his duties as trading agent he had 

had some prior experience trading futures contracts on the Chicago Open Board of 

Trade. With respect to cash commodities, Hackbarth's background consisted of 

only what he had received as a youngster back on the farm in Iowa. 

24. In order for Hackbarth to function as trading agent Stovall or his 

salesmen obtained a signed trading authorization (CX5) from the customer and 

presented it to Hackbarth for his signature. Because of a physical disability 

which made signing the authorizations difficult, Hackbarth in August, 1972 gave 

Stovall's wife written "power of attorney" to sign his name to the trading 

authorization (CX 11). Although the document was dated January 15, 1972, 

Hackbarth testified 

 

that he signed it in July or August 1972. 

25. In his capacity as trading agent Hackbarth had no contact or consultation 

with the customers he represented prior to a trade and did not receive any 

compensation from the customers for his services as a trading agent. To 

initiate a trade, either Stovall or Hackbarth would call the other and propose a 

trade of a specific commodity at a specific price with a specified delivery 

month. The party receiving the proposition had the option of accepting or 

declining it. 

Hackbarth traded, not for individual accounts, but rather for groups or subgroups of customers composed of persons who commenced dealing with Stovall 

during specific time periods and through specific salesmen. The volume traded 

in any transaction was determined by specifying a volume or "quantity as so much 

per 'X' number of dollars in the customer's margin account." The individual 

customer would get a pro-rata portion of the total volume traded. 

26. Based on data supplied by Stovall the International S.C.O.P.E.S. computer 

was programmed by Hackbarth to show specific delivery periods and specific 

delivery points, the latter being determined by the commodity involved. For 

example, the computer was programmed to show a trade of # 3 soybean oil as 

having a delivery point in Decatur, Illinois. Also based on 

 

data from Stovall the computer was programmed to show delivery periods depending 

upon whether the initiating party proposed a sale or purchase of a commodity. 

Thus it was only necessary during "negotiations" between Hackbarth and Stovall 

for the initiating party to refer to a specific month such as July and the 

computer was programmed to show a specific delivery period. 

Although Stovall supplied the source data or raw data for the printouts and 

the computer was programmed to show deliveries, Stovall never provided computer 

input to show actual deliveries of any commodities during the time period 

material to this proceeding. 
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27. In his capacity as trading agent Hackbarth never intended for his clients 

to make or take delivery of any cash commodity without the direct order of the 

client. 

28. The typical transaction during July to December 1972, in which period 

Hackbarth engaged as trading agent with Stovall, was closed out by offsetting 

trades instead of delivery of the actual commodity. If the persons Hackbarth 

represented made money on a trade, Stovall, as the opposite party, lost money. 

29. While Hackbarth functioned as trading agent, his company, International 

S.C.O.P.E.S., continued to print-out computerized P&S statements for Stovall and 

his program. The P&S statements were prepared on a weekly basis and left for 

Stovall to pick up. Once the P&S statements were picked up, Stovall, who 

operated from Chicago, mailed them to salesmen and customers such as Newkirk and 

Henrichs in Michigan. 

VI. Characterization of Stovall's Operation as Dealings in Futures Contracts 

A. Based Upon Investigation 

30. Matecki testified that his investigation revealed that Stovall's 

contracts contained the elements of futures contracts, an agreement to buy or 

sell a specified commodity at a specified price at some future date. He also 

found that the contract had not been entered into for the purpose of 

merchandising the particular commodity and there was no actual delivery made of 

the commodity. Examination of the customer statements received from Stovall by 

Newkirk and Henrichs (CX 15, 16) showed Matecki that the transactions, 

containing terms similar to those of futures contracts, were probably futures 

transactions. 

Matecki testified that the investigation disclosed that Stovall solicited or 

accepted orders for the purchase or sale of commodities for future deliver)' on 

or subject to the rules of the contract markets on which 

 

these futures transactions should have been executed. However he found no 

evidence that these futures transactions had, in fact, been executed on any 

contract market. 

A chart received by Newkirk from Stovall to show prospective customers (CX 

55) was utilized by Matecki to compare aspects of Stovall's operation with 

normal futures trading. The comparison disclosed that 15 of the 24 commodities 

listed on Stovall's chart had contract sizes and handling fees identical to 

those traded on the corresponding contract markets (Tr. 755-760). The remaining 

9 commodities listed, which Stovall purported to trade were not regulated in 

1972 and thus not part of this proceeding. 

B. Based Upon Expert Testimony 

31. Russell F. McDonald, a Ph.D. in Agricultural Economics (Marketing), is 

employed as an economist with the Commodity Futures Trading Commission and 

qualified as an expert witness as an individual with "knowledge in agriculture 

and marketing sufficient to distinguish between futures trading and cash 

commodities." 

Dr. McDonald testified about the distinguishing features and characteristics 

of cash commodity contracts and futures contracts; his testimony in this regard 

is best demonstrated by the following summary chart contained in complainant's 

proposed finding 76: 

Characteristic Cash Contracts Futures Contracts 

Mode of Settlement Delivery of Actual Usually by Offsetting 

Commodity (Tr. 289) Transactions (Tr. 289) 

Intended Use Obtain quantity of Transfer risk of owner- 
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Characteristic Cash Contracts Futures Contracts 

actual commodity ship (Tr. 293, 320-321, 

(Tr. 290, 320-321) 329) 

Price Negotiated between Determined at public 

buyer and seller auction (Tr. 290) 

(Tr. 290) Contracts Terms 

 (a) Quantity Negotiated between Standardized by exchange 

buyer and seller contract (Tr. 290) 

(Tr. 290) (b) Quality Negotiated between Standardized by exchange 

 (grade) buyer and seller contract (Tr. 291) 

(Tr. 291) (c) Delivery Negotiated between Standardized by exchange 

 Points buyer and seller contract (Tr. 291) 

(Tr. 291) (d) Delivery Negotiated between Standardized by exchange 

 Period buyer and seller contract (Tr. 291) 

(Tr. 291) 

 (e) Delivery Negotiated between Standardized by exchange 

 Date buyer and seller contract (Tr. 291-292) 

(Tr. 291-292) 

 

32. Dr. McDonald examined the complaint in this action, Annex A to the 

complaint (CX 10, a summary of approximately 177 transactions in regulated 

commodities for 14 accounts from May to December 1972) and the transcript of the 

hearing in this proceeding held in January 1975. n6 As a result of examining 

these documents, Dr. McDonald was of the opinion that the operation of Stovall 

paralleled and was identifiable with "the type of activities one would expect to 

see if one were involved in the futures market". In elaborating on his opinion, 

Dr. McDonald testified that the quantities bought and sold in Stovall's 

operation paralleled quantities that were typical of futures contracts and that 

the characteristic manner of settlement in futures contracts is by offset. He 

also relied on the fact that the customers who testified in January 1975 stated 

that they did not intend to take delivery (Tr. 296-300). 

n6 The hearing in January 1975 included the testimony of Newkirk and 

Henrichs concerning their accounts and those of their customers, plus the 

testimony of CEA personnel regarding statements made to them by Stovall and 

other Stovall customers. 

In delineating some qualities of a cash contract Dr. McDonald said that "the 

bulk of the cash contract between buyer and seller usually results in the buyer 

taking delivery of the actual" (Tr. 301). In emphasizing this point Dr. 

McDonald later stated that seldom in a cash commodity transaction "do we find 

the buyer not wanting a commodity after the purchase" (Tr. 321). 

33. As a result of examining the documents noted above (Complaint, CX 10, and 

January 1975 transcript), Dr. McDonald stated that Stovall's transactions 

represented in Annex A (CX 10), if executed, could have been used for: hedging 

transactions in interstate commerce in the commodities or by products of the 

commodities set forth in Annex A, determining the price bases of transactions in 

interstate commerce in those commodities and delivering such commodities sold, 

shipped or received in interstate commerce for the fulfillment thereof. 

34. Michael Maduff, the managing partner of Maduff & Sons, a firm actively 

engaged in futures and cash transactions, testified about his experience in 

futures contracts and cash commodities and was qualified as an expert in futures 

contracts and cash commodities. 
Page 10 

Given a hypothetical question which assumed that: (a) the information in 

Annex A (CX 10) was representative of transactions that occured between two 

principals, (b) the customers specified in Annex A were not in a business 

requiring the use of the commodities listed as bought, and sold in Annex A, (c) 

the customers specified in Annex A signed a contract stating an intention to 

make or take delivery but that there was testimony to the effect that there was 

no intention in fact by these customers to make or take delivery, (d) no 

deliveries of the commodities were made and (e) the 

 

customers listed in Annex A placed an initial deposit with Stovall, Maduff 

testified that the factual situation presented had "far more characteristics of 

a futures transaction than of a cash transaction" (Tr. 389-390, 392-393). 

In explaining his opinion Maduff noted that all of the transactions 

represented in Annex A were settled by offsetting or opposing transactions on 

the same day or within a few days of the initial transaction. To Maduff this 

was significant because in the cash market an offset without delivery would be 

extremely rare requiring "special circumstances", and "for such unusual 

circumstances to occur would require a much greater length of time than is 

indicated by (Annex A) . . ." (Tr. 393-394). Although he acknowledged a dim 

recollection of specific transactions in 1972, according to Maduff's 

"recollection of the general methods and business of cash transactions going 

back for the last 15 years, there is nothing that stands out as one year any 

different from any other in this respect, and that is that of all the cash 

transactions that (he had) been involved in or witnessed, an infinitesimal 

percentage, certainly less than two or three percent, were not, in fact, settled 

by physical delivery" (Tr. 396). 

35. In distinguishing between the intended uses of futures and cash commodity 

contracts Maduff noted that persons entering the futures market do so with the 

intent of profiting by price fluctuation or, in the case of one in the industry, 

with the intent of profiting or not losing as a result of price fluctuations. 

Conversely, Maduff testified that one goes into the cash market "with the intent 

of obtaining or getting rid of specific merchandise for specific reasons . . . 

." (Tr. 398-399). 

36. Maduff's opinion that Stovall's operations bore the characteristics of 

futures transactions did not change when the facts in the hypothetical set forth 

in finding 34, supra. were changed to provide for deliveries of the actual 

commodities (Tr. 429). 

37. In response to questions by Stovall, Maduff stated that in a cash sale 

the "contract size" is "practically never right on the pound" (Tr. 404). Maduff 

also testified that a buyer and seller in a cash commodity transaction generally 

initiate negotiations by telephone conversations and negotiate all terms of the 

contract (Tr. 403-405). 

38. With respect to the quality or grades of commodities, Maduff agreed with 

Dr. McDonald that the trade does not recognize a grade of number 3 pork bellies 

as was found on Stovall's P&S statements. (Tr. 316, 397, CX 10, 15, 16). 

39. As an expert, qualified in the nature of futures trading G. Edward Piala, 

on the basis of the CEA investigation of Stovall, opined that the transactions 

which Stovall purported to execute were futures transactions and not 

transactions in cash commodities. 

He defined a futures contract as one "in which one person agrees to buy and 

another to sell a specified commodity for delivery during a specified period in 

the future, which ordinarily is entered into for the purpose of assuming or 

shifting the risk of price change without assuming or transferring title to the 
Page 11 

cash commodity, and is, or is of the character of, a contract of sale for future 

delivery as commonly conducted on a board of trade" (Tr. 31). 

In addition he testified that "(t)he principal distinguishing feature between 

a futures contract and a cash contract is that a futures contract is ordinarily 

intended to be satisfied by offset against another futures contract; whereas a 

cash commodity contract is ordinarily intended to be satisfied by actual 

deliver)' of the commodity" (Tr. 32, 192). 

Another distinguishing feature, according to Piala, is that one dealing in a 

cash contract usually has a use for the commodity he is buying and is in the 

business, whereas if one wanted to speculate he would go into the futures 

market. The witness acknowledged that a buyer of a cash commodity lacking 

storage facilities might defer delivery but stated that this does not make it a 

futures contract. Piala also noted the standardized aspects of a futures 

contract, the lack of title transfer with futures contracts and the manner of 

settlement by offset. 

VII. Perjury Conviction of Stovall 

40. On the basis of a plea of guilty, Stovall, as an individual, stands 

convicted of a felony (perjury before a federal grand jury) in Case No. 73 Cr 

679 (United States District Court for the Northern District of Illinois) (CX 

12). 

Opinion 

The foregoing findings and the conclusions which follow have been made after 

full consideration of the entire record. All contentions raised by the parties 

have been considered, whether or not specifically mentioned. All motions, 

objections, proposed findings and arguments presented by the parties which are 

inconsistent with this decision are denied or found to be without merit. 

Jurisdiction 

Any doubts regarding Jurisdiction are easily resolved by reference to the 

language of Sections 6(b) and 6(c) of the Act (7 U.S.C. § 9, 13b) which 

authorizes the Secretary of Agriculture (now the Commission) to proceed against 

any person whom the Secretary has reason to believe is violating or has violated 

any of the provisions of the Act, or rules and regulations. Section 8a(3) of 

the Act (7 U.S.C. 12a(3))incorporates by reference the procedures "in paragraph 

(b) of section 6 of this Act." The provisions of the Act and regulations which 

the Secretary had reason to believe were violated by respondents were enumerated 

in the complaint and will be discussed in detail below. 

Stovall's Program 

In our consideration of the merits of this proceeding we must conclude that 

complainant has sustained its burden of proof and that the allegations of the 

complaint are supported by a preponderance of the record evidence. 

The Stovall transactions which were the subject of this proceeding were not 

as respondent maintains, transactions in cash commodities for deferred delivery, 

but instead were transactions in futures contracts in commodities subject to 

regulation under Section 2 of the Act (7 U.S.C. 2), which transactions are 

commonly conducted on boards of trade and subject to the rules of the boards of 

trade. 

During oral argument in this proceeding (Or. 2-3) attorney for complainant 

compared the Stovall program to a game of monopoly - - "a game made possible by 

Mr. Stovall being able to enlist the aid and assistance of innocent and 
Page 12 

unbuspecting people - - who thought they were actually engaging in some business 

transactions, when in fact there were no business transactions". 

By further analogy one might compare the Stovall operation to a board of 

trade or exchange operated privately by Stovall in which fictitous trades were 

solicited and bucketed. 

Although cash and futures contracts have characteristics which are to a 

degree similar and dissimilar, an examination of generally recognized 

characteristics of each (findings 30-39) as applied to the facts in this case 

lead to the inescapable conclusion that the purported transactions were futures 

contracts. 

Two primary characteristics which distinguish cash contracts from futures 

contracts are the intended use and the method of settling such contracts. With 

respect to use, the cash contract is a merchandising contract while the futures 

contract is a speculative or hedging contract. In regard to method of 

settlement, the cash contract is ordinarily settled by delivery of the actual 

commodity whereas futures contracts are ordinarily settled by offsetting 

transactions. In this regard see pages 9-10, 12 of respondents' answer. 

Regarding these characteristics, the testimony of Piala, McDonald and Maduff 

representing views of a regulatory agency, academia and the industry, is very 

persuasive and entitled to much weight. This testimony as well as the facts 

adduced concerning the operation of Stovall's program demonstrate that Stovall's 

alleged transactions were futures transactions and not cash commodity 

transactions. Most significant is the fact that all of Stovall's transactions, 

with the qualified exception of Rutherford, were 

 

settled by offset in lieu of delivery and that none of the persons involved with 

Stovall, again with the qualified exception of Rutherford, had any use for any 

of the commodities they thought they purchased or sold. Further, none of these 

persons had any intention to make or take delivery of the actual commodity. 

Analyzing Stovall's business in terms of the reasons customers became associated 

with him undeniably leads to the conclusion that Stovall's customers were 

seeking a speculative investment vehicle. 

Although the cash contract is recognized as a vehicle for merchandising a 

cash commodity, Stovall's customers were not employing the cash commodity 

contracts as such vehicle. Even though there was testimony that two customers 

thought they were dealing in cash commodities, neither these customers nor any 

others had any business use for the commodities traded. In this regard it is 

highly significant that of 177 transactions in 14 accounts there was not a 

single delivery of the actual cash commodity (Annex A - CX 10.). The absence of 

any use for merchandising the actual commodities is inconsistent with the 

purpose and use of real cash commodity contracts. 

The only testimony adduced at the hearing regarding the merchandising aspect 

with cash contracts was that of Donald Rutherford, a 

 

contracts signed by Stovall's customers contained a clause that the customer 

intended to make or take delivery (CX 5 - sales agreement), the customer 

testimony at the hearing and the documentary evidence introduced showed that 

none of the customers, with the very limited exception of Rutherford, terminated 

their contracts by delivery. When Stovall simultaneously acted as trading agent 

and principal for customers such as Newkirk and Henrichs, the record reflects 

only offsetting transactions. Hackbarth spoke only in terms of executing 

transactions and not mutual recission for those persons on whose behalf he acted 

as trading agent. Although Stovall supplied the source data or raw data for the 

computerized P&S statements and the computer was programmed to show deliveries, 
Page 13 

Stovall never provided input regarding deliveries during the time period 

material to this case. This is further indication that the transactions were 

closed out by offset in lieu of delivery. There was likewise no testimony from 

Rutherford that he and Stovall mutually agreed to non-delivery of the actual 

commodities; rather, Rutherford's trading record (CX 18-48, 56A & 56B) indicates 

either delivery in a very small percentage of the total purchases and sales or, 

more frequently, an offsetting transaction. 

Respondents, at various places in their briefs, argue that evidence 

concerning the Terms of Purchases and/or Sales Agreement (CX 5) and the 

intention of Stovall's customers to make or take delivery of the actual cash 

commodity is inadmissible, as violative of the parol evidence rule and the 

Illinois Uniform Commercial Code. This agrument, while perhaps applicable to 

the parties to the agreement, is of no merit here 

 

in a disciplinary proceeding, where the subject of the agreement lies within the 

control of Congress to regulate. Cf: Wallace v. Hudson-Duncan & Co., 98 F.2d 

985, 991-992 (9th Cir., 1938). 

Further paragraph 3 of the Terms of Purchase (CX 5) states that: 

"CLIENT agrees that any and all purchasee and/or sales with STOVALL 

contemplate actual delivery and/or receipt of the (actual) commodities . . . ."

A reading of this paragraph reveals that "contemplate" involves a mental 

process subject to various interpretations and that the relationship was 

intended to be an on going one. During the hearing testimony was presented by 

Stovall's customers. Their testimony was clear and unambiguous - they did not 

contemplate making or taking delivery of the actual commodities. This testimony 

explained the parties' understanding of an ambiguous term in the document, and 

demonstrated the true intention of the parties to the agreement and the 

circumstances surrounding the formulation of the agreement. Indeed, an 

examination of those transactions (CX 10, 56 A&B) where Stovall was the 

purchaser shows a settlement, almost exclusively, by offset instead of delivery. 

Thus, even where Stovall as purchaser should have taken delivery, according to 

his construction of the Agreement, he did not take delivery. Thus Stovall's 

actions, in fact, were consistent with the customer's belief and intention. 

Other characteristic differences between cash and futures contracts and the 

manner in which futures contracts are traded provide additional support for the 

conclusion that Stovall's transactions involved futures contracts. With futures 

contracts, the contract written by the exchange contains provisions that are 

standardized with respect to all terms (quantity, quality, place of delivery) 

except month of delivery and price. In cash transactions all terms are subject 

to negotiation between the parties. Analysis of Stovall's operation in light of 

contract terms shows it was one involving futures contracts. 

To initiate a futures transaction one need only be concerned with price and 

delivery month. To initiate a trade in Stovall's program, either Stovall or 

Hackbarth would call the other and propose a trade of a specific commodity at a 

specific price with a specified delivery month. The party receiving the 

proposition had the option of accepting or declining it. Based on data supplied 

by Stovall the International S.C.O.P.E.S. computer was already programmed by 

Hackbarth, pursuant to Stovall's instructions, to show specific delivery periods 

and specific delivery points, the latter being determined by the commodity 

involved. Also based on data from Stovall the computer was programmed to show 

delivery periods according to whether the initiating party proposed a sale or 

purchase of a commodity. 

 
Page 14 

It was only necessary during the telephone conversations for the initiating 

party to refer to a specific month such as July and the computer was programmed 

to show a specific delivery period. Thus in Stovall's program everything was 

standardized and programmed in the computer except the delivery month and price. 

This is hardly consistent with the concept of term by term negotiation in 

legitimate cash commodity contracts. 

The overwhelming evidence, including the records of Rutherford, support 

complainant's contention that Stovall's program involved futures transactions. 

Regardless of what Stovall chose to call his operation, his "program" involved 

futures contracts and not true cash commodity contracts. Such futures 

transactions, if executed, could have been used for: hedging transactions in 

interstate commerce in the commodities or byproducts set forth in CX 10, 

determining the price bases of transactions in interstate commerce in those 

commodities, and delivering such commodities sold, shipped or received in 

interstate commerce for the fulfillment thereof. 

Respondents' argument, paragraphs 4 and 5 of their Supplemental Brief and at 

oral argument (Or. 50-51), that certain exhibits were inaccurate and false is 

without merit and ignores the testimony adduced at the hearing. Annex A (CX 10) 

and supporting documents (CX 15, 16) represented transactions between Stovall 

and the Michigan customers, such as 

 

Newkirk and Henrich (Tr. 81, 87, 104-105, 171-176, 558-561, 570-579, 724-726). 

The thrust of respondents' argument here is that in Stovall's "negotiations" 

with Hackbarth the computer was always programmed to show Stovall's purchase of 

a # 1 grade and a sale of a # 3 grade, which was inconsistent with some of the 

grades in complainant's exhibits. 

However since Hackbarth never acted as trading agent for those customers, 

Stovall's allegations as to the accuracy of CX 10, 15 and 16 appear frivolous. 

Conceding for purpose of argument the presence of typographical errors in CX 10, 

does not destroy its efficacy as a summary of 177 transactions from 14 Stovall 

accounts from May to December 1972, all of which were settled by offsetting 

transactions and not by delivery of the actual commodity. Moreover, the fact 

that the computer was programmed according to Stovall's instructions to show 

standardized data for everything but price and delivery month is indicative of 

futures transactions. 

Respondents argue estoppel and claim that the sample of customers upon which 

this action is predicated is insufficient. With respect to the latter 

contention respondents claim that the complainant rests its case on the trades 

of 25 to 30 customers whereas Stovall's program involved about 4,000 customers. 

Matecki testified that 25 to 30 customers were interviewed (Tr. 73). Hackbarth 

testified that there were 50 to 70 customers starting in June 1972, which number 

increased to about 3,300 in September 1973. Hackbarth did not know the number 

of customers in 

 

December 1972 (Tr. 464, 480-481). Stovall, of course, had the only complete 

customer list, which he refused to turn over to CEA investigators (Tr. 20-21, 

24, 26-29,69-70, 149-152, 732-733; CX 1, 3,4), and Stovall did not testify on 

his own behalf or in response to questions by Complainant's counsel at the 

hearing. The subpoena issued by the CEA to obtain customer information was not 

honored and the enforcement action was delayed by the criminal investigation of 

Stovall's activities (Tr. 160-161, 165A-167). In these circumstances, we 

believe that the Complainant's sample of Stovall's customers is adequate and 

representative. Indicative of its adequacy is the fact that Rutherford, the 

sole witness to testify on Stovall's behalf about actual deliveries, was the 

sole customer complainant, in the early stages of the hearing, believed might 

have made delivery (Tr. 75, 176, 178, 181). 
Page 15 

Regarding respondents' estoppel argument, Stovall contends that his program 

was approved by employees of the CEA and that complainant is now estopped from 

prosecuting this matter. When Stovall met with CEA employees Hill and Smith in 

April 1971 he inquired whether the CEA had jurisdiction over a "cash grain 

operation per se". According to the testimony at the hearing Stovall did not 

elaborate on the details of his proposed operation. At that time it might well 

have appeared that 

 

Stovall was proposing a legitimate cash merchandising operation. The skeletal 

information offered by Stovall was certainly inadequate to bind the complainant 

to approval of his program. Moreover Stovall's refusal to give pertinent 

records to CEA investigators is inconsistent with his claim of earlier good 

faith attempts to obtain CEA approval of his program. 

Finally respondents contend (Brief page 8) that trading a contract on a 

contract market is what makes it a futures contract. Respondents further argue 

that if Stovall's transactions were futures contracts they were not subject to 

the Commodity Exchange Act because they were not traded on a board of trade. 

However the requirement that a futures contract be executed on a designated 

contract market is what makes the contract legal, and not what makes it a 

futures contract. To permit execution other than on a contract market would 

invite bucket shops and other fraudulent and non-regulated activities to the 

detriment of the public and in contravention of the history of commodity 

regulation, which was designed to insure honest dealings and protection of the 

public. 

All tradings in futures contracts must be done on a contract market 

designated by the Secretary of Agriculture, now the CFTC. See: Cargill, supra, 

at 1156; In re: Louis Romoff, 31 Agric. Dec. 158, 162 (31 A.D. 158, 162) (1972); 

 

 In re David G. Henner, supra. at 1156. 

Viewed in this light, it is evident that the statutory language contained in 

various provisions, "on or subject to the rules of any contract market", means 

that a futures contract must be executed on a designated contract market to be 

legal. Cf. In re: Henry S. Sicinski, 25 Agric. Dec. 302, 306 (25 A.D. 302, 306) 

(1966); Secretary of Agriculture v. Ray E. Stuart, 1 Agric. Dec. 359, 361 (1 

A.D. 359, 361) (1942 consent). To construe the statute in any other way would 

be to ignore its remedial nature and to render meaningless the requirement that 

contract markets be designated in accordance with the Act. n7 In addition, the 

requirement that futures contracts be executed on a designated contract market 

to be legal is consistent with the statutory provisions prohibiting bucketing 

and fictitious transactions. To require less would invite the proliferation of 

bucket shops and operations similar to that of Stovall. 

n7 In order to obtain designation as a contract market for trading in a 

particular commodity, a board of trade must meet rigid requirements (see 

Section 5 of the Act, 7 U.S.C. § 7), and must continue, after designation, 

to maintain specific standards. (See Section 5a of the Act, 7 U.S.C. § 

7a). 

 

Because the trades Stovall purportedly executed were futures transactions, 

they should have been executed on a designated contract market. 

Violations of the Act 

1. Section 4 of the Act: 

Section 4 of the Act (7 U.S.C. § 6) provides, in part that: 
Page 16 

"It shall be unlawful for any person to deliver for transmission through the 

mails or in interstate commerce by telegraph, telephone, wireless, or other 

means of communication any offer to make or execute, or any confirmation of the 

execution of, or any quotation or report of the price of, any contract of sale 

of any commodity for future delivery on or subject to the rules of any board of 

trade in the United States, or for any person to make or execute such contract 

of sale, which is or may be used for (a) hedging any transaction in interstate 

commerce in any commodity or the products of byproducts thereof, or (b) 

determining the price basis of any such transaction in interstate commerce, or 

(c) delivering any commodity sold, shipped, or received in interstate commerce 

for the fulfillment thereof, except, in any of the foregoing cases, where such 

contract is made by or through a member of a board of trade which has been 

designated by the Secretary of Agriculture (Commission) as a 'contract market' . 

. ."

Stovall violated this statutory provision by using the mails to transmit to 

his customers confirmations of the purported transactions and to quote the 

prices of the transactions, since such transactions had not been executed on a 

designated contract market. See: In re Sicinski, supra. Stovall's purported 

transactions were in reality futures 

 

transactions and, as such, subject to the rules of a board of trade. 

2. Section 4d of the Act: 

Section 4d of the Act (7 U.S.C. § 6d) provides in part that: 

"It shall be unlawful for any person to engage as futures commission merchant 

in soliciting orders or accepting orders for the purchase or sale of any 

commodity for future delivery, or involving any contracts of sale of any 

commodity for future delivery, on or subject to the rules of any contract market 

unless -

(l) such person shall have registered under this Act, with the Secretary of 

Agriculture (Commission) as such futures commission merchant and such 

registration shall not have expired nor been suspended nor revoked;. . . "

In addition Section 2a of the Act (7 U.S.C. § 2) defines "futures commission 

merchant" to: 

"mean and include individuals, associations, partnerships, corporations, and 

trusts engaged in soliciting or in accepting orders for the purchase or sale of 

any commodity for future delivery on or subject to the rules of any contract 

market and that, in or in connection with such solicitation or acceptance of 

orders, accepts any money, securities, or property (or extends credit in lieu 

thereof) to margin, guarantee, or secure any trades or contracts that result or 

may result therefrom. "

Although Stovall's activities fell within the statutory definition of a 

futures commission merchant (FCM) he, as an individual or as R. L. Stovall, Sole 

Proprietor in Cash Commodities, was never registered as an 

 

FCM. 

In the case of In re David L. Hofer, 29 Agric. Dec. 1334 (29 A.D. 1334) 

(1970), the Judicial Officer, on facts similar to those here, concluded that the 

respondent was acting as an unregistered FCM. Hofer solicited and obtained from 

his customers a "Power of Attorney and Agency Agreement . . which authorized 

him, as agent and attorney-in-fact, to buy, sell, and trade in commodities or 

contracts relating thereto", 29 Agric. Dec. at 1338-1339 (29 A.D. at 1338-1339). 

The agreement gave respondent open-ended discretion with respect to all trades 

and required the customer to place a sum of money as a deposit with Hofer. The 

agreement in Hofer was found to be an "order" within the definition of an FCM 
Page 17 

and Hofer's conduct qualified him as an FCM. 29 Agric. Dec. at 1339-1342 (29 

A.D. at 1339-1342). See also: In re J. M. Leak, 7 Agric. Dec. 528, 530-531 (7 

A.D. 528, 530-531) (1948, Default). 

It is clear that Stovall's conduct was such that his business involved the 

solicitation and acceptance of orders to buy or sell futures contracts and the 

acceptance of money to margin those trades. As in Hofer, Stovall's trading 

authorization and management contract (CX 5) gave the trading agent (Stovall and 

later Hackbarth) complete and open discretion concerning trades, provided for 

the customer to authorize the trading agent to buy and sell contracts on 

"margin" (CX 5 - Trading Authorization) and called for the customer to give 

Stovall a "deposit" for the purpose of 

 

trading (CX 5 - management contract). Moreover Stovall admitted to Matecki that 

he solicited accounts and money from customers (Tr. 158, 171). Stovall's 

conduct and activities bring him within the statutory definition of an FCM. 

Stovall's lack of registration as an FCM is undisputed and violative of Section 

4d of the Act (7 U.S.C. § 6d). 

3. Section 4b(D) of the Act; Section 1.38 of the Regulations Section 4b of 

the Act (7 U.S.C. § 6b) prohibits bucketing n8 by making it unlawful: 

"(l) for any member of a contract market, or for any correspondent; agent, or 

employee of any member, in or in connection with any order to make, or the 

making of any contract of sale of any commodity in interstate commerce, made, or 

to be made, on or subject to the rules of any contract market, for or on behalf 

of any other person, or (2) for any person, in or in connection with any order 

to make, or the making of, any contract of sale of any commodity for future 

delivery, made, or to be made, on or subject to the rules of any contract 

market, for or on behalf of any other person if such contract for future 

delivery is or may be used for (a) hedging any transaction in interstate 

commerce in such commodity or the products or by products thereof, or (b) 

determining the price basis of any transaction in interstate commerce in such 

commodity, or (c) delivering any such commodity sold, shipped, or received in 

interstate commerce for the fulfillment thereof. . . . 

(D) to bucket such order, or to fill such order by offset against the order 

or orders of any other person or willfully and knowingly and without the prior 

consent of such person to become the buyer in respect to any selling order of 

such person, or become the seller in respect to any buying order of such 

person."

n8 Bucketing is the practice of taking the opposite side of a customer's 

trade instead of executing it in the open market. Campbell, Trading in 

Futures Under The Commodity Exchange Act, 26 Geo. Wash. L. Rev. 215, 232. 

The danger of bucket shops has long been recognized. Hoffman states that: n9 

"Their intent is to defraud their patrons. To accomplish this, they 

encourage their customers to enter into contracts promising profit if prices 

advance. However, these contracts may be handled, whether nominally executed 

upon a recognized exchange or not, the house assumes an opposite position to the 

customer gaining if the customer loses and losing if the customer gains. They 

must have quotations from some source to operate. If they are to remain in 

business, (1) their trade must either include both buying and selling customers 

which offset each other thus permitting the house to profit from commissions 

without the costs of execution or the risk of the market or (2) the market must 

so move, where they are forced to take an opposite position to their customers, 

that they will gain and their customers lose."
Page 18 

n9 Hoffman, Futures Trading Upon Organzied Commodity Markets In the 

United States (1932), pp. 357-358, (referred to as "one of the standard 

works on futures trading", In re Cargill, Incorporated 29 Agric. Dec. 880, 

907 (29 A.D. 880, 907)) 

 

In purporting to execute transactions for customers such as Newkirk and 

Henrichs, Stovall took the opposite side of a customer's order when acting as 

agent for the customer on the one hand and as the principal for his own account 

on the other. Further, such transactions were not executed in accordance with 

the rules of a contract market. In part this situation changed in approximately 

July 1972 when Hackbarth became trading agent for some of the Stovall customers. 

The substitution of Hackbarth, however, did not detract from Stovall's practice 

of taking the opposite side of a customer's trade. After Hackbarth began acting 

as trading agent, Stovall or his salesmen continued to obtain customers and new 

accounts. Hackbarth played no role in the solicitation of business and had no 

personal contact with the persons on whose behalf he traded. Each time 

Hackbarth "executed" a trade, Stovall benefited by a gain in the transaction or 

collection of a handling fee (Respondent's proposed finding 76). Regardless of 

who held the trading authorization, the account owners were Stovall's customers. 

Stovall thus retained an interest in the account against which he purported to 

trade. 

Stovall's admission to Matecki on December 8, 1972 that he was on the 

opposite side of each of his customers' transactions (Tr. 772) demonstrates a 

clear violation of Section 4b of the Act as well as 

 

Section 1.38 of the regulations (17 CFR § 1.38) which requires execution of 

trades "openly and competitively". See e.g., In re: Julian M. Marks, 22 Agric. 

Dec. 761, 776 (22 A.D. 761, 776) (1963); In re: Raymond A. Gerstenberg, 26 

Agric. Dec. 816, 822 (26 A.D. 816, 822) (Consent 1967); In re: Charles Vojtek, 7 

Agric. Dec. 386, 388-389 (7 A.D. 386, 388-389) (Default 1948); Secretary of 

Agriculture v. Stuart, 1 Agric. Dec. 359, 361 (1 A.D. 359, 361) (Consent 1942). 

4. Section 4c(A) of the Act 

Section 4c(A) of the Act (7 U.S.C. § 6c(A)) prohibits fictitious 

transactions. Under that Section it is: 

"unlawful for any person to offer to enter into, enter into, or confirm the 

execution of, any transaction involving any commodity, which . . . .

(A) if such transaction is, is of the character of, or is commonly known to 

the trade as, a 'wash sale', 'cross trade', or 'accommodation trade', or is a 

fictitious sale; "

"The essential and identifying characteristic of a 'wash sale' seems to be 

the intent not to make a genuine, bona fide trading transaction in stocks or 

commodities. A wash sale is a form of fictitious transaction". The fictitious 

sale provision of the statute was intended "to outlaw insofar as possible all 

schemes of trading that are artificial and are not the result of arms-length 

trading on the basis of supply and demand factors and trading opinion of these 

factors." In re: Jean Goldwurm, 7 Agric. Dec. 265, 274-276 (7 A.D. 265, 274-276) 

(1948). As noted above, Stovall bucketed the "trades" in his program and none 

of the transactions were ever actually executed in a bona 

 

The Sanction 

The complaint and notice of hearing filed in this proceeding alleges willful 

violations of the Act and reads: 

". . . At such hearing, the respondents will have the right to appear and 

show cause, if any there be, why an appropriate order should not be issued in 

accordance with the Commodity Exchange Act, (1) suspending or revoking the 
Page 19 

registration of respondent Rawlin L. Stovall as a floor broker, (2) suspending 

or revoking the registration of respondent Stovall and Stovall, Inc. as a 

futures commission merchant (at pages 27 and 28 of the brief in support of 

proposed findings and conclusions, complainant seeks revocation of the finds 

registration), (3) prohibiting respondent Stovall from trading on or subject to 

the rules of any contract market, and directing that all contract markets refuse 

all trading privileges to respondent Stovall for such period of time as may be 

determined and (4) directing that respondent Stovall shall cease and desist from 

violating the Act in the manner alleged herein."

Under the Administrative Procedure Act (5 U.S.C. § 558), a revocation or 

suspension order may be issued without prior notice only if the violation was 

willful. Assuming that this section is applicable, the violations by 

respondent, Stovall, were willful. 

The respondent is an experienced trader. Stovall, during the period material 

to this proceeding, was a registered floor broker and his firm, Stovall and 

Stovall, Inc., was a registered futures commission merchant,which necessitated 

familiarity with the Act and Regulations. Hence the inference is inescapable 

that Stovall willfully violated the 

 

Act and Regulations in the manner described above. 

A violation is willful, within the meaning of the term in a regulatory 

statute, if the violator "1) intentionally does an act which is prohibited, -- 

irrespective of evil motive or reliance on erroneous advice, or 2) acts with 

careless disregard of statutory requirements" Goodman v. Benson, 286 F.2d 896, 

900 (7th Cir., 1961) . 

Because the activities of R. L. Stovall, Sole Proprietor, Principal in Cash 

Commodities, were flagrant violations of the Act, fraudulent misrepresentations 

to the public, and a source of gain to Stovall, the sanction imposed is severe 

and consistent with that recommended in the complaint, viz.: 

a. Revocation of the floor broker registration; 

b. Two year denial of trading privileges; and 

c. An order to cease and desist. 

In addition the registration of Stovall & Stovall, Inc., a registered futures 

commission merchant during 1972, is revoked as being unfit to continue as a 

futures commission merchant, since Stovall as an officer (President) and 

principal stockholder of the firm, engaged in practices prohibited by the Act, 

and was convicted of a felony (perjury) 

 

in a federal court (finding 40). Such revocation is in accord with Section 

8a(2) (B) (1) and 8a(3) of the Act (7 U.S.C. § 12a(2)(B)(1) and 12a(3)). 

CONCLUSIONS OF LAW 

1. The CEA (now CFTC) has jurisdiction over the persons and subject matter of 

this action by virtue of Sections 6(b), 6(c) and 8a(3) of the Act (7 U.S.C. §§ 

9, 13b, 12a(3)). 

2. The business in which Stovall engaged involved the offer to make and the 

purported entering into of purchases and sales of commodities for future 

delivery which were subject to the rules of contract markets. 

3. By soliciting and accepting orders for the purchase and sale of 

commodities for future delivery on or subject to the rules of any contract 

market,and accepting money deposits to margin such orders, Stovall engaged in 

business as a futures commission merchant. 
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4. Because Stovall was not registered with the Secretary of Agriculture in 

1972 as a futures commission merchant, Stovall violated Section 4d of the Act (7 

U.S.C. § 6d). 

5. By using the mails to transmit confirmations of the purported executions 

and quotations or reports of prices of contracts of sale of commodities for 

future delivery on or subject to the rules of 

 

any board of trade, which were not executed by or through a member of a board of 

trade which has been designated as a contract market, Stovall violated Section 4 

of the Act (7 U.S.C. § 6). 

6. Because Stovall was on the opposite side of all his customers' 

transactions which were not subject to bona fide execution in accordance with 

the rules of a contract market and because such transactions were not executed 

openly and competitively by open outcry or posting of bids and offers or by 

other equally open and competitive methods in a place provided by a contract 

market, Stovall violated Section 4b(D) of the Act and Section 1.38(a) of the 

Regulations (7 U.S.C. § 6b(D) and 17 CFR § 1.38(a)). 

7. In reporting and confirming a trade to customers as having been executed, 

when in fact no bona fide execution had occurred, Stovall engaged in fictitious 

transactions and violated Section 4c(A) of the Act (7 U.S.C. § 6c(A)). 

8. Stovall's failure and refusal to make available for inspection by 

representatives of the CEA and Secretary of Agriculture his books and records 

regarding his business violated Section 1.35(a) of the regulations (17 CFR § 

1.35(a)). 

9. Because Rawlin L. Stovall, an officer of Stovall and Stovall, Inc. 

violated the Act and was convicted of a felony, the corporation is unfit to 

engage in the business as a futures commission merchant. 

ORDER 

1. The respondent, Rawlin L. Stovall, is prohibited from trading on or 

subject to the rules of any contract market for a period of 2 years, and all 

contract markets shall refuse all trading privileges to him during said period. 

Such prohibition and refusal shall apply to all trading done and all positions 

held directly, or indirectly, whether for his account, or for the account of any 

other person. 

2. The registration of respondent, Rawlin L. Stovall, as a registered floor 

broker under the Act, is revoked. 

3. The registration of respondent Stovall and Stovall, Inc., as a futures 

commission merchant under the Act, is revoked. 

4. Respondent, Rawlin L. Stovall, shall cease and desist from: 

a. Engaging as a futures commission merchant without being registered as 

required by the Act and the regulations thereunder; 

b. Using the mails to transmit confirmations of purported executions and 

quotations or reports of prices of contracts of sale of commodities for future 

delivery, on or subject to the rules of any 

 

board of trade, which are not executed by or through a member of a board of 

trade which has been designated as a contract market; 

c. Entering into, or offering to enter into, any futures transaction subject 

to the Act if such transaction is, is of the character of, or is commonly known 

to the trade as, a "wash sale," or is a fictitious sale; and 
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d. Executing any futures transaction subject to the Act if such transaction 

is bucketed or if such transaction is not executed openly and competitively in 

accordance with section 1.38 of the regulations issued under the Act (17 CFR 

1.38). 

5. Paragraphs 1, 2, and 3 of this Order shall be effective on the twentieth 

day after this Decision and Order become final. Paragraph 4 shall be effective 

on the date this Decision and Order become final. 

6. Pursuant to the Rules of Practice governing proceedings under the Act, 

this Decision and Order shall become final 30 days after service thereof, unless 

appealed to the Commodity Futures Trading Commission 

 

by a party to this proceeding, or otherwise acted upon by the Commission. (17 

CFR § 10.84(c), 10.102) 

7. Copies hereof shall be served upon each party and on each contract market. 

Done at Washington, D.C. 

6 MAY 1977 

[SEE SIGNATURE IN ORIGINAL] 

John A. Campbell 

Administrative Law Judge 

LOAD-DATE: August 6, 2008 
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