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Commodity Futures Trading Commission 

CEA CASES 

NAME: DAVID L. HOFER 

CITATION: 29 Agric. Dec. 1334 

DOCKET NUMBER: 156 

DATE: DECEMBER 15, 1970 

DOCUMENT TYPE: DECISION AND ORDER 

(No. 13,542) 

In re DAVID L. HOFER. CEA Docket No. 156. Decided December 15, 1970. 

Jurisdiction -- Futures commission merchant -- False statements -- 

Segregation of funds -- Cease and desist -- Denial of trading privileges -- 

Denial of application for registration

Respondent is found to have violated the act and the regulations as charged 

in the complaint. The complaint charged that respondent operated as a futures 

commission merchant without being so registered, that he wilfully made material 

false statements in his application for registration as a futures commission 

merchant and in a statement of financial condition filed with the Secretary, and 

that he failed to segregate customers' funds. 

Respondent is ordered to cease and desist from the violations found, is 

prohibited from trading on all the contract markets for a period of six months, 

and his application for registration as a futures commission merchant is denied. 

Gilbert A. Horn and Earl L. Saunders for Commodity Exchange Authority. 

Respondent pro se.

John Curry, Hearing Examiner. 

Decision by Thomas J. Flavin, Judicial Officer

DECISION AND ORDER

This is an administrative proceeding under the Commodity Exchange Act (7 

U.S.C. 1, et seq.), charging respondent with various violations of the act. 

Respondent filed an answer and a hearing was held in Chicago, Illinois, before 

John Curry, Hearing Examiner, Office of Hearing Examiners, United States 

Department of Agriculture. Thereafter, complainant filed proposed findings of 

fact, conclusions, and order, and respondent filed a brief in his own behalf. 

The hearing examiner issued a recommended decision and order proposing a 

denial of respondent's application for registration 

as a futures commission merchant, a cease and desist order for the violations 

found, and denial of trading privileges to respondent for a period of six months 

on all the contract markets. Respondent did not file exceptions thereto. 

In view of the foregoing and upon consideration of the entire record, the 

recommended decision and order of the hearing examiner are adopted as the final 

decision and order herein. The cease and desist order shall become effective on 

the date of service of a copy hereof upon respondent. The denial of trading 

privileges to respondent shall become effective on the 30th day after entry of 

this order. Copies hereof shall be served on the parties and on each contract 

market. 
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HEARING EXAMINER'S RECOMMENDED DECISION AND ORDER 

PRELIMINARY STATEMENT

This is a proceeding under the Commodity Exchange Act (7 U.S.C. 1, et seq. ) 

instituted by a complaint issued by the Assistant Secretary of Agriculture and 

filed herein on November 6, 1968. 

The complaint charges that David L. Hofer, an individual, engaged as a 

futures commission merchant within the meaning of that term in the Act and that 

he filed application for registration as futures commission merchant under the 

Act on August 2, 1968, but that registration has not been granted. It charges 

that respondent failed to segregate and to account separately for the funds 

belonging to his customers, commingled such funds with his own funds, and used 

customers' funds for his own benefit. It charges, further, that except for two 

days, August 14 and 15, 1968, respondent failed and refused to prepare a daily 

segregation record of his customers' funds, and that the segregation record that 

he did prepare on August 15 improperly included two accounts receivable totaling 

$ 21,440 as segregated funds and when the record is adjusted to eliminate this 

amount, it showed that the total amount of money, securities and property held 

for customers was insufficient to pay all credits and equities due them by the 

sum of $ 18,055.52. The complaint further charges that respondent made a false 

statement in the application for registration that he filed with the Commodity 

Exchange Authority by stating that he had never been involved in any action by 

the United States Securities and Exchange Commission or the securities 

commission or equivalent authority of any state that had 

not been previously reported to the Commodity Exchange Authority, whereas, in 

fact, he had been subject to such an action in November 1967, in the State of 

Iowa, which action resulted in the issuance of a cease and desist order against 

him. The complaint further charges that respondent wilfully submitted a false 

financial report with his application for registration which overstated his 

assets by more than $ 100,000 and concealed the fact that he lacked more than $ 

52,000 of having enough funds to pay his customers' credits and equities. 

Finally, the complaint charges that during the period of June 18 through August 

16, 1968, respondent acted as futures commission merchant in soliciting and 

accepting orders for the purchase and for the sale of commodity futures subject 

to the Act without being registered with the Secretary of Agriculture as a 

futures commission merchant. 

Respondent filed an answer on December 17, 1968, denying that he engaged as a 

futures commission merchant as defined in the Act at any time material to this 

proceeding. He contends that the Commodity Exchange Authority had been advised 

of the Iowa action at the time of its occurrence and that thus his answer to the 

question in his application about such action was not false. Finally, he denies 

all other charges in the complaint. 

An oral hearing was held at Chicago, Illinois, on June 18 and 19, 1969, 

before John Curry, Hearing Examiner, Office of Hearing Examiners, United States 

Department of Agriculture. Complainant was represented at the hearing by 

Gilbert A. Horn, Office of the General Counsel, United States Department of 

Agriculture. Respondent was represented by Attorney James L. Fox of Chicago, 

Illinois. Thereafter, on September 9, 1969, the complainant filed proposed 

findings of fact, conclusions, and order. On February 3, 1970, the respondent 

himself filed a brief in his own behalf. 

PROPOSED FINDINGS OF FACT

1. Respondent is an individual whose business address is 110 North Franklin 

Street, Chicago, Illinois, and was, during the period of June 18 through August 

16, 1968, engaged as a futures commission merchant as that term is defined in 

Section 2(a) of the Act (7 U.S.C. § 2). 
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2. On or about August 2, 1968, respondent filed an application for 

registration as futures commission merchant under the Act, but registration has 

not been granted. 

3. During the period from June 18 through August 16, 1968, respondent, acting 

in the capacity of futures commission merchant under the Act, carried accounts 

for customers for the purpose of trading in commodity futures subject to the 

provisions of the Act in said customers' behalf, and received or held funds 

belonging to such customers representing deposits of margin by and profits 

accruing to such customers without being registered with the Secretary of 

Agriculture as futures commission merchant. 

4. During the period of June 18, through August 16, 1968, respondent failed 

and refused to segregate and to account separately for funds belonging to his 

customers and, except for two days -- August 14 and 15, 1968 -- failed and 

refused to prepare a daily record setting forth the amount of customers' money 

and equities required to be kept in segregation in accordance with the 

provisions of Section 4d of the Act (7 U.S.C. 6d). The segregation records 

prepared by respondent for August 14 and 15, 1968, showed that he had excess 

funds in segregation on each of said days. However, in such records, respondent 

included deposits in non-segregated bank accounts, deposits in non-segregated 

margin accounts, and two accounts receivable items, none of which constituted 

funds in segregation under the Act and Regulations. 

5. Respondent knowingly made a material false statement in the application 

for registration that he filed with the Commodity Exchange Authority on or about 

August 2, 1968, in that he answered "no" to the following question in such 

application: 

Have you or any general partner, officer, holder of more than 10 percent of 

the capital stock, or any person participating in managing your business or any 

of your offices been subject to any of the following actions which have not been 

previously reported to this agency: * * * 2. Any action by the United States 

Securities and Exchange Commission, the securities commission or equivalent 

authority of any State? 

In truth and in fact, the respondent was subject to such an action in 

November 1967, before the Insurance Commissioner of the State of Iowa, and on 

November 7, 1967, the Insurance Commissioner entered an order in that action 

which, inter alia, ordered the respondent to "cease and desist from further 

solicitation and sale" of certain securities in the State of Iowa, which said 

action had not been previously reported to the Commodity Exchange Authority. 

6. On August 2, 1968, respondent, in connection with his application for 

registration as futures commission merchant, wilfully submitted to the Commodity 

Exchange Authority a false Statement of Financial Condition as of June 30, 1968, 

which statement contained the following material overstatements of assets: 

Item Per Respondent's Correct OverFinancial Statement Amount: statement: 

Cash -- First Arlington National Bank -- Illinois Livestock $ 25,581.50 $ 11,268.18 $ 14,313.32

Margin Deposits 

(at King & King, Inc.) 83,655.50 39,760.00 43,895.50

Total overstatement $ 58,208.32

The statement also contained a grossly exaggerated overstatement of assets 

concerning the value of Stock of Hofer Systems, Inc., to wit: 

Hoyer Systems, Inc. $ 57,922.61 $ 7,922.61 $ 50,000.00

PROPOSED CONCLUSIONS

The basic question in this proceeding is whether respondent was operating as 

a futures commission merchant as that term is defined by Section 2(a) of the 

Act. The pertinent portion of that Section reads as follows: 
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The words "futures commission merchant" shall 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. 

In this connection, there are two questions to be considered: (1) Did 

respondent's operation fall within this description, and if so, (2) was 

respondent operating as a futures commission merchant during the period of the 

alleged violations, that is, between June 18 through August 16, 1968? We shall 

consider these questions separately. 

Generally, respondent's mode of operation was as follows: He solicited and 

accepted from customers a "Power of Attorney and 

Agency Agreement" (Complainant's Exhibit 1) which authorized him, as agent and 

attorney-in-fact, to buy, sell, and trade in commodities or contracts relating 

thereto. The agreement provides: "In all such purchases, sales, trades and 

other transactions David Hofer is authorized to act for the undersigned and in 

the undersigned's behalf in the same manner and with the same force and effect 

as the undersigned might or could act with respect to such purchases, sales, 

trades, and other transactions . . ." The agreement further provides: 

Funds which I am depositing herewith, to wit the sum of $ ----------, and 

funds which I may hereafter deposit must be accounted for separately by David 

Hofer. I understand that I will receive monthly statements indicating the net 

open position(s) in my account, as well as my net balance; and in addition, on 

the day a purchase, sale or trade is made, David Hofer shall mail to me a 

statement indicating such sale, purchase or trade made in my account. 

As of June 30, 1968, respondent had entered into such powers of attorney and 

agency agreements with 118 patrons (Tr. 289) and had accepted and held money 

from them in the total amount of $ 117,683.52. (Complainant's Exhibit 2, 

Respondent's Exhibit 4). As of that date, respondent had $ 39,760 of his 

patrons' money on deposit with the firm of King & King, a clearing broker on the 

Chicago Board of Trade, for the purpose of margining, guaranteeing, or securing 

trades in commodity futures on his patrons' behalf. (Respondent's Exhibit 4, 

Complainant's Exhibit 5). As of that date, respondent's patrons held 100 

contracts for the purchase of August 1968 cattle which open positions respondent 

had negotiated in their behalf. (Complainant's Exhibit 3). 

The power of attorney and agency agreement, and respondent's operations 

thereunder meet all of the conditions of the above quoted definition of a 

futures commission merchant, provided that the agreement was an "order for the 

purchase or sale of any commodity for future delivery." On this point, there is 

testimony given by Neal H. Stults, Deputy Director of the Compliance Division of 

the Commodity Exchange Authority. Mr. Stults' qualification as an expert on the 

Commodity Exchange Act and on matters involved in futures trading were conceded 

by respondent's attorney (Trans. pg. 167). Mr. Stults said that an order for 

the purchase and sale of commodities for future delivery may range from a very 

specific order to buy or sell a specific commodity on a certain day at a 

specific price, through a semi-discretionary 

order giving the futures commission merchant some leeway as to price, contract 

month, or other details, down to a complete open-ended discretionary order such 

as is involved in this case. The witness also stated that it has been the 

policy of the Commodity Exchange Authority for some time to treat powers of 

attorney such as this as open discretionary orders. (Trans. pg. 175). A recent 

case in which this position and policy has been affirmed by the Secretary of 
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Agriculture is Arthur Gerber, et al., 27 Agric. Dec. 1362, 1365 (27 A.D. 1362, 

1365) (1968). In that case, the Secretary said, in part: 

It is apparent from the record that the activities of Arthur Gerber, acting 

for and on behalf of and, in reality, through respondent corporation, in the 

solicitation and acceptance of trading authorizations or discretionary orders 

from individual customers for the purchase and sale of potato futures and the 

acceptance, in connection with such solicitation and acceptance of orders, of 

money to margin the resulting trades come within the definition of "futures 

commission merchant" contained in Section 2 of the Act (7 U.S.C. 2). 

That decision is dispositive of the question of whether or not the power of 

attorney amounted to an "order" under Section 2 of the Act. Clearly, it was 

such an order. 

We consider next whether respondent was in fact operating as a futures 

commission merchant during the period involved in the complaint, that is, June 

18 through August 16, 1968. There is no proof that respondent solicited or 

accepted powers of attorney and agency agreements from any new patrons during 

this period or that additional margin funds were deposited with him during that 

period by any of his old customers. All of the 118 powers of attorney and 

agency agreements had been entered into prior to June 18, 1968, at a time when 

trading in livestock and livestock products was not regulated by the Act. 

However, when these commodities were brought within the purview of the Act by an 

amendment thereto that became effective on June 18, 1968, respondent continued 

to service these existing accounts even though he did not seek new ones. As 

noted above, there were 100 open trades in August 1968 cattle futures in 

respondent's customers' accounts, respondent continued to carry customers' 

deposits of $ 117,683.52 on his books and continued to have $ 39,760 in 

customers' funds deposited as a margin account with King & King. Moreover, 

during the period of June 18 

through August 16, there was activity in almost every customer's account as 

evidenced by the fact that the balances due them as shown by respondent's 

customer's account ledger changed in every instance between these dates. (Tr. 

pg. 108). 

Since respondent did not solicit or accept any new powers of attorney and 

agency agreements and did not accept any new deposits of margin from his patrons 

after June 18, the question is, did he fall within the definition of a futures 

commission merchant under Section 2(a) of the Act? If the answer to this 

question were "no", then respondent would not be in violation of Section 4d(1) 

of the Act which makes it 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 unless such person shall have 

registered under the Act. This would put the Commodity Exchange Authority in 

the anomalous position of permitting respondent to continue trading in behalf of 

his customers in regulated commodities without being registered under the Act so 

long as he does not solicit any new accounts or accept any additional margin 

money from his customers. The Commodity Exchange Authority contends that such a 

result would be contrary to the clear purposes of the Act. 

The power of attorney and agency agreement that respondent entered into with 

his patrons is a continuing order for the purchase and sale of commodities. 

This is expressly provided for by the terms of the agreement, that is: 

This authorization and indemnity is a continuing one and shall remain in full 

force and effect until revoked by the undersigned by a written notice addressed 

to David Hofer and delivered to his office at Chicago, Illinois, or terminated 

by operation of law because of the death or other legal disability of the 

undersigned . . . 

So long as the agreement remained in effect, every action that respondent 

took thereunder amounted to an acceptance of the order. Thus, the fact that the 
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agreement was originally entered into and executed prior to the period involved 

in the complaint, that is, June 18 through August 16, 1968, is of secondary 

importance. The important thing is that respondent took action in behalf of the 

patrons during this period. Such action consisted of continuing to carry his 

customers' open trades in regulated commodities, continuing to retain the funds 

they invested with 

him for trading, and continuing to maintain a customer's margin deposit at King 

& King. All of these activities clearly came within the purview of the 

Commodity Exchange Authority as soon as the commodity in which respondent was 

trading became a regulated commodity. Respondent contends, however, in his 

brief, at pages 1-2, that under the power of attorney given by his clients to 

execute trades he was authorized to trade in his own name or the name of his 

clients, and that since he "did not solicit orders or even place orders for 

specific individuals," he did not "have an open order nor did [he] exercise an 

open order to trade any specific individual's regulated commodity account." 

Respondent also contends that inasmuch as the contracts with his various clients 

were entered into prior to the time when his trading became subject to 

regulation his activities thereafter did not come within the purview of the 

statute as a futures commission merchant. These points raised by respondent are 

not persuasive. As previously stated, the power of attorney and agency 

agreement and respondent's operation thereunder showed that respondent comes 

squarely within the definition of a futures commission merchant. Because 

respondent was authorized "to trade in [his] own name" as well as for his 

customers account, this fact alone did not make him any the less a futures 

commission merchant than the conventional brokerage firm operating under a 

similar authorization. Under such an authorization to solicit and accept 

orders, the respondent and the brokerage firm are merely agents of their clientprincipals and as such are futures commission merchants. 

On the question of whether respondent became subject to regulation as a 

futures commission merchant after June 18, the respondent is critical of the 

testimony given by Mr. Neal H. Stults on behalf of the complainant. Actually, 

the qualifications of Mr. Stults as an expert on commodity trading were conceded 

by respondent's counsel at the hearing. The essence of this witness' testimony 

was that the Commodity Exchange Authority, the agency charged with the 

administration and enforcement of the act, was of the opinion that respondent's 

activities became subject to regulation as soon as the commodity in which he was 

trading became a regulated commodity. It would seem to be crystal clear that 

Congress intended such a result in enacting the amendment. Accordingly, any 

agreement or contract entered into by private parties, the effect of which 

attempts to enable them to escape regulation, cannot serve to obstruct or defeat 

the impact of a regulatory statute enacted by Congress. 

From the foregoing, it is concluded that respondent was a Futures Commission 

Merchant during the period of June 18 through August 16, 1968, as that term is 

defined by Section 2 (a) of the Act, and that he was required to be registered 

with the Secretary as a futures commission merchant during that period by the 

terms of Section 4d(1) of the Act. That he was not so registered has never been 

challenged. He filed an application for registration on or about August 2, 1968 

(Complainant's Exhibit 10). The application was never approved and respondent 

subsequently, through his attorney, requested that it be withdrawn (Tr. pps. 277 

to 279). 

We consider next the allegation that respondent falsified his application for 

registration as a futures commission merchant by answering "no" to question No. 

13-1: whether he had ever been subject to any action by the United States 

Securities and Exchange Commission, the securities commission or equivalent 

authority of any state which action had not been previously reported to the 

Commodity Exchange Authority. In truth, respondent had been subject to such an 

action before the Commissioner of Insurance of the State of Iowa. On November 

7, 1967, an order was issued against respondent to cease and desist from further 
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solicitation and sale of securities in the State of Iowa (Complainant's Exhibit 

14). 

Respondent contends that "no" was the proper answer to question No. 13-1 

because this Iowa action had previously been reported to the Commodity Exchange 

Authority. To support this contention, respondent testified that on two 

different occasions he discussed the Iowa action with agents of the Commodity 

Exchange Authority. He testified that the first occasion was a conversation 

with Arnold Berkowitz, an auditor with the Commodity Exchange Authority, in 

February 1968. Respondent said Berkowitz asked him about several accounts on 

the books of King & King under the name of Illinois Livestock Company that 

respondent had been directing the trading in. (Tr. p. 255). Respondent told 

Berkowitz that he owed sums of money to persons in Iowa and Minnesota as the 

result of a Power of Attorney Agreement that they had placed with him. "He 

asked if I was still continuing to accept such powers and such monies, and I 

described to him that since the Iowa cease and desist proceedings of November 

the preceding year, that I had found such activities to be quite unprofitable, 

and I had terminated accepting such powers and monies . . . ." (Tr. p. 256). 

That any such conversation ever took place is refuted by Mr. Berkowitz' 

written memorandum of his interview with David L. Hofer. (Complainant's Exhibit 

16). The memorandum shows that the interview actually took place on April 24, 

1968, and that it did concern Hofer's trading as the Illinois Livestock Company. 

However, the interview was concerned solely with events that took place prior to 

September 1967, at which time Hofer said he had transferred the ownership of 

Illinois Livestock Company to Mr. Patrick Donovan because he felt the necessary 

recordkeeping was too time consuming. From the foregoing, it is concluded that 

it is doubtful that the purported conversation about the Iowa proceeding ever 

took place between Hofer and Berkowitz. And if it had, it could hardly be 

considered a "report to the Commodity Exchange Authority." Rather, it seemed to 

be only a casual comment to an agent of the Commodity Exchange Authority, which 

did not describe the nature of the proceedings that gave rise to the cease and 

desist order, the name of the administrative body that issued the order, nor any 

of the factual details that would be necessary to constitute a "report" of the 

proceedings. 

The second mention of the Iowa proceeding, according to respondent's 

testimony, came during a meeting with Mr. Frederick S. Kozlowski, another 

auditor for Commodity Exchange Authority, in July 1968. Kozlowski had delivered 

application forms to Hofer to be filled out "post haste." Hofer says he asked 

Kozlowski to go through the application with him step by step and when they came 

to the question about actions before federal or state securities agencies, "I 

had expressed to him only the one in Iowa, last November, but the agency already 

knew about that one, and he said, 'Well, if they already know about it, then 

check that no,' which I, of course, did." (Tr. p. 259). 

This exchange, if it occurred, could hardly be considered a "report to the 

Commodity Exchange Authority." It was not given as a report, but merely as a 

statement of an assumed fact that the agency already knew about the case. 

Again, it contained none of the detail or specificity that would constitute a 

"report." 

With respect to the foregoing, the respondent in his brief (p. 6) avers that: 

"The second allegation concerns whether or not respondent answered question 

number 13-1 correctly. The question dealt with whether or not I had been 

subject to any action by the U. S. Securities and Exchange Commission or 

equivalent authority of any State which action had not been previously 

 

reported to the Commodity Exchange Authority. I will simply state that I had 

notified agents Berkowitz and Kozlowski on previous interviews in February, 1968 

and August, 1968 that I had been involved in proceedings by the Iowa Securities 

Commission. When filling out the questionnaire, I was advised by Mr. Kozlowski, 
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that since I had previously reported this action to him and Mr. Berkowitz, that 

the question should be answer NO (Tr. p. 256), and I did so. The question on 

the application does not read 'filed a formal report' but rather 'had been 

previously reported' which it was." 

Most of the foregoing statements have heretofore been fully considered, 

supra, (Pp. 11-14). It merely needs to be added that the respondent alone is 

legally responsible for having answered the question as he did on the 

registration application. Even if respondent had previously told two employees 

of the Commodity Exchange Authority of the action taken by the State of Iowa, 

which assertion is disputed by them, this would not justify his giving a false 

answer in his application for registration. Therefore, in giving the answer he 

did, respondent made a false statement in his application for registration. It 

is concluded, therefore, that respondent's "no" answer to the question was a 

false or misleading statement of a material fact in his registration application 

in violation of Section 6 (b) of the Act. 

We consider next the charge that respondent gave false and misleading 

information in his Statement of Financial Condition as of June 30, 1968. 

(Complainant's Exhibit 2). This was an official CEA form that respondent 

submitted along with his application for registration on or about July 31, 1968. 

There is little dispute that the amounts shown on the Statement of Financial 

Condition with respect to a bank deposit in the Arlington National Bank, and 

Margin Deposits at King & King, Inc., were false. Respondent admitted this in 

his own testimony (Tr. p. 303). These falsifications were of major amounts. 

There was no attempt to explain or offer any excuse for them at the hearing.

Specifically, respondent showed a cash balance of $ 25,581.50 in the Illinois 

livestock account at the First Arlington National Bank whereas there actually 

was only $ 11,268.18 in that account on June 30, 1968. This was an 

overstatement of $ 14,313.32. Respondent showed margin deposits at King & King, 

Inc., of $ 83,655.50 whereas the true balance in his margin account on that date 

was only $ 39,760, an overstatement of $ 43,895.50. The true balances in each 

of these accounts clearly appear in 

 

respondent's bank statements and in his records of the King & King trading 

account. In respondent's brief (p. 3) it is contended that respondent was 

coerced into preparing a hasty and unaudited statement of his financial 

condition and was denied an opportunity to resubmit an accurate one. Further, 

that he had been told that accuracy of classification was not important because 

the purpose of the statement was only to verify his solvency. With respect to 

the foregoing, respondent offered no evidence which would establish coercion or 

any other unreasonable conduct by the complainant. There can be no other 

conclusion but that these falsifications were intentional and deliberate. 

The third questionable item in respondent's Statement of Financial Condition 

is the $ 57,922.61 asset value that he put on Hofer Systems, Inc. By his own 

evidence and testimony, this corporation had cash assets of not more than $ 

7,922.61 as of June 30, 1968. (Complainant's Exhibit 6; Tr. pp. 267, 320). To 

these cash assets, respondent added $ 50,000 as "capitalized earnings" to arrive 

at the asset value for Hofer Systems, Inc., shown in his Statement of Financial 

Condition. He arrived at this $ 50,000 figure by doubling the estimated annual 

earnings of Hofer Systems, Inc. Without basic substantiation, Hofer stated that 

Hofer Systems, Inc., had been in existence for two calendar months prior to June 

30, 1968, and in that time had earnings of $ 4,800. It was from these earnings 

that he projected the two year earnings of $ 50,000. (Tr. pp. 268, 319-320). 

On cross examination, Hofer stated that Hofer Systems, Inc., is a one-man 

operation, wholly owned and operated by respondent himself. Its business was to 

advise customers on the buying and selling of commodities. Respondent also 

carried his personal trading accounts in the name of Hofer Systems, Inc. (Tr. 

pp 303-307). Hofer stated he had no idea whether the stock in Hofer Systems, 

Inc., had any market value -- he had never had any offer for it (Tr. p. 320). 

Respondent's expert witness, Frederic L. Specht, stated that there is usually 
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very little, if any, market value to closely held corporate stock such as this 

(Tr. p. 326). 

It was the evaluation placed on Hofer Systems, Inc., that started an 

investigation into the accuracy of respondent's Statement of Financial 

Condition. On questioning by respondent's attorney, Neal Stults testified: 

I told you this morning that we looked at the value put on Hofer Systems, 

Inc., and this was what first red flagged it to 

 

our attention. Now, in my experience, when you run across a name like that any 

place: Hofer Systems, Inc., Commodity Index, Commodex, you wind up with a oneman operation with a mimeograph who runs over to the Board of Trade every day, 

gets the price, comes back and peddles his service to people. That isn't 

indicative of an operation valued at $ 57,000 or even $ 25,000. This was the 

nature of the examination. (Tr. p. 332). 

With respect to the respondent's valuation of the Hofer Systems, Inc. stock, 

the respondent contends it represents a fair value of its worth (Br. p. 4). 

Also, that because he testified that he had never had an offer for it did not 

mean it had no particular value. Respondent also deprecated the statement of 

his own witness that "there usually is very little, if any, market value" to any 

closely held corporate stock. Citing provisions of the Internal Revenue Code, 

respondent contends that: (1) Lack of an active market does not preclude 

establishment of a fair market value for such stock; (2) Sometimes earnings are 

capitalized to arrive at an exact stock value; (3) That the sum of $ 50,000 

added to the cash assets of the corporation representing "goodwill," was 

reasonable; and (4) That mailing lists and regular customers of the Service are 

additional factors to be considered in arriving at fair value of a stock. 

In connection with the foregoing, it should be noted that the respondent 

offered no testimony at the hearing regarding procedures of the Internal Revenue 

Service in establishing the evaluation of stock holdings. It should also be 

noted that evaluation of common stocks for income tax purposes under the 

Internal Revenue Code has no application to the facts herein, namely, the value 

set by respondent upon the stock of Hofer Systems, Inc. By any reasonable 

standard, respondent's appraisal of Hofer Systems, Inc., stock is grossly 

exaggerated inasmuch as his only solid assets were $ 7,922.61 in cash and 

alleged earnings of $ 4,800 made for two calendar months prior to June 30, 1968. 

As previously stated, it was from these earnings that respondent projected two 

years earnings of $ 50,000. 

Despite the grossly exaggerated value set by respondent upon the stock in 

question, upon reflection it cannot be fairly concluded that his valuation was 

necessarily false and wilful, especially in the absence of any guidelines or 

instructions as to what may be fairly considered as assets in a financial 

statement. 

We have, then, three gross overstatements of assets in respondent's Statement 

of Financial Condition: an overstatement of $ 14,313.32 in the Illinois 

Livestock bank account, an overstatement of $ 43,895.50 in the margin account 

with King & King, and an overstatement of $ 50,000 in the value of Hofer 

Systems, Inc. This is a total overstatement of $ 108,208.82. With this 

overstatement eliminated from the assets shown in the statement, it would appear 

that instead of having $ 65,285.01 in free capital assets as shown, respondent 

actually had a deficit of $ 42,823.81. 

Respondent has introduced evidence to prove that he was not in fact insolvent 

on June 30, 1968. This evidence would indicate that in addition to making the 

overstatements of assets noted above, the financial report was also in error in 

that it failed to include $ 54,000 in accounts receivable alleged to be due 

respondent from Patrick Donovan, and failed to include a $ 10,060 check from 
Page 10 

King & King to Hofer Systems, Inc., which check was allegedly in transit on June 

30, 1968. 

The question of whether respondent was solvent or insolvent on June 30, 1968, 

is not primarily an issue in this case, it not having been so specified in the 

complaint herein. The issue is whether or not respondent's Statement of 

Financial Condition contained false and misleading statements of material facts 

in violation of Section 6 (b) of the Act. The evidence offered by respondent 

showing that substantial assets were omitted from his Statement of Financial 

Condition does not prove that the statement was not false or misleading. On the 

contrary, it is actually proof of additional misrepresentations over and above 

those charged in the complaint. 

We consider next the charge that respondent failed and refused to segregate 

and account separately for the funds belonging to his customers during the 

period of June 18 through August 16, 1968. Section 1.20 of the regulations that 

were in force at that time specifies the manner in which customers' money must 

be segregated and separately accounted for as follows: 

All money received by a futures commission merchant to margin, guarantee, or 

secure the trades or contracts of commodity customers and all money accruing to 

such customers as the result of such trades or contracts shall be separately 

accounted for and be segregated as belonging to such customers. Such funds, 

when deposited with any bank or trust company, shall be deposited under an 

account name which will clearly show that they are customers' funds segregated 

as required by the Commodity Exchange Act, and under a written 

 

agreement with such bank or trust company waiving any claim, lien, or right of 

setoff of any nature which such bank or trust company might otherwise have or 

obtain against such funds. An executed copy of such agreement shall be kept by 

the futures commission merchant in accordance with the requirements of § 1.31. 

If such funds are deposited with a clearing organization of a contract market, 

they shall be deposited under an account name which will clearly show that they 

are customers' funds segregated as required by the Commodity Exchange Act. 

(emphasis supplied) 

Respondent maintained two commercial bank accounts at the First Arlington 

National Bank, one under the name of "Illinois Livestock" and the other under 

the name of "Hofer Systems, Inc." In addition, he had a small personal bank 

account at the Hawthorne Bank of Wheaton (Complainant's Exhibit 2). None of 

these accounts would qualify as a segregated bank account under Section 1.20 of 

the Regulations because the account names do not clearly show that they are 

customers' money segregated as required by the Commodity Exchange Act. 

Likewise, respondent carried two accounts with King & King, one under the name 

of "Illinois Livestock" and the other under the name of "Hofer Systems, Inc." 

(Tr. pp. 55, 56). Again, neither of these accounts would qualify as a 

segregated customers' account under the requirements of Section 1.20 of the 

Regulations (Tr. p. 58). It is clear, therefore that respondent failed to 

segregate and separately account for his customers' money as required by the Act 

and Regulations. 

There is no question that respondent failed to prepare daily segregation 

records during the period covered by the complaint except for two days -- August 

14 and 15 (Complainant's Exhibits 4 and 9). The segregation records for these 

two days showed cash deposits, margin deposits, and accounts receivable for a 

total amount of $ 107,067.24 on August 14 and $ 109,350.24 on August 15, 1968. 

As pointed out above, respondent's customers' funds were not deposited in 

segregated bank accounts or segregated margin accounts. Furthermore, the Act 

and Regulations limit the deposit of customers' funds to segregated bank 

deposits, segregated margin accounts, and State and Federal Government 

obligations. Thus, accounts receivable could not be treated as customers' 

segregated funds under any circumstances. Accordingly, respondent improperly 

reported customers' funds in segregation on these two dates whereas, in fact, 

none of his customers' funds were held in segregation on those dates. 
Page 11 

With respect to the foregoing analysis of the charge that respondent failed 

and refused to segregate and account separately for the funds belonging to his 

customers during the period of June 18 through August 16, 1968, the respondent 

in his brief at page 6 merely avers that: "The final allegation concerned not 

keeping proper segregation records from June 18 to August 16, except for one 

day, August 14. This allegation is inaccurate in that segregation records were 

maintained for the date requested, August 13, through the date of dissolution of 

the enterprise, October 12, 1968." Obviously, these brief averments can have no 

probative value in resolving the charge that respondent failed to segregate and 

account separately for funds belonging to his customers. No where does 

respondent show how or where he maintained segregated funds belonging to his 

customers, or that complainant's documentary evidence thereon was inaccurate. 

Finally, respondent contends (Pp. 6-7) that "If the violations were . . . 

perpetrated, one must consider if 'wilful misrepresentation' is to be proven. 

Significantly, the complainant's brief made no suggestion of any possible 

motive, it merely reasoned that if I signed the statement, and it was 

inaccurate, then I am guilty of filing a false and misleading statement. I had 

no reason to file a false statement of financial condition on June 30, 1968, in 

fact, I replaced it with an accurate statement as of July 31, 1968, as soon as 

it was prepared. Had I wilfully misstated the facts, I would have done it in a 

less obvious manner than overstating bank accounts and margin deposits. 

Furthermore, I cannot conceive of any reason why I should want to even think 

that I could conceal the fact that I had been the subject of any action by the 

Iowa Securities Exchange Commission. Obviously, the Commodity Exchange 

Authority knew about the proceedings, because they claimed this misstatement 

almost immediately after receiving the document . . . concerning the filing of a 

'false and misleading financial statement': the assets as shown on the June 30 

statement were merely misclassified, hardly false and misleading. Demonstrating 

my good faith, I supplanted the inaccurate financial statement with an accurate 

one, correcting the violation as soon as humanly possible. Most importantly, 

the equities of the clients involved were never in jeopardy and in fact, they 

were paid in full on the date of dissolution, in October 1968." 

The respondent seems to argue that in an administrative proceeding such as 

this, he should be exculpated from all responsibility in making a false 

financial report and a false statement in 

 

his application for registration, if the element of wilfulness is lacking. 

However, the law is well settled that a presumption of wilfulness arises when a 

person engages in an act knowingly, deliberately and intentionally which is the 

case here. Of course, mitigation of the applicable penalty may be considered in 

some types of cases if it can be shown that the offender did not benefit from 

his actions. 

In summary, during the period of June 18 through August 16, 1968, respondent 

violated Section 4d(1) of the Act and Section 1.7 of the Regulations by engaging 

as a futures commission merchant as that term is defined by Section 2(a) of the 

Act without having registered as such with the Secretary under the Act. During 

the same period, respondent violated Section 4d(2) of the Act and Section 1.20 

of the Regulations by failing to separately account for and segregate his 

customers' funds in the manner required by Section 1.20 of the Regulations. 

During the same period, except for two days, respondent failed to prepare a 

daily segregation record as required by Section 1.32 of the Regulations. The 

two daily segregation reports that respondent did prepare were false in that 

they reported substantial sums of customers' funds in segregation whereas, in 

truth and in fact, none of such customers' funds were held in segregation in the 

manner required by the Act and Regulations. Finally, respondent wilfully made 

false and misleading statements of material facts in an Application for 

Registration as Futures Commission Merchant and in a Statement of Financial 
Page 12 

Condition that he filed with the Secretary on August 2, 1968, in violation of 

Section 6 (b) of the Act. 

The foregoing violations of the Act and Regulations are both flagrant and 

material. Under Section 8a of the Act, such violations provide ample basis for 

denial of respondent's application for registration as Futures Commission 

Merchant. In addition, these violations form a basis for a cease and desist 

order under Section 6 (c) of the Act and the denial of trading privileges under 

Section 6(b) of the Act. 

All contentions of the parties presented for the record have been considered 

and, whether or not specifically mentioned herein, any suggestions, requests, 

etc., inconsistent with this decision is denied. 

PROPOSED ORDER

The respondent's application for registration as Futures Commission Merchant 

under the Act is hereby denied. 

Effective 30 days after this date respondent, David L. Hofer, shall cease and 

desist from: 

(1) engaging as futures commission merchant within the meaning of the 

Commodity Exchange Act without being registered with the Secretary of 

Agriculture as required by Section 4d(1) of the Act (7 U.S.C. 6d(1)) and the 

Regulations thereunder; 

(2) failing to treat and deal with customers' funds that he receives as such 

futures commission merchant as belonging to such customers as required by 

Section 4d(2) of the Act (7 U.S.C. 6d(2)) and the Regulations thereunder; 

(3) failing to hold his customers' funds in segregated accounts as required 

in Section 4d(2) of the Act (7 U.S.C. 6d(2)) and the Regulations thereunder; 

(4) failing to maintain a daily segregation record of his customers' funds as 

required in Section 4d(2) of the Act (7 U.S.C. 6d(2)) and the Regulations 

thereunder; 

(5) wilfully making any material false or misleading statement in any 

application or report filed with the Secretary of Agriculture under the 

Commodity Exchange Act; and 

(6) wilfully omitting to state any material fact in connection with any such 

application or report. 

Effective 30 days after this date respondent, David L. Hofer, is prohibited 

from trading on or subject to the rules of any contract market for a period of 

six (6) months, and all contract markets shall refuse all trading privileges to 

him during this period, such prohibition and refusal to apply to all trading 

done and all positions held by the said David L. Hofer, directly or indirectly. 

A copy of this order shall be served upon each of the parties and upon each 

contract market. 

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