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UNITED STATES OF AMERICA 


Before the 


COMMODITY FUTURES TRADING COMMISSION 


SHERRY R. MIDDLETON and MARK A. 

MIDDLETON, 

Complainants, 

v. 

INFINITY FUTURES, LLC and TRANSACT 

FUTURES LLC, 

Respondents. 

CFTC Docket No. 11-ROl 1

OPINION & ORDER 

~~~~~~~~~~~~~~~~)

TransAct Futures LLC ("TransAct" or "Respondent"), 1 a registered futures commission 

merchant ("FCM"), appeals a judgment officer ("JO") decision in favor of Sherry and Mark 

Middleton (the "Middletons" or "Complainants") on their reparations claim. In the initial 

decision ("ID") under review, the JO concluded that Respondent engaged in unauthorized 

trading when it mistakenly liquidated Complainants' open positions due to a data-entry error. 

The JO held that Respondent's unauthorized trading violated section 4d(a)(2) of the Commodity 

Exchange Act ("CEA"), 7 U.S.C. § 6d(a)(2) and Commission Rule 166.2, 17 C.F.R. § 166.2, 

and awarded the Middletons their losses of $6,075 from the liquidation. 

On appeal, TransAct asserts that the JO erred in holding that: 1) TransAct engaged in 

unauthorized trading; 2) the Middletons did not ratify the liquidation; 3) the Middletons were not 

required to actively mitigate damages; and 4) the Middletons were entitled to their requested 

losses. We reject all four arguments and affirm the JO's decision. 

1 As explained more fully below, Infinity Futures LLC ("Infinity"), the introducing broker ofthe 

Middletons' account and an affiliate of TransAct, was previously dismissed from these 

proceedings and is not a party to the present appeal. 

1 

I. FACTS 

The pertinent facts are undisputed. In January 2010, the Middletons opened and 

deposited $80,000 in a non-discretionary customer trading account. The account was introduced 

by Infinity Futures, L.L.C. ("Infinity"), and cleared through Infinity's parent, TransAct, a 

registered FCM that conducts electronic trading focused on self-directed accounts. Middleton v. 

Cagnina, [2012 Transfer Binder] Comm. Fut. L. Rep. (CCH) ~ 32,109, at 68,544, 68,546-47, No. 

11-ROl 1, 2012 WL 368578, at *1, *3, *6 (CFTC JO Feb. 3, 2012) ("Middleton I"). 

TransAct's electronic trading system included a predetermined automatic liquidation 

feature intended to limit trading losses, primarily to protect the FCM. Id. at 68,544, *1. 

TransAct's system monitored all positions in each customer's account. Id. If daily losses in the 

account reached a pre-determined limit, the system would automatically liquidate all open 

positions. Id. Ifthe account balance dropped significantly, the system would automatically recalculate the risk assessment level to about sixty percent of the new account balance. Id. The 

daily risk assessment level could be adjusted upward or downward following consultation 

between the customer and an account executive. Id. 

Mark Middleton, an experienced trader, began trading in the account in late January 

2010. Id. at 68,544-46, *1, *3. The risk limit setting in the account was adjusted several times 

thereafter until May 24, 2010, when, following a disputed liquidation not at issue in this appeal, 

Middleton and his broker, Anthony Giacomin of Infinity, agreed via an email exchange to 

increase the risk setting to $47,000 or 60% of the account balance. Id. at 68,547 & n.7, *5 & n.7. 

The risk setting remained there until August 30, 2010, when a TransAct employee attempting to 

adjust the risk assessment level in another customer's account accidentally transposed account 

2 

numbers for that account and mistakenly reduced the daily risk assessment level for the 

Middletons' account from $47,000 to $6,000. Id. at 68,549, *9. 

The Middletons only learned of this mistake months later when the enoneous risk level 

triggered a liquidation. Id. at 68,548-49, * 8-9. On October 20, 2010, the Middletons entered a 

short position in December Euro FX futures. The market spiked up. The resulting losses 

breached the erroneous $6,000 risk assessment level, and TransAct automatically liquidated all 

open positions in the account, causing the Middletons to lose $6,075 at the time of liquidation. 

Id. at 68,549, *9. 

Mr. Middleton immediately called his Infinity broker, Giacomin, for an explanation. Id. 

at 68,549-50, * 10. Giacomin then called TransAct. Id. A TransAct agent told Giacomin that the 

risk assessment level of $6,000 had been triggered, causing the liquidation. Id. Giacomin 

relayed this information to Mr. Middleton, who told him that the liquidation should not have 

occurred, because his risk limit was far higher. Id. Mr. Middleton forwarded their May 24th email exchange confirming the $47,000 risk setting. Id. Giacomin responded that he would look 

into it. He also told Mr. Middleton that his account, which had been temporarily locked when 

losses exceeded the reduced risk level, had been re-activated following the liquidation, and 

advised him to re-establish his positions in order to make up the loss. Id. Mr. Middleton refused 

to do so and asked to speak with Giacomin's supervisor. Id.; see also Complaint (Dec. 14, 2010) 

("Comp!.") at 4 (description). 

Giacomin then e-mailed TransAct risk manager and principal Mark Gordy. Giacomin 

asked Gordy for the history of loss limit changes in the account and told him that the last change 

Giacomin had was to $47,000 on May 24. Middleton I, [2012 Transfer Binder] Comm. Fut. L. 

Rep. (CCH) at 68,550, 2012 WL 368578, at *10. Gordy admitted to Giacomin that there had 

3 

been a typographical error in setting the risk level for another customer's account, resulting in 

the Middletons' account level being reduced instead. Id. Giacomin exclaimed: "Crap," and 

asked "[w]hat should we do?" Id. Gordy more or less responded that they should do nothing, 

telling Giacomin that the Middletons' account had already been "unlocked immediately and [Mr. 

Middleton] had plenty of time to re-establish the price at the price or better. He chose not to." 

Id. 2 In phone conversations later that day, Giacomin and his supervisor, Infinity principal James 

Cagnina, repeatedly urged Mr. Middleton to re-establish his positions and offered a commission 

credit, but Mr. Middleton continued to refuse. Id.; see also Compl. at 4. 

II. PRIOR PROCEEDINGS 

Having heard nothing further from Giacomin or Cagnina, the Middletons filed a 

reparations complaint in December 2010, alleging that Infinity and its employees/associated 

persons/principals, Giacomin and Cagnina, liquidated their positions on October 20, 2010, 

without authorization. Compl. 3 TransAct was not named as a party at that time. 

1. The Judgment Officer's First Decision 

Following discovery and submissions by the parties, the JO issued an initial decision. 

lvfiddleton I, [2012 Transfer Binder] Comm. Fut. L. Rep. (CCH), 32,109, 2012 WL 368578. He 

determined that Infinity, but not Cagnina or Giacomin, violated Section 4b(a) of the CEA, 7 

iU.S.C. § 6b(a), because Infinity was required but failed to provide timely and adequate 

disclosure of a material fact-the fact of and reasons for TransAct' s reduction of the Middletons' 

account risk setting. Id. at 68,550-51, * 11. The JO fmiher determined that purported waivers in 

2 Giacomin only disclosed the cause of the error during discovery in the Middletons' reparations 


proceeding, more than one year later. Middleton I, [2012 Transfer Binder] Comm. Fut. L. Rep. 


(CCH) at 68,545, 2012 WL 368578, at *2. 


3 The Middletons also alleged that there was an unauthorized liquidation of their positions in 


May 2010. Compl. at 4. The JO dismissed this allegation as to all respondents. Middleton I, 


[2012 Transfer Binder] Comm. Fut. L. Rep. (CCH) at 68,551, 2012 WL 368578, at *12. The 


Middletons did not appeal that dismissal, and it is now final. 


4 

the customer agreement did not overcome Infinity's duty to disclose the risk setting change and 

the reasons for it. Id. He rejected Infinity's ratification and mitigation arguments on the grounds 

that Infinity's failure to disclose material facts in advising Mr. Middleton to re-establish his 

positions precluded those defenses. Id. at 68,551 n.8, * 12 n.8. The JO awarded the Middletons 

$6,075, their claimed losses from the liquidation. Id. at 68,551, *12. 

2. The Commission's Remand Order 

Infinity appealed to the Commission. We reversed and dismissed the complaint as to 

Infinity on the grounds that there was no evidence it knew of TransAct's error at the time of the 

liquidation and no basis to impute TransAct's actions to Infinity. Middleton v. Cagnina [2013­

2014 Transfer Binder] Comm. Fut. L. Rep. (CCH) ~ 32,955, No. 11-ROl 1, 2014 WL 495628 

(CFTC Jan. 2, 2014) ("Middleton II"). However, we remanded to the JO to: 1) give the 

Middletons the opp01iunity to present evidence that would support a finding that TransAct was 

an agent of Infinity; and/or 2) determine whether the applicable statute of limitations and tolling 

doctrines would permit a reparation action against TransAct. Id. at 75,471, * 1. 

3. The Judgment Officer's Second Decision 

After the remand, the Middletons moved to amend their complaint to add TransAct as a 

respondent. The JO provisionally granted the motion, subject to fmiher submissions by the 

paiiies on the timeliness of the amended complaint and whether TransAct violated CEA section 

4d(a) and Rule 166.2. Middleton v. Infinity Futures LLC, et al., No. 11-ROll, slip op. at 2 

(CFTC Dec. 12, 2014) ("Middleton III"). 4 

Following those submissions, the JO issued another initial decision holding that TransAct 

committed unauthorized trading in violation of Section 4d(a)(2) and Rule 166.2 when it 

4 This decision is not rep01ied in CCH or Westlaw. 

5 

liquidated the Middletons' account based on an erroneous risk limit level. Id., slip op. at 12. 

The JO did not address anew the ratification and mitigation arguments or arguments as to the 

proper calculation of damages. He awarded the Middletons their losses at the time of 

liquidation, $6,075, plus interest and filing costs. Id., slip op. at 3, 13.5 

III. 	 STANDARD OF REVIEW 

The Commission reviews the facts and law de nova. Ahlstedt v. Capital Commodity 

Servs., Inc., [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) if 27,131, at 45,290, No. 

96-R050, 1997 WL 458096, at *3 n.12 (CFTC Aug. 12, 1997); Chu v. Peregrine Fin. Grp., Inc., 

[2013-2014 Transfer Binder] Comm. Fut. L. Rep. if 32,806,.at 73,760, No. 07-R029, 2013 WL 

4785177, at *4 (CFTC Sept. 5, 2013). 

IV. 	 DISCUSSION 

1. 	 Unauthorized Trading in Violation of Section 4d(a)(2) and 

Rule 166.2 

TransAct maintains that the JO erred in determining that the liquidation was unauthorized 

because: a) liquidations for failure to meet legitimate margin calls are considered authorized; and 

b) TransAct's customer agreement authorized the liquidations and/or waived any liability 

TransAct would otherwise have. Appeal Brief to the December 12, 2014 Initial Decision on 

Remand in Perfection of TransAct's December 19, 2014 Notice of Appeal, Appellate Arguments 

of TransAct Futures (Jan. 16, 2015) ("TransAct Br.") at 7-14. We disagree. 

Generally, to show that a trade was authorized, the FCM must show either: 1) a written 

power of attorney authorizing a person or entity to conduct discretionary trading; or 2) specific 

authorization of the transaction by the customer in advance of its execution. Hussain v. Saul 

5 The JO also found that the Middletons' complaint as to TransAct was timely. Middleton III, 

slip op. at 4-11. TransAct did not challenge this determination, which is therefore final and not 

at issue in this appeal. 

6 

Stone & Co., [2003-2004 Transfer Binder] Comm. Fut. L. Rep. (CCH) ir 29,460, at 54,991, No. 

98-Rl53, 2003 WL 1908052, at *7 (CFTC Apr. 22, 2003). Although a forced liquidation may 

constitute unauthorized trading, we have held that an FCM can avoid liability by showing the 

liquidation was done for failure to meet a legitimate margin call. See, e.g., Slone v. Dean Witter 

Reynolds, Inc., [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ir 26,283, at 42,433-34, 

No. 93-R125, 1994 WL 702358, at *4-5 (CFTC Dec. 16, 1994); Ahlstedt, [1996-1998 Transfer 

Binder] Comm. Fut. L. Rep. (CCH) at 45,290, 1997 WL 458096, at *4; Faro v. Interlink 

Trading, Inc., [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ir 26,537, at 43,373-74, 

No. 93-R134, 1995 WL 684097, at *8 (CFTC Nov. 16, 1995); Hussain, [2003-2004 Transfer 

Binder] Comm. Fut. L. Rep. (CCH) at 54,991, 2003 WL 1908052, at *8; Lee v. Lind-Waldock & 

Co., [1999-2000 Transfer Binder] Comm. Fut. L. Rep. (CCH) ii 28,173, at 50,159, No. 99-R018, 

2000 WL 862615, at *4 (CFTC June 29, 2000). These cases reconcile the prohibition against 

unauthorized trading with the need for FCMs to exercise judgment in demanding margin and, as 

necessary, liquidating customer positions in order to avoid excessive losses that endanger other 

customers and the FCM itself. 6 

While none of these decisions squarely address the scenario here-a concededly 

erroneous liquidation-they all turn on whether the margin call was based on the FCM' s exercise 

of reasoned judgment. Slone, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) at 

6 Some of our earlier decisions such as Baker v. Edward D. Jones & Co., [1980-1982 Transfer 

Binder] Comm. Fut. L. Rep. (CCH) ii 21,167, at 24,771-72, No. R76-4, 1981 WL 26078, at *4 

(CFTC Jan. 27, 1981), and Roberts v. Ray E. Friedman & Co., [1986-1987 Transfer Binder] 

Comm. Fut. L. Rep. (CCH) ir 23,063, at 32,131, No. 82-R813, 1986 WL 66208, at *2 (CFTC 

May 15, 1986), do not suggest a contrary outcome here. These older decisions excuse an FCM 

from unauthorized trading liability for forced liquidation when such FCM does not mislead its 

customers and makes good faith business judgments regarding margin calls and forced 

liquidations. Baker, [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) at 24,771, 1981 

WL 26078, at *4 (referring to FCMs' "legitimate business judgments"). Respondent's failure to 

exercise any reasoned judgment precludes reliance on Baker or Roberts. 

7 

42,433, 1994 WL 702358, at *4; Hussain, [2003-2004 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) at 54,991, 2003 WL 1908052, at *7-8; Lee, [1999-2000 Transfer Binder] Comm. Fut. L. 

Rep. (CCH) at 50,159, 2000 WL 862615, at *4. Here, TransAct exercised no judgment in 

reducing the Middletons' risk limit. The reduction was an admitted mistake. Middleton I, [2012 

Transfer Binder] Comm. Fut. L. Rep. (CCH) at 68,549, 2012 WL 368578, at *9; TransAct Br. at 

2-3. Under these circumstances, this liquidation was not a response to a "legitimate" margin call 

in the sense that we have previously recognized as a defense to a claim of unauthorized trading. 

Separately, TransAct argues that section 7 of its customer agreement with the Middletons 

authorized the liquidation and/or waived any liability it might otherwise have. We disagree. 

Section 7 authorizes TransAct to liquidate positions in its "sole discretion." TransAct Br. at 9­

11; see also Respondents' Statement of Case, Answer, and Affirmation Defenses (Mar. 28, 

2011 ), Ex. 1 (Customer Agreement) at § 7. But TransAct did not liquidate the Middletons' 

positions in the exercise of "discretion." It did so due to a clerical enor. TransAct also cites to 

an unidentified provision in the agreement that purpmiedly absolves it of liability for losses 

caused by problems with its automated trading system. TransAct Br. at 11. TransAct does not 

state what provision of the agreement does this, and we therefore do not credit the asse1iion. 

Moreover, the functioning of the automated trading system is not at issue here. Finally, the 

customer agreement itself provides that customer transactions are subject to "exchange rules and 

law," including "all applicable government acts and statutes and to rules and regulations 

thereunder," which include the prohibitions on unauthorized trading. Customer Agreement § 2. 

2. Ratification 

TransAct next claims that the JO erred in rejecting its claim that the Middletons ratified 

the liquidation. TransAct Br. at 14-25. The record provides no support for this claim. A 

customer may be found to have ratified a trade under either of two scenarios. The first is where 

8 

it is "clear from all the circumstances presented that the intent of the customer was to adopt, as 

his own and for all time, the trades executed for his account without authorization." Adams v. 

Black Diamond Futures & Trading, Inc., [2005-2007 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) ii 30,492, at 59,403, No. 04-R052, 2007 WL 1110753, at *4 (CFTC Apr. 11, 2007) 

(citation omitted). In order for the customer to adopt the trades in question, he or she must know 

both of the trades in question and that he or she had a right to avoid financial responsibility for 

them. Yrag Traders, LLC v. Liberty Trading Grp., [2014-2015 Transfer Binder] Comm. Fut. L. 

Rep. (CCH) ii 33,363, at 76,935, No. 12-R033, 2014 WL 7028077, at *3 (CFTC Dec. 11, 2014). 

The second scenario in which ratification may be found is when a customer acquiesces to 

unauthorized trading by knowingly failing to object. Sherwood v. Madda Trading Co., [1977­

1980 Transfer Binder], Comm. Fut. L. Rep. (CCH) iJ 20,728, at 23,020 n.19, No. 77-2, 1979 WL 

11487, at *4 n.19 (CFTC Jan. 5, 1979); Modern Settings, Inc. v. Prudential-Bache Sec., Inc., 709 

F. Supp. 70, 76 (S.D.N.Y. 1989), ajf'd in part and rev 'din part, 936 F.2d 640 (2d Cir. 1991). 

Nothing in the record indicates that the Middletons adopted the liquidation or acquiesced in it. 

On the contrary, Mr. Middleton objected at every turn. Accordingly, this argument is rejected. 

3. Mitigation 

TransAct also argues that the Middletons did not mitigate their damages because they 

failed to re-establish their positions. TransAct Br. at 25-31. But there is no duty under these 

circumstances for a customer to re-enter the market. See Ahlstedt, [1996-1998 Transfer Binder] 

Comm. Fut. L. Rep. (CCH) at 45,291, 1997 WL 458096, at *4 (citing Schultz v. CFTC, 716 F.2d 

136, 140 (2nd Cir. 1983) (citing Letson v. Dean Witter Reynolds, 532 F. Supp. 500, 503 (N.D. 

Cal. 1982))). Accordingly, this argument is rejected as well. 

9 

4. Calculation of Damages 

Finally, TransAct claims that the JO erred in awarding the Middletons their out-of-pocket 

losses based on the difference between the purchase price of their positions and the liquidation 

price. According to TransAct, the JO should have assessed the damages "at the intermediate 

price reached between the contract's liquidation and the price during a reasonable time after the 

liquidation." TransAct Br. at 33. 

TransAct alludes to the "highest intermediate value" rule for calculating unauthorized 

trading damages. Under this rule, recovery is limited "to the additional amount required to 

repurchase the same contracts in the market within a reasonable time after liquidation." 

Severance v. First Options of Chicago, Inc., [2005-2007 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) ~ 30,132, at 57,518, No. 02-R078, 2005 WL 2171179, at *9 (CFTC Sept. 7, 2005) 

(citation omitted). 7 This is "measured by the difference between the contracts' liquidation prices 

and the highest intermediate prices reached by the identical contracts during a reasonable period 

after the wrongful sale." Id.; accord Ahlstedt, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) at 45,291, 1997 WL 458096, at *4. This rule, however, applies only to long positions. 

Where, as here, the wrongful liquidation is of a short position, the general "highest intermediate 

value" rule is inverted and "the lowest intermediate price is used." Stiller v. Shearson Loeb 

Rhoades, Inc., [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ~ 22,663, at 30,808 n.3, 

No. R 79-359-80-45, 1985 Westlaw 56303, at *1 n.3 (CFTC June 27, 1985). 

TransAct states that after the wrongful liquidation at 1.3973, the market moved higher, 

peaking six minutes later at 1.3982, which it argues was a reasonable time period after 

liquidation for purposes of computing damages. On these facts, TransAct argues that the 

Middletons' damages are zero because if they had reentered the market at that highest 

7 As discussed above, the customer need not actually do so. 

10 

intermediate value, they would have come out ahead of where they would have absent the 

wrongful liquidation. TransAct Br. at 33-34. Because this was a wrongful liquidation of a short 

position rather than a long position, however, the "highest intermediate value" rule does not 

apply. Accordingly, we reject TransAct's argument on damages. 8 

V. CONCLUSION 


For the reasons stated above, we AFFIRM the JO's decision. 


IT IS SO ORDERED. 


By the Commission (Chairman MAS SAD and Commissioners, BOWEN, and 


GIANCARLO.) 

Secretary of the Commission 

Commodity Futures Trading Commission 

Dated: July 29, 2016 

8 We decline to consider sua sponte any arguments for reduced damages that TransAct failed to 

assert on appeal. See Myron v. Chicoine, 678 F.2d 727, 731-32 (7th Cir. 1982). 

11