IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 09-20699

UNITED STATES OF AMERICA

Plaintiff - Appellant

v.

MARK DAVID RADLEY; JAMES WARREN SUMMERS;

CODY DEAN CLABORN; CARRIE KIENENBERGER,

Defendants - Appellees

Appeal from the United States District Court

for the Southern District of Texas

Before JONES, Chief Judge, and REAVLEY and HAYNES, Circuit Judges.

EDITH H. JONES, Chief Judge:

The United States appeals from the district court’s order dismissing the

indictment of Appellees for wire fraud and violations of the Commodities

Exchange Act (CEA), 7 U.S.C. § 13(a)(2). Because Appellees’ conduct fell within

a statutory exemption for off-exchange commodities transactions, we affirm the

dismissal of the indictment’s price manipulation and cornering counts. Although

the CEA exemption does not necessarily inoculate Appellees from the wire fraud

statute, we affirm the district court’s dismissal of the wire fraud counts.

United States Court of Appeals

Fifth Circuit

F I L E D

January 27, 2011

Lyle W. Cayce

Clerk

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I. Background

Appellees Mark David Radley, James Warren Summers, Cody Dean

Claborn, and Carrie Kienenberger worked as commodities traders for BP

Products North America Inc. Among other things, they traded futures in “TET

propane,” which is propane stored in a salt dome near Mont Belvieu, Texas, and

transported in a pipeline system belonging to the Texas Eastern Products

Pipeline Company, LLC. TET propane, along with the propane stored in two

other Mont Belvieu salt domes, is the primary supply of propane sold between

Gulf Coast producers and Midwestern and Northeastern consumers.

TET propane futures do not trade on an exchange. Rather, buyers and

sellers place bids on an electronic interface called Chalkboard, negotiate deals

directly, or use brokers to negotiate deals on their behalf. Bids and offers are

anonymous, though all market participants can see the price and quantity of

each transaction. Each day, the Oil Price Information Service (OPIS) compiles

data on the day’s trades and publishes an average price.

Beginning in early February 2004, the Appellees began purchasing a large

number of futures contracts for delivery at the end of that month—i.e., taking

a “long position” in February TET propane. They did so through the Chalkboard

system, placing multiple bids at different prices and quantities. They also

entered agreements to sell February TET propane at the OPIS average price.

Because of Appellees’ ambitious (and risky) buying campaign, the price of

futures skyrocketed from 61 cents per gallon on February 9, 2004 to a high of

94 cents on February 27, 2004, the last trading day before delivery on February

29. After the February contracts came due, the price of propane futures

plummeted. On March 1, the price of March TET propane fell almost 25 cents

per gallon to settle at 61.75 cents.

BP made money from Appellees’ activity in two ways. First, some of the

people who sold futures contracts (the “shorts”) did not actually have any

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propane to sell (“naked shorts”); in order to fulfill their obligation, they needed

to repurchase TET propane at the high price prevailing after Appellees’ buying

campaign was underway, often from Appellees themselves. Second, Appellees’

contracts to sell at future OPIS prices generated profits because the OPIS price

increased with Appellees’ voracious demand.

On October 25, 2007, following a two-year investigation, a grand jury in

the Northern District of Illinois returned a twenty-count indictment against

Appellees. The district court transferred that case to the Southern District of

Texas, where a second grand jury returned a twenty-six-count superseding

indictment on January 29, 2009. The superseding indictment charged price

manipulation, attempted price manipulation, cornering the market, attempted

cornering, wire fraud, and conspiracy to commit those crimes. According to the

government, Appellees attempted to drive up the price of February TET propane

by placing multiple bids on Chalkboard—“stacked bids”—in order to trick other

market participants into believing that demand for the commodity was strong

and came from more than one source. Moreover, Appellees placed bids at prices

higher than other bidders had posted, allegedly perpetrating their deception by

enticing other market participants to transact at higher prices. The indictment

finally alleged that Appellees withheld information about the extent of their

purchases and falsely denied attempting to corner the market.

Appellees moved to dismiss the indictment, and the district court granted

their motion. The district court cited several grounds for dismissal. First, the

court reasoned that the transactions in question fell within a statutory exception

to the CEA’s ban on price manipulation and cornering. United States v. Radley,

659 F. Supp. 2d 803, 809-10 (S.D. Tex. 2009). Second, the court held that even

if the statutory exclusion did not apply, dismissal was appropriate because the

CEA’s price manipulation provision was unconstitutionally vague. Id. at 816.

Third, again assuming the exclusion did not apply, the court concluded that the

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indictment failed to allege one of the two elements of cornering the market: a

dominant position in futures contracts plus control of the underlying asset. Id.

at 817-18. Finally, the court dismissed the wire fraud counts because the

indictment failed to allege a misrepresentation of material fact. Id. at 820. The

government, as Appellant, challenges each of these decisions.

II. Standard of Review

We review de novo both the district court’s construction of the CEA and its

determination that the indictment failed to allege all elements of wire fraud.

United States v. Jho, 534 F.3d 398, 402 (5th Cir. 2008); United States v. Kay,

359 F.3d 738, 742 (5th Cir. 2004). The allegations in the indictment are

presumed true for present purposes. The district court, no doubt intending to

cover all bases, discussed in some detail Appellees’ contention that the CEA’s

anti-manipulation provision, § 13(a)(2), is unconstitutionally vague. Radley,

659 F. Supp. 2d at 813-15. Because we conclude that the exemption in § 2(g)

shielded Appellees’ conduct, we reserve comment on the constitutional issue.

III. Discussion

A. § 2(g)

The CEA makes it a felony for “[a]ny person to manipulate or attempt to

manipulate the price of any commodity in interstate commerce . . . or to corner

or attempt to corner any such commodity . . . .” 7 U.S.C. § 13(a)(2). In 2000,

Congress updated the CEA by passing the Commodity Futures Modernization

Act (CMFA), Pub. L. No. 106-554, § 1(a)(5), 114 Stat. 2763. The CFMA aimed

to dispel uncertainty over the reach of the CEA and prevent the commodity

futures market from fleeing the United States. CFMA § 2(5)-(6),(8). As modified

by the CFMA, the CEA exempts from its regulations certain off-exchange

transactions in non-agricultural commodities: “No provision of this chapter . . .

shall apply to or govern any agreement, contract, or transaction in a commodity

other than an agricultural commodity,” provided three conditions are met.

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7 U.S.C. § 2(g). The conditions require that the contract was “(1) entered into

1

only between persons that are eligible contract participants at the time they

enter into the agreement, contract, or transaction; (2) subject to individual

negotiation by the parties; and (3) not executed or traded on a trading facility.”

Id. The district court carefully explained how the subject matter of this case

satisfies the statutory conditions of the exception. Radley, 659 F.Supp. 2d at

811-12. On appeal, the government does not challenge the conditions’

satisfaction. Instead, the parties dispute the reach of the exemption itself.

The dispute focuses on the meaning of “transaction” in Section 2(g). The

activities alleged in the indictment—placing “stacked bids,” withholding supply

from the market, falsely denying a scheme to corner the market, and falsely

stating that BP intended to consume its propane—are not contracts, but whether

they are part of a “transaction” or “agreement” is a more difficult question.

Neither this Circuit nor the Supreme Court has defined “transaction” for

purposes of the CEA. Other courts have struggled with the issue but failed to

produce a test to identify which conduct is sufficiently disconnected from a

purchase and sale to fall outside the definition of a transaction.

The government argues for a narrow meaning of “transaction,” rooted in

dicta from this Court’s unpublished decision in United States v. Futch, 278 Fed.

App’x 387 (5th Cir. 2008). Futch affirmed the conviction of a natural gas trader

who made false statements to an industry publication about the prices his

company was paying for natural gas. Id. at 389-90. “Inaccurate reports” are

unlawful under the CEA. See 7 U.S.C. § 13(a)(2). Although § 2(g) was enacted

after the conduct in Futch, the Fifth Circuit noted in dicta that the exemption

would not have helped the defendant because he “was not indicted for entering

into an ‘agreement, contract or transaction,’ but for distributing false market

The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111- 1

203, 124 Stat. 1376, repeals § 2(g), effective July 21, 2011.

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information under § 13(a)(2).” Futch, 278 Fed. App’x at 392. Other courts have

also concluded that false reporting is not part of a CEA-exempt agreement,

contract or transaction. The Southern District of Texas, for example, refused to

apply the exclusion in § 2(g) when a trader reported fictitious transactions to a

trade journal. CFTC v. Johnson, 408 F. Supp. 2d 259 (S.D. Tex. 2005); see also

CFTC v. Reed, 481 F. Supp. 2d 1190 (D. Colo. 2007), CFTC v. Bradley, 408 F.

Supp. 2d 1214 (N.D. Okla. 2005).

Even accepting arguendo the consensus that § 2(g) does not protect

outright fabrications, the false reporting cases nevertheless prove too much.

Beyond the necessary finding that a defendant violates the CEA when he reports

transactions that never occurred, the courts hearing false reporting cases tend

to advance a narrow construction of “contract, agreement, or transaction.” The

Johnson court, for example, declared that “the exemptions are, by their terms,

limited to contracts, agreements or transactions—denoting mutual exchanges

between parties.” 408 F. Supp. 2d at 271. Bradley likewise confines “contract,

agreement, or transaction” to “a mutual understanding between parties creating

rights or obligations that are enforceable or are recognized at law.” 408 F. Supp.

2d at 1219. The government seizes upon these interpretations of § 2(g) that may

only exempt activities which create legally enforceable obligations. Tracing the

lineage of this definition through citations like that in Bradley, however, leads

to one source: the dictionary definition of “contract.” Bradley, 408 F. Supp. 2d

at 1219 (citing BLACK’S LAW DICTIONARY 318 (7th Ed. 1999)), Johnson, 408 F.

Supp. 2d at 271-72 (citing Black’s Law Dictionary and language nearly identical

to Bradley, which corresponds to the dictionary’s definition of “contract”). None

of the false reporting cases on which the government relies distinguishes

between contracts and the other activities listed in § 2(g).

Yet, the citations in Bradley and Johnson embody the fundamental

interpretive error of extending the definition of one term in a three-term series

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to cover the entire trio. Their methodology violates the “cardinal principle of

statutory construction that a statute ought, upon the whole, to be so construed

that, if it can be prevented, no clause, sentence, or word shall be superfluous,

void, or insignificant.” TRW Inc. v. Andrews, 534 U.S. 19, 31, 122 S. Ct. 441

(2001) (internal citations omitted). The interpretation in Bradley and Johnson

renders the terms “transaction” and “agreement” superfluous. For this reason,

the government’s cases, which could at best constitute persuasive authority, fail

to persuade.

In the absence of reliable precedent, the scope of § 2(g) is a matter of first

impression. “As in any case involving statutory interpretation, we begin by

examining the text of the relevant statutes.” United States v. Rains, 615 F.3d

589, 596 (5th Cir. 2010). Contrary to the government’s expedient position, the

text of the CEA broadly defines a transaction. In a provision discussing the

CFTC’s jurisdiction, the statute refers to “agreements (including transactions . . .

commonly known to the trade as . . . [a] ‘bid’ [or] ‘offer’ . . . ).”

7 U.S.C. § 2(a)(1)(A). While not a precise definition, this provision sheds enough

light on the CEA’s argot to reject the government’s narrow interpretation.

Because both terms encompass bids and offers, the quoted language shows that

agreements and transactions cover more than enforceable contracts. The same

provision refers to “transactions involving contracts.” Id. (emphasis added).

This language confirms that contracts and transactions have separate meanings

and triggers this Court’s duty to give effect to both terms. United States v.

Molina-Gazca, 571 F.3d 470, 474 (5th Cir. 2009). The CEA’s own language

belies the argument that “transaction” refers only to a completed and enforceable

contract.

Beyond the law itself, dictionary definitions inform the plain meaning of

a statute. See United States v. Ferguson, 369 F.3d 847, 851 (5th Cir. 2004)

(employing a dictionary in order to “give the words of statutes their plain

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meaning.”). Black’s Law Dictionary defines a transaction as “[t]he act or an

instance of conducting business or other dealings; esp., the formation,

performance, or discharge of a contract.” BLACK’SLAW DICTIONARY 1535 (8th ed.

2004). This definition is also consistent with the outcome in Futch and the other

false reporting cases; reporting nonexistent transactions is not part of

“conducting business” and therefore finds no sanctuary in § 2(g).

Applying the ordinary meaning of “transaction” to the conduct identified

in the indictment shows that Appellees’ activities fall within the scope of § 2(g).

2

The indictment lists three behaviors that the government asserts are not

transactions. First, it alleges that Appellees placed bids on Chalkboard without

intending to enter into a transaction based on each bid, but rather for the

purpose of misleading other market participants about the demand for February

TET propane. Placing disingenuous bids, the argument goes, was a deception

rather than the first step in a transaction. Second, the indictment asserts that

Appellees misled the market by refusing to buy propane at a discounted price

unless the seller agreed to conceal the discount from other market participants.

According to the government, a refusal to buy at a lower price is a nontransaction subject to § 13(a)(2) because refusing to enter into a transaction

cannot be a transaction. Third, the government argues that § 2(g) does not

protect Appellees’ statements denying their plan to drive up the price of propane.

The alleged denials include Mr. Claborn’s statement that BP would consume its

propane at some point and his comment that a fellow trader was “badly

mistaken” in suggesting that BP was attempting to corner the market. We

evaluate each of these purported non-transactions under the definition

established above.

We emphasize that conduct falling within the CEA’s broad definition of “transaction” 2

must still meet the qualifying conditions of § 2(g) to be exempt. There is no argument here

that the alleged conduct does not meet those qualifying conditions.

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Appellees’ bidding activities fall within the ordinary meaning of

“transaction,” as well as the CEA’s internal definition. As quoted above, the

CEA includes conduct “commonly known to the trade as . . . [a] ‘bid’ [or] ‘offer’”

within the scope of a transaction. 7 U.S.C. § 2(a)(1)(A). Under the dictionary

definition of a transaction as “conducting business,” Appellees’ bids are likewise

covered. In fact, under the Chalkboard system, traders cannot conduct their

business without placing bids and offers.

To focus, as the government does, on the possibility that the bids could

convey information about the number of buyers for TET propane is to overlook

the bids’ legitimacy. Unlike the false reports in Futch, the bids in this case were

real; a counter-party could have accepted them and formed an enforceable

contract at any time. Indeed, that event occurred routinely, proving that the

bids were genuine. The indictment misses this point and instead recasts both

successful and unsuccessful bids as proof of malfeasance. It characterizes bids

that failed to attract a seller (despite being the highest price when placed) as

ploys to “prevent other market participants from engaging in transactions at

prices lower than the conspirators’ bids.” Where Appellees’ bids found a seller,

however, the indictment complains of “purchases of February 2004 TET propane

for the purpose of preventing a drop in the price and acquiring control of the

supply . . . .” ¶60. While weaving its damned-if-you-do-damned-if-you-don’t web,

the indictment demonstrates that Appellees’ bids were bona fide and that other

market participants freely chose which bids to accept and which to reject.

Unless they were somehow illusory, which was not the case, Appellees’ bids were

part of their transactions in February TET propane futures. As such, § 2(g)

excludes them from the reach of the CEA.

The same conclusion obtains in the case of statements designed to conceal

Appellees’ long position and their refusal to buy propane at a discount. Both of

these alleged actions differ from the bidding activity in that they could not

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culminate in the formation of a contract. Nevertheless, the process of

“conducting business” encompasses negotiation and communication that fails to

produce an agreement. Negotiations are as integral to a transaction as the

consummating signature. See, e.g., Thomas v. Duralite Co., Inc., 524 F.2d 577,

587 (3d Cir. 1975) (holding in the context of securities fraud that early

negotiations “may fairly be considered part of the original transactions”),

Progress Tailoring Co. v. FTC, 153 F.2d 103, 105 (7th Cir. 1946) (“preliminary

negotiations were all an essential part of the entire transaction.”).

In the case of refusals to sell, excluding them from the exemption in § 2(g)

opens the door for prosecution based on early-stage negotiations, even if an early

refusal (perhaps even in the face of a discount) leads to a better price and

subsequent agreement. For that matter, the fact of a subsequent agreement

cannot be decisive in whether early refusals are exempt; otherwise, criminality

attaches only when the allegedly manipulative deal does not occur. Because a

transaction encompasses more than the execution of a contract, negotiations

cannot be removed from the protection of § 2(g).

Finally, the indictment alleges violations of the CEA based on Appellees’

efforts to conceal their long position in February TET propane. These include

Appellee Claborn’s denial that he was running a corner, his statement to another

trader that BP intended to consume its propane purchases, and Appellees’ efforts

to conceal their long position from supervisors at BP. The government

maintains that these actions are analogous to the false reporting in Futch. As

the district court explained, however, Futch involved false reports of sales that

did not actually occur. Radley, 659 F. Supp. 2d at 810. By contrast, the

statements here concerned genuine transactions—and transactions protected by

§ 2(g), no less. We reject the government’s proffered construction of § 2(g) that

shields every aspect of a transaction while requiring the people involved to

disclose their strategy to even the most informal of inquiries from other parties.

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See Dunn v. CFTC, 519 U.S. 473, 476-77, 119 S. Ct. 913, 919 (1997), (rejecting

CFTC’s narrow construction of an exemption for “transactions in foreign

currency” and noting CFTC’s agreement that “futures contracts are a subset” of

those transactions (emphasis added)). The correct tools for prosecuting false or

misleading statements in connection with exempt transactions are, if anything,

the fraud statutes, to which we now turn.

B. Wire Fraud

Counts 20 through 26 of the indictment allege wire fraud in violation of

18 U.S.C. § 1343. That statute punishes wire, radio and television

communications in furtherance of “any scheme or artifice to defraud.” 18 U.S.C.

§ 1343. To prove wire fraud, “the government must prove: (1) a scheme to

defraud and (2) the use of, or causing the use of, wire communications in

furtherance of the scheme.” United States v. Ingles, 445 F.3d 830, 838 (5th Cir.

2006) (internal quotations omitted). Although the language of § 1343 does not

require a material misrepresentation, the Supreme Court has interpreted the

statute to call for one. Neder v. United States, 527 U.S. 1, 20-25, 119 S. Ct. 1827

(1999). The test for materiality is whether a misrepresentation “has a natural

tendency to influence, or is capable of influencing, the decision-making body to

which it was addressed.” United States v. Valencia, 600 F.3d 389, 426 (5th Cir.

2010). Valencia is the most recent case involving false reporting in the

commodities context. Unlike Futch, however, the appeal in Valencia focused on

wire fraud alone. Finally, “[v]iolation of the wire-fraud statute requires the

specific intent to defraud . . . .” United States v. Brown, 459 F.3d 509, 519 (5th

Cir. 2006).

In the present case, neither party contests that Appellees communicated

by wire in furtherance of their strategy to profit from increasing prices of

February 2004 TET propane. Whether that strategy constitutes a “scheme or

artifice to defraud” is before this court. Without an antecedent scheme to

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defraud, the wire fraud charges cannot survive. Matter of Lewisville Properties,

Inc., 849 F.2d 946, 951 (5th Cir. 1988). The indictment here re-alleges as the

“scheme to defraud” the same conduct and transactions that we have already

found exempt from regulation under § 2(g). Appellees rely on the principle that

when a grand jury charges one specific theory of a scheme to defraud, the

defendant may not be convicted based on another theory. United States v.

Hoover, 467 F.3d 496, 498, 500-02 (5th Cir. 2006). Thus, when the government’s

allegations charge market manipulation and cornering as the “scheme to

defraud,” and our preceding discussion explains why this is not criminal conduct

when falling within the § 2(g) exemption for OTC propane trades, the same

scheme cannot alone be re-characterized and rendered illegal as wire fraud.

We agree with Appellees’ argument supporting dismissal on this basis,

although with the caveat that § 2(g) cannot wholly exempt participants in

unregulated commodities transactions from conventional wire fraud charges. As

the government notes, fraud can occur any time defendants make material

misrepresentations in an attempt to obtain money or property. Where § 2(g)

does not apply, this court has considered allegations of common-law fraud in the

commodities trading context. Rio Grande Royalty Co. v. Energy Transfer

Partners, L.P., 620 F.3d 465 (5th Cir. 2010) (applying Texas law). In this case,

however, the only grounds the government alleged for a scheme to defraud are

precisely those actions that are exempt.

IV. Conclusion

We decline to review the district court’s conclusion that the CEA’s price

manipulation provision is unconstitutionally overbroad. Reaching this issue is

unnecessary given the applicability of § 2(g). As we conclude that the statutory

exemption covers all aspects of a transaction, Appellees’ risky campaign of

buying propane futures in the hope that other traders would not detect their

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efforts was lawful. Nor did Appellees’ statements or omissions amount to

actionable wire fraud.

AFFIRMED.

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