In the

United States Court of Appeals

For the Seventh Circuit

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No. 03-4245

COMMODITY FUTURES TRADING COMMISSION,

Plaintiff-Appellant,

v.

MICHAEL ZELENER, et al.,

Defendants-Appellees.

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Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 03 C 4346—Matthew F. Kennelly, Judge.

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ARGUED JUNE 1, 2004—DECIDED JUNE 30, 2004

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Before EASTERBROOK, KANNE, and ROVNER, Circuit

Judges.

EASTERBROOK, Circuit Judge. This appeal presents

the question whether speculative transactions in foreign

currency are “contracts of sale of a commodity for future

delivery” regulated by the Commodity Futures Trading

Commission. 7 U.S.C. §2(a)(1)(A). Until recently almost

all trading related to foreign currency was outside the

CFTC’s remit, even if an equivalent contract in wheat or oil
2 No. 03-4245

would be covered. See Dunn v. CFTC, 519 U.S. 465 (1997)

(describing the Treasury Amendment to the Commodity

Exchange Act). But Congress modified the Treasury

Amendment as part of the Commodity Futures Modernization Act of 2000, and today the agency may pursue claims

that currency futures have been marketed deceitfully,

unless the parties to the contract are “eligible contract

participants”. 7 U.S.C. §2(c)(2)(B). “Eligible contract participants” under the Commodity Exchange Act are the equivalent of “accredited investors” in securities markets: wealthy

persons who can look out for themselves directly or by

hiring experts. 7 U.S.C. §1a(12); 15 U.S.C. §77b(a)(15).

Defendants, which sold foreign currency to casual speculators rather than “eligible contract participants,” are not

protected by the Treasury Amendment except to the extent

that it permits them to deal over-the- counter, while most

other futures products are restricted to registered exchanges (called boards of trade) or “derivatives transaction

execution facilities” (specialized markets limited to professionals).

The agency believes that some of the defendants deceived

some of their customers about the incentive structure:

salesmen said, or implied, that the dealers would make

money only if the customers also made money, while in fact

the defendants made money from commissions and markups whether the customers gained or lost. This allegation

(whose accuracy has not been tested) makes it vital to know

whether the contracts are within the CFTC’s regulatory

authority. The district judge concluded that the transactions are sales in a spot market rather than futures contracts. 2003 U.S. Dist. LEXIS 17660 (N.D. Ill. Oct. 3, 2003).

AlaronFX deals in foreign currency. Two corporations

doing business as “British Capital Group” or BCG solicited

customers’ orders for foreign currency. (Michael Zelener, the

first-named defendant, is the principal owner and manager

of these two firms.) Each customer opened an account with
No. 03-4245 3

BCG and another with AlaronFX; the documents made it

clear that AlaronFX would be the source of all currency

bought or sold through BCG in this program, and that

AlaronFX would act as a principal. A customer could

purchase (go long) or sell (short) any currency; for simplicity

we limit our illustrations to long positions. The customer

specified the desired quantity, with a minimum order size

of $5,000; the contract called for settlement within 48

hours. It is agreed, however, that few of BCG’s customers

paid in full within that time, and that none took delivery.

AlaronFX could have reversed the transactions and charged

(or credited) customers with the difference in price across

those two days. Instead, however, AlaronFX rolled the

transactions forward two days at a time—as the AlaronFX

contract permits, and as BCG told the customers would

occur. Successive extensions meant that a customer had an

open position in foreign currency. If the dollar appreciated

relative to that currency, the customer could close the

position and reap the profit in one of two ways: take

delivery of the currency (AlaronFX promised to make a wire

transfer on demand), or sell an equal amount of currency

back to AlaronFX. If, however, the dollar fell relative to the

other currency, then the client suffered a loss when the

position was closed by selling currency back to AlaronFX.

The CFTC believes that three principal features make

these arrangements “contracts of sale of a commodity for

future delivery”: first, the positions were held open indefinitely, so that the customers’ gains and losses depended on

price movements in the future; second, the customers were

amateurs who did not need foreign currency for business

endeavors; third, none of the customers took delivery of any

currency, so the sales could not be called forward contracts,

which are exempt from regulation under 7 U.S.C. §1a(19).

This subsection reads: “The term ‘future delivery’ [in

§2(a)(1)(A)] does not include any sale of any cash commodity

for deferred shipment or delivery.” Delivery never made
4 No. 03-4245

cannot be described as “deferred,” the Commission submits.

The district court agreed with this understanding of the

exemption but held that the transactions nonetheless were

spot sales rather than “contracts . . . for future delivery.”

Customers were entitled to immediate delivery. They could

have engaged in the same price speculation by taking

delivery and holding the foreign currency in bank accounts;

the district judge thought that permitting the customer to

roll over the delivery obligation (and thus avoid the costs of

wire transfers and any other bank fees) did not convert the

arrangements to futures contracts.

In this court the parties debate the effect of Nagel v. ADM

Investor Services, Inc., 217 F.3d 436 (7th Cir. 2000), and

Lachmund v. ADM Investor Services, Inc., 191 F.3d 777 (7th

Cir. 1999). These decisions held that hedge-to- arrive

contracts in grain markets, which allow farmers to roll their

delivery obligations forward indefinitely and thus to

speculate on grain prices (while selling their crops on the

cash market), are not futures contracts. The rollover feature

offered by AlaronFX gives investors a similar option, and

thus one would think requires a similar outcome. The CFTC

seeks to distinguish these decisions on the ground that

farmers at least had a cash commodity, which they nominally sold to the dealer that offered the hedge-to- arrive

contract (though they did not necessarily deliver grain to

that entity). AlaronFX and BCG acknowledge this difference but say that it is irrelevant; they rely heavily on

Chicago Mercantile Exchange v. SEC, 883 F.2d 537, 542

(7th Cir. 1989), where we wrote:

A futures contract, roughly speaking, is a fungible

promise to buy or sell a particular commodity at

a fixed date in the future. Futures contracts are

fungible because they have standard terms and

each side’s obligations are guaranteed by a clearing

house. Contracts are entered into without prepayment, although the markets and clearing house
No. 03-4245 5

will set margin to protect their own interests.

Trading occurs in “the contract”, not in the commodity. Most futures contracts may be performed

by delivery of the commodity (wheat, silver, oil,

etc.). Some (those based on financial instruments

such as T-bills or on the value of an index of stocks)

do not allow delivery. Unless the parties cancel

their obligations by buying or selling offsetting

positions, the long must pay the price stated in the

contract (e.g., $1.00 per gallon for 1,000 gallons of

orange juice) and the short must deliver; usually,

however, they settle in cash, with the payment

based on changes in the market. If the market

price, say, rose to $1.50 per gallon, the short would

pay $500 (50¢ per gallon); if the price fell, the long

would pay. The extent to which the settlement price

of a commodity futures contract tracks changes in

the price of the cash commodity depends on the size

and balance of the open positions in “the contract”

near the settlement date.

These transactions could not be futures contracts under

that definition, because the customer buys foreign currency

immediately rather than as of a defined future date, and

because the deals lack standard terms. AlaronFX buys and

sells as a principal; transactions differ in size, price, and

settlement date. The contracts are not fungible and thus

could not be traded on an exchange. The CFTC replies that

because AlaronFX rolls forward the settlement times, the

transactions are for future delivery in practice even though

not in form; and the agency insists that fixed expiration

dates and fungibility are irrelevant. It favors a multi-factor

inquiry with heavy weight on whether the customer is

financially sophisticated, able to bear risk, and intended to

take or make delivery of the commodity. See Statutory

Interpretation Concerning Forward Transactions, 55 Fed.
6 No. 03-4245

Reg. 39188, 39191 (Sept. 25, 1990). See also CFTC v. Co

Petro Marketing Group, Inc., 680 F.2d 573, 577 (9th Cir.

1982).

Instead of trying to parse language in earlier decisions

that do not wholly fit this situation, we start with the statute itself. Section 2(a)(1)(A) speaks of “contracts of sale of a

commodity for future delivery”. That language cannot

sensibly refer to all contracts in which settlement lies

ahead; then it would encompass most executory contracts.

The Commission concedes that it has a more restricted

scope, that it does not mean anything like “all executory

contracts not excluded as forward contracts by §1a(19).”

What if there were no §1a(19)? Until 1936 that exemption

was limited to deferred delivery of crops. (Compare the

Grain Futures Act of 1922, 42 Stat. 998 (1922), with the

Commodity Exchange Act of 1936, 49 Stat. 1491 (1936).)

Then until 1936 a contract to deliver heating oil in the

winter would have been a “futures contract,” and only a futures commission merchant could have been in the oil business! (Moreover, those contracts could have been secured

only on boards of trade, because with rare exceptions, such

as foreign currency under the Treasury Amendment, all

futures contracts must be traded on exchanges or not at

all.) Can it be that until 1936 all commercial contracts for

future delivery of newspapers, magazines, coal, ice, oil, gas,

milk, bread, electricity, and so on were unlawful futures

contracts? Surely the answer is no, which means that

“contract for future delivery” must have a technical rather

than a lay meaning.

The Commission’s candidate for that technical meaning is

a multi-factor approach concentrating, as we have remarked, on the parties’ goals and sophistication, plus the

likelihood that delivery will occur. Yet such an approach

ignores the statutory text. Treating absence of “delivery”

(actual or intended) as a defining characteristic of a futures

contract is implausible. Recall the statutory language: a
No. 03-4245 7

“contract of sale of a commodity for future delivery.” Every

commodity futures contract traded on the Chicago Board of

Trade calls for delivery. Every trader has the right to hold

the contract through expiration and to deliver or receive the

cash commodity. Financial futures, by contrast, are cash

settled and do not entail “delivery” to any participant.

Using “delivery” to differentiate between forward and

futures contracts yields indeterminacy, because it treats as

the dividing line something the two forms of contract have

in common for commodities and that both forms lack for

financial futures.

It may help to recall the text of §1a(19): “The term ‘future

delivery’ does not include any sale of any cash commodity

for deferred shipment or delivery.” This language departs

from the definition of a futures contract by emphasizing

sale for deferred delivery. A futures contract, by contrast,

does not involve a sale of the commodity at all. It involves

a sale of the contract. In a futures market, trade is “in the

contract.” See Chicago Board of Trade v. SEC, 187 F.3d 713,

715 (7th Cir. 1999); Robert W. Kolb, Understanding Futures

Markets (5th ed. 1997); Jerry W. Markham, The History of

Commodity Futures Trading and its Regulation (1986);

Louis Vitale, Interest Rate Swaps under the Commodity

Exchange Act, 51 Case W. Res. L. Rev. 539 (2001).

In organized futures markets, people buy and sell contracts, not commodities. Terms are standardized, and each

party’s obligation runs to an intermediary, the clearing

corporation. Clearing houses eliminate counterparty credit

risk. Standard terms and an absence of counterparty-specific risk make the contracts fungible, which in turn makes

it possible to close a position by buying an offsetting contract. All contracts that expire in a given month are identical; each calls for delivery of the same commodity in the

same place at the same time. Forward and spot contracts,

by contrast, call for sale of the commodity; no one deals “in

the contract”; it is not possible to close a position by buying
8 No. 03-4245

a traded offset, because promises are not fungible; delivery

is idiosyncratic rather than centralized. Co Petro, the case

that invented the multi-factor approach, dealt with a fungible contract, see 680 F.2d at 579-81, and trading did occur

“in the contract.” That should have been enough to resolve

the case.

It is essential to know beforehand whether a contract is a

futures or a forward. The answer determines who, if

anyone, may enter into such a contract, and where trading

may occur. Contracts allocate price risk, and they fail in

that office if it can’t be known until years after the fact

whether a given contract was lawful. Nothing is worse than

an approach that asks what the parties “intended” or that

scrutinizes the percentage of contracts that led to delivery

ex post. What sense would it make—either business sense,

or statutory-interpretation sense—to say that the same

contract is either a future or not depending on whether the

person obliged to deliver keeps his promise? That would

leave people adrift and make it difficult, if not impossible,

for dealers (technically, futures commission merchants) to

know their legal duties in advance. But reading “contract of

sale of a commodity for future delivery” with an emphasis

on “contract,” and “sale of any cash commodity for deferred

shipment or delivery” with an emphasis on “sale” nicely

separates the domains of futures from other transactions.

Any contention that it is appropriate to ignore the contract’s form and focus on economic effects—here, that

rollover without full payment (AlaronFX allows customers

to use margin while positions are open) can give the buyer

the economic equivalent of a long position on a futures

exchange—produces a sense of déjà vu. We’ve been here

before, but in securities rather than commodities law. A

business can be transferred two ways: the corporation may

sell all of its assets, then liquidate and distribute to investors the cash received from the buyer; or the investors may

sell their securities directly to the buyers. With sufficient
No. 03-4245 9

care in drafting, these two forms may be made economically

equivalent. This equivalence led to arguments that the sale

of stock to transfer a whole business should not be regulated by the federal securities laws. Because the sale of

assets would be governed by state contract law, it would

upset expectations to handle the functionally equivalent

transaction under federal law just because stock played a

role. Many courts adopted this sale-of-business doctrine, but

the Supreme Court rejected it, ruling that form must be

respected. See Landreth Timber Co. v. Landreth, 471 U.S.

681 (1985). One reason is that the securities laws are about

form, and one can say much the same about the commodities laws. Another powerful reason was the need for

certainty. The sale-of-business doctrine led to all sorts of

questions. What if there were a significant minority

shareholder? What if the new buyer did not plan to run the

business as an entrepreneur? The list of questions turned

out to be long and the uncertainty considerable—just as the

CFTC’s list of factors has made it hard to determine when

rollovers turn spot or forward deals into futures contracts.

By taking form seriously the Supreme Court was able to

curtail, if not eliminate, that uncertainty and promote

sensible business planning. See also Reves v. Ernst &

Young, 494 U.S. 56 (1990) (simplifying the approach to

determining when notes are securities). Since the main

battle in the sale-of-business cases was whether fraud

litigation would occur in state or federal court, the Justices

saw no reason for prolonged litigation about the forum:

fraud is illegal in every state. So, too, for the definition of

futures contracts. The Commission’s principal substantive

contention is that BCG deceived its clients. That could form

the basis of a mail-fraud or wire-fraud prosecution, a civil

or criminal action under RICO, or fraud litigation in state

court. Consumers or state attorneys general could invoke

consumer-protection laws as well. It is unnecessary to

classify the transactions as futures contracts in order to

provide remedies for deceit. Why stretch the Commodity
10 No. 03-4245

Futures Act—with resulting uncertainty, litigation costs,

and potentially unhappy consequences for other economic

arrangements that may be swept into a regulatory system

not designed for them—when other remedies are ready to

hand?

Recognition that futures markets are characterized by

trading “in the contract” leads to an easy answer for most

situations. Customers of foreign exchange at AlaronFX

did not purchase identical contracts: each was unique in

amount of currency (while normal futures contracts are for

fixed quantities, such as 1,000 bushels of wheat or 100

times the price of the Standard & Poors 500 Index) and in

timing (while normal futures contracts have defined expiration or delivery dates). Thus the trade was “in the commodity” rather than “in the contract.” Cf. Marine Bank v.

Weaver, 455 U.S. 551 (1982) (a non-fungible contract that

could not be traded on an exchange is not a security);

Giuffre Organization, Ltd. v. Euromotorsport Racing, Inc.,

141 F.3d 1216 (7th Cir. 1998) (a sports franchise linked to

a single owner is not a security).

Citing Chevron U.S.A. Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837 (1984), the Commission contends

that its position that rollovers turn spot sales into futures

contracts should be respected without independent judicial

inquiry. Yet when deciding what is (or isn’t) a “security,”

courts have not deferred to the SEC; there is no greater

reason to defer to the CFTC when defining futures contracts. In Dunn the Supreme Court addressed de novo the

question whether an over-the-counter option on foreign

currency was excepted under the pre-2000 version of the

Treasury Amendment. Perhaps Dunn could be distinguished on the ground that the very name of the Treasury

Amendment implied deference to its namesake, the Treasury Department (a possibility the Court mused about, 519

U.S. at 479 n.14). But the central point is that deference

depends on delegation. See United States v. Mead Corp., 533
No. 03-4245 11

U.S. 218 (2001). When Congress has told an agency to

resolve a problem, then courts must accept the answer.

When, however, the problem is to be resolved by the courts

in litigation—which is how this comes before us—the

agency does not receive deference. Adams Fruit Co. v.

Barrett, 494 U.S. 638, 649-50 (1990). Courts must heed the

agency’s reasoning and give it the benefit of the doubt. But

the CFTC has avoided rather than addressed the central

issue: is trading “in the contract” a defining characteristic?

The agency has assumed a negative answer without

explanation. In Nagel, Chicago Mercantile Exchange, and

other decisions, this circuit addressed the subject without

extending Chevron deference to the Commission; we adhere

to that position today. Both Nagel and Lachmund hold that

rollovers of grain sales do not turn them into futures; it is

hard to see why we should treat rollovers of currency sales

differently.

Our decision in Nagel observed that in the great majority

of situations even opinions emphasizing “the totality of

the circumstances” boil down to whether trading has occurred in fungible contracts. 217 F.3d at 441. Best to take

Occam’s Razor and slice off needless complexity. We recognized a qualification, however: “there is an exception for

the case in which the seller of the contract promises to sell

another contract against which the buyer can offset the first

contract, as in In re Bybee, 945 F.2d 309, 313 (9th Cir.

1991), and CFTC v. Co Petro Marketing Group, Inc., supra,

680 F.2d at 580. That promise could create a futures

contract.” Ibid. A promise to create offsets makes a given

setup work as if fungible: although the customer can’t go

into a market to buy an equal and opposite position, the

dealer’s promise to match the idiosyncratic terms in order

to close the position without delivery means that the customer can disregard the absence of a formal exchange.

Because the parties’ briefs did not address this possibility,

we inquired at oral argument whether the customers’
12 No. 03-4245

contracts with BCG and AlaronFX entitled customers to

close their positions by offset. Counsel for the CFTC answered with a ringing “yes” and counsel for the defendants

with an equally confident “no.” So they agree that the answer is clear; they just don’t agree on what that answer is.

Because neither side has made anything of the contracts

between customers and BCG, we limit attention to the

contracts that AlaronFX required all customers to sign. The

Commission relies on paragraphs 5, 8, and 9 of that contract. Paragraph 8 provides that if a customer’s account

contains “two or more open and opposite Contracts providing . . . for the purchase and sale of the same Foreign

Currency . . . on the same Value Date, such Contracts shall

automatically be canceled and replaced by an obligation to

settle only the net difference”. So far, so good; offset is a

standard feature of trading in the contract on a futures

market. But the question we posed in Nagel is whether the

dealer has promised to sell the offsetting position, and thus

allow netting on demand. Such an obligation is harder to

find in the AlaronFX contract.

Paragraph 9, on which the Commission places its principal reliance, does not contain any promise. What it says

instead is that, if the client fails to give timely instructions

about the disposition of the positions, then “AlaronFX is

authorized, in AlaronFX’s sole discretion, to deliver, roll

over or offset all or any portion of the Open Position in

Customer’s Account at Customer’s risk.” This paragraph

does not give the client a right to purchase an offsetting

position and thus close a transaction; that option belongs to

AlaronFX rather than to the customer. As for ¶5: subsection

5.3 says that “AlaronFX will attempt to execute all Orders

that it may, in its sole discretion, accept from Customer in

accordance with Customer’s instructions . . . .” That’s not a

promise to close any given position by offset. This subsection continues: “AlaronFX or its affiliates may, at a future

date, establish a trade matching system . . . . In that event,
No. 03-4245 13

AlaronFX . . . shall have the right (but not the obligation) .

. . to act for its own account, and as a counter party or as a

broker to AlaronFX customers, in the making of markets”.

The Commission does not contend that such a “trade

matching system” was ever established. Customers thus

had no assurance that they could close their positions by

offset. The only promise was that, if AlaronFX did not buy

back the currency (and thus create an offset under ¶8), it

would deliver. This looks more like the business of a

wholesaler in commodities such as metals or rare coins than

like the system of trading in fungible contracts that characterizes futures exchanges.

These transactions were, in form, spot sales for delivery

within 48 hours. Rollover, and the magnification of gain

or loss over a longer period, does not turn sales into futures

contracts here any more than it did in Nagel and

Lachmund. The judgment of the district court therefore is

AFFIRMED.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—6-30-04