Source: https://www.cftc.gov/sites/default/files/ogc/oporders97/ogcwheat3.htm
Timestamp: 2018-06-18 23:17:25
Document Index: 283232028

Matched Legal Cases: ['§ 12', '§ 9', '§ 9', '§ 12', 'art 9', '§ 9', '§ 9', '§ 12', '§ 552', '§ 12', '§ 12', '§ 145', 'art 9', 'art 9']

In re CBOT's Settlement of Disciplinary Charges related to March Wheat Expiration - September 12, 1997
CBOT'S SETTLEMENT OF DISCIPLINARY CHARGES CFTC Docket No. 97-E-1 AGAINST DONALD W. SCHECK RELATED TO THE
MARCH WHEAT EXPIRATION ON MARCH 20, 1996
CBOT'S SETTLEMENT OF DISCIPLINARY CHARGES CFTC Docket No. 97-E-2 AGAINST J. BRIAN SCHAER RELATED TO THE
MARCH WHEAT EXPIRATION ON MARCH 20, 1996 :
CBOT'S SETTLEMENT OF DISCIPLINARY CHARGES CFTC Docket No. 97-E-3 AGAINST JOHN C. BEDORE RELATED TO THE
MARCH WHEAT EXPIRATION ON MARCH 20,1996
CBOT'S SETTLEMENT OF DISCIPLINARY CHARGES CFTC Docket No. 97-E-4 AGAINST GEORGE F. FREY, JR. RELATED TO THE
CBOT'S SETTLEMENT OF DISCIPLINARY CHARGES CFTC Docket No. 97-E-5 AGAINST JAY P. IERONIMO RELATED TO THE
CBOT'S SETTLEMENT OF DISCIPLINARY CHARGES CFTC Docket No. 97-E-6 AGAINST PRODUCE GRAIN, INC. RELATED TO THE
In this order we address most of the open issues that have been raised by the parties concerning the record. We have previously issued an order directing the Proceedings Clerk to include a copy of a staff report in the record of each proceeding and an order directing the Chicago Board of Trade ("CBOT" or "Exchange") and the Division of Trading and Markets ("T&M") to file documents relating to the CBOT disciplinary actions under review. We now address the CBOT's motions to strike the staff report or portions of it from the record and to place the documents that it filed in response to our prior order under seal. We also address the joint motion of respondents J. Brian Schaer and John C. Bedore that the Proceedings Clerk be directed to produce to them all of the documents filed by the CBOT and T&M in response to our prior order, and their motion that those documents be placed under seal.
For the reasons discussed below, we deny the CBOT's motions to strike the staff report or portions of it from the record and the motion of the CBOT and the respondents to seal the record. Furthermore, as more fully discussed below, the respondents and T&M shall be provided with access to the documents that the CBOT has filed in this proceeding. Finally, we address certain objections that have been raised by the parties concerning the record but which are not the subject of pending motions.
On November 26, 1996, the Commission issued an order taking sua sponte review under Section 8c(b) of the Commodity Exchange Act ("Act"), 7 U.S.C. § 12c(b) (1994), and Commission Rule 9.31(b), 17 C.F.R. § 9.31(b) (1996), of the CBOT's settlement of six related disciplinary proceedings ("Order Taking Review"). We took review in response to a recommendation of Commission staff that we do so because, in the staff's view, the CBOT's resolution of the proceedings was deficient. See Report on Chicago Board of Trade March 1996 Wheat Future Expiration on March 20, 1996, Division of Trading & Markets and Division of Enforcement, in Consultation with Division of Economic Analysis ("EA"), November 26, 1996 ("Staff Report" or "Report"). In each of the settled proceedings, the CBOT alleged that the respondent had traded after the close and issued a letter of reprimand.(1) In the staff's view, the sanction imposed by the CBOT was not commensurate with the gravity of the alleged violation and otherwise failed to conform to Commission guidance on sanctions. The Commission took review to consider the issues raised in the Report.
In the Order Taking Review, we directed the Proceedings Clerk to include a copy of the Staff Report in the record of each proceeding and to serve a copy of the Report along with the Order Taking Review on the respondents in the CBOT disciplinary proceedings and on the CBOT. We also established a schedule for the respondents, the CBOT, and Commission staff to file responses. Responses have been filed by each of the foregoing.
In addition to addressing the adequacy of the sanctions imposed in the disciplinary proceedings, the CBOT and the respondents raised several procedural issues in their responses. Among other things, the CBOT moved to strike the Staff Report or in the alternative to strike allegedly irrelevant portions of it from the record on review. T&M's response to the CBOT's and the respondents' submissions contained a motion that the Commission accept as part of the record the documents listed in Appendix A to its response ("Appendix A"). Appendix A contained two categories of documents: "Exchange Disciplinary Files" and "Other." The documents included as Exchange Disciplinary Files were: (i) charging letters, (ii) Office of Investigations and Audits ("OIA") statement transcripts, (iii) two OIA memoranda, (iv) an OIA Report, (v) CBOT Time and Sales, (vi) CBOT Daily Trading Activity, (vii) trading cards and order tickets, (viii) minutes of Business Conduct Committee ("BCC") meetings, (ix) settlement agreements, and (x) a transcript of a BCC meeting. Only one document was listed under Other--a March 28, 1996 memorandum of the Division of Economic Analysis ("EA Memorandum"). Neither the CBOT nor the respondents responded to T&M's motion.
On July 2, 1997, we issued an order ("July 2nd Order") granting T&M's motion to accept as part of the record the documents listed in Appendix A, directing the CBOT to file the documents listed under Exchange Disciplinary Files and directing T&M to file and serve the EA Memorandum. We did not direct the CBOT to serve its documents on the respondents or on T&M.
T&M and the CBOT filed the documents subject to the July 2nd Order on July 17, 1997 and July 24, 1997, respectively.(2) The CBOT's response consisted of six separate filings. In each proceeding it filed a record containing the documents pertaining to the disciplinary proceeding under review, a notice of filing, and a motion that the record in our review proceeding be maintained under seal and not be made available to the public. As noted above, two of the respondents (Schaer and Bedore) concur with the CBOT that the record should be sealed from the public and further assert that the EA Memorandum should not be made public. Schaer and Bedore have also filed a motion requesting production of the record to them. Although respondent Donald W. Scheck has not filed such a motion, in a letter to the Proceedings Clerk dated July 14, 1997, he objected to the issuance of any Commission order based on a record containing documents which have not been provided to him..
The CBOT asserts that the Staff Report should be struck from the record because (a) it was not a part of the "[r]ecord of the exchange proceeding" as defined by Commission Rule 9.2(i), 17 C.F.R. § 9.2(i) (1997); (b) its admission violates due process because it allegedly consists of compound hearsay based on information that has not been the subject of cross-examination and assumes facts not in evidence; and (c) the documents that properly form the record have already been furnished to T&M. In the alternative, the CBOT moves to strike from the record those portions of the Report that it argues are irrelevant.(3)
T&M opposes CBOT's motion to strike the Staff Report or portions of it from the record. It argues that the CBOT's suggestion that the record in a Section 8c proceeding is limited to the record that the exchange had before it could prevent the Commission from acting in cases where the exchange record was inadequate. Furthermore, T&M, in view of its recommendation that the proceedings be remanded to the CBOT, finds no merit in CBOT's argument that including the Staff Report in the record violates due process. T&M argues that there are no due process concerns because the respondents now have access to the Staff Report and any additional sanctions could be imposed on them only pursuant to new settlements or after an Exchange hearing at which they would have an opportunity to address the Staff Report.
The Commission has never adopted comprehensive procedural rules to govern proceedings initiated on its own motion under Section 8c of the Act. (4) Accordingly, we must determine in the context of this case what should appropriately be included in the record on review, as well as decide other procedural issues that have been presented by the parties.(5)
We first consider the nature and purpose of this proceeding. Section 8c provides the Commission with an added tool for exercising oversight over the exchanges' self-regulatory processes. As the Commission has recognized in the past, this provision enables the Commission to review disciplinary proceedings in which "an exchange has apparently failed to carry out its self-regulatory responsibilities and [has not taken] prompt, appropriate action to enforce its rules." 43 Fed. Reg. 59,343, 59,344 (1978). Once having taken review, the Commission's role is to determine whether the exchange's action is "in accordance with the policies of this [Act]." 7 U.S.C. § 12c(c)(1994). The Commission does not act as a trier of fact when it takes review of exchange actions under Section 8c(b). Rather, we act in an oversight capacity specifically focusing on the exchange's use of its disciplinary procedures. This role is particularly appropriate when we take review on our own motion rather than at the behest of a disciplined member.
The Commission initiated this proceeding for the purpose of considering whether the reprimands issued in the settled disciplinary proceedings were commensurate with the gravity of the violations alleged and otherwise conformed with Commission guidance on penalties. In the context of this proceeding, we can discern no reason to limit the record to documents comprising the "record of the exchange proceeding" as defined by Commission Rule 9.2(i).(6) As discussed above, sua sponte proceedings are not governed by the procedural requirements of Part 9. Even in cases governed by those requirements, however, our rules would not mandate that the record on review always be confined to the record of the exchange proceeding. See 17 C.F.R. § 9.33 (1997) (providing that the Commission's opinion and order will be based upon "the record before it, including the record of the exchange proceeding") (emphasis supplied) and 17 C.F.R. § 9.9 (1997) (authorizing the Commission to waive any rule in a particular case upon good cause shown).
The fact that we are reviewing exchange disciplinary proceedings that resulted in settlements underscores the appropriateness of including the Staff Report in the record. A traditional hearing record--consisting of pleadings, transcripts, motions, and a written decision containing factual findings--does not exist. We thus must look elsewhere for the information that will enable us to review these disciplinary proceedings. In the context of this proceeding, we believe that the Report will assist the Commission in carrying out its statutory review function and is appropriately contained in the record on review.(7)
Furthermore, we do not believe that including the Staff Report in the record raises due process concerns. Consistent with the oversight nature of a Section 8c review proceeding, we have not and will not finally determine specific underlying facts relating to the respondents' behavior in this proceeding. Cf. Board of Trade of the City of Chicago v. CFTC, No. 89-C-4300 (N.D. Ill. Sept. 27, 1989) (Memorandum Opinion and Order at 25) (when reviewing an exchange disciplinary proceeding--in that case an appeal by an aggrieved member--the Commission "is itself a board of review and not the original decisionmaker."). Furthermore, in light of T&M's recommendation as to the ultimate disposition of this matter, we do not anticipate that we will be augmenting the sanctions. T&M has recommended that the Commission should determine that the reprimands were not adequate, should set aside the settlements and should direct the CBOT to reopen the proceedings and either: (1) to reach settlements that reflect the gravity of the violations or (2) to augment its prior investigations, as appropriate, and to conduct full disciplinary hearings. Thus, if we adopt T&M's recommendation, we anticipate that any additional sanctions would be imposed based upon newly-negotiated settlements or following a full disciplinary proceeding. This approach obviates the due process concerns voiced by the CBOT and the respondents.
II. Motions to Seal the Record.
The CBOT's motion to seal the record is based on its contention that the documents included in the record that it has filed are of a confidential and/or investigatory nature and that their disclosure would undermine the CBOT's ability to function as a self-regulatory organization. It relies on Sections 8(a)(1) and 8c(a)(2) of the Act, 7 U.S.C. §§ 12(a)(1) and 12c(a)(2) (1994), and invokes a number of evidentiary privileges and exemptions from disclosure under the Freedom of Information Act, 5 U.S.C. § 552 (1994) ("FOIA"). In their motion to seal the record, Respondents Schaer and Bedore rely upon the same asserted bases for confidentiality as the CBOT. After a careful review, we have decided to deny both motions.
Section 8c(a)(2) of the Act limits an exchange's ability to disclose the evidence obtained in its disciplinary proceedings. It provides in relevant part that:
An exchange shall makes public its findings and the reasons for the exchange action in any such [disciplinary] proceeding, including the action taken or the penalty imposed, but shall not disclose the evidence therefor, except to the person who is suspended, expelled, or disciplined, or denied access, and to the Commission.
The CBOT does not assert that this provision places any direct limitations on the Commission's ability to disclose evidence from exchange disciplinary files; however, it argues that this provision should be interpreted indirectly to limit our ability to disclose such information. It argues that Section 8c(a)(2) reflects certain policies--such as encouraging cooperation with and maintaining the integrity of the Exchange's disciplinary procedures--which would be undermined if the records in these proceedings were made available to the public in this review proceeding. The Exchange finds authority for this position in federal court opinions that have protected exchange disciplinary records from discovery in private litigation. See Apex Oil Company v. DiMauro, [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,759 (S.D.N.Y. 1985); Ross v. Bolton, 106 F.R.D. 22 (S.D.N.Y. 1985).(8)
While Section 8c(a)(2) reflects a Congressional determination that an exchange should not routinely disclose the evidence from its disciplinary proceedings, we do not read this provision or its history to limit the Commission's ability to disclose that evidence. Within the same provision of the Act that limits an exchange's authority to disclose the evidence of its disciplinary proceedings, Congress granted the Commission comprehensive authority to review exchange disciplinary actions without placing any limitations on the nature of such review proceedings or the disclosure of the information obtained in such proceedings. See note 5, supra.
Furthermore, we believe that different policy considerations come into play when the Commission is conducting a Section 8c review proceeding than when a court is faced with determining whether a private litigant should be given access to exchange disciplinary records. A Section 8c review proceeding is a Congressionally authorized inquiry (whether initiated by the filing of an appeal or, as here, sua sponte) designed to permit the Commission to review exchange disciplinary proceedings to determine whether they are "in accordance with the policies of this [Act]." 7 U.S.C. § 12c(c)(1994). It is precisely in this context that any interest in protecting the confidentiality of an exchange's investigatory records may be required to give way to the public's interest in ensuring that an exchange is acting in conformity with the policies of the Act. Thus, for purposes of determining whether to seal the record in a Section 8c review proceeding, we accord little weight to judicial opinions that have protected exchange disciplinary proceedings from discovery in private litigation.
In our view, the public interest would be seriously harmed by sealing the record filed by the CBOT in this proceeding. We believe that the public interest is best served when we conduct our review of an exchange disciplinary proceeding in the light of day and subject to public scrutiny. By doing so, the public is better able to assess the basis for the actions of both the exchange and the Commission.
Furthermore, the CBOT and respondents have failed to demonstrate that any of the particular documents listed in Appendix A that have been filed are of such a confidential or privileged nature that they should be sealed from the public. Reliance on the investigatory privilege (assuming its application to an exchange disciplinary proceeding) is undermined by the fact that the CBOT has already released much of this information to the respondents and the Commission has published it in the Staff Report. The CBOT also has failed to make a case for protecting any discrete category of investigatory information, such as information concerning the Exchange's investigatory techniques and procedures.(9) Reliance on a work product privilege for purposes of protecting the investigatory records is also misplaced as most of the documents to which the CBOT suggests this privilege applies--the transcripts of witness statements--have already been produced to the respondents.
Furthermore, the Commission's rules contemplate that the minutes of the BCC meetings and the OIA investigation report--the documents that the CBOT most strenuously objects to disclosing to the public--should be included routinely in the appellate record of disciplinary proceedings such as these. The Commission's definition of the "record of the exchange proceeding" expressly includes minutes of exchange committee meetings such as those involved here. See note 6, supra. Moreover, we have previously recognized that an internal investigatory report that may have influenced an exchange's resolution of a disciplinary proceeding should be included in the appellate record. See Semel v. The Commodity Exchange, Inc., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,898 at 37,257 (CFTC July 26, 1990); In re Malato, CFTC Docket No. 86-E-2 (CFTC Feb. 20, 1986). Since the committee that accepted the offers of settlements in these proceedings--the Business Conduct Committee--had been provided with the OIA investigation report (see Staff Report at 34-35), that report may have influenced the resolution of these proceedings and thus should be included in the record on review. Id. Although not directly applicable here, the aforementioned Commission rules and case law provide guidance by analogy and also suggest that the CBOT was on notice that such documents would not be treated confidentially in a Section 8c review proceeding.
Finally, contrary to the suggestion of CBOT and respondents, Section 8(a) of the Act does not preclude the Commission from publishing data and information that would separately disclose futures and cash market positions in this proceeding. In this regard, notwithstanding Section 8(a)'s general prohibition on publishing such information, Section 8(b) of the Act specifically authorizes the Commission publicly to disclose such information when such disclosure is made in connection with an administrative or judicial proceeding brought under the Act. See 7 U.S.C. § 12(b)(1994). Clearly, this is such a proceeding, and disclosure is thus authorized. Finally, in the context of this proceeding which is specifically designed to address the adequacy of the settlements, we believe that the settlement documents are relevant and should be included in a record that is open to the public.
For all the foregoing reasons, we deny the pending motions to seal the record from the public.
III. Motion to Produce Record.
Respondents Schaer and Bedore assert that fundamental fairness requires that they be provided with all the documents in the record on which the Commission relies in issuing its decision. Respondent Scheck makes the same fundamental fairness argument in his procedural objection. The CBOT does not object to providing each respondent with the record that it has filed in the proceeding concerning that particular respondent, agreeing that fundamental fairness so requires.(10) The CBOT asserts, however, that production of certain confidential documents--such as the OIA investigation report and the minutes of the BCC meetings--will seriously undermine any subsequent proceeding at the Exchange.
We agree that fundamental fairness requires that each respondent be provided with access to the record that the CBOT has filed with the Commission in the proceeding concerning that respondent. If a respondent agrees to pay the reasonable costs of duplicating a copy of the record, the CBOT shall serve a copy of the record on that respondent. The CBOT shall also serve a copy of the record that it has filed in each proceeding on T&M, if T&M so requests.
Based on the record before us, we are unable to conclude that release of the OIA investigation report or the minutes of the BCC meetings would seriously undermine a subsequent proceeding at the Exchange. First, the CBOT has failed to specify how release of the documents will interfere with any future disciplinary proceeding. Its assertions of threatened harm are conclusory. Second, in our review of the OIA investigation report and the minutes of BCC meetings, we have not uncovered information the disclosure of which we believe would likely cause the serious harm suggested by the CBOT. The OIA report contains a lengthy factual summary, some limited analysis and recommendations concerning proposed disciplinary action. Most of this information has already been provided to the respondents either by the CBOT or in the Staff Report. The minutes of the BCC meetings report committee votes without divulging the deliberations of the individual members. Accordingly, while the Commission is and will continue to be sensitive to protecting the integrity of exchange disciplinary proceedings, we believe that it is important to the integrity of this proceeding that both the Commission and the respondents have access to all of the documents that the CBOT has filed relating to these disciplinary proceedings.
IV. CBOT Objection Concerning May 17, 1996 Letter.
The CBOT's response to the Commission's Order Taking Review contains an "objection" to the inclusion of a May 17, 1996 letter from its General Counsel to Commission staff ("May 17, 1996 Letter") as an appendix to the Staff Report. That letter responded to two separate inquiries from the Commission concerning the expiration of the March 1996 wheat contract and the governing Exchange rules and procedures. CBOT asserts that it submitted that letter to the Commission subject to a petition for confidential treatment and that its release has interfered with and, if a remand is ordered, will continue to interfere with the conduct of its disciplinary proceeding. T&M briefly responds to this objection by explaining that the regulation governing CBOT's request for confidential treatment, Commission Rule 145.9(a), 17 C.F.R. § 145.9(a) (1997), applies only in the context of a request under the Freedom Of Information Act.
We disagree with CBOT's suggestion that the May 17, 1996 Letter should not have been included as an appendix to the Staff Report because it was subject to a petition for confidential treatment. The CBOT's petition for confidential treatment under the FOIA does not affect the Commission's authority to disclose the letter in a context other than a request under the FOIA. Moreover, we agree with T&M that CBOT has failed to specify how release of the May 17, 1996 Letter has or will interfere with its disciplinary proceeding.
For the reasons discussed above, we (i) deny the CBOT's motions to strike the Staff Report or portions of it from the record; (ii) deny the motions of the CBOT and respondent Schaer and Bedore to seal the records of the exchange disciplinary proceeding that the CBOT filed in response to our July 2nd Order; (iii) deny the motions of respondents Schaer and Bedore to keep the EA Memorandum confidential and non-public; and (iv) grant the motions of respondents Schaer and Bedore that the record be produced and direct the CBOT to serve a copy of the record on each respondent willing to pay the reasonable costs of duplicating a copy and to serve a copy of the record in each proceeding on T&M, if T&M so requests.
1. The trading under review took place during the extraordinary expiration of the March 1996 wheat futures contract on March 20, 1996--an expiration during which the price of the contract spiked over two dollars within a few minutes.
2. The CBOT's filing omitted the following documents listed in Appendix A: the Daily Trading Activity runs and copies of charging letters and settlement documents relating to Louis Dreyfus Corporation, Term Commodities, Inc., and Raymond L. Czupek. The CBOT asserts that the Daily Trading Activity runs were not utilized by the Exchange in connection with its investigation and were not contained in its investigatory or disciplinary files in these proceedings. It contends that the charging letters and settlement documents concern proceedings which are not under review and that those documents do not relate to the six proceedings under review. We do not address at this time whether we will deem the CBOT to be in compliance with our July 2d Order.
3. The Staff Report includes a discussion and recommendations concerning the CBOT's regulatory responses to the events of March 20, 1996. CBOT moves to strike those portions of the Report, as well as other portions, which it argues are irrelevant to this proceeding.
4. When the Commission first adopted the Part 9 rules governing review of exchange disciplinary actions it declined to apply those rules to reviews that were initiated on its own motion. As it anticipated that such proceedings would be uncommon, the Commission decided that it would decide what procedures it would apply in a sua sponte proceeding at the time that review was taken. See 43 Fed. Reg. 59,343, 59,344 (1978). The Commission revised and restated the Part 9 rules in 1987. See 52 Fed Reg. 25,362 (1987). We said nothing at that time to indicate that we were changing our originally expressed view that sua sponte proceedings should be subject to case-specific procedures. Id.
5. In this regard, Section 8c(b) authorizes the Commission to establish "such standards and procedures as it deems appropriate" and thus provides the Commission with considerable latitude in designing procedures for Section 8c(b) review of exchange actions.
6. 6 Rule 9.2(i) defines the "[r]ecord of the exchange proceeding" to mean:
all testimony, exhibits, papers and records produced at or filed in an exchange disciplinary or access denial proceeding or served on a party to that proceeding; all documents, minutes or other exchange records serving as a basis for or reflecting the findings, rationale and conclusions concerning the adverse action taken by an exchange; a transcript of any proceeding before any body of the exchange in connection with the exchange proceeding; and a copy of all exchange rules which form the basis for the exchange proceeding.
7. We deny CBOT's motion to strike the portions of the Report and its Appendices that CBOT asserts are irrelevant to consideration of the adequacy of the sanctions. The expiration of the March wheat futures contract was extraordinary and resulted in Commission review not only of these settled disciplinary proceedings but also of the CBOT's related rules and operational procedures. The regulatory and operational issues surrounding the March expiration provide useful information in understanding the events of March 20, 1996 and the disciplinary proceedings that followed. Accordingly, we disagree with CBOT's assertion that portions of the Report and its Appendices are irrelevant for purposes of reviewing the disciplinary proceedings.
8. It should be noted that Section 8c(a)(2)'s prohibition on exchange disclosure is not absolute. Consistent with the legislative history of that provision, the Commission's Office of General Counsel has recognized that an exchange may disclose evidence of an exchange disciplinary proceeding or investigation to the U.S. Attorney pursuant to a subpoena issued in connection with a criminal investigation. CFTC Interpretative Letter No. 80-1, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,966 at 23,877 (CFTC Office of General Counsel Feb. 6, 1980). See also Apex Oil, ¶ 22,759 at 31,161-31,163 (relying on legislative history and OGC's interpretation, concludes that Section 8c does not create an absolute bar to discovery in civil litigation).
9. Schaer and Bedore argue that the EA Memorandum should be sealed from the public because it contains information from confidential sources. That memorandum has already been filed and served and is a part of the public record in this proceeding. Accordingly, any investigatory or other privilege that might have attached to the document has now been waived. In any event, we question the standing of respondents to object to the public disclosure of an internal Commission memorandum.
10. The CBOT has already provided the respondents with most of the documents in the records that it has filed. For instance, the statement transcripts which comprise approximately four of the five record volumes filed in each proceeding have been provided to the respondents. The CBOT, however, has not provided the respondents with copies of the OIA investigation report, the minutes of BCC meetings, the transcript of one BCC meeting (at which several of the respondents were present), or the charging letters and settlement documents as they relate to any respondent other than the respondent to whom they were directed.