Opinion ID: 3206749
Heading Depth: 2
Heading Rank: 2

Heading: review of cftc proceedings

Text: The essence of Chu’s claim rests on a theory of unauthorized trading, namely that she never gave permission for Huang to conduct trades in the account and that Kelly, in CHU V. COMMODITY FUTURES TRADING COMM’N 11 following Huang’s directives, violated 17 C.F.R. § 166.2. The regulation prohibits transactions by any futures commission merchant or its associated persons unless the customer gives (1) specific authorization, including the precise interest and exact amount to be purchased or sold, or (2) written general authorization “to effect transactions in commodity interests for the account without the customer’s specific authorization . . . .” 17 C.F.R. § 166.2. The FCM may “make trades ordered by someone other than the customer himself when that someone is designated by the customer to control the customer’s account” or otherwise “has either actual or apparent authority to make the trades.” Peltz v. SHB Commodities, Inc., 115 F.3d 1083, 1088 (2d Cir. 1997). Here, the CFTC’s conclusion that Huang had actual authority to trade in the account is supported by substantial evidence. Chu gave Huang blanket trading authority over any future accounts, and when she opened the disputed account, incorporated the power of attorney documents from an older account.5 Those authorizations came in the context of a longstanding relationship between Chu and Huang, with Huang trading on Chu’s behalf in her other Peregrine accounts. In addition, close in time to opening the account in dispute, there was a series of emails between Chu and Huang and Chu and Kelly in which Chu confirmed that she wanted Huang to keep trading for her. These affirmative grants of authority easily 5 Chu argues that Peregrine never ascertained whether she understood the account opening documents. However, Chu regularly communicated with Peregrine and Kelly through Huang and Huang’s staff, who translated between English and Taiwanese, and Chu never claimed that she did not understand a document or that something was inaccurately translated. 12 CHU V. COMMODITY FUTURES TRADING COMM’N fall within the definition of actual authority. Actual authority “is created by direct manifestations from the principal to the agent, and the extent of the agent’s actual authority is interpreted in the light of all circumstances attending these manifestations, including the customs of business, the subject matter, any formal agreement between the parties, and the facts of which both parties are aware.” Id. (citation omitted). Chu’s fraud allegations fare no better. She claims that Kelly encouraged her to open the account with the representation that it would be used to generate interest through the purchase of a $500,000 T-bill, but then ignored her instructions and allowed the account to be traded to a total loss. Under 7 U.S.C. § 6b(a)(2), it is unlawful for a person to “cheat or defraud” a customer through trades, or to willfully “deceive or attempt to deceive the other person . . . .” Liability under § 6b contains an element of scienter which is more than “[m]ere negligence, mistake, or inadvertence.” Wasnick v. Refco, Inc., 911 F.2d 345, 348 (9th Cir. 1990). This case appears to be—at worst—one of misunderstanding on Chu’s part, not Kelly’s intentional disregard for Chu’s instructions. Chu never ordered a T-Bill, and had there been one in the account, Peregrine would have had to cash the bill to satisfy margin calls.6 Chu’s specification that “margin be linked” among the accounts was 6 Chu argues that the one-page account opening form did not contain a required risk disclosure statement, but fails to acknowledge that the form incorporated the risk disclosure statement for an older account. Chu used the same account opening form for all of her older accounts without objection. CHU V. COMMODITY FUTURES TRADING COMM’N 13 thus inconsistent with her claim that the account was to be an interest-only account. Nor did Kelly commit fraud in failing to inform Chu that Huang was trading in the account. The Commission noted in its Order that “Chu’s purported desire to generate interest in the account and use a T-Bill from another account . . . does not establish that Chu limited Huang’s trading authority.” None of Chu’s emails to Kelly reference any trading limitation, nor did the notation about the T-Bill limit or change Chu’s explicit instructions, as outlined above, that Huang had blanket trading authority. Chu was clearly aware of the ongoing trading, having objected to one trade in which a risk manager had placed a stop. Accordingly, substantial evidence supports the CFTC’s decision that Kelly made no material misrepresentation or omission, that there was no unauthorized trading, and that the record does not support a finding of fraud. PETITION DENIED.