Opinion ID: 2709532
Heading Depth: 1
Heading Rank: 1

Heading: regulatory and statutory background

Text: This commodities fraud lawsuit presents a corporation’s attempt to recoup investments allegedly depleted 2 PFG has also filed a motion to dismiss Prestwick’s appeal, arguing that it is barred by res judicata. According to PFG, Acuvest and its principals are the true “wrongdoers” whose dismissal from this lawsuit bars further litigation of the matter. PFG contends that, because releasing a wrongdoer discharges any entities which may be derivatively liable, PFG has been implicitly released from this lawsuit. Prestwick rejoins that the statutory framework of the CEA, not the law of guarantor liability, controls. Specifically, Prestwick argues, the purpose of the CEA and its associated rules is to protect investors from judgment-proof brokers. Prestwick therefore asserts that this underlying policy goal compels a finding that PFG remains “on the hook” for the Acuvest defendants’ alleged misconduct. We recognize, as PFG argues, that the CEA does not provide inviolate guarantees. But the CEA’s regulatory scheme does clearly draw distinctions between the nature of the duties imposed upon guarantors (like PFG) and those imposed upon brokers (like Acuvest). More fatal to PFG’s res judicata argument is the fact that this doctrine does not apply to orders within the same case. See, e.g., Bernstein v. Bankert, 702 F.3d 964, 995 (7th Cir. 2012) (noting that res judicata “bar[s] a second suit in federal court”) (emphasis supplied). In any event, Prestwick appealed the order dismissing Acuvest—an order which was, we note, devoid of a finding that Acuvest was not liable in PFG’s settlement with Acuvest. For these reasons, we DENY PFG’s motion to dismiss Prestwick’s appeal. 4 No. 12-1232 during commerce involving an underfunded trading pool. In this financial setting, parties commonly attempt to shift price risk by signing futures contracts. Briefly stated, a futures contract is an agreement involving a promise to purchase or sell a particular commodity at a fixed date in the future. See Lachmund v. ADM Inv. Servs., Inc., 191 F.3d 777, 786 (7th Cir. 1999). We have previously described the operative promise of such agreements as “fungible” because it employs standard terms and engages clearing brokers to guarantee the parties’ respective obligations. Chi. Mercantile Exch. v. S.E.C., 883 F.2d 537, 542 (7th Cir. 1989). “Trading occurs in ‘the contract’, not in the commodity,” and takes place on the futures exchange, a market meticulously defined and governed by the CEA. Id. Enacted in 1936, the CEA regulates transactions unique to the futures industry and forbids fraudulent conduct in connection with these activities. When futures trading expanded in the 1970s, Congress “ ‘overhaul[ed]’ the . . . [CEA] in order to institute a more ‘comprehensive regulatory structure to oversee the volatile and esoteric futures trading complex.’ ” Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 836 (1986) (quoting H.R. R EP. N O . 93-975, 93d Cong., 2d Sess. at 1 (1974)). Congress contemporaneously created the Commodity Futures Trading Commission (“CFTC”), the regulatory agency charged with administering the CEA and promulgating any rules necessary to implement its new structure. Geldermann, Inc. v. Commodity Futures Trading Comm’n, 836 F.2d 310, 312 (7th Cir. 1987) (citing 7 U.S.C. § 12a(5) (1974)). One important aspect of this responsibility is No. 12-1232 5 the oversight of futures commission merchants (“FCMs”), which are akin to securities brokerage houses. The CEA defines FCMs as “individual[s], association[s], partnership[s], corporation[s], or trust[s] . . . that [are] engaged in soliciting or in accepting orders for . . . the purchase or sale of a commodity for future delivery.” 7 U.S.C. § 1a(28)(A)(i)(I)(aa)(AA). Prior to 1982, it was customary for FCMs to outsource various projects to independent agents. See S. R EP. N O . 97384, at 40 (1982). The business dealings of these agents—many of whom were individuals or small businesses—troubled the CFTC for many reasons which soon came to the attention of Congress. As the House Committee on Agriculture noted in its May 17, 1982 report on the Futures Trading Act of 1982: Although agents may perform the same functions as branch officers of [FCMs], agents generally are separately owned and run. [FCMs] frequently disavow any responsibility for sales abuses or other violations committed by these agents. The Committee believes that the best way to protect the public is to create a new and separate registration category for “agents” . . . . Activities of agents and those of commodity trading advisors or associated persons of [FCMs] may be virtually identical, yet commodity trading advisors and such associated persons are registered and regulated under the [CEA], while many agents are not. H.R. R EP. N O . 97-565(I), at 49 (1982). The CFTC originally suggested requiring “agents” to register as FCMs’ “associ- 6 No. 12-1232 ates,” but Congress rejected that proposal. On that point, the Senate Committee on Agriculture, Nutrition, and Forestry reported, “[I]t would be inappropriate to (1) require these independent business entities to become branch offices of the [FCMs] through which their trades are cleared or (2) to impose vicarious liability on a [FCM] for the actions of an independent entity.” S. R EP. N O . 97-384, at 41. Yet Congress could no longer avoid the demand “to guarantee accountability and responsible conduct” of entities that “deal with commodity customers and, thus, have the opportunity to engage in abusive sales practices.” Id. at 111. This quandary incited new legislation: the Futures Trading Act of 1982, Pub. L. No. 97-444, 96 Stat. 2294 (1983). One legislative tactic Congress employed to remedy the CEA’s perceived shortcomings was to launch a new futures trading entity: the introducing broker (“IB”). Like its “agent” predecessor, the IB was intended to procure customer orders independently, relying on FCMs to retain customer funds and maintain appropriate records. S. R EP. N O . 97-384, at 41. This change was discernible in amended § 1a of the CEA, which defines an IB as “any person (except an individual who elects to be and is registered as an associated person of a futures commission merchant) . . . who . . . is engaged in soliciting or in accepting orders for . . . the purchase or sale of any commodity for future delivery.” 7 U.S.C. § 1a(31)(A)(i)(I)(aa). To improve IB accountability, the Futures Trading Act of 1982 also supplemented the CEA’s registration requirements. The amended CEA provides: “It shall be unlawful for any person to be an No. 12-1232 7 [IB] unless such person shall have registered with the [CFTC] as an [IB].” Id. § 6d(g). Registration as an IB is contingent upon the broker’s ability to “meet[] such minimum financial requirements as the [CFTC] may by regulation prescribe as necessary to insure his meeting his obligation as a registrant.” Id. § 6f(b). In a House Conference Report of December 13, 1982, Congress justified these amendments as follows: Because many introducing brokers will be small businesses or individuals, as contemplated by the definition of this class of registrant, the conferees contemplate that the [CFTC] will establish financial requirements which will enable this new class of registrant to remain economically viable, although it is intended that fitness tests comparable to those required of associated persons will also be em- ployed. The intent of the conferees is to require commission registration of all persons dealing with the public, but to provide the registrants with substantial flexibility as to the manner and classification of registration. H.R. R EP . N O . 96-964, at 41 (1982) (Conf. Rep.). Pursuant to 7 U.S.C. § 21(o), the CFTC has delegated this registration function to the National Futures Association (“NFA”), a private corporation registered as a futures association under the CEA. See 7 U.S.C. § 21(j) (discussing requirements for registered futures associations). In August 1983, the CFTC promulgated a final rule setting forth minimum financial benchmarks for IBs. 48 Fed. Reg. 35,248, 35,249 (Aug. 3, 1983). This, too, was a 8 No. 12-1232 compromise; the draft version of the rule would have required IBs, inter alia, to maintain a minimum adjusted net capital level of $25,000 and to file monthly financial reports if capital fell to “less than 150 percent of the minimum” amount (the “early warning” requirement). Id. at 35,249; see also 48 Fed. Reg. 14,933, 14,934, 14,945 (Apr. 6, 1983) (original version of rule). After the notice and comment period, the CFTC reduced the minimum adjusted net capital requirement to $20,000 and permitted IBs to credit toward this balance 50 percent of guarantee or security deposits maintained with FCMs.3 48 Fed. Reg. at 35,249. The current requisite minimum adjusted net capital is $45,000 or “[t]he amount of adjusted net capital required by a registered futures association of which [an IB] is a member.” 17 C.F.R. § 1.17(a)(1)(iii)(A)- (B). Each IB must annually report its net capital position on CFTC Form 1-FR-IB. Id. § 1.10(b)(2)(ii)(A). However, an IB “shall be deemed to meet the adjusted net cap- ital requirement” if it is a party to a binding guarantee agreement 4 satisfying the conditions outlined in 17 C.F.R. § 1.10(j). Id. § 1.17(a)(2)(ii). A guaranteed IB, in other words, is not subject to the same reporting requirements imposed on an IB that has assumed an independent status. According to the CFTC, this dispensation is appropriate because “the guarantee agreement 3 “Taken together, these changes effectively reduce[d] the required capital level for [IBs] by nearly 45 percent.” 48 Fed. Reg. at 35,249. 4 A definition of the term “guarantee agreement” appears at 17 C.F.R. § 1.3(nn). No. 12-1232 9 provides that the FCM . . . will guarantee performance by the [IB] of its obligations under the Act and the rules, regulations, and order thereunder. . . . [and] is an alternative means for an [IB] to satisfy the [CFTC’s] standards of financial responsibility.” 48 Fed. Reg. at 35,249.