Opinion ID: 372623
Heading Depth: 1
Heading Rank: 3

Heading: COUNT IV SECTION 4m OF THE ACT

Text: 31 It is undisputed that the appellant has never been registered as a commodity trading advisor. Although he previously sought registration, such registration was denied, and the denial upheld. Savage v. Commodity Futures Trading Commission, 548 F.2d 192, 197 (7th Cir. 1977). 11 Savage now claims he need not have registered under section 4m because he is within an exception to the registration requirement in section 4m, Viz., he has not furnished commodity trading advice to more than fifteen persons and . . . does not hold himself out generally to the public as a commodity trading advisor. We disagree. We hold that Savage does not come within the scope of this exception. 32
33 7 U.S.C. § 2 defines a commodity trading advisor as any person who, for compensation or profit, engages in the business of advising others, either directly or through publications or writings . . . . This language demonstrates some concern for indirectly, as well as directly, conveyed advice. The CFTC staff has interpreted this provision liberally. 34 We do not believe that the definition of commodity trading advisor requires that the compensation or profit flow directly from the person or persons advised. It is sufficient that the compensation or profit is to result wholly or in part from the furnishing of services . . . . 35 CFTC Interpretive Letter No. 75-11 (1975-77 Transfer Binder) Comm.Fut.L.Rep. (CCH) P 20,098 (1975) at 20,763 n. 6. The exemption upon which appellant depends relieves from registration only advisors who, during the preceding twelve months, have not Furnished commodity trading advice to more than fifteen persons. Furnished implies indirect as well as direct provision. The CFTC staff in a related context has taken the position which lends support to our view, that nonpaying as well as paying clients must be joined for determining the exemption's availability. CFTC Interpretive Letter No. 76-9 (1975-77 Transfer Binder) Comm.Fut.L.Rep. (CCH) P 20,151 (1976). 36 The Act was enacted to remedy widespread abuses in commodity trading. We have recognized that (r)emedial statutes should be liberally construed and should be interpreted (when that is possible) in a manner tending to discourage attempted evasions by wrongdoers. Westinghouse Electric Corp. v. Pacific Gas & Electric Co., 326 F.2d 575, 580 (9th Cir. 1964) (quoting Scarborough v. Atlantic Coast Line R. R., 178 F.2d 253, 258 (4th Cir. 1949)). In other security law contexts courts ordinarily defer to statutory purpose and narrowly construe exemptions from registration. See, e. g., Securities & Exchange Commission v. Ralston Purina Co., 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494 (1953); Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977), Cert. denied, 436 U.S. 905, 98 S.Ct. 2236, 56 L.Ed.2d 403 (1978); Quinn & Co. v. Securities & Exchange Commission, 452 F.2d 943, 946 (10th Cir. 1971), Cert. denied, 406 U.S. 957, 92 S.Ct. 2059, 32 L.Ed.2d 344 (1972). We believe our interpretation of section 4m is consistent with this emphasis. 37 The registration provisions of the Act serve an important purpose; registration assures a public source of information about those upon whom customers rely and protects the public from individuals unfit to act as advisors. Advisors should not be able to circumvent the congressionally-mandated registration scheme merely by the subterfuge of advising a person or entity who then operates as a conduit for trading advice to the actual advisees. If this were possible the registration requirement would serve little protective purpose at all. On the other hand, attributing the customers of an advisee to the advisor in all contexts would stretch the Act unjustifiably. Remedial intent must not become a rationalization for bending a statute to a court's will. 38 We interpret section 4m, 7 U.S.C. § 6m, to include within the persons to whom an advisor furnishes advice customers of an advisee when the advisor knows or should know that advice he gives is directly passed to those customers. The ultimate customers should be protected from the ultimate advisor in this situation. The fee the ultimate advisor receives will reflect the value of the advice to the ultimate customers. Absent the interpretation we have given the section, mere sham arrangements would shield those unqualified to be advisors from the registration and disclosure procedures. 39
40 AITC was a registered futures commission merchant under the Act. As such, AITC solicited and accepted orders for the purchase and sale of commodities for future delivery and promoted a Managed Account Program whereby customers placed money under the discretionary control of AITC. It had as many as 900 customers in that program. Melvin Berman was responsible for making the trading decisions for the managed account program. He was registered with the CFTC as a person associated with a futures commission merchant under 7 U.S.C. § 6k. The CFTC affidavits establish that Savage communicated trading advice to Melvin Berman and thereby to AITC itself. Savage did not communicate directly with AITC customers, although it is undisputed that he knew AITC managed a great number of customer accounts and that his advice was acted upon by AITC in its dealings for the benefit of managed account customers. Savage, by affidavit, merely asserted that he at no time advised customers of AITC. 12 Upon review of this summary judgment, we must decide whether appellant's denial that he advised AITC customers sufficiently creates an issue of fact as to whether he furnished advice to those customers within the meaning of section 4m. 41 The affidavits submitted by the CFTC support an inference that Savage knew that Melvin Berman and AITC acted upon his advice directly in making trading decisions for the managed account program. The advice did not, however, flow through to customers in the sense of given advice being actually communicated to AITC customers for those customers to then act upon. There is no indication that AITC acted as a mere conduit for physical passage of Savage's advice. Nevertheless, AITC customers entrusted funds to AITC and gave AITC discretion to enter commodity transactions on those customers' accounts. Savage, aware of this fact, gave advice to AITC knowing that AITC, on behalf of its customers, would incorporate that advice directly into actual transactions. Savage knew his advice impinged directly upon the fortunes of these ultimate customers; it was not merely a component of an independent investment model employed by AITC. These customers, well in excess of fifteen, are subject through this arrangement to the very risks Congress sought to eliminate by requiring registration. On these facts we find that Savage furnished commodity trading advice to more than fifteen individuals. His affidavits did not create a genuine issue of material fact. 42 In holding as we do, we are influenced by the interrelationship of the Act's registration provisions. If AITC had operated a commodity trading pool, appellant's relationship to the pool would have been disclosed in the pool's registration. 7 U.S.C. § 6n(1)(A) & (B). Or, if Savage supervised persons who solicited or accepted funds from customers of AITC, he would need to register as a person associated with a futures commission merchant. 7 U.S.C. § 6k. While these provisions do not apply here, they provide related but inapplicable protections. Instead, Savage provided trading advice to a futures commission merchant under unique circumstances. He knew that his advice became the direct basis for trades made by AITC on behalf of its managed account customers. Under these circumstances the district court did not err by finding no issue of material fact existed as to whether Savage furnished trading advice to more than fifteen persons within the meaning of the Act. We, therefore, affirm as to Count IV. 43 IV. COUNTS III AND V VIOLATIONS OF SECTIONS 4b, 4c & 4o(1) OF THE ACT 44 A. Applicability of Section 4o(1) to Appellant. 45 Section 4O of the Act, 7 U.S.C. § 6O (1), in its form at the time of the alleged violation, made it unlawful for any commodity trading advisor . . . Registered under this Act . . . to employ any device, scheme or artifice to defraud any client . . . or prospective client (emphasis added). Congress has since deleted the registered under this Act language, Pub.L.No.95-405, § 10, 92 Stat. 870 (1978). The amendment makes it clear that persons engaged in activities which should require them to be registered . . . are subject to . . . Section 4O of the Act, even though those persons are not in fact registered with the Commission. H.R.Rep.No.1181, 95th Cong., 2d Sess. 20-21 (1978). Savage argues that because he was not registered at the time of this action, and because Congress had not yet changed the law, section 4O does not apply to him. The CFTC argues that section 4O applies to all those who Should have been registered under the Act, and therefore in accordance with our own conclusion in Part III, Supra, appellant is subject to the section. 46 No prior court to our knowledge has interpreted this provision. The fact that Congress deleted registered under this Act might suggest that a gap in the law existed prior to amendment. We consider the amendment to be a clarification, however. The purpose of the statute supports this interpretation of congressional intent. It would be anomalous indeed if an advisor could escape the fiduciary duties of section 4O by avoiding required registration. This would frustrate a principal purpose of the Act. 47 We also find support for this interpretation of section 4O in the history of the 1978 amendments. The CFTC consistently has taken the position in a related context that persons who engaged in conduct which should have required their registration would be liable in reparation cases even if they were not so registered. See Stucki v. American Options Corp., Comm.Fut.L.Rep. (CCH) P 20,559 (1978). See also Robley v. American Options Corp., Comm.Fut.L.Rep. (CCH) P 20,612 (1978). These actions interpreted section 14 of the Act, 7 U.S.C. § 18, which establishes an administrative procedure through which individuals can be awarded reparations. The 1978 amendments deleted a requirement identical to the one in section 4O that such reparations could be recovered from persons registered under the Act. Pub.L.No.95-405, § 21, 92 Stat. 865 (1978). The House Report expressly approved the CFTC interpretation of section 14 in Stucki. See H.R.Rep.No.1181, 95th Cong., 2d Sess. 30 (1978). See also S.Rep.No.781, 95th Cong., 2d Sess. 28 (1978). 48 Our interpretation also is consistent with interpretations of other security law provisions. Under the proxy solicitation rules, for example, the Eighth Circuit has held that a corporation at all pertinent times subject to registration and proxy solicitation requirements could not escape the latter merely because they are literally applicable only to solicitations of proxies for registered securities. Reserve Life Insurance Co. v. Provident Life Insurance Co., 499 F.2d 715 (8th Cir. 1974), Cert. denied, 419 U.S. 1107, 95 S.Ct. 778, 42 L.Ed.2d 803 (1975). Accord, Bastian v. Lakefront Realty Corp., 581 F.2d 685 (7th Cir. 1978). 49 B. Standards for Summary Judgment. 50 Section 4O of the Act is thus not rendered inapplicable because of Savage not being registered under the Act. Whether Counts III and V of the complaint stated a cause against Savage properly disposed of by summary judgment requires analysis of some familiar ground. To obtain summary judgment against Savage, CFTC had the burden of demonstrating the absence of a genuine issue as to any material fact. Rule 56, Fed.R.Civ.P. A material fact is one which may affect the outcome of the litigation. Mutual Fund Investors v. Putnam Management Co., 553 F.2d 620, 624 (9th Cir. 1977). An opposing party may not defeat summary judgment, once the movant has met his burden, in the absence of any significant probative evidence tending to support (his legal theory). First National Bank v. Cities Service Co., 391 U.S. 253, 290, 88 S.Ct. 1575, 1593, 20 L.Ed.2d 569 (1968). 51 Savage's opposition affidavit admits that he entered into most of the alleged transactions. He contends, however, that his affidavit brings into dispute a critical element of each section of the Act that he is charged with having violated. He argues that violation of these sections requires a fraudulent intent or knowing violation the element of scienter. His affidavit denies: (1) an intent to enter into prearranged accommodation trades; (2) knowledge that he entered into trades away from the market price; and (3) an intent to serve as an intermediary to shift funds between accounts of AITC customers. If, as appellant contends, a fraudulent intent or knowing violation is necessary to run afoul of sections 4b, 4c and 4O (1) of the Act, then his intent and knowledge are material to the violation and his opposition affidavit has raised a genuine issue of material fact. 52 We say this because appellant's intent and knowledge are particularly within his personal comprehension. As this court has noted, (g)enerally, when intent is at issue, a jury should be allowed to draw its own inferences from the undisputed facts unless all reasonable inferences defeat appellants' claims. Mutual Fund Investors v. Putnam Management Co., supra, 553 F.2d at 624. We cannot say that the facts put forward in the CFTC affidavits raise inferences so reasonable as to defeat Savage's claims. If resolution of the dispute would pit appellant's word against the CFTC's affiants, the decision is one for a trier of fact. We have previously stated: 53 Doubt with respect to (appellant's) ultimate success . . . does not justify the granting of the appellees' motion for summary judgment so long as a genuine issue of material fact with respect to the matter exists. Rule 56, Fed.R.Civ.P. exists not to avoid trials, the outcome of which in the opinion of the trial judge are reasonably predictable, but to terminate litigation on claims with respect to which there exists no genuine issue of material fact. 54 Abramson v. University of Hawaii, 594 F.2d 202, 210 (9th Cir. 1979). 55 We conclude, therefore, that summary judgment was improper provided Savage is correct in his view that to violate sections 4b, 4c, and 4O (1) of the Act a fraudulent intent or knowing violation is necessary. We now turn to this issue. 56
57
58 The substantive prohibitions in section 4b are found in four subsections. The subsections are not entirely separate; a single action may violate more than one. Each subsection is phrased in strong terms, making it unlawful to Cheat or Defraud (4b(A)), Willfully to make a false report (4b(B)), Willfully to deceive (4b(C)), and to bucket an order or offset an order or Willfully and Knowingly to take the opposite side of a transaction for another person (4b(D)). Taken together, these subsections clearly require that Savage's acts be done with knowledge of their nature and character. That is, to be charged with a violation of 4b(A), Savage must have known that he was cheating; to violate 4b(B), he must have known the report was false; 4b(C) that he was deceiving; and 4b(D) that he was taking the opposite side of a transaction. Knowledge, of course, exists when one acts in careless disregard of whether his acts amount to cheating, filing false reports, etc. That is, the element of knowledge cannot be precluded by ignorance brought about by willfully or carelessly ignoring the truth. 59 Other courts treating violations of this section have adopted a similar approach. The Tenth Circuit stated that willful or fraudulent action is required under section 4b. Master Commodities, Inc. v. Texas Cattle Management Co., 586 F.2d 1352 (10th Cir. 1978) (private civil suit). Although not requiring an evil motive, the Seventh Circuit has held that a willful violation of the section requires an intentional act or careless disregard for the statutory requirements. Silverman v. Commodity Futures Trading Commission, 549 F.2d 28, 31 (7th Cir. 1977) (unauthorized trading for customer accounts); Goodman v. Benson, 286 F.2d 896, 900 (7th Cir. 1961) (unauthorized trading). Similarly, the Second Circuit requires knowing action even though evil motive may be absent: 60 It is enough that he acted deliberately, Knowing that his acts were unauthorized and contrary to instructions. Such knowing, intentional conduct made his acts wilful, and therefore his violations of the statutory prohibition against cheating or defrauding the customer were wilful . . . . 61 Haltmier v. Commodity Futures Trading Commission, 554 F.2d 556, 562 (2d Cir. 1977) (emphasis added). 62 In the present action, Savage is accused of prearranging trades that defrauded AITC customers and of entering into offsetting trades with those customers' accounts. Such action required that Savage and AITC act in concert, concert that would require knowledge on the part of the participants. Savage's affidavit denied that he had the requisite knowledge. 63
64 Section 4c of the Act prohibits wash trading, cross trading, accommodation trading, or fictitious sales or using a transaction to cause a false price to be reported. 13 Congress viewed such transactions, as pure, unadulterated fraud. 80 Cong.Rec. 7905 (1936) (remarks of Senator Smith). Such trades, if effected, do not reflect the forces of supply and demand and therefore may mislead market participants. One commodity exchange authority case in defining one type of trade prohibited by section 4c stated: The essential and identifying characteristic of a 'wash sale' seems to be the Intent not to make genuine, bona fide trading transactions in stocks or commodities. In re Jean Goldwurm, 7 Agric.Dec. 265, 274 (1948) (emphasis added). 65 We hold, therefore, that a violation of section 4c requires knowledge, as defined for purposes of section 4b. One cannot have an accommodation sale or a fictitious transaction if one in fact believes he is bargaining faithfully and intends to effect a bona fide trade. Nor can one enter a transaction to Cause the reporting of a false price without an intent to do so. The language of the section is clear. Our holding sustains Congress' concern to prevent fraud. Of course, the required knowledge cannot be eliminated by willfully or carelessly induced ignorance. On this record the district court erred by granting summary judgment as to section 4c for the same reasons stated in connection with section 4b. Thus, we must reverse the judgment with respect to Count IV and remand for further proceedings. 14 66
67 In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), the Supreme Court held that a showing of scienter was required in private damage actions under Rule 10b-5. That decision is distinguishable from the present case on two important grounds. First, the Supreme Court stressed the importance of the language of section 10(b) of the Securities Exchange Act of 1934 and its legislative history. Section 4O (1) of the Commodity Exchange Act contains not only language paralleling section 10(b) which makes it unlawful for any commodity trading advisor to employ any device, scheme or artifice to defraud any client . . . or prospective client, but also much broader language (of which there is no counterpart in section 10(b)) which makes it unlawful to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client . . . or prospective client. (§ 4O (1)(B)). 15 This broader language is devoid of any hint of a scienter requirement. Rather, the section resembles closely section 206 of the Investment Advisers Act, 15 U.S.C. § 80b-6(1), 16 which the Supreme Court in SEC v. Capital Gains Bureau, 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963), held did not require a showing of scienter in SEC injunctive actions under that provision. This is the second factor which distinguishes Hochfelder, since that case involved only a private damage action, and indeed several courts have subsequently held that no showing of scienter is required in SEC enforcement actions under Rule 10b-5. See, e. g., SEC v. Aaron, 605 F.2d 612 CCH Fed.Sec. P 96,800 (2d Cir. 1979); SEC v. World Radio Mission, Inc., 544 F.2d 535 (1st Cir. 1976). But see SEC v. Blatt, 583 F.2d 1325 (5th Cir. 1978). See generally Comment, Scienter and SEC Injunction Suits, 90 Harv.L.Rev. 1018 (1977). 68 Nor does the legislative history of the 1974 amendments creating this section provide arguments supporting the requirement of scienter. S.Rep.No.1131, 93d Cong., 2d Sess. 24, Reprinted in (1974) U.S.Code Cong. & Admin.News, pp. 5843, 5874. Instead, the legislative history indicates that the purpose of the 1974 amendments applicable to advisors was to discourage the enticement of unsuspecting traders, and to eliminate undesirable business practices. See Mitchell, The Regulation of Trading Advisors, 27 Emory L.J. 957, 994 (1978). Furthermore, section 4O (1) fulfills a slightly different function than do sections 4b and 4c. It implements the fiduciary capacity that characterizes the advisor's relationship to his clients. See In re Savage, (1975-77 Transfer Binder) Comm.Fut.L.Rep. (CCH) P 20,139 at 20,923-24 (1976). 69 For all these reasons, we hold that an action for injunctive relief by the CFTC under section 4O (1) requires only that the violator have acted intentionally. That is, he must have intended to employ the device, scheme, or artifice but it is not necessary that he know that its result will be to defraud the client or prospective client. If the trading advisor or commodity pool operator intended to do what was done and its consequence is to defraud the client or prospective client that is enough to constitute a violation of section 4O (1). To repeat, it is not necessary that the advisor or operator intend to defraud or to practice deceit to make out a violation of section 4O (1) by the advisor or operator. Therefore, its absence does not preclude an injunctive action brought by the CFTC. 70 Moreover, we hold that summary judgment with respect to the section 4O (1) violation, Count V, was proper. Appellant Savage's relationship with AITC customers giving advice with knowledge that it was incorporated directly into trades on the customers' behalves, and then buying and selling opposite those customer orders constitutes a transaction, practice, or course of business which operated as a fraud or deceit on those customers. Savage's affidavit does not put in issue these facts. Summary judgment to this extent was proper. 71 AFFIRMED as to judgment finding violations of sections 4m and 4O (1) (Counts IV and V), REVERSED and REMANDED as to judgment finding violations of sections 4b and 4c (Count III).