Opinion ID: 348579
Heading Depth: 1
Heading Rank: 2

Heading: Applicability of Commodity Exchange Act

Text: 21 On June 24, 1974, the district court dismissed Count II of Hirk's original complaint alleging a violation of Section 4b of the Commodity Exchange Act of 1936 (7 U.S.C. § 6b) on the ground that the complaint did not state a cause of action because the statements and omissions did not occur in connection with any order to make, or the making of any contract of sale of any commodity for future delivery. Mem. op. 9. 8 Thereafter Hirk filed an amended complaint setting forth additional facts supporting the allegations of fraud. On June 28, 1976, the district court entered a minute order dismissing Count II of the amended complaint on the basis of its June 24, 1974, memorandum opinion. 22 Hirk and the Commodity Futures Trading Commission, appearing here as amicus curiae, suggest that the decision of the district court represents a formalistic and ultra-restrictive construction of Section 4b which has no reasonable basis in the language of the Act, its legislative history or in decisions that have interpreted analogous anti-fraud provisions of other remedial legislation. As such, the lower court's decision is clearly at variance with the Supreme Court's repeated admonition that federal statutes enacted to prevent fraud should be construed flexibly to effectuate their remedial purposes. 23 Section 4b of the Commodity Exchange Act (7 U.S.C. § 6b) provides in pertinent part: 24 It shall be unlawful (1) for any member of a contract market, or for any correspondent, agent, or employee of any member, in or in connection with any order to make, or the making of, any contract of sale of any commodity in interstate commerce, made, or to be made    for or on behalf of any other person, or (2) for any person, in or in connection with any order to make, or the making of, any contract of sale of any commodity for future delivery, made, or to be made    for or on behalf of any other person    25 (A) to cheat or defraud or attempt to cheat or defraud such other person; 26 (B) willfully to make or cause to be made to such other person any false report or statement thereof, or willfully to enter or cause to be entered for such person any false record thereof; 27 (C) willfully to deceive or attempt to deceive such other person by any means whatsoever in regard to any such order or contract or the disposition or execution of any such order or contract, or in regard to any act of agency performed with respect to such order or contract for such person;   .  (Emphasis added.) 28 The district court interpreted the underscored in connection with language of the statute as addressing only conduct related to persuading a customer to purchase a commodities futures contract or in reporting to a customer the status of the contract or the trading. Because the deceptive conduct asserted involved here was solicitation in connection with a contract for discretionary trading accounts and occurred prior to actual trading in the account, the court concluded that it was not included within the scope of Section 4b. Mem. op. 8-9. We disagree. 29 The language of Section 4b prohibits any person from engaging in fraudulent or deceptive practices in or in connection with futures transactions and proscribes as well the mere attempt to defraud or to deceive in or in connection with those activities. By its terms, Section 4b is not restricted in its application to instances of fraud or deceit in orders to make or the making of contracts. Rather, Section 4(b) encompasses conduct in or in connection with futures transactions. The plain meaning of such broad language cannot be ignored. 30 Furthermore, any doubts as to whether or not this language was meant to cover the deceptive conduct herein alleged are resolved by the enactment of Section 205(a) of the Commodity Futures Trading Commission Act of 1974. This new provision, addressing the use of mail in interstate commerce by commodity trading advisors, 9 makes it unlawful: 31 (A) to employ any device, scheme, or artifice to defraud any client or participant or prospective client or participant; or 32 (B) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant.  7 U.S.C.A.Supp. § 6o (1)(A)(B). (Emphasis added.) 33 Also, the legislative history relating to the grant of enforcement powers to the new Commodity Exchange Commission in 1974 indicates Congress' awareness of this pre-trading conduct and that it was, in part, the impetus for granting the Commission its strong enforcement powers. Testimony in the House indicated the 34 existence of schemes of systematic solicitations and bilking of unsophisticated potential customers attracted to certain non-regulated futures contracts investments by misleading advertising  (emphasis added). H.R.Rep. No. 93-975, 93d Cong., 2d Sess. 48-49 (1974). 35 Moreover, the legislative history of the 1936 Act indicates that its purpose was to protect investors and was designed, among other things, to eliminate (c)ertain trade practices involving the cheating of customers   . S.Rep. No. 1431, 74th Cong., 1st Sess. 3 (1935). Clearly Congress has recognized through the years that fraudulent and deceptive conduct in connection with futures transactions can and does occur prior to the actual opening of a trading account and has intended to regulate it by including the in connection with language in Section 4b. 36 Our construction of this language is reinforced by the Supreme Court's similar interpretation of identical language used in the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b) and SEC Rule 10b-5 (17 C.F.R. 240.10b-5). For example, the Supreme Court repeated recently that the language in Section 10(b) must be read flexibly, not technically and restrictively (Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 30 L.Ed.2d 128), although the deceptive practices merely touch the sale of securities (id. at 12-13, 92 S.Ct. 165). 10 37 There is no justification in the language of Section 4b or the legislative history of the Act to accept the district court's narrow interpretation of the broad in connection with phrase. Accordingly, we hold that Count II does state a cause of action. 38 Affirmed as to the federal securities laws; reversed and remanded as to Commodity Exchange Act; costs to be borne by the respective parties.