Court Opinion

ID: 2994169
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:13:11.805196+00
Date Added: 2024-06-11T12:11:16.514757
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

No. 99-2947

Jerry W. Slusser, First Republic Financial
Corporation, and First Republic Trading
Corporation,

Petitioners,

v.

Commodity Futures Trading Commission,

Respondent.

Petition for Review of an Order of the
Commodity Futures Trading Commission

Argued February 22, 2000--Decided April 24, 2000

  Before Coffey, Easterbrook, and Williams, Circuit
Judges.

  Easterbrook, Circuit Judge. During the spring of
1989, Jerry Slusser and entities he controls came
into possession of approximately $29 million that
German investors had entrusted to International
Participation Corporation (IPC) for investment in
American financial markets. IPC raised the money
using a prospectus offering investors a choice
from a number of portfolios. Portfolios III and
IV were to be invested in financial futures
traded on a public exchange. Investors were to
receive 65% of all profits; IPC was entitled to
the other 35% (plus a 10% surcharge at the time
of the initial investment) to cover all operating
expenses and trading commissions. Fund III was to
stop trading if it lost 10% of invested funds
(disregarding the 10% surcharge); Fund IV was to
stop losses at 35% of investment. After he gained
control of the $29 million, however, Slusser and
his firms (collectively "Slusser") disregarded
these promises. He charged hefty commissions
against the pooled funds; he invested part of the
money in securities and another part in corporate
acquisitions (two trading corporations that
Slusser treated as his own property); he kept
trading long after the stop-loss marks had been
passed. Slusser repeatedly lied to German
authorities in order to extend his control of the
pool. A kitty that had been approximately $29
million in May 1989 dwindled to $16 million by
November, when Slusser ceased the churning and
wired the remaining funds to Germany. For these
events Slusser has been banned for life from U.S.
futures markets and fined $10 million by the
Commodity Futures Trading Commission. 1999 CFTC
Lexis 167, Comm. Fut. L. Rep. para.27,701 (July
19, 1999). He wants us to set aside the CFTC’s
order.

  The CFTC found that Slusser had violated the
Commodity Exchange Act, 7 U.S.C. sec.sec. 1-25,
in three principal ways. First, he failed to
register with the CFTC as a "commodity pool
operator" and its "associated person" even though
he was managing a commodity pool--initially on
behalf of IPC, then after the end of May 1989 in
his own right, following a contractual assumption
of IPC’s position. See sec.sec. 4k(2), 4m of the
Act, 7 U.S.C. sec.sec. 6k(2), 6m. Second, after
assuming IPC’s duties to the investors Slusser
failed to adhere to the contractual limitations
the prospectus placed on use of the funds, and in
the process violated the Act and the implementing
regulations by charging more than $3 million in
improper commissions, devoting money to uses
other than those allowed by the prospectus,
commingling pool funds, and diverting investors’
money to personal purposes. See sec.4o(1) of the
Act, 7 U.S.C. sec.6o(1), and 17 C.F.R. sec.4.20.
Third, Slusser committed multiple frauds. See
sec.4b(a) of the Act, 7 U.S.C. sec.6b(a). Many of
the tall tales were told to German authorities in
order to buy time. For example, at the end of May
1989 Slusser told the Germans that trading had so
far been profitable and that investors would
suffer substantial losses if the futures
contracts were liquidated prematurely. In July
Slusser wrote to a German criminal prosecutor
that "many of the traded instruments will mature
over the next 90 days. We project profits from
these positions at maturity, but there will be
substantial reductions in value if prematurely
liquidated." The assertions about profits to date
were false, and the remaining assertions were
nonsense, designed to deceive persons ignorant
about futures markets. Contracts traded on public
exchanges (as these were) do not "mature" and are
not "liquidated"; they either expire or are
closed by acquiring offsetting positions, which
realizes all accrued gain or loss without penalty
for "premature" action. See generally Chicago
Board of Trade v. SEC, 883 F.2d 525 (7th Cir.
1989). Slusser knew this well. The positions that
he told the German official must be left
undisturbed for 90 days soon were closed, and the
accounts were turned over many times (with
commissions deducted for each turn) before
Slusser finally distributed the residue.
  Slusser’s principal response is to assert, as
if it were incontestable truth, a view of matters
that the administrative law judge and the
Commission found incredible, irrelevant, or both.
For example, Slusser insists that he did not know
about the promises IPC made in the prospectus
regarding the uses of the funds and the way the
pool manager would be compensated; indeed,
Slusser insists that for many months he did not
know anything about the funds’ origin, and that
when he learned their general source he did not
know that the $29 million represented the
proceeds of Funds III and IV rather than other
pools mentioned in the prospectus. The ALJ
concluded, on the basis of substantial evidence
(including not only the contract by which Slusser
assumed all of IPC’s obligations but also
documents showing that Slusser had an account at
Commerzbank Dusseldorf into which investors
deposited funds), that Slusser knew no later than
June 1, 1989, exactly what his obligations as the
pool’s new manager were. But suppose this is
wrong, and Slusser never learned the provenance
of the funds. Then what was he doing trading at
a riotous pace, rather than purchasing safe
vehicles such as Treasury bills until the money’s
owner could be determined? Slusser made the most
of an opportunity to charge big commissions
without supervision. The CFTC as regulator of pool
operators is entitled to require more
conscientious management of unknown investors’
money.

  Although the CFTC’s findings of fact are
supported by substantial evidence, Slusser
insists that they are legally insufficient to
prove that he committed fraud. Slusser lied to IPC
when he promised to manage the funds according to
the prospectus; he lied to German officials when
he said that premature liquidation would turn
profits into losses; he lied to the investors in
a letter sent in July 1989 asserting that his
management of the funds had been successful (it
had been quite unprofitable--except to Slusser),
that he was subject to regulatory oversight
(neglecting to mention his failure to register
with the CFTC), and that the principal would be
returned by September (Slusser clung to the money
until November, when the investors and German
officials induced him to hand over the remainder
by promising not to prosecute him for his
conduct). Still, Slusser insists, he is not
culpable, because none of these persons testified
that he relied on Slusser’s statements--and
reliance is an element of fraud, at least in
private litigation where the plaintiff must show
causation. See, e.g., Basic, Inc. v. Levinson,
485 U.S. 224, 243 (1988) (securities litigation);
Restatement (2d) of Torts sec.sec. 525, 548
(1977). We may assume that a causal chain from
deceit to injury also is essential in private
actions under 7 U.S.C. sec.25, which requires the
plaintiff to show "actual damages" attributable
to a violation of the Act, and that reliance is
the usual way to show causation.

  Must the public prosecutor show that a private
person was taken in? In criminal prosecutions the
answer is no, unless the statute expressly makes
reliance an element of the offense. See Neder v.
United States, 527 U.S. 1 (1999) (prosecution for
mail, wire, tax, and bank frauds). Three courts
of appeals have reached the same conclusion for
fraud actions prosecuted by the SEC under
sec.10(b) of the Securities Exchange Act, 15
U.S.C. sec.78j(b). SEC v. North American Research
& Development Corp., 424 F.2d 63, 84 (2d Cir.
1970); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir.
1985); SEC v. Rana Research, Inc., 8 F.3d 1358,
1363-64 (9th Cir. 1993). Reliance, unlike the
"connection" between the misconduct and a
purchase or sale of securities, see Aaron v. SEC,
446 U.S. 680 (1980), is not a statutory element
and therefore is not an essential part of an
administrative case. Is there any reason to treat
administrative prosecutions under the Commodity
Exchange Act differently? Slusser observes that
sec.10(b) of the Securities Exchange Act
prohibits not only deceptive but also
manipulative devices, while sec.4b of the
Commodity Exchange Act does not refer to
manipulation. True enough, but nothing turns on
this; Ernst & Ernst v. Hochfelder, 425 U.S. 185
(1976), concluded that the plaintiff in all
private sec.10(b) actions must demonstrate the
ingredients of common-law fraud. When it held in
Basic that reliance is one of these elements, the
Court did not suggest that matters would differ
if the plaintiff stressed "manipulation" rather
than "fraud"; it is better to say that
manipulation is a species of fraud. North
American Research, Blavin, and Rana Research hold
that there is a difference between private and
public actions, not that there is a difference
between "fraud" and "manipulation."

  Section 4b of the Commodity Exchange Act does
differ from sec.10(b) of the Securities Exchange
Act, but the differences all favor the CFTC. For
example, although sec.10(b) does not prohibit
attempted deceits, and this is a good reason why
a private plaintiff must show actual reliance
rather than just a potential for reliance,
sec.4b(a)(i) makes it actionable "to cheat or
defraud or attempt to cheat or defraud such other
person" (emphasis added). Perhaps, then, it is
unnecessary to show reliance even in a private
action--for an attempt that fails (perhaps
because no one relied on it) is nonetheless a
violation of sec.4b(a)(i). Section 4b(a)(ii)
reinforces this possibility by declaring that it
is unlawful "willfully to make or cause to be
made to such other person any false report or
statement", and sec.4b(a)(iii) adds that it is
forbidden "willfully to deceive or attempt to
deceive such other person by any means
whatsoever". Slusser made (or caused to be made)
many false statements; these may be condemned
under sec.4b(a)(ii) and (iii) without proof of
reliance even if the CFTC did not establish all
elements of common-law "fraud." See also Philip
McBride Johnson & Thomas Lee Hazen, II
Commodities Regulation sec.5.08[17][B] at 5-165
n.821 (3d ed. 1998) (concluding that the CFTC need
not establish reliance).

  Although none of Slusser’s other objections to
the CFTC’s decision on the merits requires
comment, there is a serious problem with the $10
million fine. Section 6(c)(3) of the Act, 7
U.S.C. sec.9(3), permits the Commission to
"assess . . . a civil penalty of not more than
the higher of $100,000 or triple the monetary
gain to such person for each such violation". The
Commission justified the $10 million penalty as
appropriate in relation to Slusser’s gain but did
not notice that the treble-gain provision entered
the Act in 1992. Section 212(b) of Pub. L. 102-
546, 106 Stat. 3609. Back in 1989, when Slusser
was managing the funds, the maximum penalty was
$100,000 per violation. Only clear statutory
language justifies retroactive application of an
increase in damages or civil penalties, see
Landgraf v. USI Film Products, 511 U.S. 244
(1994), and nothing in the 1992 amendments so
much as hints at retroactivity. Thus the maximum
penalty is $100,000 per violation. The complaint
filed by the Division of Enforcement listed only
six violations. Most of the violations narrated
by the complaint entail multiple acts or
statutes; it would have been easy to separate the
events into tens if not hundreds of violations,
or to allege that each day of managing the funds
without registration as a commodity pool operator
was a separate violation. But the CFTC’s staff did
not do any of these things, perhaps because 7
U.S.C. sec.13b implies that fines for each day of
a series of violations are appropriate only after
the CFTC has issued a cease-and-desist order. Just
as the sentence in a criminal case is limited by
the number of counts alleged in an indictment
times the maximum punishment for each offense, so
the penalty in an administrative prosecution is
limited by the number of violations alleged in
the complaint times the maximum fine per
violation. A reasonable person in Slusser’s
position would have assumed that his maximum
exposure was $600,000 and financed his defense
accordingly.
  Despite our convenient use of "Slusser" as a
placeholder for Jerry Slusser, his associates,
and the firms he controlled, there were quite a
few participants in this scheme, and three remain
as petitioners in this court--Slusser personally
and two corporations. The statutory cap applies
person-by-person, as well as violation-by-
violation, so the CFTC may be able to justify a
total penalty as high as $1.8 million, though it
may have considerable trouble collecting from the
defunct corporations. This potential trouble
shows one way in which knowing the maximum
penalty might have affected the administrative
litigation. Until the 1992 amendment deleted it,
7 U.S.C. sec.9a contained this language:

In determining the amount of the money
penalty . . . , the Commission shall
consider, in the case of a person whose
primary business involves the use of the
commodity futures market--

the appropriateness of such penalty to the
size of the business of the person
charged, the extent of such person’s
ability to continue in business, and the
gravity of the violation;

and in the case of a person whose primary
business does not involve the use of the
commodity futures market--

the appropriateness of such penalty to the
net worth of the person charged, and the
gravity of the violation.

The two corporate parties, at least, are covered
by the first of these clauses, which courts
generally call the "collectibility" condition.
Slusser believes that he personally comes within
the second clause, so that the Commission must
consider the appropriateness of the penalty in
light of his net worth. Yet the record does not
contain any information on Slusser’s net worth,
the size of the two corporate parties, or the
effect of any penalty on their ability to
continue in business.

  Each side blames the other for this deficiency.
Slusser contends that the CFTC has both the burden
of production and the burden of persuasion; the
CFTC asserts that Slusser had the burden of
production and that, because he (and the two
corporations) kept mum, the burden of persuasion
became irrelevant. Perhaps Slusser adopted his
strategy of silence because he anticipated a
$600,000 maximum penalty and feared that evidence
about net worth would embolden the Commission to
demand the full $600,000. But that’s just
speculation. All we know is that the record is
empty.

  When casting the burden of production on
Slusser and the firms, the CFTC cited two of its
decisions. In re Grossfeld, Comm. Fut. L. Rep.
para.26,921 at 44,465-66 (CFTC Dec. 10, 1996); In
re Rothlin, Comm. Fut. L. Rep. para.21,851 at
27,573 (CFTC Dec. 21, 1981). The Commission’s
opinion did not mention Gimbel v. CFTC, 872 F.2d
196 (7th Cir. 1989), which disapproved that
position, at least with respect to the
collectibility consideration for futures traders.
Gimbel holds that the Commission’s Division of
Enforcement has the burden of production and must
introduce evidence about the net worth of the
person who will be called on to pay a financial
penalty. Because "the Division failed to meet its
burden of establishing the collectibility of the
proposed penalty", 872 F.2d at 201, we vacated
the financial sanction. Accord, Premex, Inc. v.
CFTC, 785 F.2d 1403, 1409 (9th Cir. 1986).
Neither the CFTC’s opinion, which ignored both
Gimbel and Premex, nor the CFTC’s brief in this
court, which cites Gimbel only for the
uncontested proposition that an opportunity to
offer evidence satisfies the due process clause,
suggests any reason why the burden of production
with respect to a person’s net worth should be
allocated differently from the burden of
production with respect to the collectibility of
a penalty imposed on a commodity futures trader.
The Act is silent on the burden of production, so
we would have been attentive to an argument that
Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984), permits the
Commission to regulate that aspect of its own
proceedings, provided it shoulders the burden of
persuasion in the end. See Director, OWCP v.
Greenwich Collieries, 512 U.S. 267 (1994);
Steadman v. SEC, 450 U.S. 91 (1981). See also
Vermont Yankee Nuclear Power Corp. v. Natural
Resources Defense Council, Inc., 435 U.S. 519
(1978). By placing its head deep in the sand, and
refusing to acknowledge the adverse judicial
views, the Commission disabled itself from making
such a pitch. If it wants to impose any financial
penalty on these parties, the CFTC must bear both
the burden of production and the burden of
persuasion on collectibility and net worth.

  The order of the Commission is enforced to the
extent it revokes the registrations of, and bans
trading by, the three petitioners, and orders
them to cease and desist from further violations
of the Act. The petition for review is granted to
the extent the Commission imposed financial
penalties, and the matter is remanded for
proceedings consistent with this opinion.