Court Opinion

ID: 165775
Source: CourtListenerOpinion
Date Created: 2010-08-14 08:59:33+00
Date Added: 2024-06-11T17:24:48.585728
License: Public Domain

F I L E D
                                                                 United States Court of Appeals
                                                                         Tenth Circuit
                      UNITED STATES COURT OF APPEALS
                                                                         APR 27 2005
                                    TENTH CIRCUIT
                                                                    PATRICK FISHER
                                                                             Clerk

 COMMODITY FUTURES TRADING
 COMMISSION,

           Plaintiff-Appellee,
 v.

 WALL STREET UNDERGROUND,
 INC., a Delaware corporation; DEREK
 ABRAHAMS; NICHOLAS A.
                                                          04-3131
 GUARINO,
                                                (D.C. No. 03-CV-2193, CM)
                                                    (District of Kansas)
           Defendants,

 and

 WEB FULFILLMENT CENTRE,
 INC., a Delaware Corporation;
 FRANK ASARO,

           Defendants-Appellants.

                                 ORDER AND JUDGMENT *

Before EBEL, Circuit Judge, McWILLIAMS, Senior Circuit Judge, and
KELLY, Circuit Judge.

       Pursuant to 7 U.S.C. § 13a-1(a), the Commodity Futures Trading

       *
        This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
Commission (“Commission”) filed, on April 22, 2003, in the United States

District Court for the District of Kansas a Complaint for Injunctive and Other

Equitable Relief and for Civil Penalties under the Commodity Exchange Act (the

“Act”), against Wall Street Underground, Inc. (“Wall Street”) and Web

Fulfillment Centre, Inc. (“Web”), both Delaware corporations, and Derek

Abrahams, Frank Asaro, and Nicholas A. Guarino. The complaint charged the

defendants with repeated violations of the Act, namely sections 40(1)(A) and

40(1)(B), codified at 7 U.S.C. §§ 60(1)(A) and 60(1)(B), and sought a preliminary

and permanent injunction against all of the defendants. At the same time, the

Commission sought, and obtained, an ex parte restraining order against the

defendants, which froze assets and barred the destruction of books and records.

      On June 27, 2003, the district court held a one-day evidentiary hearing on

the Commission’s request for a preliminary injunction. Of the five named

defendants, only Web and Asaro made appearances. Whether the other three

defendants named in the complaint were served is not clear from the record before

us. On July 18, 2003, the district court, in a detailed memorandum and order,

entered a preliminary injunction against all defendants, which order now appears

as 281 F.Supp.2d 1260 (D. Kan. 2003). Web and Asaro appeal that order. The

other defendants named in the complaint are not parties to this proceeding.

      In short, the complaint charged all defendants with fraudulently promoting,

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marketing and selling commodity trading advice by means of mail and electronic

delivery of promotional materials, in violation of the Act’s anti-fraud provisions.

(Wall Street’s electronics service, for example, cost the subscriber $5,000 per

year.) The district court, in its order, summarized the provisions of the Act with

which we are here concerned, as follows:

                     The Act provides in pertinent part that it is
                     unlawful for a commodity trading advisor,
                     by use of the mails or any means or
                     instrumentality of interstate commerce: 1)
                     “to employ any device, scheme, or artifice
                     to defraud any client or prospective client
                     or participant;” or 2) “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.” See 7 U.S.C. §§
                     6o(1)(A) and 6o(1)(B). Under the Act, a
                     commodity trading advisor is defined as any
                     person who, for compensation or profit,
                     engages in the business of advising others,
                     directly or through publications, writings or
                     electronic media, as to the value or the
                     advisability of trading in contracts of sale
                     of a commodity for future delivery,
                     commodity options or leverage transactions,
                     or, as part of a regular business, issues or
                     promulgates analyses or reports regarding
                     the same. See 7 U.S.C. § 1a(6)(A).

       Before considering the issues raised on appeal by Web and Asaro, we shall

first refer to the order of the district court.

       In the district court, Web and Asaro argued that they were incapable of

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violating the Act because they did not meet the definition of a commodity trading

advisor as set forth in the Act. The district court agreed with Web and Asaro that

neither of them came within the statutory definition of a commodity trading

advisor. However, at the same time, the district court concluded that Wall Street

and Guarino did come within the statutory definition of a commodity trading

advisor and discussed at some length its reasons for so holding. The district court

then proceeded to consider whether the Commission nevertheless had a right to a

preliminary injunction against Web and Asaro under the “common enterprise” or

“controlling person” theories. Under the “common enterprise” theory, the district

court stated that where one or more corporate entities operate in a common

enterprise, each may be held liable for the deceptive acts and practices of the

other. On this basis the district court determined that the Commission was

entitled to a preliminary injunction against Web.

      As to Asaro, the district court concluded that he was not a part of the

“common enterprise,” but that, notwithstanding, under the “controlling person”

theory, both he and Abrahams, the latter not being a party to this appeal, “had

control of the entities within the enterprise and lack of good faith or knowing

inducement of the acts constituting the violation.” The district court went on to

state that a “controlling person acts in bad faith if he does not ‘maintain a

reasonably adequate system of internal supervision and control . . . or [does] not

                                           4
enforce with any reasonable diligence such system.’” The court noted that Asaro

“created and is president of defendant Web” and further “controlled the day-to-

day operations of defendant Web.”

      At the hearing on the preliminary injunction, the Commission called one

Donald Nash, an investigator for the Commission, and one Larry Larsen, an

investigator employed by the Kansas Attorney General’s office. As mentioned

above, Asaro testified in his own behalf, and also called a person who subscribed

to the “services” of Wall Street and he testified concerning his personal

experience with that company. In addition, numerous exhibits and affidavits were

before the court.

      On appeal, Web and Asaro argue there was insufficient evidence to support

any injunction against either, that the definition of “commodity trading advisor” is

unconstitutionally vague, and that, in any event, there was insufficient evidence to

show that either Wall Street or Guarino were commodity trading advisors.

Further, the defendants argue that the injunction constituted a “prior restraint” on

their First Amendment Freedoms and was overly broad. We are not persuaded. 1

      1
        On appeal, the Commission argues that several of these matters were not
raised in the district court and hence should not be considered on appeal.
However, the Commission also argues that, in the alternative, the record supports
the district court’s preliminary injunction. We prefer to dispose of the appeal on
the latter ground. In this connection, we note that counsel for appellants was not
counsel at trial.

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      We review a district court’s issuance of a preliminary injunction for abuse

of discretion. Soskin v. Reinertson, 353 F.3d 1242, 1247 (10th Cir. 2004). See

also Atchison, Topeka & Santa Fe Ry Co. v. Lennen, 640 F.2d 255, 260 (10th Cir.

1981). Our review of the record indicates that the district court did not abuse its

discretion.

      It should be emphasized that we are here concerned with an appeal from a

preliminary injunction and there is still pending, in the district court, the

Commission’s request for a permanent injunction. The function of a preliminary

injunction is to preserve the status quo pending a final determination of the rights

of the parties. Lennen at 260. We have said that a preliminary injunction should

issue “when the evidence shows that the defendants are engaged in, or about to be

engaged in, the acts or practices prohibited by a statute which provides for

injunctive relief to prevent such violations . . . .” Mical Communications, Inc. v.

Sprint Telemedia, Inc., 1 F.3d 1031, 1035 (10th Cir. 1993) (citing Lennen, 640

F.2d at 259). In Continental Oil Co. v. Frontier Ref. Co. 338 F.2d 780, 781 (10th

Cir. 1964), we also stated that in order to obtain a preliminary injunction it is not

necessary that the plaintiff’s right to a favorable decision on his request for a

permanent injunction after trial is “absolutely certain” and “wholly without doubt.”

See also Lennen, 640 F.2d at 261 (noting that “it is not necessary that plaintiffs

show positively that they will prevail on the merits before a preliminary injunction

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may be granted.”

      We think the Commission has met that test and under such circumstances,

we need not discuss in detail the evidence presented at the hearing on the motion

for a preliminary injunction. In this regard, in Continental Oil, 338 F.2d at 782 we

spoke as follows:

                    It would serve no useful purpose to discuss in
             detail the evidence presented at the hearing on the motion
             for preliminary injunction. Suffice it to say that we have
             examined the allegations of the complaint and motion
             and the affidavits and we are convinced that the lower
             court did not abuse its discretion in issuing the
             preliminary injunction.

      Judgment affirmed and case remanded with directions that, upon request, the

district court shall expeditiously hear, and determine, the Commission’s request

for a permanent injunction.

                                       ENTERED FOR THE COURT,

                                       Robert H. McWilliams
                                       Senior Circuit Judge

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