620 F.

2d 900

PRECIOUS METALS ASSOCIATES, INC., et al., Petitioners,

Appellants,
v.
COMMODITY FUTURES TRADING COMMISSION,
Respondent, Appellee.
No. 79-1449.

United States Court of Appeals,

First Circuit.
Argued Jan. 10, 1980.
Decided April 17, 1980.

Lloyd Kadish, with whom Robert A. W. Boraks, Peter Berman, Kadish &
Boraks, Washington, D. C., Davis Franklin, and Franklin, Pearlstein &
Passalacqua, Boston, Mass., were on brief, for petitioners, appellants.
John P. Connolly, Atty., Commodity Futures Trading Commission,
Washington, D. C., with whom John G. Gaine, Gen. Counsel, Pat G.
Nicolette, Deputy Gen. Counsel, Gregory C. Glynn, Associate Gen.
Counsel, Nancy A. Petranto and Nancy E. Yanofsky, Attys., Commodity
Futures Trading Commission, Washington, D. C., were on brief, for
respondent, appellee.
Before ALDRICH, CAMPBELL and BOWNES, Circuit Judges.
BOWNES, Circuit Judge.

This case is before us on the petition of Precious Metals Associates, Inc. (PMA)
and John W. Carter to review an order of the Commodity Futures Trading
Commission (Commission) requiring appellants to cease and desist from the
sale of options in violation of the Commodity Exchange Act (Act), as amended
in 1976, Pub.L. 95-405, 92 Stat. 867, 7 U.S.C. 1 et seq., and regulations
promulgated thereunder. Our jurisdiction over this direct appeal is based upon 7
U.S.C. 9 and 13b.1

PROCEDURAL HISTORY

On November 22, 1978, the Division of Enforcement (Division) of the

Commission issued a seven-count complaint alleging that appellants, from June
13 through October, 1978, engaged in the offer and sale of.$1.2 million in
investment vehicles known as limited risk forward contracts, LRFs, to
approximately two hundred clients and that, because LRFs were options, such
solicitations and sales violated the agency-imposed ban on the sale of options
which went into effect on June 1, 1978.

Arguing that the Commission and the public would be best served by a speedy
resolution of the issues of license revocation and imposition of a cease and
desist order, the Division urged that Counts I, II, III, and VII, charging the
illegal sale of options and futures, be severed and hearings on those counts
expedited.2 The administrative law judge to whom the case was assigned
approved the severance and scheduled a public hearing for December 4, 1978.3
Adjudication of the fraud and misrepresentation charges and resolution of the
issues of revocation of trading privileges and civil money damages are being
held in abeyance pending the outcome of this case.

Upon receipt of the complaint on November 27, 1978, PMA moved, in the
United States District Court for the District of Massachusetts, for a temporary
order restraining the December 4th public hearing. The district court ordered a
ten-day stay of proceedings and granted an additional ten-day extension upon
the expiration of the initial order. It declined to issue a preliminary injunction,
finding that a waiver of the requirement of exhaustion of administrative
remedies was not warranted. The hearing was held on February 21, 1978. The
ALJ's findings and recommendations were that: (1) appellants did not violate
section 4h (7 U.S.C. 6h) (illegal futures trading); (2) they did violate sections
4c(b) and 4c(c) (7 U.S.C. 6c(b) and 6c(c)) (illegal option trading); (3) the
facts warranted the imposition of a cease and desist order; and (4) PMA's
registration as a futures commission merchant and a commodity trading adviser,
and the registration of Carter as an associated person should be suspended for
six months pursuant to 7 U.S.C. 6(b). The Commission adopted the ALJ's
findings of fact; issued the cease and desist order; but, with two commissioners
dissenting, declined to suspend the registration of PMA and Carter.4 This
appeal ensued.

The issues are: (1) whether the regulatory scheme under which appellants are
charged is void for vagueness; (2) whether the doctrines of equitable estoppel
and/or laches should be applied; (3) whether the procedures invoked by the
Commission comported with fundamental fairness; and (4) whether the
sanctions imposed by the Commission are to be sustained.

The Commodity Futures Trading Act provides that "the findings of the
Commission as to the facts, if supported by the weight of the evidence, shall . .
. be conclusive." 7 U.S.C. 9. Thus, our function on appeal is "to review the
record with the purpose of determining whether the finder of fact was justified,
i. e., acted reasonably, in concluding that the evidence, including the demeanor
of the witnesses, the reasonable inferences drawn therefrom and other pertinent
circumstances, supported (its) findings." Great Western Food Distributors, Inc.
v. Brannan, 201 F.2d 476, 479-80 (7th Cir.), cert. denied, 345 U.S. 997, 73
S.Ct. 1140, 97 L.Ed. 1404 (1953).

THE FACTS
7

PMA is a Delaware corporation with its sole office located in Boston,

Massachusetts. It is registered with the Commission as a futures commission
merchant, commodity trading adviser, and commodity pool operator. Appellant
Carter, an associated person within the meaning of 7 U.S.C. 6k, purchased
PMA in June of 1978, after serving as the firm's vice-president of sales and
marketing. Carter was a real estate salesperson before entering the commodities
field.

PMA engaged in the sale of London commodity options prior to June 1, 1978,
the effective date of Commission Rule 32.11 prohibiting traffic in most
commodity options. When the ban went into effect, PMA ceased selling
options and sought to find an investment vehicle to offer in place of the banned
options. It decided that LRF was that vehicle. Carter's efforts to determine
whether LRFs came within the option-ban are the basis of appellants' equitable
estoppel and laches claims. He consulted with corporate counsel regarding the
legality of LRFs under the Commission's interim rules. Counsel "examined the
Act, regulations and interpretive opinions of the CFTC and could find nothing
defining LRFs or giving any insight into the definitional elements of
commodity options or commodity futures." Appellants' Brief at 11. The
attorney then called the office of the Commission's general counsel to inquire
about the status of LRFs. The staff attorney to whom PMA's lawyer spoke said
that she "personally viewed them as options," but declined to render a formal
opinion. PMA's attorney advised Carter by letter of the fruits of his research,
concluding that LRFs are option-futures "hybrids." At Carter's request, counsel
wrote to the Commission seeking an advisory opinion on the status of LRFs.
No reply was made to this letter or to subsequent correspondence of another
attorney retained by PMA seeking the same thing.

In late June, 1978, Carter instituted, in his words, an "experimental" LRF

program. Shortly thereafter, appellants became engaged in the extensive

nationwide offer and sale of LRFs for sugar, coffee, copper, and silver.
10

PMA, prior to Carter's ascendancy, had been plagued by legal problems not
relevant to this appeal. During the LRF sales campaign, PMA was embroiled in
litigation focusing on prior operating procedures. The Commission attorney
handling PMA's other legal problems was aware that PMA was selling LRFs,
but did not comment on the program or start proceedings against appellants on
LRF grounds at that time.

11

PMA's sales literature described the LRF as a "hedged contract to buy or sell a
specific commodity for a specific price on or before a specific date." The
brochure then gave an explanation of the risks involved in an LRF transaction.5
The literature disseminated by PMA prior to June 1, 1978, utilized the same
language to describe the risks inherent in option investments. The later
brochures merely substituted "LRF" for "option."

12

The mechanics of "LRFs" and "options" are almost identical. In exchange for a
nonrefundable fee, the purchase price, PMA sold a client the right to buy or sell
a specified amount of a particular commodity at a fixed (strike) price on or
before the predetermined "declaration date." If the commodity's selling price on
the "declaration date" exceeded the purchase price of the LRF (or option) plus
the "strike price," there would be a profit.6 Loss was limited to the amount of
the purchase price. After selling an LRF, PMA, through a Geneva, Switzerland,
firm, would buy or sell a commodity futures contract on the appropriate
London exchange, hedging its futures position with an off-setting commodity
option. The terms of the PMA contract on the London exchange paralleled the
terms of the PMA-client contract. PMA, not the individual customer, was the
owner of record of the London option contract.

13

While the LRF program was in effect, the Commission and appellants
attempted to work out a settlement prior to institution of enforcement
proceedings. When negotiations broke down, the Commission filed its
complaint. At that point, PMA discontinued the LRF campaign which in fact
had proved to be less than a smashing financial success.

THE REGULATORY SCHEME

14

The business of trading contracts for specified amounts of commodities to be

sold or bought in the future is an integral component of the American
investment scheme. Essentially, two distinct contract forms are involved. A
commodity futures contract is an agreement to buy or sell a specified quantum

of a specified commodity for a pre-determined price at a specified future date.

A commodity option contract, on the other hand, gives a right to buy or sell a
specified quantum of a specified commodity for a predetermined price (strike
price) at a specified future date. A contract entitling its owner to purchase a
commodity is referred to within the industry as a "put"; one authorizing a sale
is a "call."
15

From the beginning, the inherent speculativeness of commodity trading and the
absence of government regulation spawned a breeding ground for unscrupulous
tactics, manipulation, and irresponsible trading. See S.Rep.No. 93-1131, 93d
Cong., 2d Sess., reprinted in (1974) U.S.Code Cong. & Admin.News, pp. 5843,
5852-55. Early in this century, Congress attempted to curb some commodity
trading abuses by enacting the Grain Futures Act of 1922. The Commodity
Exchange Act of 1936 broadened the regulatory scheme to include more
commodities and empowered the Department of Agriculture to prosecute for
fraudulent practices. The 1968 amendments to the Act instituted requirements
designed to promote the fiscal responsibility of those selling to the public, and
authorized the issuance of cease and desist orders for violations.

16

By 1973, commodity trading had burgeoned into a $500 billion business. Grave
concern with manipulative practices within the industry prompted Congress to
enact legislation reflective of current market conditions.7

17

The Commodity Futures Trading Act of 1974, Pub.L. 93-463, 88 Stat. 1389, 7
U.S.C. 1-22 (1975), created the Commodity Futures Trading Commission as
an independent regulatory agency, 7 U.S.C. 4a (1974). The 1974 Act vested
the agency with exclusive jurisdiction to regulate commodities and "all other
goods and articles, except onions8 . . . and all services, rights, and interests in
which contracts for future delivery are presently or in the future dealt in." 7
U.S.C. 2. While the thrust of the Act is regulation through registration and
reporting procedures with power vested in the Commission to deny or revoke
licenses, the Act established criminal penalties for noncompliance, fraud, and
deceit. 7 U.S.C. 13.

18

To enable the Commission to deal effectively with any emergency,9 Congress

authorized the Commission "to take such action as, in the Commission's
judgment, is necessary to maintain or restore orderly trading in, or liquidation
of, any futures contract." Prior to 1974, only option transactions in certain
commodities were prohibited. The 1974 Act gave the Commission discretion to
extend the ban to newly regulated commodities or to allow their sale in
accordance with rules promulgated by the Commission. 7 U.S.C. 6c(b).

19

To combat rampant abuses in the sale of options, the Commission adopted

registration, disclosure, recordkeeping, and antifraud rules in 1976. 17 C.F.R.
32.1-.10 (1978). Nevertheless, it was apparent in 1978 that " 'the offer and sale
of commodity options in the United States is fraught with fraud and other
illegal and unsound practices and represents substantial risks to members of the
general public.' " Futures Trading Act of 1978, S.Rep.No. 95-850, 95th Cong.,
2d Sess. 14, 24, reprinted in (1978) U.S.Code Cong. & Admin.News 2087,
2112. Accordingly, on April 17, 1978, the Commission imposed a temporary
ban on the solicitation and sale of most commodity options. 17 C.F.R. 32.11
(1979).10 Congress approved Rule 32.11 by incorporating the ban, with some
modifications, into the Futures Trading Act of 1978. Section 4c(c) of the Act
effectively continued the ban on option selling until such time as the
Commission demonstrates "its ability to regulate successfully such
transactions." 7 U.S.C. 6c(c).

THE VAGUENESS CLAIM

20

Appellants challenge the constitutionality of the statutes and rules which they
were found to have violated as void for vagueness under the fifth amendment.
Although the sanctions imposed on appellants are civil in nature, the
Commodity Futures Trading Act contains criminal penalties. Should the
Department of Justice elect to institute criminal proceedings on those charges
which remain to be heard, appellants, if found guilty, would be subject to fines
and imprisonment. Because the Act itself treats the offenses of which
appellants were found guilty as criminal in nature, and because the unresolved
charges arise out of the same operative facts, we must examine the Act and
regulations to assure that they are "so framed as to provide a constitutionally
adequate warning to those whose activities are governed." Diebold, Inc. v.
Marshall, 585 F.2d 1327, 1336 (6th Cir. 1978). Fair play requires that notice of
proscribed conduct be given the potential offender in advance of the offense.
United States v. Harriss, 347 U.S. 612, 617, 74 S.Ct. 808, 811, 98 L.Ed. 989
(1954). This principle acknowledges one's freedom to chart a course
comporting with the state of the law. "Vague laws may trap the innocent by not
providing fair warning." Grayned v. City of Rockford, 408 U.S. 104, 108, 92
S.Ct. 2294, 2299, 33 L.Ed.2d 222 (1972). A statute is vague if it "either forbids
or requires the doing of an act in terms so vague that men of common
intelligence must necessarily guess at its meaning and differ as to its
application . . . ." Connally v. General Construction Co., 269 U.S. 385, 391, 46
S.Ct. 126, 127, 70 L.Ed. 322 (1926). Definiteness, however, is not an absolute.
It does not impose "impossible standards" on the drafter. United States v.
Petrillo, 332 U.S. 1, 7-8, 67 S.Ct. 1538, 1541-1542, 91 L.Ed. 1877 (1947).
Thus, language of proscription is not deficient if it "conveys sufficiently

definite warning as to the proscribed conduct when measured by common

understanding and practices." Jordan v. DeGeorge, 341 U.S. 223, 231-32, 71
S.Ct. 703, 95 L.Ed. 886 (1951). Moreover, if the forbidden act involves
conduct of a select group of persons having specialized knowledge, and the
challenged phraseology is indigenous to the idiom of that class, the standard is
lowered and a court may uphold a statute which uses "words or phrases having
a technical or other special meaning, well enough known to enable those within
its reach to correctly apply them . . . ." Connally v. General Construction Corp.,
269 U.S. at 391, 46 S.Ct. at 127. The appropriate measure for testing a statute
directed at a class of persons possessed of specialized learning is whether the
"language sufficiently conveys a definite warning as to the proscribed conduct,
when measured by common understanding and commercial practice." United
States v. Tehan, 365 F.2d 191, 198 (6th Cir. 1966), cert. denied, 385 U.S. 1012,
87 S.Ct. 716, 17 L.Ed.2d 548 (1967) (emphasis added). To determine the
certainty of the challenged acts and regulations, we must examine them "in the
light of the conduct" with which appellants are charged. United States v.
National Dairy Corp., 372 U.S. 29, 33, 83 S.Ct. 594, 9 L.Ed.2d 561 (1963).
21

The 1974 Act vested exclusive jurisdiction in the Commission over "any
transaction which is of the character of, or is commonly known to the trade as,
an 'option', 'privilege', 'indemnity', 'bid', 'offer', 'put', 'call', 'advance guaranty',
or 'decline guaranty'. . . ." 7 U.S.C. 2. The interim regulations adopted by the
Commission on November 2, 1976, defined "commodity option transaction"
and "commodity option" as "any transaction or agreement in interstate
commerce which is or is held out to be of the character of, or is commonly
known to the trade as, an 'option', 'privilege', 'indemnity', 'bid', 'offer', 'put',
'call', 'advance guaranty', or 'decline guaranty' involving any commodity
regulated under the Act. . . ." 17 C.F.R. 32.1 (1978).

22

Neither the Act nor the rules promulgated thereunder specifically define
"option." The term, however, has certain uniformly accepted characteristics. For
example,

a23contractual right to buy, or sell, a commodity or commodity future by some

specific date at a specified, fixed price, known as the "striking price."
24

British American Commodity Options Corp. v. Bagley, 552 F.2d 482, 484-85
(2d Cir.), cert. denied, 434 U.S. 938, 98 S.Ct. 427, 54 L.Ed.2d 297 (1977);

25 London commodity option is the contractual right, but not the obligation, to buy
(A)
(a "call" option) or sell ("put") a specific commodity futures contract on the
appropriate market in London, England, for a certain fixed price (the option's "strike

price") within a specified period of time, . . . .

26

Commodity Futures Trading Commission v. British American Commodity

Options Corp., 2 Comm.Fut.L.Rep. (CCH) P 20,662 at 22-699 (S.D.N.Y.1978);

27 stock, or other exchanges, a privilege, secured by the payment of a certain

"On
premium, or consideration, either (1) of calling for the delivery, or (2) of making
delivery, of a certain specified amount of some particular stock or produce, at a
specified price, and within specified limits of time. The first kind of option is usually
designated a call, and the second a put ; but both are sometimes called futures."
28

A. Corbin, Contracts, 259, n. 3 (1952), quoting Century Dictionary.

29

We might have some concern over the statutory language if it levied sanctions
on laypersons. But it does not. The ambit of the statute is limited to members of
contract markets, futures commission merchants, and floor brokers. The Act
exposes to penalties only highly specialized members of a professional class
who, for purposes of their livelihood, know thoroughly what "options,"
"privileges," "puts," and "calls" are and how they operate.

30

The statutory and regulatory language is sufficient to put a broker on notice that
attempts to circumvent the statute by a change of the name will not be
tolerated.11 Transactions with the character of "options" are prohibited.
Appellants' actions, particularly those of Carter, show that they knew this. Yet
their sales literature reflects an attempt to transform PMA's options into LRFs
merely by inserting a different designation into the brochures. Such an exercise
in semantics will not wash. Under the statute, it is the underlying economic
reality of the transaction, not its name, that determines legality.

31

The United States District Court for the Southern District of New York
confronted an analogous situation in CFTC v. Morgan, Harris & Scott, Ltd., 2
Comm.Fut.L.Rep. (CCH) P 20.901 (S.D.N.Y.1979). Defendants attempted to
circumvent the June 1, 1978, option ban by offering "deferred delivery"
contracts. The court examined the underlying economic reality of the contracts
and ruled that they were options in disguise. The court noted that "(t)he
requirements of the Act and the Commission's rule cannot be avoided by a
defendant who merely gives his illegal activities obfuscatory names." 2
Comm.Fut.L.Rep. P 20,901 at 23,660.

32

In CFTC v. Goldex International Limited, 2 Comm.Fut.L.Rep. (CCH) P 20,839

(N.D.Ill.1979), 7 U.S.C. 6c(c) and 17 C.F.R. 32.11 were found to give

warning sufficient to survive a vagueness attack. Defendants argued that

"deferred delivery" contracts are not options within the meaning of the statute.
The court, declining to accept this rationale, ruled that the term "option" is
reasonably well understood in the market place" and found that as applied to the
defendant corporation and employees, it was not vague. 2 Comm.Fut.L.Rep. P
20,839 at 23,441. Moreover, appellants cannot escape their own brochure
definitions. " A Limited Risk Forward, or LRF, is a hedged contract to buy or
sell a specific commodity for a specific price on or before a specific date." An
option is "a right to buy (or sell) a commodity (sugar, tin, silver, etc.) at a fixed
price, for a fixed length of time." The essential distinction between the two
definitions is hard to discern. We find that the pertinent statutory sections and
regulations easily pass constitutional muster, both facially and as applied.
EQUITABLE ESTOPPEL
33

The doctrine of equitable estoppel operates to preclude a party, both at law and
in equity,

34
"(f)rom
asserting rights which might perhaps have otherwise existed, either of
property, of contract, or of remedy, as against another person, who has in good faith
relied upon such conduct, and has been led thereby to change his position for the
worse, and who on his part acquires some corresponding right, either of property, of
contract, or of remedy."
35

2 J. Pomeroy, Equity Jurisprudence 804 at 1421-22 (3d ed. 1905). The

standard for a valid estoppel was articulated by this circuit in Bergeron v.
Mansour, 152 F.2d 27, 30 (1st Cir. 1945): "A person is estopped from denying
the consequences of his conduct where that conduct has been such as to induce
another to change his position in good faith or such that a reasonable man
would rely upon the representations made."

36

While we recognize that there still is some question as to whether the doctrine
of equitable estoppel can apply to the government at all and, if it can, under
what circumstances,12 we avoid that bramblebush by assuming the application
of the doctrine if the facts warrant it. Appellants' claim of equitable estoppel is
based on the assertion that any prosecution of them was unfair because they
unsuccessfully sought from the Commission a definitive status of LRF vis-a-vis
option. The basic fallacy of appellants' position is that there was no misleading
conduct or misrepresentations on the part of the Commission. Failure to
respond to inquiries does not amount to estoppel conduct. Appellants would
have us ascribe to the Commission the interpretation, really wishful thinking,
that appellants put on the Commission's silence. While in some instances

silence may reasonably induce reliance, this is not such a situation. What
appellants did was try to cover the uncertain legality of the LRF operation by
inquiring as to its status. Appellants went ahead with an operation knowing full
well that it was probably illegal or, at the optimum, that its legality was
doubtful. They cannot convert the Commission's silence into approval. They
took their chances and must suffer the consequences.
37

The Sixth Circuit confronted a similar argument in United States v. Mattucci,

502 F.2d 883 (6th Cir. 1974). Defendants claimed that government agents'
failure to advise them of the illegality of the Barbut game (a gambling game)
gave rise to estoppel. Rejecting that argument, the court stated:

38

Finally, appellants claim that they were not given fair warning of the illegality
of their business, and therefore, the government ought to have been estopped
from indicting and prosecuting them. In support of that contention, appellants
introduced proof that they had previously sought advice from government
agents concerning the legality of the Barbut game. No claim is made that the
government agents entrapped defendants, or even that they erroneously advised
defendants that their conduct was legal. The claim is that they failed to advise
defendants of the illegality of the Barbut game under 1955. The responsibility
for determining what conduct shall be illegal under federal law rests with
Congress, and Congress bears the burden of doing so with definiteness. United
States v. Harriss, 347 U.S. 612, 74 S.Ct. 808, 98 L.Ed. 989 (1954).

39

Id. at 890 (emphasis added).

40

The regulation banning the sale of options was clear. The 1974 Act did not
mandate that the Commission answer requests for interpretation. Moreover,
"the Commission's employees are not . . . required to provide advice. . . . "
CFTC Interpretative Letter No. 77-17, reprinted in 2 Comm.Fut.L.Rep. (CCH)
P 20,449 at 22,065.

41

Appellants engaged in a hedging operation with the Commission as to the

legality of the LRF program. They cannot now complain that they hedged on
the wrong side of the law. There is no basis for invoking the doctrine of
equitable estoppel.

42

Intertwined with appellants' equitable estoppel notion is the claim that laches
should be invoked because the Commission failed to take instant action upon
discovering that PMA had embarked upon an LRF program.

43

As with equitable estoppel, there is a basic question as to whether laches can be

invoked against the government. The Supreme Court has held, "(i)t is well
settled that the United States is not . . . subject to the defense of laches in
enforcing its rights." United States v. Summerlin, 310 U.S. 414, 416, 60 S.Ct.
1019, 1020, 84 L.Ed. 1283 (1940). Nevertheless, courts have not construed this
as an absolute bar where unreasonable agency delay has caused hardship. Equal
Emp. Opportunity Com'n v. Liberty Loan Corp., 584 F.2d 853, 857-58 (8th Cir.
1978) (four-year delay unreasonable where relevant papers discarded and
witnesses moved).

44

In any event, the facts here do not support estoppel by laches. Appellants
commenced their LRF program and sent their first letter to the Commission in
June, 1978. In August, a Division attorney requested information on the
program. In November, 1978, the Commission, after unsuccessful settlement
negotiations, formally charged appellants. The Commission was not obliged to
prosecute when knowledge of the program was initially brought to its attention.
"(I)t is not true that once a government agency smells a rat, the agency must
exterminate it forthwith or allow it the run of the public's house in perpetuo."
United States v. Michael Schiavone & Sons, Inc., 430 F.2d 231, 233 (1st Cir.
1970), appeal dismissed for want of jurisdiction, 396 U.S. 275, 90 S.Ct. 565, 24
L.Ed.2d 466 (1975). A delay of five months is not inordinate in the context of
this case. See Silverman v. Commodity Futures Trading Com'n, 549 F.2d 28,
34 (7th Cir. 1977), where a two-year delay in prosecution was found not
unreasonable. There is no merit in the laches claim.

AGENCY PROCEDURE
45

Appellants attack the bifurcation of the charges against them and the expedition
of the proceedings on the counts at issue here.

46

We note at the outset that due process mandates that an administrative hearing
will constitute "a fair trial, conducted in accordance with fundamental
principles of fair play and applicable procedural standards established by law."
Swift & Co. v. United States, 308 F.2d 849, 851 (7th Cir. 1962). Since "(t)ime
is of the essence in futures markets," In the Matter of Wiscope, S. A., 2
Comm.Fut.L.Rep. (CCH) P 20,757 at 23,108 (1978), aff'd, 2 Comm.Fut.L.Rep.
(CCH) P 20,785 (1979), the Division of Enforcement moved for bifurcation
and expedition so that there could be an immediate determination of whether a
cease and desist order should issue. Commission Rule 1.03(b), 17 C.F.R.
10.3(b), authorizes the Commission to expedite a hearing if it deems that no
party will be prejudiced and the ends of justice will be served thereby. If these
criteria are met, due process is satisfied. Silverman v. CFTC, 562 F.2d 432, 439

(7th Cir. 1977).

47

48

The broad grant of authority given the Commission to protect the public
interest indicates legislative intent that the Commission employ the appropriate
procedures to assure the financial well-being of the investing public. This
reflected the Congressional concern over the abuses in option and futures
sales.13
The Commission responded to the Congressional mandate, in the instant case,
by expediting hearings on those issues having an immediate impact on
investors. The approach of bifurcation and expedition was justified.

NOTICE
49

Appellants claim inadequate notice of the proceeding which was originally

scheduled for December 4, 1978. All that is required under the statute is three
days notice. 7 U.S.C. 9. Appellants received formal notification seven days
prior to the scheduled date. In addition, the Commission and appellants
attempted to negotiate a settlement prior to the institution of formal charges.
Only when these negotiations broke down, did the Commission file a complaint
against appellants. Thus, there was no element of surprise. Moreover, the
hearing was successfully postponed by appellants for three months after they
received the requisite notice. Their complaint of inadequate notice is without
foundation.

ENFORCEMENT ACTION
50

The Commission prosecuted appellants at an enforcement proceeding held

pursuant to 7 U.S.C. 6(b) and 17 C.F.R. 10.21-26. Appellants contend that
the Commission should have employed the rulemaking procedure of 17 C.F.R.
13.1-6. This argument misapprehends the purpose of rulemaking and
overlooks the syllogism inherent in the facts of this case: LRFs are options;
option sales were effectively banned on June 1, 1978; therefore, LRFs were
banned on June 1, 1978.

51

Rulemaking proceedings are properly employed to resolve disputed questions

of law. They are designed to fill in the interstices of a statute. Securities Com'n
v. Chenery Corp., 332 U.S. 194, 202, 67 S.Ct. 1575, 1580, 91 L.Ed. 1995
(1947), and to "promulgat(e) policy-type rules or standards . . . ." United States
v. Florida East Coast R. Co., 410 U.S. 224, 245, 93 S.Ct. 810, 821, 35 L.Ed.2d
223 (1973).

52

Congress vested the Commission with authority to institute an enforcement

proceeding.14 The Commission, believing that appellants were violating
provisions of 7 U.S.C., exercised its discretion and chose the enforcement
proceeding as the appropriate forum for protecting the public.

53

In the context of the facts of this case, a rulemaking proceeding would have
been inappropriate. The rule, "it shall be unlawful on or after June 1, 1978 . . .
for any person to solicit or accept for . . . the purchase or sale of any
commodity option . . . " 17 C.F.R. 32.11, is not ambiguous. No interstices
need to be filled. In addition, a rule promulgated pursuant to 17 C.F.R. 13.1-6
would have prospective application only. Had the Commission chosen this
route, appellants could have sold the options with impunity while awaiting the
announcement of a rule that merely reiterated what the law already said. The
Commission did not abuse its discretion when it elected to hold an enforcement
proceeding.

54

The Commission ordered appellants to cease and desist from the solicitation
and sale of options.15 They argue that the sanction imposed is too harsh. In Butz
v. Glover Livestock Com'n Co., 411 U.S. 182, 93 S.Ct. 1455, 36 L.Ed.2d 142
(1973), the Supreme Court delineated the appropriate standard for review of
administrative sanctions.

55

The applicable standard of judicial review in such cases required review of the
Secretary's order according to the "fundamental principle . . . that where
Congress has entrusted an administrative agency with the responsibility of
selecting the means of achieving the statutory policy 'the relation of remedy to
policy is peculiarly a matter for administrative competence.' " American Power
Co. v. SEC, 329 U.S. 90, 112, 67 S.Ct. 133, 91 L.Ed. 103 (1946). Thus, the
Secretary's choice of sanction was not to be overturned unless the Court of
Appeals might find it "unwarranted in law or . . . without justification in fact . . .
." Id. at 112-113, 67 S.Ct. at 146; Phelps Dodge Corp. v. NLRB, 313 U.S. 177,
194, 61 S.Ct. 845, 852, 85 L.Ed. 1271 (1941); Moog Industries, Inc. v. FTC,
355 U.S. 411, 413-414, 78 S.Ct. 377, 379-380, 2 L.Ed.2d 370 (1958); FTC v.
Universal-Rundle Corp., 387 U.S. 244, 250, 87 S.Ct. 1622, 1626, 18 L.Ed.2d
749 (1967); 4 K. Davis, Administrative Law 30.10, pp. 250-251 (1958).

56

Id. at 185-86.

57

The sanction here is neither "unwarranted in law (n)or without justification in

fact." Appellants argue that the order was not justified because they voluntarily
discontinued their LRF program. A cease and desist order is justified when the

party who commits statutory transgressions is likely to persist in the contumacy

in the future, unless restrained. A solitary infraction may be insufficient to
support a cease and desist order, see NLRB v. Beth Israel Hospital, 554 F.2d
477, 483 (1st Cir. 1977), but a proclivity to violate the law can be proved "when
a record discloses persistent attempts to interfere with legislatively protected
rights . . . ." NLRB v. Union Nacional de Trabajadores, 540 F.2d 1, 11 (1st Cir.
1976), cert. denied, 429 U.S. 1039, 97 S.Ct. 736, 50 L.Ed.2d 750 (1977).
58

The regulatory ban effective June 1, 1978, did not deter appellants from
continuing their option program under another name, even though they had
doubts as to its legality. Appellants' plea for mitigation has a hollow ring. One
of the factors in ending the program was that it was not profitable. But the
profitability picture could change. Having no assurance that, without imposition
of a cease and desist order with its attendant penalties for violation, appellants
would not adopt the same game plan for an option under yet another name, the
Commission was justified in imposing a cease and desist order.

59

Affirmed.

A cease and desist order of the Commission is "subject to appeal as in other

cases provided for in section 9 . . .." 7 U.S.C. 13b. In relevant part, 9 states:
After the issuance of the order by the Commission, the person against whom it
is issued may obtain a review of such order or such other equitable relief as to
the court may seem just by filing in the United States court of appeals of the
circuit in which the petitioner is doing business a written petition, within fifteen
days after the notice of such order is given to the offending person praying that
the order of the Commission be set aside. A copy of such petition shall be
forthwith transmitted by the clerk of the court to the Commission and
thereupon the Commission shall file in the court the record theretofore made, as
provided in section 2112 of Title 28. Upon the filing of the petition the court
shall have jurisdiction to affirm, to set aside, or modify the order of the
Commission, and the findings of the Commission as to the facts, if supported
by the weight of evidence, shall in like manner be conclusive.

Appellants were charged with violating the following provisions of the Act and
regulations
Count I: 7 U.S.C. 6c(c);
Count II: 7 U.S.C. 6c(b) and 17 C.F.R. 32.11;

Count III: 17 C.F.R. 1.19;

Count IV: 7 U.S.C. 6c(b) and 17 C.F.R. 32.9;
Count V: 7 U.S.C. 6c(b) and 17 C.F.R. 32.8(a);
Count VI: 7 U.S.C. 6c(b) and 6k and 17 C.F.R. 32.3(b)(2);
Count VII: 7 U.S.C. 6h.
Counts IV (fraud allegations), V (misrepresentation) and VI (revocation of
registration) were severed. Appellants were found guilty of the illegal sale of
options charged in Counts I, II, and III, and not guilty of the illegal sale of
futures (Count VII).
3

17 C.F.R. 10.8 provides: "(u)nless otherwise determined by the Commission,

all proceedings within the scope of this Part shall be assigned to an
Administrative Law Judge for hearing." The administrative law judge's
authority to rule upon motions is derived from 17 C.F.R. 10.8(8)

The Commission opinion is reported at 2 Comm.Fut.L.Rep. (CCH) P 20,882

"WHAT ARE MY RISKS ?

While there are many obvious advantages to dealing in LRF's, there are also
definite risks involved. If, during the LRF, the market price stays still or moves
against you, you stand to lose the entire cost of your LRF. In addition, if the
market does move in your direction, but not enough to cover the cost of your
LRF, you will lose part of your original LRF cost. To put it simply, let's go
back to sugar. Since each 1-cent move equals $1,100 in equity, if sugar moves
only 2 cents in your favor, you will recover $2,200 of your original
investment."

6Purchase Price of LRF $1,000.00

Strike Price

Break Even Figure

2,000.00
--------$3,000.00

Profit is made if selling price of commodity exceeds $3,000.00. The record

indicates that a minimum one thousand dollar investment was required to open
an LRF account.
7

The shift to market-oriented economy has brought the general public into the
futures market in growing numbers. Speculators are attracted to the futures
markets by the wide price swings and the possibility of large profits. Such an

increase in trading by the speculative public, while useful to hedgers, brings

with it potential market problems. If individual speculators or groups operating
in concert obtain control of the futures markets, price manipulation, corners and
squeezes can occur, with adverse effects on producers and consumers alike
In recent years, the consumer has become increasingly aware that futures
markets have a direct effect on such matters as his grocery bill and the cost of
his home. Properly operating futures markets help to hold down consumer
prices by reducing middleman costs. However, improperly operating futures
markets can have the opposite result. In order to assure that futures markets
operate properly and that the prices consumers pay are not artificially high,
careful and efficient supervision of the markets is essential. (1974) U.S.Code
Cong. & Admin.News at 5859.
8

We have been unable to find easily any explanation of why "onions" are
exempt. We assume it is because it was already known they make you cry

Emergency was defined as follows:

The term "emergency" as used herein shall mean, in addition to threatened or
actual market manipulations and corners, any act of the United States or a
foreign government affecting a commodity or any other major market
disturbance which prevents the market from accurately reflecting the forces of
supply and demand for such commodity: Provided, That nothing herein shall be
deemed to limit the meaning or interpretation given by a contract market to the
terms "market emergency", "emergency," or equivalent language in its own
bylaws, rules, regulations, or resolutions. 7 U.S.C. 12a(9).

10

Rule 32.11 provides:

32.11 Suspension of commodity option transactions.
(a) Notwithstanding any other provision of this Part 32, it shall be unlawful on
and after June 1, 1978, until further rule, regulation or order of the
Commission, for any person to solicit or accept orders for, or to accept money,
securities or property in connection with, the purchase or sale of any
commodity option, or to supervise any person or persons so engaged.
(b) The provisions of paragraph (a) of this section shall not apply to any
commodity option offered or entered into in accordance with the provisions of
32.4(a).
(c) Nothing in this section shall apply to, or affect the rights, privileges or
obligations of any person arising out of any commodity option transaction

entered into prior to June 1, 1978.

11

In two recent cases, similar sections of the Act have been subjected to
vagueness scrutiny. In United States v. LaMantia, 2 Comm.Fut.L.Rep. (CCH) P
20,667 (N.D.Ill.1978), the prohibition against "fictitious" sales contained in 7
U.S.C. 6c(a)(A) was found to be unconstitutionally vague. The same court
ruled that the section's prohibition against "wash sales" was not vague as
applied to commodities brokers. United States v. Siegel, 472 F.Supp. 440
(N.D.Ill.1979)

12

See K. Davis, Administrative Law of the Seventies 17.01 at 399 (1976)

13

Since 1974, there has been an enormous growth in the number of firms
merchandising commodity options to the public. Many of these firms engaged
in unscrupulous practices and simply bucketed their customers' orders. Some of
these firms were so marginally capitalized that they simply fled when
customers sought to exercise their options. This growth of fraud and deception
received national attention in the Lloyd, Carr and Co. investigations and
prosecutions
The recent experience with so-called "London options" dramatizes the abuse
and consumer fraud resulting from the off-exchange trading of these
instruments. The committee notes that the Commission recently agreed to
suspend all commodity options transactions, except certain trade options,
effective June 1, 1978. In announcing the suspension, the Commission stated
that it "has determined that the offer and sale of commodity options in the
United States is at present fraught with fraud and other illegal and unsound
practices and represents substantial risks to members of the general public."
Futures Trading Act of 1978, S.Rep.No. 95-850, 95th Cong., 2d Sess. 23-24,
reprinted in (1978) U.S.Code Cong. & Admin.News 2111-12.

14

7 U.S.C. 9 provides for institution of an enforcement action

If the Commission has reason to believe that any person (other than a contract
market) is manipulating or attempting to manipulate or has manipulated or
attempted to manipulate the market price of any commodity, in interstate
commerce, or for future delivery on or subject to the rules of any contract
market, or has willfully made any false or misleading statement of a material
fact in any registration application or any report filed with the Commission
under this chapter, or willfully omitted to state in any such application or report
any material fact which is required to be stated therein, or otherwise is violating
or has violated any of the provisions of this chapter or of the rules, regulations,
or orders of the Commission thereunder, . . . .

15

The Commission's authority for imposing the order derives from 7 U.S.C.
13b, which provides:
13b. Manipulations or other violations; cease and desist orders against
persons other than contract markets; punishment; misdemeanor or felony;
separate offenses
If any person (other than a contract market) is manipulating or attempting to
manipulate or has manipulated or attempted to manipulate the market price of
any commodity, in interstate commerce, or for future delivery on or subject to
the rules of any contract market, or otherwise is violating or has violated any of
the provisions of this chapter or of the rules, regulations, or orders of the
Commission thereunder, the Commission may, upon notice and hearing, and
subject to appeal as in other cases provided for in section 9 of this title, make
and enter an order directing that such person shall cease and desist therefrom
and, if such person thereafter and after the lapse of the period allowed for
appeal of such order or after the affirmance of such order, shall fail or refuse to
obey or comply with such order, such person shall be guilty of a misdemeanor
and, upon conviction thereof, shall be fined not more than $100,000, or
imprisoned for not less than six months nor more than one year, or both, except
that if such failure or refusal to obey or comply with such order involves any
offense within paragraph (a) or (b) of section 13 of this title, such person shall
be guilty of a felony and, upon conviction thereof, shall be subject to the
penalties of said paragraph (a) or (b): Provided, That any such cease and desist
order against any respondent in any case of manipulation of, or attempt to
manipulate, the price of any commodity shall be issued only in conjunction
with an order issued against such respondent under section 9 of this title. Each
day during which such failure or refusal to obey or comply with such order
continues shall be deemed a separate offense.