Unpublished Disposition, 869 F.2d 1496 (9th Cir. 1987)

MEMORANDUM^** 

This is a petition for review of an order of the Commodity Futures Trading Commission (CFTC or Commission) issued in a reparations proceeding. The administrative law judge (ALJ) concluded, in a supplemental initial decision, that Richard Allison and his employer, Rufenacht, Bromagen & Hertz, Inc. (RBH), failed to adequately advise Frances Domenico of the mechanics and risks of commodity futures trading (17 C.F.R. Sec. 1.55 (1988); 7 U.S.C. § 6b (1982 & Supp. IV 1986)). The CFTC vacated the ALJ's conclusions. We affirm the CFTC in all respects.

FACTUAL BACKGROUND

Richard Allison is an employee of respondent Rufenacht, Bromagen & Hertz (RBH). Both are registered with the CFTC, RBH as a futures commission merchant and Allison as an associated person.

Domenico is a 52 year old widow whose husband died in 1975 leaving some life insurance proceeds. After subscribing to a newsletter by Howard Ruff and James Sibbet, Domenico invested a portion of the life insurance proceeds in gold and silver coins and in South African mining stocks. Additionally, she traded commodity futures contracts for a few weeks in the fall of 1978 with Merrill Lynch. In April 1979, Domenico contacted Allison and opened a nondiscretionary account with RBH. Domenico told Allison that based on the recommendations of Ruff and Sibbet that she wanted to trade gold and silver futures. She deposited $5000, made one trade and closed the account after a loss of $65.

In June 1980, Domenico reopened her account with RBH. She wired $63,240 into the account and initiated a number of trades in gold and silver futures. In early July 1980 she withdrew some money leaving $11,000 in the account in order to invest in gold. On July 9, 1980 Domenico wired $103,300 to RBH, telling Allison that based on the recommendations of Ruff and Sibbet she wanted to purchase gold futures contracts. At Domenico's instruction, Allison purchased a number of contracts. When the market went against her, at Domenico's request, Domenico, Allison and Sibbet had a three way telephone conversation. In accordance with Sibbet's recommendation, Domenico liquidated some of her positions by July 16, 1980. After further trading on July 18, 1980, Domenico had an account balance of $30,425.

On August 5, 1980, Domenico transferred her account from Allison to Maury Kravitz, another account executive at RBH, and sustained further losses in the amount of $5,000. Domenico incurred a total loss of $80,775 trading with RBH.

On January 27, 1981, Domenico filed a reparations complaint with the Commodity Futures Trading Commission naming RBH, Richard Allison and Maury Kravitz. Domenico alleged that RBH and Allison had failed to advise her of the mechanics and risks of commodity futures trading in violation of section 4(b) of the Commodity Exchange Act (CEA), 7 U.S.C. § 6(b), and failed to obtain a signed dated Risk Disclosure Statement in violation of 17 C.F.R. Sec. 1.55. She sought reparations in the amount of $83,850 against RBH and Allison for the loss she sustained from the gold contracts. On October 20 and October 21, 1982, the ALJ held evidentiary hearings in San Francisco, California, and on January 17, 1983, in Los Angeles, California, at which time both Allison and Domenico testified.

The ALJ found that Allison willfully failed to adequately explain the risks of commodity futures trading in violation of Section 4(b) of the CEA, and under Section 2(a) (1) of the CEA, RBH was found liable for the acts of Allison. 7 U.S.C. §§ 6(b), 2. The ALJ also found that RBH failed to obtain a signed dated Risk Disclosure Statement from Domenico in violation of Regulation 1.55.

The record contained a Risk Disclosure Statement signed by Domenico but undated, and an unsigned but underlined Risk Disclosure Statement with her April 1979 account number on it which Domenico admits she received. Domenico testified that she did not recall signing a Risk Disclosure Statement when she established the account with Allison; however, Allison testified that Domenico signed a Risk Disclosure Statement when she opened the account with him. Domenico did recall signing a Risk Disclosure Statement when the account was transferred to Mr. Kravitz after she had incurred the initial losses.

In his written decision, the ALJ accepted and credited Domenico's testimony concerning the explanation of risks given to her by Allison, and on October 31, 1983, the ALJ ordered Allison and RBH to pay Domenico reparations of $80,755 plus interest.

RBH and Allison timely appealed the ALJ's decision to the CFTC. Additionally, RBH and Allison filed a separate document entitled "Application ... to Supplement Record to Include After-Discovered Evidence" requesting that they be permitted to submit new evidence of a Risk Disclosure Statement signed by Domenico and dated July 31, 1980. The Commission considered the new evidence (signed, dated form) and the record as a whole and, on June 27, 1985, remanded to the ALJ for further clarification of the record.

On remand, the ALJ considered the new evidence of the dated, signed Risk Disclosure Statement, copies of "3 X 5" cards indicating the document compliance status of Domenico's account, with coded designations of "x" and "y" indicating a Risk Disclosure Statement was on file for the account, and a document describing the procedure that RBH used to code accounts to reflect compliance with Commission regulations.

In writing his decision, the ALJ again accepted and credited Domenico's testimony concerning the explanation of risks given to her by Allison and, despite the new evidence, concluded that Allison did not comply with Regulation 1.55.

Relying on Gordon v. Shearson Hayden Stone, Inc., Comm.Fut.L.Rep. (CCH) p 21,016, the ALJ also concluded that Allison misrepresented to Domenico the risks involved in commodity futures trading as set forth in the following portion of the ALJ's decision:

Complainant was not only unaware of the risk involved in commodity futures trading, but she was lulled into a belief that the Respondents were capable of confining market risks. Complainant testified that Respondent Allison told her that "there is [risk] in anything you do, but we could keep it at a minimum". There is of course, no trading system that can assure that a futures commission merchant or associated person can limit a customers exposure to risk. It is inherently fraudulent to say that they can minimize the risk.... Allison represented to Complainant that the risks could be controlled. I find and conclude that Respondent Allison violated Section 4(b) (A) of the Act, 7 U.S.C. § 6b(a), by misrepresentation of the risks involved in commodity futures trading. Pursuant to Section 2(a) (1) of the Act, 7 U.S.C. § 2, Respondent RB & H is liable for the acts of Respondent Allison.

As a result of these violations, the ALJ found that Domenico incurred damages in the amount of $80,775 plus interest.

RBH and Allison timely appealed the ALJ's supplemental initial decision and order on remand. The Commission considered the record as a whole, including the new evidence, and, on September 30, 1987, vacated the liability conclusions of the ALJ's supplemental initial decision and dismissed the complaint.

The ALJ, as noted by the Commission, entered only one new finding of fact on remand: "Complainant asserts that she did not sign a Risk Disclosure Statement at the time she opened her account with Respondent Allison, and the Respondents offer no explanation for the absence of the date on the undated Risk Disclosure Statement."

After acknowledging that the ALJ's findings are accorded a high degree of deference unless they are clearly in error, the Commission vacated this finding of fact as clearly in error. The Commission concluded that the review of the record reveals no support for the finding that Domenico never testified that she did not sign a Risk Disclosure Statement at the time she opened her account with Allison. After vacating this factual finding, the Commission explained that the evidence supports a finding that Domenico signed a Regulation 1.55 disclosure statement prior to any trading on her account. Moreover, " [to] the extent the ALJ found Allison's statement to be an independent fraud apart from RBH's purported failure to provide timely disclosure pursuant to Rule 1.55, such a conclusion is unsupported by the record." Domenico appeals from the decision of the CFTC vacating the ALJ's Supplemental Initial Decision and Order on Remand.

Standard of Review of Appeals of Agency Decisions

On appeal, the factual findings of the CFTC are conclusive "if supported by the weight of the evidence." 7 U.S.C. § 18e (1982) (incorporating by reference 7 U.S.C. § 9 (1982)). The Ninth Circuit has interpreted "weight of the evidence" to mean "preponderance of the evidence." Dohmen-Ramirez v. CFTC, 837 F.2d 847, 856 (9th Cir. 1988). Credibility determinations are questions of fact within an agency's province and agency resolution must stand unless not supported by the substantial evidence. Id.

DISCUSSION

Whether Weight of the Evidence Supports the Commission's Findings

Regulation 1.55 prohibits a futures commission merchant (FCM) from opening a commodity futures account unless he first " [f]urnishes the customer with a separate written disclosure statement containing only the language set forth in paragraph (b) and ... receives from the customer an acknowledgment signed and dated by the customer that he received and understood the disclosure statement." 17 C.F.R. 1.55(a). It is undisputed that Domenico signed two separate Risk Disclosure Statements which track the language of Regulation 1.55(b). The timing of when the undated Risk Disclosure Statement was signed is disputed.

Domenico contends that the CFTC unreasonably disregarded the evidence that Domenico did not receive a Risk Disclosure Statement from Allison. We disagree.

The ALJ's decision to credit Domenico's testimony that she did not receive a Risk Disclosure Statement prior to opening her account was based on an incorrect premise. The ALJ credited Domenico with testimony that did not exist. On the record, Domenico testified that she "didn't believe" she had signed a statement for Allison. "If I did sign it, I don't recall. I don't remember"; therefore, the CFTC correctly rejected the ALJ's finding as erroneous.

The Commission is free to draw its own inferences from the evidence available to it. See NLRB v. Pacific Grinding Wheel Co., Inc., 572 F.2d 1343, 1347 (9th Cir. 1978). Domenico did not testify that she signed two statements when transferring her account from Allison to Kravitz. Since the newly discovered dated Risk Disclosure Statement is the statement executed by Domenico when she transferred her account to Kravitz, the undated signed statement corroborates Allison's testimony and appears to be the statement signed when she opened her account with Allison. Despite the contrary findings by the ALJ, the evidence in support of the Commission's finding on this issue is sufficient to meet the substantial evidence test.

Domenico next contends that the Commission's conclusion that Allison's statement that he could keep risk to a minimum was not an independent basis for fraud under 7 U.S.C. § 6b was erroneous. Section 4(b) (A) of the CEA makes it unlawful for market members to "cheat or defraud or attempt to cheat or defraud" investors. 7 U.S.C. § 6(b) (A).

Domenico contends that Allison misrepresented the degree of risk involved in commodities futures trading by stating: "There is [risk] in anything you do, but we [RBH] could keep it at a minimum." Even if she received a disclosure statement prior to trading, Domenico argues that Allison's oral statement vitiated any disclosures made in a Risk Disclosure Statement.

The ALJ found that Allison's statement was inherently fraudulent; and, according to Gordon, Allison did not fulfill his fiduciary duty to disclose to the customer all material market facts--including the "fundamental fact that no commodity trading strategy is free of risk." Id. at 23,982.

In vacating the liability conclusions of the ALJ, the CFTC found Allison's alleged statement to be "at best ambiguous," and that an independent finding of fraud was unsupported by the record. We agree.

In Gordon, the CFTC held that an associated person's negligent failure to inform a customer of the risks involved in investing in a commodity spread program constitutes cheating or defrauding as proscribed in section 4b(A) of the CEA. Id. at 23,981. According to the CFTC, in order to establish a violation of section 4b(A) it must be shown that a fiduciary relationship existed, that a fiduciary duty was breached and that the breach of the fiduciary duty caused the financial harm to the commodity customer. Id. Further, in cases involving the nondisclosure of a material fact, reliance is presumed; this presumption, however, is rebuttable. Id. at 23,982 n. 41.

Assuming Domenico established all the requisites to a constructive fraud violation as described in Gordon, Allison appears to have rebutted the reliance presumption.

According to the record, Allison did not induce Domenico into opening an account; on the advice of Ruff and Sibbet, Domenico contacted Allison to open a nondiscretionary account to invest in gold futures contracts. After a substantial loss, Domenico liquidated her positions on the advice of Sibbet and transferred her account to Kravitz, another broker with RBH and sustained further losses. Based on these facts, the Commission correctly concluded that Domenico did not rely on Allison's alleged statement or Allison's alleged failure to disclose the market risks; Domenico relied primarily on the advice of Sibbet and Ruff in making her trading decisions. Furthermore, it appears that Domenico would have invested in the commodity futures contracts despite the apparent risk because she continued to invest even after her substantial losses. Accordingly, the record does not support an independent finding of fraud.

We DENY plaintiff's petition for review.