Unpublished Disposition, 883 F.2d 1023 (9th Cir. 1988)Annotate this Case
Daryoush EMAMI, Petitioner,v.COMMODITY FUTURES TRADING COMMISSION, Shearson AmericanExpress, Inc., Respondents.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted Aug. 7, 1989.Decided Aug. 22, 1989.
Before JAMES R. BROWNING, FARRIS and CANBY, Circuit Judges.
Daryoush Emami petitions for review of an order of the Commodity Futures Trading Commission (CFTC or Commission), issued in a reparations proceeding, which upheld the decision of Administrative Law Judge Painter (ALJ) made after a full hearing.1 The ALJ held that Shearson/American Express, Inc. (Shearson), a futures commission merchant, and Paul Massari, a broker and associated person of Shearson, had not violated Section 4b of the Commodities Exchange Act (the CEA), 7 U.S.C. § 6b, and 17 C.F.R. Sec. 1.55.2 Specifically, the ALJ found that Massari did not make material misrepresentations to induce Emami to open and maintain a Shearson commodity account, did not inadequately disclose the risks of commodities trading, did not engage in churning and did not enter into unauthorized trades.3 Emami also contends that the ALJ abused his discretion when he granted appellees' motion for a protective order foreclosing discovery regarding Emami's suitability for trading precious metals futures. We have jurisdiction over this appeal pursuant to Section 14(e) of the CEA, 7 U.S.C. § 18(e), and we affirm.
Daryoush Emami immigrated to the United States from Iran in August of 1984, joining his two sons, Kourosh and Dianoush. Here, Emami reestablished ties with a fellow Iranian and former business acquaintance, Ali Akbar Hossain Zadeh (Ali). On August 22, 1984, Ali introduced Emami to Massari, Ali's account representative at Shearson, to discuss opening a commodities trading account to invest the capital he had brought to the United States from the liquidation of his successful import business and other assets in Iran. At this first meeting, which lasted approximately sixty to ninety minutes, the parties discussed at length the risks, potentials and costs of commodity trading. In addition, Massari read Shearson's risk disclosure statement to Emami, discussed the information contained therein and gave Emami a copy of the statement to take home for further review by himself and his sons.4 When necessary due to Emami's limited understanding of English, during this meeting Ali acted as a translator from Farsi to English and visa versa.
Although Emami's testimony does not make reference to a second meeting, the ALJ found that five days later, Emami returned to Massari's office, signed the necessary forms (including the risk disclosure statement), and opened an account with an initial deposit of $20,000. Emami declined to vest discretionary authority to trade in Massari and instead conferred the power of attorney to trade his account on Ali. Under Ali's control, within a few weeks Emami lost virtually all his initial capital and was required to meet two margin calls. Emami therefore revoked Ali's discretionary authority to trade on his behalf and trading in the account virtually ceased until November of 1984. At that time, Emami and his son Kourosh met with Massari for approximately four hours and decided to resume trading. Emami chose to retain trading authority, but granted Kourosh third party limited authorization to trade the account. Although Massari maintained frequent contact with either Emami or Kourosh to provide them with information he had obtained from Shearson's research department in New York about the silver market, Massari was never given trading authority by Emami. In fact, Emami apparently took a position opposite from Massari's recommendations approximately 85 percent of the time.5
Over the next four and a half month period, Emami's increasing frequent trading in silver futures contracts, characterized as "overtrading" by expert witnesses for both parties and the ALJ, resulted in additional losses of approximately $160,000. According to the findings of fact of the ALJ, without encouragement from Massari, "the Complainant was chasing a volatile market and at the same time attempting to keep margin calls to a minimum by reversing positions or creating straddles to average the account down and thereby limit his margin exposure." By March of 1984, several margin calls had been made and met by Emami. When Emami paid a final margin call with a check returned marked "insufficient funds," Shearson liquidated Emami's account on April 2, 1985. The account was left with a deficit of $20,542.
One year later, Emami commenced reparations proceedings by filing a complaint with the CFTC. Emami alleged that Shearson and Massari had defrauded him by allowing him to trade futures contracts without properly explaining the risks to him and despite their knowledge that he was not "suitable" for such trading. The complaint further alleged that Massari had excessively traded or churned Emami's account to generate commission income, and had engaged in unauthorized trading. Emami sought $180,240 in damages. In an amended answer, Shearson and Massari denied wrongdoing and counterclaimed for the $20,542 debit balance in Emami's account after liquidation.
Prior to the oral hearing before the ALJ, the parties were permitted to engage in discovery. Several of the interrogatories served by Emami inquired into Emami's suitability to trade futures contracts. Shearson and Massari sought and received a protective order pursuant to 17 C.F.R. Sec. 12.30(b) (2) (i) foreclosing discovery regarding suitability on the grounds that the issue of "suit-ability" was outside the scope of the CEA. Emami never appealed the protective order as explicitly permitted under 17 C.F.R. Sec. 12.302.
After the oral hearing and receipt of post-hearing briefs, the ALJ entered a decision on May 12, 1987. He dismissed all of Emami's claims and rejected the counterclaim. Emami appealed this decision to the CFTC, challenging the ALJ's issuance of the protective order and refuting the ALJ's conclusions regarding risk disclosure and churning. On July 8, 1988, the Commission summarily affirmed the ALJ's decision, stating that the ALJ was "substantially correct in result, and that no important question of law or policy had been raised." This timely appeal followed.
STANDARD OF REVIEW
On appeal, "the factual findings of the Commission are conclusive 'if supported by the weight of evidence.' " Dohmen-Ramirez v. Commodity Futures Trading Comm'n, 837 F.2d 847, 856 (9th Cir. 1988) (quoting 7 U.S.C. § 9, as incorporated by reference in 7 U.S.C. § 18(e)). We have interpreted "weight of the evidence" to mean a "preponderance" of the evidence. Id. (citations omitted); Premex, Inc. v. Commodity Futures Trading Comm'n, 785 F.2d 1403, 1407 n. 11 (9th Cir. 1986); Lawrence v. Commodity Futures Trading Comm'n, 759 F.2d 767, 773 (9th Cir. 1985). However,
The function of this court is something other than that of mechanically reweighing the evidence to ascertain in which direction it "preponderates"; it is rather to review the record for the purpose of determining whether the finder of fact--here the ALJ--was justified.
Dohmen-Ramirez, 837 F.2d at 856 (quoting Chapman v. Commodity Futures Trading Comm'n, 788 F.2d 408, 410 (7th Cir. 1986)).6
On appeal, Emami, apparently representing himself, contends that:
(1) the ALJ's findings of fact pertaining to risk disclosure are unsupported by the evidence and the ALJ therefore improperly concluded that appellees Massari and Shearson did not violate Section 4b of the CEA by failing to adequately explain and disclose all risks to Emami;
(2) the ALJ's finding of fact pertaining to control over Emami's trading account was improper and the ALJ therefore erred in concluding that Massari did not engage in churning of Emami's account in violation of Section 4b of the CEA;
(3) the ALJ erred in refusing to adopt Emami's proposed finding of fact regarding his prior inexperience in investing in commodities markets and precious metals futures contracts; and
(4) the ALJ abused his discretion by granting appellees' motion for a protective order prohibiting discovery of matters pertaining to Emami's suitability for trading.7
Taking each of these contentions in turn, we first hold that the weight of the evidence supports the ALJ's conclusion that Massari did not make material misrepresentations of risks or refrain from disclosing the risks in order to induce Emami to open and maintain a futures trading account. The ALJ found that risks were explicitly discussed by Massari and Emami (with the help of Ali's translation) in two separate meetings. Emami testified that he had run a successful retail importing business in Iran prior to immigrating to the United States, supporting the ALJ's finding that Emami was a highly intelligent and sophisticated individual presumably capable of understanding Massari's explanation of the highly volatile commodities market and the risks inherent in futures contracts trading. In addition, Emami took the risk disclosure statement home to review with the assistance of his two sons, after the first meeting with Massari and prior to opening an account. The risk disclosure statement was then executed by Emami after additional discussion with Massari. Although Emami's testimony paints a drastically different picture, the ALJ found Emami's testimony on this issue incredible. Based on our independent review of the record, the ALJ's credibility finding is not "patently unreasonable" and we therefore accept the ALJ's assessment of Emami's credibility on this point. Dohmen-Ramirez, 837 F.2d at 856.
Emami nevertheless asserts that he could not possibly have understood the risks because of his inability to speak English. However, Ali was present at the meetings to translate Massari's explanations into Farsi and Emami's sons speak English fluently. Emami's suggestion that Ali may not have translated accurately is without evidentiary support; Emami declined to call Ali as a witness at the oral hearing.
Therefore, we hold that the findings of fact regarding disclosure of risk are consistent with the testimony presented to the ALJ and, indeed, supported by the weight of that evidence. On these facts, we have no difficulty rejecting Emami's related contention that the ALJ erred in concluding that neither Massari nor Shearson violated Section 4b of the CEA or 17 C.F.R. Sec. 1.55 for failing adequately to disclose the risks involved in commodities futures trading or for otherwise making material misrepresentations in order to induce Emami to open or maintain his trading account at Shearson. Cases relied on by Emami are distinguishable. See, e.g., Drew v. First Nat'l Monetary Corp., [1984-1986 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 22,859 at 31, 529 (CFTC Jan. 10, 1986) (CFTC found violation of CEA when broker failed to explain material facts to an unsophisticated customer who was not proficient in the English language).
Similarly, the ALJ's finding that Emami or his son Kourosh controlled the account at all times after November 19, 1984 must also stand, thereby precluding a finding of liability for churning. Churning occurs "when a broker, exercising control over the volume and frequency of trades, abuses his customer's confidence for personal gain by initiating transactions that are excessive in view of the character of [the] account and the customer's objectives as expressed to the broker." Lopez v. Dean Witter Reynolds, Inc., 805 F.2d 880, 882 n. 1 (9th Cir. 1986) (quoting Black's Law Dictionary 220 (5th ed. 1979)). See also Smith v. Siegel Trading Co., [1980-1982 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 21,105 at 24,452 (CFTC Sept. 3, 1980). Churning constitutes a violation of Section 4b of the CEA. Siegel Trading Co., [1980-1982 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 21,105 at 24,452-53. See also In re Lincolnwood Commodities, Inc., [1982-1984 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 21,986 at 28,246 (CFTC Jan. 31, 1984). In order to make a claim of churning, a complainant must establish two key elements: (1) that the broker exercised control over the trading in the customer's account; and (2) that the level of trading was excessive in light of the customer's desired objectives. See, e.g., id.; Ball v. Shearson Hayden Stone. Inc., [1980-1982 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 21,184 at 24,874 (CFTC Apr. 2, 1981). Even if we assume that excessive trading was present, to establish a claim of churning Emami still needed to show that Massari or Shearson held de facto or de jure control over his account.
Massari never had de jure control because Emami never vested any discretionary authority in Massari (or any representative of Shearson for that matter) to trade on his account. DeAngelis v. Shearson/American Express, Inc., [1984-1986 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 22,753 at 31,137 (CFTC Sept. 30, 1985). De facto control, although a closer question, was also not established. De facto control exists when the broker occupied such a position with respect to the customer that a finder of fact could reasonably determine that the broker and not the customer was responsible for the level of trading in the account. Id. (citation omitted). The following factors, which are not exhaustive, tend to demonstrate the existence of de facto control:
(1) a lack of customer sophistication, (2) lack of prior commodity trading experience on the part of the customer and a minimum of time devoted by him to his account, (3) a high degree of trust and confidence reposed in the [broker] by the customer, (4) a large percentage of transactions entered into by the customer based on the recommendations of the [broker], (5) the absence of prior customer approval for transactions entered into on his behalf, (6) customer approval of recommended transactions where approval is not based on full, truthful and accurate information by the [broker].
Lehman v. Madda Trading Co., [1984-1986 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 22,417 at 29,866 (CFTC Nov. 13, 1984); Siegel Trading Co., [1980-1982 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 21,105 at 24,454 (quoting Ball, [1980-1982 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 21,184 at 24,874). A finding of control does not require the presence of all of the above factors. Lehman v. Madda Trading Co., [1984-1986 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 22,417 at 29,866-67.
As discussed above, the ALJ reasonably found that Emami is a "highly intelligent and sophisticated individual." He enjoyed the counsel of his two sons, at least one of whom exhibited some familiarity with the commodities markets. Furthermore, there was frequent contact between Emami or Kourosh and Massari concerning the status of the account and Shearson's recommendations regarding the market, and Emami apparently regularly watched a cable television show which presented the current price of various futures in the commodities markets. Emami also was aware of the status of his account because he received both daily confirms and monthly statements from Shearson and on numerous occasions was required to either transfer or deposit substantial funds into his commodity account to meet margin calls. Most importantly, the ALJ found that all trading in Emami's account after November 19, 1984 was at the direction of Emami or Kourosh.8 There was no showing (except for self-serving statements of Emami and Kourosh which the ALJ implicitly discredited) that Massari directed trading in the account, that Massari entered into any transaction without prior approval or that Massari's trading recommendations, whether or not they were heeded by Emami, were anything less than truthful and accurate. The finding that Emami or his son controlled the account is clearly justified by the evidence in the record. This factual finding precludes a finding of liability for churning in violation of Section 4b of the CEA.
Next, Emami argues that the ALJ erred in refusing to adopt his proposed finding of fact to the effect that Emami had no prior experience investing in the commodities market or in precious metals futures contracts. Emami correctly recognizes that this finding is relevant to one of the factors considered in a determination of the existence of de facto control. See Lehman v. Madda Trading Co., [1984-1986 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 22,417 at 29,866. However, the ALJ never explicitly made or even implicitly relied on any finding to the contrary and was under no obligation to adopt any of Emami's proposed findings of fact. This contention is without merit.
Finally, Emami argues that the ALJ abused his discretion by granting the appellees' motion for a protective order prohibiting the discovery of matters regarding Emami's "suitability" for trading. An appeal from an ALJ's discovery order during reparations proceedings is provided for in 17 C.F.R. Sec. 12.302.9 Emami did not take advantage of this direct appeal of the ALJ's discovery order. By failing to raise the issue before the ALJ, Emami waived his right to consideration of the issue by this court. Dohmen-Ramirez, 837 F.2d at 860.10
Because all of Emami's claims are meritless, Shearson and Massari have clearly prevailed and are entitled to attorneys' fees for this appeal under the mandatory fee provision of Section 14(e) of the CEA, 7 U.S.C. § 18(e) ("If the appellee prevails, he shall be allowed a reasonable attorney's fee to be taxed and collected as a part of his costs"). They are also entitled to costs. Id. ("The appellee shall not be liable for costs in said [United States Court of Appeals]"). The request for further sanctions under Fed. R. App. P. 38 is denied.
The Petition for Review is DENIED. Appellees Shearson and Massari are awarded costs and a reasonable attorneys' fee on this appeal.11
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Cir.R. 36-3
Section 14(a) of the Commodities Exchange Act, 7 U.S.C. § 18(a) sets forth a "reparations procedure through which disgruntled customers of professional commodities brokers [may] seek redress for the brokers' violation of the Act...." Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833, 835 (1986)
Section 4b, in relevant part, makes it unlawful for any person to "cheat or defraud or attempt to cheat or defraud" any other person in connection with an order for a futures contract, made for or on behalf of such other person. 7 U.S.C. § 6b(A). 17 C.F.R. Sec. 1.55 provides that a futures commission merchant (FCM) may not open a commodity futures account for a customer unless the FCM first "furnishes" the customer with a risk disclosure statement and then "receives" from the customer a signed and dated "acknowledgment" that the customer "received and understood" the disclosure statement
The allegation of unauthorized trading was apparently not raised in Emami's brief on appeal to the Commission. On this ground alone, he may have waived his right to consideration of the issue of unauthorized trading by this court. Cf. Dohmen-Ramirez v. Commodity Futures Trading Comm'n, 837 F.2d 847, 860 (9th Cir. 1988) (failure to raise issue before ALJ precludes raising argument on appeal). However, in addition, Emami's brief before this court makes only passing reference to the unauthorized transaction claim with no supporting argument or citation to authority or the record. We therefore deem this claim waived and do not consider it here
The ALJ explicitly found that " [Emami's] testimony regarding the length and content of the initial meeting ...--that the entire meeting took 10-15 minutes, of which 5-7 minutes was devoted to [Emami's] interest in opening an account and that all [Emami] did was sign 20 or 30 documents in blank--is not credible." "Credibility determinations made by an ALJ are given great deference and upheld 'unless they are 'inherently incredible or patently unreasonable.' ' " Dohmen-Ramirez v. Commodity Futures Trading Comm'n, 837 F.2d 847, 856 (9th Cir. 1988) (quoting Photo-Sonics, Inc. v. NLRB, 678 F.2d 121, 123 (9th Cir. 1982) (in turn quoting NLRB v. Anthony Co., 557 F.2d 692, 695 (9th Cir. 1977)). We see no reason to upset the credibility determination of the ALJ in this case
The ALJ found that " [a]fter [Ali's] discretionary authority was revoked, the majority of the trades in Complainant's account were entered by Complainant, with the remainder transacted by Kourosh Emami" and "that Complainant or his son Kourosh at all times after November 19, 1984, controlled Complainant's account and entered all trades thereon." Emami challenges these conclusions in this appeal. See discussion, infra
There is no attention in our prior cases reviewing an order of the CFTC to the standard of review of legal conclusions and mixed conclusions of law and fact of the CFTC or the ALJ. The issue of control over Emami's account, relevant to his churning claim, may qualify as such a mixed question. We need not, however, reach the issue of the proper standard to be applied here. Because we accept the strictly factual findings of the ALJ (which lead to his legal conclusions) as being supported by the weight of the evidence, we would reach the same result on the ultimate legal conclusions under either a de novo or a more permissive standard of review. Cf. Dohmen-Ramirez, 837 F.2d at 857 (holding, inter alia, that substantial evidence in the record as a whole supported the ALJ's factual findings leading to the conclusion that the customer was defrauded)
Emami also suggests that the Commission "should use this case to force brokers to advise non-English-speaking investors of the risks in their native tongue." This contention is meritless. This court is not authorized to require the CFTC to create policies or adopt specific regulations
Also relevant is the ALJ's finding of fact that Emami traded against the recommendations of Massari 85 percent of the time. However, Emami correctly points out that the only evidence in the record supporting this finding is a statement by Massari estimating on the spur of the moment the amount of times Emami traded against his recommendation. We do not rely on this finding for our conclusion that the weight of the evidence supports a finding of an absence of de facto control over Emami's account on the part of Massari
17 C.F.R. Sec. 12.302 provides, in relevant part:
Any party aggrieved by a discovery-related order issued by [in this case, the ALJ] may appeal such order by filing, within five (5) days after service upon him of the discovery order, a motion to vacate or modify such order, or any part thereof, setting forth the grounds therefor, and specifying whatever other relief that the moving party may seek.
In addition, we note that both the courts and the CFTC have rejected a suitability cause of action under the fraud provisions of Section 4b of the CEA. See, e.g., Schofield v. First Commodity Corp. of Boston, 793 F.2d 28, 34 (1st Cir. 1986); Trustman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., [1984-1986 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 22,490 at 30,168 (C.D. Cal. Jan. 24, 1985); Phacelli v. ContiCommodity Services, Inc., [1986-1987 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 23,250 at 32,672-73 (CFTC Sept. 5, 1986). But see Yi v. International Trading Group Ltd., [1986-1987 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 22,958 at 31,789-90 (CFTC Mar. 13, 1986) ("It does appear that a suitability requirement may be derived from Sec. 4b(A) and/or Sec. 4o of the [CEA]"). We do not, however, have to reach that issue here
The CFTC seeks no attorneys' fees for this appeal, and none are awarded