Commodity Futures Trading Commission v. Wilson et al, No. 1:2012cv11799 - Document 67 (D. Mass. 2014)
Court Description: Judge Richard G. Stearns: MEMORANDUM & ORDER entered granting 55 Motion for Summary Judgment and granting requests for injunctive relief and civil penalties. The CFTC will have ten (10) days from the date of today's Order to submit a proposed form of final judgment consistent with the court's findings and rulings as contained in the attached memorandum. (RGS, law1)
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Commodity Futures Trading Commission v. Wilson et al Doc. 67 UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS CIVIL ACTION NO. 12-11799-RGS U.S. COMMODITY FUTURES TRADING COMMISSION v. J OHN B. WILSON AND J BW CAPITAL LLC MEMORANDUM AND ORDER ON PLAINTIFF’S MOTION FOR SUMMARY J UDGMENT May 16, 20 14 STEARNS, J . The Com m odity Futures Trading Com m ission (CFTC) accuses defendants J ohn B. Wilson and J BW Capital LLC (J BW), of civil violations of the Com m odity Exchange Act (CEA). The CFTC alleges that Wilson (and J BW, see § 2(a)(1)(B) of the CEA) violated 7 U.S.C. §§ 6m (1), 6b(a)(2)(i)(iii), 6b(a)(1)(A)-(C),1 and 6o(1)(A)-(B) by (1) failing to register with the CFTC as a com m odity pool operator (CPO) while operating such a pool, (2) knowingly and willfully m aking m isrepresentations of m aterial fact to the pool investor-participants, and (3) using m eans of interstate com m erce to 1 The CFTC Reauthorization Act of 20 0 8 took effect on J une 18, 20 0 8; thus, the relevant sections of the CEA with regard to com m odities fraud are § 6b(a)(2)(i)-(iii) for acts before J une 18, 20 0 8, and § 6b(a)(1)(A)(C) for acts after J une 18, 20 0 8. Dockets.Justia.com defraud and deceive the participants. The CFTC seeks sum m ary judgm ent, an order of perm anent injunction, a perm anent trading ban, and a perm anent registration ban, against Wilson and J BW. The CFTC also seeks the paym ent of restitution and civil m onetary penalties. Wilson and J BW, for their part, argue that a m aterial dispute over scienter precludes entry of sum m ary judgm ent.2 BACKGROUND J BW was registered as a Massachusetts lim ited liability com pany on J uly 23, 20 0 7, and Wilson, a Massachusetts resident, was listed as its sole registered agent. See J BW Cert. of Org. (Dkt. # 55-6 at 10 -11). The J BW Operating Agreem ent stated that J BW’s business purpose was to “invest in stocks, bonds, derivatives, com m odity futures, financial futures, stock index futures, options on stocks, and options on futures.” See J BW Operating 2 Defendants also com plain that they have been “unduly restricted” in form ulating an opposition because of the CFTC’s alleged withholding of discovery. This allegation is baseless. Defendants have engaged in a pattern of abusive discovery practice by dem anding the production of m assive am ounts of irrelevant m aterial. See Dkt. # 38, # 51, and # 52 (denying defendants’ m otions to com pel). Defendants have also rebuffed the court’s repeated invitations to cure their overbroad (or at tim es incom prehensible) discovery requests. See, e.g., Dkt. # 52 (noting that “[d]efendant is free to issue a m ore targeted 30 (b)(6) request in com pliance with the rules, but has been on notice of the defects in its first request for m ore than two m onths,” and that “defendant’s m otion does not identify what inform ation defendant seeks from the CFTC that it is entitled to under F.R.C.P. 26(b) that it does not already possess.”). 2 Agm t. (Dkt. # 55-5) ¶ 5. The Operating Agreem ent also stated that Wilson was the Manager of J BW and would be com pensated for his services, and that, as Manager, he had “sole responsibility” over the investm ent and m anagem ent of J BW’s assets. See id. ¶¶ II(3) & II(6). Neither Wilson nor J BW was ever registered with the CFTC as a CPO, nor did either file a notice with the National Futures Association (NFA) claim ing to be exem pt from CFTC registration. In Septem ber of 20 0 7, Wilson accepted contributions for J BW from several investors. The initial investors in J BW were fam ily m em bers and acquaintances of Wilson, including Stephen Wilson (Wilson’s brother), Peter Parsons, Thom as Trafton, Peter Trafton, and J eyhsin Yao. In his affidavit in opposition to the CFTC’s m otion for sum m ary judgm ent, Wilson refers to these initial investors as the “founders” of J BW. See Wilson Aff. (Dkt. # 58 -4) ¶ 2. On Septem ber 10 , 20 0 7, Wilson opened a bank account for J BW at Sovereign Bank, and on Septem ber 12, 20 0 7, he opened a trading account for J BW at MF Global, Inc. (MFG). Wilson deposited funds from J BW investors into the J BW bank account and then transferred the pooled funds to the MFG trading account. Wilson used the m oney to begin trading in 3 com m odity futures in October of 20 0 7, and initially used an algorithm called the “Hum phrey Program ” to trade com m odity futures.3 By Decem ber 31, 20 0 7, J BW had thirteen pool participants. In March of 20 0 8, J BW accepted funds from at least eight new pool participants. At som e point, each of the investors in J BW was sent a “Certificate of Beneficial Interest” (CBI) purporting to show each investor’s pro rata percentage share of the pooled funds. During the life of the unregistered pool, Wilson obtained over $ 2,0 0 0 ,0 0 0 from twenty-five pool participants (excluding him self), had total net trading losses of approxim ately $ 1,80 0 ,0 0 0 , and returned approxim ately $ 227,0 0 0 to the investors. It is undisputed that in operating J BW, Wilson used the telephone and em ails. See Defs.’ Resp. to Stm t. of Facts (Dkt. # 59) ¶ 19. Wilson circulated periodic reports to J BW investors, including statem ents reporting J BW’s Net Asset Value (NAV). Fals e an d Mis le a d in g Sta te m e n ts Wilson adm itted to receiving daily and m onthly statem ents of account from MFG, through which he conducted the trading on behalf of J BW. See Wilson Dep. 10 4:4-10 , Sep. 22, 20 11 (Dkt. # 55-14) (Wilson 3 Wilson has stated that the Hum phrey Program was developed by him and an individual nam ed Edward Baafi, and that he had successfully conducted a 90 -day sim ulated trading test of the program on algorithm ic futures trading software between Decem ber 20 0 6 and May 20 0 7. 4 9/ 22/ 11 Dep.). Wilson also adm itted to sending various em ails to the pool participants containing inform ation about the status of the pool, including updated NAV values. The following chart sum m arizes the em ails sent by Wilson to pool participants prior to Septem ber of 20 0 8.4 Date NAV reported by Wilson Actual J BW NAV As of 11/ 30 / 0 7 $ 159,460 .0 0 $ 159,460 .0 0 12/ 21/ 0 7 $ 180 ,0 71.0 0 $ 177,385.0 0 3/ 0 1/ 0 8 $ 566,0 76.13 $ 553,523.0 0 5/ 30 / 0 8 $ 2,0 29,271.0 0 $ 1,0 41,399.0 0 On Septem ber 1, 20 0 8, J BW’s trading account at MFG reflected a net balance of approxim ately $ 2,558,347. experienced a net trading loss On Septem ber 11, 20 0 8, J BW of approxim ately $ 1,0 45,632. Notwithstanding, on Septem ber 13, 20 0 8, Wilson reported by em ail to J BW investors that “Today’s NAV” was $ 2,475,941. See Slowly Decl., Ex. 12 (Dkt. # 55-6 at 2). The actual NAV on Septem ber 13, 20 0 8, was approxim ately $ 1,149,628. Wilson adm its to circulating this em ail and it is undisputed that he knew that the $ 2,475,941 NAV figure was inaccurate. See Wilson Dep. 10 5:4-10 , Nov. 20 , 20 13 (Dkt. # 55-19) (Wilson 11/ 20 / 13 Dep.); cf. Defs.’ Opp’n (Dkt. # 58) at 15 (listing a plethora of allegedly disputed facts 4 See Pl.’s Mem . (Dkt. # 55-1) at 4. The values in the rightm ost colum n are taken from MFG statem ents attached as exhibits to the affidavit of J udith M. Slowly, an CFTC Futures Trading Investigator. See Dkt. # 554, # 55-9, & # 55-10 . 5 regarding whether Wilson com m itted “any fraudulent act,” but failing to allege that Wilson did not know the actual NAV am ount on Septem ber 13, 20 0 8). On Septem ber 15 and 16, 20 0 8, J BW experienced another net futures trading loss of over one m illion dollars. See Slowly Decl., Ex. 35 (Dkt. # 55-7). On Septem ber 22, 20 0 8, Wilson again em ailed the J BW pool participants (with the exception of Daniel Mann, a pool participant who had recently agreed to invest), adm itting the Septem ber 11, 20 0 8 loss, and noting that he had already spoken to each of the em ail recipients personally. He wrote: [I] . . . want to again express m y apologies for the rem arkable loss I incurred. I also want to apologize for not reporting the $ 1M loss of 9/ 11 in m y weekly report. M y in t e n t io n w a s n o t t o d e ce iv e b u t t o “r o ll” t h e lo s s in t o t h e n e xt w e e k a n d h o p e fu lly s h o w s o m e r e co v e r y . Clearly a recovery was not the case because I experienced the second m ajor loss on the following Monday. I will be sending a report later this m onth which will explain how I plan to recover from this. Each of you know this is m y profession and only source of incom e. I will m ake a recovery and m ake every effort to m ake each investor whole. Slowly Decl., Ex. 13 (Dkt. # 64-1) (em phasis added). Wilson acknowledged writing this em ail. See Wilson 9/ 22/ 11 Dep. 220 :21-222:13. Prior to sending the Septem ber 22, 20 0 8 em ail adm itting the Septem ber 11 loss, Wilson welcom ed Daniel Mann into J BW, em ailing him 6 on Septem ber 17, 20 0 8, to confirm receipt of his $ 10 0 ,0 0 0 investm ent. Slowly Decl., Ex. 57 (Dkt. # 55-10 at 6). Wilson adm its that this em ail was sent after the Septem ber 11 losses, and that when he received the funds from Mann, he did not disclose the precipitous losses the fund had incurred during the previous few days. See Wilson 9/ 22/ 11 Dep. 220 :4-16. Mann was also om itted from the Septem ber 22, 20 0 8 confessional em ail that Wilson sent to the other pool participants. At the end of Septem ber, Wilson sent an em ail to each of the investors with a “recovery plan.” Wilson pledged to transfer $ 20 0 ,0 0 0 of his own funds to the trading account, stated that he would m odify his “autom ated trading program ” to contain a “stop loss order” feature, and that he would be soliciting new investor contributions, but that he would segregate the new investor contributions for purposes of his com pensation. See Wilson 11/ 20 / 13 Dep. 112:17-114:11. Wilson adm itted that he did not actually m odify the program to include a stop-loss order feature, and adm itted that he did not actually segregate new funds received (from Mann), contrary to the statem ents in his recovery plan e-m ail. Id. 114:12-20 . On Decem ber 12, 20 0 8, Wilson em ailed an NAV update to Mann, falsely stating that Mann’s investm ent in J BW was worth approxim ately $ 120 ,867, despite the fact that the NAV for the entire pool barely exceeded 7 $ 42,0 0 0 (Wilson had incurred a net trading loss of approxim ately $ 161,875 on Decem ber 1, 20 0 8, which he had not disclosed to Mann). On Decem ber 15, 20 0 8, Wilson em ailed Mann a CBI, recognizing Mann’s initial $ 10 0 ,0 0 0 capital contribution (from Septem ber). The CBI represented that Mann’s percentage interest in J BW as of Septem ber 28 , 20 0 8, was 3.76% of the total fund. The actual NAV of the J BW fund at the end of Septem ber 20 0 8 approxim ated $ 10 ,0 0 0 .0 0 .5 Wilson adm itted to knowingly deceiving Mann about his percentage interest in J BW and about the value of the fund in total, and adm itted to deceiving him for fear that Mann would withdraw his m oney and refuse to invest further funds. At his deposition, Wilson testified as follows: Q: What did you tell him ? A: I told him whatever the $ 10 0 ,0 0 0 was over two and a half m ill, som ething like that. I don’t know what the percentage was, but it was – I don’t know what the percentage was, but it was basically $ 10 0 ,0 0 0 of two and a half m illion. Q: At the tim e you told Mr. Mann that he was putting $ 10 0 ,0 0 0 or words to that effect into a $ 2 m illion fund, that was not true, there was no $ 2 m illion fund? A: You’re absolutely right. Q: Was there a reason why you did not tell him ? A: Fear, sim ple as that. Q: Was there a concern that he would not invest the m oney? 5 Dkt. # 55-1, at 6. On or about Decem ber 16, 20 0 8, Mann invested another $ 10 0 ,0 0 0 in J BW. Id. 8 A: Yes. Wilson 9/ 22/ 11 Dep. 147:19-148:12. Wilson explained that he m isled Mann in the attem pt to recoup the losses suffered by his other investors in Septem ber of 20 0 8. See id. at 148:13-24. DISCUSSION Sum m ary judgm ent is appropriate when “the m ovant shows that there is no genuine dispute as to any m aterial fact and the m ovant is entitled to judgm ent as a m atter of law.” Fed. R. Civ. P. 56(a). If this is accom plished, the burden then “shifts to the nonm oving party to establish the existence of an issue of fact that could affect the outcom e of the litigation and from which a reasonable jury could find for the [nonm oving party].” Rogers v. Fair, 90 2 F.2d 140 , 143 (1st Cir. 1990 ). The nonm oving party “m ust adduce specific, provable facts dem onstrating that there is a triable issue.” Id., quoting Brennan v. Hendrigan, 888 F.2d 189, 191 (1st Cir. 1989). “[T]he m ere existence of som e alleged factual dispute between the parties will not defeat an otherwise properly supported m otion for sum m ary judgm ent; the requirem ent is that there be no genuine issue of m aterial fact.” Anderson v. Liberty Lobby , Inc., 477 U.S. 242, 247-248 (1986) (em phases in original). 9 “State of m ind” issues do not necessarily preclude sum m ary judgm ent. See Medina-Munoz v. R.J. Rey nolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990 ) (“Even in cases where elusive concepts such as m otive or intent are at issue, sum m ary judgm ent m ay be appropriate if the nonm oving party rests m erely upon conclusory allegations, im probable inferences, and unsupported speculation.”); Carm ona v. Toledo, 215 F.3d 124, 133 (1st Cir. 20 0 0 ) (a m oving party is not required to “prove a negative” to avoid trial on a specious claim ). Th e Co m m o d itie s Exch an ge Act Section 1a(11) of the CEA defines “Com m odity pool operator” (CPO) as “any person– (i) engaged in a business that is of the nature of a com m odity pool . . . or sim ilar form of enterprise and who, in connection therewith, solicits, accepts, or receives from others, funds, securities, or property . . . for the purpose of trading in com m odity interests, including any– (I) com m odity for future delivery.” 7 U.S.C. § 1a(11). A com m odity pool is “any investm ent trust, syndicate, or sim ilar form of enterprise operated for the purpose of trading in com m odity interests.” 1a(10 )(A). 10 Id. § CPO Re gis tratio n Re qu ire m e n t It is unlawful for a CPO “to m ake use of the m ails or any m eans or instrum entality of interstate com m erce in connection with his business” unless the CPO registers with the CFTC (with certain exceptions). Id. § 6m (1).6 Principals are liable for the violations of their agents in this regard. See 7 U.S.C. § 2(a)(1)(B), and 17 C.F.R. § 1.2. If a person claim s exem ption from the requirem ent under one of the articulated exceptions, he or she m ust still file an electronic notice with the NFA. 17 C.F.R. § 4.13(b)(1). It is beyond dispute that neither Wilson nor J BW registered as a CPO, nor did either file an electronic notice of a claim ed exem ption with the NFA.7 In opposition to the CFTC’s m otion for sum m ary judgm ent, Wilson alleges that “[t]he undisputed evidence proves that Mr. Wilson was not solely responsible for decisions and that the decision-m aking of the Founders [of J BW] was on a collective basis.” Defs.’ Opp’n at 4.8 This 6 The exceptions are set out in 17 C.F.R. § 4.13. 7 In any event, Wilson did not qualify for exem ption from the registration requirem ent because J BW had m ore than 15 pool participants, controlled m ore than $ 2 m illion in capital contributions, and because Wilson was com pensated for his services as the m anager of J BW. Dkt. # 551 at 10 . 8 In support, Wilson cites page 37, line 9-19 of an October 2, 20 13 Hearing Transcript, which is a portion of his deposition testim ony on direct exam ination, answering questions asked by his lawyer, Philip Giordano. As 11 assertion (even assum ing that it had som e legal relevance) is directly contradicted by Wilson’s own testim ony: Q: You then ultim ately opened up a futures trading account at Man Financial? A: That’s right, MF Global. Q: In the nam e of J BW Capital? A: That is correct. Q: Not in your nam e? A: That’s right. Q: But you are the one who had trading authority over the J BW account at MF Global? A: That’s correct. Q: No one else? A: That’s correct. Wilson 9/ 22/ 11 Dep. 77:4-16. Q: Were you the only person that had check signing authority on the J BW account at Sovereign Bank? A: Yes. Q: Why did you choose MF Global for the clearing firm ? A: They gave the best com m ission rate of any firm . Id. at 89:15-22. Further, Wilson adm itted that he controlled the J BW account and m ade all financial decisions affecting the pool: the entirety of the cited testim ony concerns interactions between Wilson and others “before J BW Capital was created” (see line 11), the testim ony is irrelevant to any issue in this case. 12 Q: Now, I know you m entioned that you considered them equal m em bers because they have certificates of beneficial interest, but they didn’t have m anaging decision power over the com pany? A: That’s correct. Q: They didn’t have trading authority over the account? A: That’s correct. Q: They didn’t have the check signing authority over the bank account? A: That’s correct. Q: Even though they had a beneficial interest in the com pany as an investor, all the executive decisions were still being m ade by you for the com pany? A: That is correct. Q: And only you? A. That is correct. Id. 10 7:10 – 10 8:4. Wilson’s second line of defense would excuse his (and J BW’s) failure to register, because he supposedly relied on “professionals” for legal, tax, accounting, regulatory and com pliance m atters. See Defs.’ Opp’n at 4.9 Specifically, Wilson asserts that an attorney nam ed J am es DeMaria “was engaged to m ake sure that the entity was in accord with all com pliance 9 The individuals Wilson nam es as his “professionals” are Peter Kortkam p, Esq. (as legal counsel), J am es DeMaria, Esq. (as legal counsel), Lillian Gonzales (a CPA), and Kate Ryan (a CPA). Kortkam p, DeMaria, and Gonzales were all investors in J BW Capital. Ryan was an em ployee at Gonzales’ accounting firm (Gonzales and Associates). 13 regulatory registration issues” and that he and the other professionals “had a duty to correctly advise the Defendants . . . of all relevant issues pertaining to their field of expertise, including but not lim ited to the obligation, if any, to register the securities of J BW, whether J BW and/ or Mr. Wilson had a duty to register as an investm ent advisor, or otherwise.” Defs.’ Opp’n at 5. Wilson also points to a February 24, 20 0 8 em ail he sent to Kate Ryan, a CPA, in which he stated: Hi Kate, I’m attracting m ore investors which is good news. What I don’t want is bad news about registration concerns. I attached this hyperlink about “investm ent clubs” which seem s to best apply to m y L.L.C. If I understand it correctly m y “gates” to avoid SEC or other regulation is 10 0 m em bers or $ 25M. Am I right? [hyperlink] As we discussed m any tim es, I want to be a quiet successful venture; I don’t want publicity, notoriety or constriction. I want to m ake a lot of m oney for m e and m y investors and I want to play by the rules. That being said, I want to protect m y back side and thank you for your help. J ohn Slowly Decl., Ex. 10 (Dkt. # 55-6). Im m ediately beneath the first paragraph of the em ail, a handwritten “Yes” appears. (Lillian Gonzales testified that 14 the handwriting appears to be that of Ryan, then no longer her em ployee). See Defs.’ Opp’n, Ex. 13 (Sep. 30 , 20 13 Hrg. Trans.), 185:1-10 .10 Putting aside the fact that this em ail correspondence is dated well after Wilson began operating J BW, and passing over the contradictory nature of Wilson’s own testim ony,11 to the extent that this argum ent m ight be construed as an attem pted “m isled by counsel” or “m isled by CPA” defense, it vastly understates the elem ents of a proper “advice of counsel” defense and the obligations incum bent upon a party asserting it. See, e.g., G.S. Enters., Inc. v. Falm outh Marine, Inc., 410 Mass. 262, 275 (1991) (“To establish the advice-of-counsel defense, the party raising it m ust show that: (1) he is acting in good faith in the belief that he has a good cause for his action and is not seeking an opinion to shelter him self; (2) he has m ade a full and honest disclosure of all the m aterial facts within his knowledge or belief; (3) he is doubtful of his legal rights; (4) he has reason to know that 10 Ryan by way of affidavit avers that “Wilson never asked m e whether J BW should be registered with [the CFTC] or [the NFA]. I assum ed that Wilson had an attorney for questions regarding any need for registration as m y focus was on preparing the tax returns for J BW. I do not have any knowledge or expertise about the registration rules of the CFTC or NFA.” Slowly Aff., Ex. 52 ¶ 5. 11 In his Septem ber 22, 20 11 deposition, Wilson was asked “you were not registered with the NFA or the CFTC?” He responded, “I was not,” and was then asked “Did you ever consider registering with the NFA?” and “You didn’t consult with anybody about whether or not you should register?” He responded “I did not” to both questions. Wilson 9/ 22/ 11 Dep. 92:9-19. 15 his counsel is com petent; (5) he honestly com plied with his counsel=s advice; and (6) his counsel is of such training and experience that he is able to exercise prudent judgm ent in such m atters.”). In any event, the registration requirem ent does not contain a “state of m ind” lim itation to liability. There is a “flat prohibition . . . against using the facilities of interstate com m erce to give com m odity advice unless registered,” and “[w]hile fraud and m isconduct m ay also be violations of the Act . . . violations of § 6m alone are sufficient” to warrant the granting of an injunction. CFTC v. British Am . Com m odity Options, 560 F.2d 135, 142 (2d Cir. 1977). The British Am erican Court also noted that “Congress has specifically found that the activities of com m odity trading advisors affect substantially the transactions on comm odity m arkets, see 7 U.S.C. § 6l, and it has m ade the policy decision that the conduct of business by unregistered advisors is not in the public interest.” Id. Although the court is unaware of any case directly discussing state of m ind with regard to a failure to register (as opposed to operating as a CPO when the CFTC has rejected an application for registration), the CFTC m akes a com pelling analogy to the securities laws generally and to the flat prohibition against holding oneself out as an investm ent advisor without first registering with the Securities and Exchange Com m ission (SEC). 15 16 U.S.C. § 80 b-3. Courts have consistently held that the SEC registration requirem ent is a “strict liability” provision. See, e.g., SEC v. Blavin, 557 F. Supp. 130 4, 130 9 (E.D. Mich. 1983), aff’d, 760 F.2d 70 6, 712 (6th Cir. 1985). I agree with the CFTC that for enforcem ent purposes, § 6m (l) of the CEA deserves to stand on the sam e footing as Securities Exchange Act (SEA) § 80 b-3. As in the case of the SEA, the CFTC registration requirem ent is “central” to the “com prehensive schem e for regulation of trading in com m odity futures” established by Congress in the wake of severe abuses of the com m odity future m arket. See British Am ., 560 F.2d at 138 (“Registration is the kingpin in this statutory m achinery, giving the Com m ission the inform ation about participants in com m odity trading which it so vitally requires to carry out its other statutory functions of m onitoring and enforcing the Act.”). In the context of strict liability, there is little force to Wilson’s lack of scienter argum ent given his direct adm ission that that he “chose” not to register as a com m odity pool operator.12 12 Scienter is “a m ental state em bracing the intent to deceive, m anipulate or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193194 n.12 (1976). It m ay also be established by a showing of “a high degree of recklessness.” Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir. 20 0 2). 17 Q: It was your intent when you started J BW capital to use the investors’ m oney to only trade futures? A: Right. Q: That was your intent? A: That’s right. Q: That’s what you told the investors? A: That’s right. Q: That’s what you did, you only traded futures with their m oney? A: That is correct. Q: Given that, sitting here today, why do you still think it was not a com m odity pool? A: I just didn’t think of it as a com m odity pool because I had not registered with the NFA nor the CFTC, which would have then designated it as a com m odity pool. Q: I am asking you your opinion based upon your experience, because you have som e experience in the futures m arket, why do you not think that you should have been registered as a com m odity pool operator? A: I’m not saying that I didn’t think I should. I chose not to register as a com m odity pool operator. Wilson 9/ 22/ 11 Dep. 94:20 – 95:22. The court therefore concludes that Wilson, and by extension, J BW, violated 7 U.S.C. § 6m (1) by failing to register as a CPO as required. Co m m o d itie s Frau d The CEA contains a general fraud provision, stating: It shall be unlawful— 18 ( 1) for any person, in or in connection with any order to m ake, or the m aking of, any contract of sale of any com m odity in interstate com m erce or for future delivery that is m ade, or to be m ade, on or subject to the rules of a designated contract m arket, for or on behalf of any other person . . . ( A) to cheat or defraud or attem pt to cheat or defraud the other person; ( B) willfully to make or cause to be m ade to the other person any false report or statem ent or willfully to enter or cause to be entered for the other person any false record; ( C) willfully to deceive or attem pt to deceive the other person by any m eans whatsoever in regard to any order or contract or the disposition or execution of any order or contract, or in regard to any act of agency perform ed, with respect to any order or contract for or, in the case of paragraph (2), with the other person. 7 U.S.C. § 6b(1)(A)-(C).13 “In an enforcem ent proceeding, the CFTC can show a violation of this anti-fraud provision by establishing that the defendant intended to m ake and did m ake a m aterial m isrepresentation with scienter.” S.E.C. v. Princeton Econ. Int’l Ltd., 73 F. Supp. 2d 420 , 424 (S.D.N.Y. 1999) (collecting cases); see also TC v. R.J. Fitzgerald & Co., 310 F.3d 1321, 1328 (11th Cir. 20 0 2) (noting that to establish a violation of section 6(b)(1)(A)(C), the CFTC m ust prove that (1) a m isrepresentation was m ade, (2) with scienter, and (3) that the m isrepresentation was m aterial). 13 7 U.S.C. § 6b(a)(2)(i)-(iii) for acts prior to J une 18, 20 0 8. 19 A statem ent is “m aterial” if there is a “substantial likelihood that a reasonable investor would consider it im portant in m aking an investm ent decision.” Saxe v. E.F. Hutton & Co., Inc., 789 F.2d 10 5 (2d Cir. 1986) (citing TSC Indus. Inc. v. N orthw ay , Inc., 426 U.S. 438, 449 (1976)). Fraudulent statem ents about NAV are m aterial. Princeton Econ., 73 F. Supp. 2d at 423 (letters to investors overstating the NAV were m aterial m isrepresentations in connection with sales of securities); Bruhl v. Price W aterhousecoopers Int’l, 257 F.R.D. 684, 697 (S.D. Fla. 20 0 8) (“[T]he fact that som e investors would have access to different data[] does not elim inate the NAV statem ents as a relevant and m aterial m atter to be considered in the investm ent calculus.”). Wilson’s sole defense to the obviously false (and m aterial) statem ents about NAV that he m ade to his investors is the rather dubious contention that he didn’t “intend” to defraud anyone. However, as the First Circuit has noted, “the Com m ission need not find an actual intent to m isrepresent a fact or to deceive.” First Com m odity Corp. of Boston v. CFTC, 676 F.2d 1, 6 (1st Cir. 1982). Rather, “the Com m ission has the power to base liability upon “willful” behavior, liberally defined to include ‘reckless’ behavior.” Id. at 7. Recklessness in a securities context is typified by “an extrem e departure from the standards of ordinary care, and which 20 presents a danger of m isleading buyers or sellers that is either known to the defendant or is so obvious the actor m ust have been aware of it.” Greebel v. FTP Softw are, Inc., 194 F.3d 185, 198 (1st Cir. 1999). A m isrepresentation can be so bald (e.g., “Today’s NAV for J BW is $ 2,475,941,” when it is in fact $ 1,149,628) that it m akes it “very difficult to believe the speaker was not aware of what he was doing.” First Com m odity Corp. of Boston, 676 F.2d at 6-7. Here, however, the court need not even consider “recklessness,” as Wilson has not denied knowing that his statem ents were false. His excuse that he did not “m ean” to deceive, but just “m eant” to roll-over the losses into the next week or m onth’s report in the Micawber-like hope that som ething would turn up, virtually defines an “intent to deceive.”14 Lastly, Wilson argues that none of his investors relied on his m isrepresentations. However, in public enforcem ent cases, reliance is not an essential elem ent. See, e.g., JCC, Inc. v. CFTC, 63 F.3d 1557, 1565 n.23 (11th Cir. 1995). The CEA “m akes it actionable ‘to cheat or defraud or attem pt to cheat or defraud such other person,’” and thus it is 14 Wilson also m ade separate m isrepresentations and m aterial om issions in his em ails to Mann, even after he disclosed the Septem ber 11, 20 0 8 losses to his other investors. Actionable m isrepresentations include those m ade to persons during the solicitation of funds. Saxe v. E.G. Hutton & Co., Inc., 789 F.2d 10 5, 110 -111 (2d Cir. 1986); Hirk v. Agri-Research Council Inc., 561 F.2d 96, 10 3-10 4 (7th Cir. 1977); CFTC v. Rosenberg, 8 5 F. Supp. 2d 424, 447-448 (D.N.J . 20 0 0 ). 21 “unnecessary to show reliance even in a private action” because “an attem pt that fails (perhaps because no one relied on it) is nonetheless a violation of [7 U.S.C. § 6b].” Slusser v. CFTC, 210 F.3d 783, 786 (7th Cir. 20 0 0 ) (em phasis added in original). CPO Co m m o d itie s Frau d Section 6o of the CEA is a “parallel statute” to section 6b (the general anti-fraud provision discussed above), “forbidding fraud and m isrepresentation by com m odity trading advisors.” Stotler & Co. v. CFTC, 855 F.2d 1288, 1291 (7th Cir. 1988); see also CFTC v. Driver, 877 F. Supp. 2d 968, 978 (C.D. Cal. 20 12) (“The sam e intentional or reckless m isappropriations, m isrepresentations, and om issions of m aterial fact violative of section [6]b of the Act . . . also violate section [6]o(1)(A)-(B) of the Act.”). Section 6o(1)(A) of the CEA m akes it unlawful for a CPO to use instrum ents of interstate com m erce to “em ploy any device, schem e, or artifice” to defraud prospective or actual custom ers. Id. Section 6o(1)(B) m akes it unlawful to use the instrum ents of interstate com m erce to “engage in any transaction, practice, or course of business which operates as a fraud or deceit” upon actual or prospective custom ers. Id. As noted in the discussion of section 6b, it is undisputed that Wilson sent false NAV updates, am ong other false and m isleading financial 22 inform ation, to the J BW pool participants. It is also undisputed that he used m eans of interstate com m erce to do so (em ail), and did so while acting as a CPO. This is enough to find that Wilson violated section 6o(1)(B), which, unlike section 6b, has no scienter requirem ent. See First Com m odity Corp., 676 F.2d at 6 (noting that section 6o is an “antifraud provision that does not depend on scienter”); In re Kolter, Com m . Fut. L. Rep. ¶ 26,262, 1994 WL 621595 at *7 (CFTC Nov. 8, 1994) (“Although scienter m ust be proved to establish a violation of section [6]b and section [6]o(1)(A), it is not necessary to establish a violation of section [6]o(1)(B).”). Further, given that sections 6o and 6b are viewed as parallel provisions, differing only in that section 6o requires a CPO to have engaged in the violative conduct, and to have used m eans of interstate com m erce to do so, there is no reason to re-evaluate the scienter requirem ent with respect to section 6o(1)(A). Wilson’s allegations of a dispute of fact regarding scienter are thoroughly refuted by his own adm issions and by the docum entary evidence, as discussed earlier in this opinion. Thus, the court finds that Wilson also violated 7 U.S.C. § 6o(1)(A). Re qu e s te d Re lie f Injunctive Relief: Pursuant to 7 U.S.C. § 13a-1, the CFTC m ay “bring an action in the proper district court of the United States” and m ay seek to 23 enjoin “any act or practice constituting a violation of any provision [of the CEA] or any rule, regulation, or order thereunder.” 7 U.S.C. § 13a-1(a). The injunctive relief the CFTC seeks is appropriate, given Wilson’s violations. Further, Wilson recognizes that he has an “addiction” to trading and that, as a result, he has “exited the industry, as far as being a trader.” See Wilson Dep. 56:10 -23, Oct. 18, 20 11 (Dkt. # 55-15); see also id. at 78:10 -22. Civil Penalties: Pursuant to 7 U.S.C. § 13a-1(d)(1), and 17 C.F.R. § 143.8, civil m onetary penalties are perm itted up to the greater of $ 130 ,0 0 0 per violation for acts com m itted prior to October 23, 20 0 8, or treble a defendant’s m onetary gain. Civil m onetary penalties m ay be im posed in an am ount that is appropriate to the gravity of the offense and as is necessary as a deterrence. “Civil m onetary penalties are also exem plary; they rem ind both the recipient of the penalty and other persons subject to the Act that noncom pliance carries a cost.” In re GN P Com m odities, Inc., Com m . Fut. L. Rep. ¶ 25,360 at 39,222, 1992 WL 20 1158, at *23 (CFTC Aug. 11, 1992). Civil penalties are appropriate here. Wilson and J BW violated core provisions of the CEA. Further, Wilson continues to refuse to acknowledge the gravity of his actions, and continues to m ischaracterize what can only be called “lies” to his investors about the current value of their investm ents, by calling them “estim ates,” or, alternatively, by stating that he was 24 genuinely optim istic about the fact that the value of the fund would som eday equal the figure he told his investors was then “current.” See, e.g., Wilson 11/ 20 / 13 Dep. 10 0 :13-22, 10 2:7.15 In the absence of a showing by the CFTC of any personal gain on Wilson’s part as the result of the fraud, the appropriate m easure of a civil penalty is the statutory per-violation am ount, rather than a trebling of the investors’ losses (as the CFTC proposes).16 15 When Wilson was asked why he sent an em ail on May 30 , 20 0 8 , stating that “Today’s NAV” is $ 2,0 29,271.45 when in fact the NAV on that date as reflected in an MFG statem ent, was actually $ 1 m illion less, he replied, “I did it because I had an estim ate of what was going to happen in the m onth of J une. And that seem s to have realized itself, by looking at the J une statem ent.” Id. 10 2:7-24. 16 The CFTC has also requested disgorgem ent and restitution in the am ount of $ 1,780 ,456, which is the agency’s calculation of loss to the pool participants (who had invested a total of $ 2,0 0 8,275, and received approxim ately $ 227,818 when Wilson dissolved the fund). While the court’s jurisdiction under section 13a-1 includes equitable rem edies such as disgorgem ent and restitution, see, e.g., CFTC v. W ilshire Inv. Mgm t. Corp., 531 F.3d 1339, 1344 (11th Cir. 20 0 8) (collecting cases), the appropriate m easure for restitution here is “the benefit unjustly received by the defendants.” F.T.C. v. Verity Int ‘l, Ltd., 443 F.3d 48, 67 (2d Cir. 20 0 6) (noting that the district court “strayed off course” when m easuring restitution purely by the plaintiffs’ losses); see also CFTC v. Am . Metals Exchange Corp., 991 F.2d 71, 78 (3d Cir. 1993) (“[I]n designing rem edies under the [CEA] or the [SEA], the courts have considered disgorgem ent to serve prim arily to prevent unjust enrichm ent.”). There m ust be a “relationship between the am ount of disgorgem ent and the am ount of illgotten gain.” Id. at 79. Wilson and J BW com m itted significant violations of the CEA, and thus the court has im posed civil penalties, but no evidence 25 ORDER For the foregoing reasons, the CFTC’s m otion for sum m ary judgm ent is ALLOWED. The CFTC will have ten (10 ) days from the date of today’s Order to subm it a proposed form of final judgm ent consistent with the court’s findings and rulings. SO ORDERED. / s/ Richard G. Stearns ______________________ UNITED STATES DISTRICT J UDGE has been presented with regard to the am ount of retained profits or illgotten gains. The court therefore declines to enter an order of restitution. 26
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