United States Commodity Futures Trading Commission v. Hunter Wise Commodities, LLC ( 2014 )

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 13-10993
________________________
D.C. Docket No. 9:12-cv-81311-DMM
UNITED STATES COMMODITY
FUTURES TRADING COMMISSION,
Plaintiff - Appellee,
versus
HUNTER WISE COMMODITIES, LLC, et al.,
Defendants,
HAROLD EDWARD MARTIN, JR.,
FRED JAGER,
Defendants - Appellants.
________________________
Appeal from the United States District Court
for the Southern District of Florida
________________________
(April 15, 2014)
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Before MARCUS, DUBINA and WALKER, * Circuit Judges.
DUBINA, Circuit Judge:
This is an appeal from the district court’s grant of a preliminary injunction.
Amendments to the Commodity Exchange Act (“the Act”) made by the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 purport to expand
the enforcement authority of the Commodity Futures Trading Commission (“the
Commission”). Pub. L. No. 111-203, 124 Stat. 1376, 1732–33 (effective July 16,
2011) (“Dodd-Frank”); see also 7 U.S.C. § 2 (drawing the contours of the
Commission’s jurisdiction). Among other things, the Dodd-Frank amendments
authorize the Commission to regulate retail commodity transactions offered “on a
leveraged or margined basis, or financed by the offeror, the counterparty, or a
person acting in concert with the offeror or counterparty on a similar basis.”
Dodd-Frank § 742, 124 Stat. at 1732–33 (codified at 7 U.S.C. § 2(c)(2)(D)). This
case presents a question of first impression in this or any circuit regarding whether
that amendment actually expands the Commission’s enforcement authority. After
careful consideration of the record and, with the benefit of oral argument, we hold
that it does. Because the Commission has authority to regulate the transactions
alleged in this case and the requirements for a preliminary injunction are satisfied,
*
Honorable John Walker, Jr., United States Circuit Judge for the Second Circuit Court of
Appeals, sitting by designation.
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this court affirms the district court’s grant of a preliminary injunction.
I. BACKGROUND
The Commission brought a civil enforcement action alleging that twenty
defendants violated the Act by conducting off-exchange and fraudulent retail
commodity transactions. See, e.g., 7 U.S.C. §§ 6(a), 6b (prohibiting off-exchange
and fraudulent commodity futures transactions). A number of defendants objected
that the Commission lacked statutory authority for the enforcement action; the
district court rejected their arguments, granted a preliminary injunction, and
appointed a special monitor to administer the business entities involved. Two
defendants, the sole officers and members of the commodity brokerage firm at the
center of the case, now appeal that injunction.
Appellants insist that their brokerage firm, Hunter Wise, 1 bought and sold
precious metals, which it would then sell to retail customers via a network of
dealers. But according to the Commission’s complaint and the district court’s
factual findings, Hunter Wise did not actually trade, store, or transfer any metals.
Commodity Futures Trading Comm’n v. Hunter Wise Commodities, LLC, No. 12-
81311-CIV, 2013 WL 718503, at *7 (S.D. Fla. Feb. 26, 2013) (“Hunter Wise”).
Instead, Hunter Wise managed its risk exposure from customers’ trading positions
1
Four limited liability companies comprise “Hunter Wise,” and the court uses the term to
refer to them collectively. Hunter Wise Commodities is a holding company, while Hunter Wise
Trading, Hunter Wise Credit, and Hunter Wise Services are its wholly owned subsidiaries.
3
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not by holding a physical inventory of metals for customers but by trading
derivatives in its own margin trading accounts with precious metals trading
companies. Id.
A. The Transactions’ Participants
The first of the four categories of players in these transactions includes
Hunter Wise and its members and managers, Appellants Harold Martin and Fred
Jager. 2 Martin was responsible for Hunter Wise’s day-to-day operations as Chief
Operating Officer, while Jager served as Chief Executive Officer. Together, the
Hunter Wise entities offered market access, financing, and a technology platform
for retail precious metals dealers.
Hunter Wise engaged those dealers via the Lloyds entities, the second group
of participants. Acting together, three Lloyds entities – a holding company and
two affiliated companies – served as an intermediary to recruit the dealers to
execute retail transactions on behalf of Hunter Wise. All three Lloyds entities
share the same two members and managers, James Burbage and Frank Gaudino,
who, along with the entities they own and manage, are defendants. The registered
agent for the holding company Lloyds Commodities, LLC, is J.B. Grossman, P.A.,
a law firm that previously represented Hunter Wise and continues to represent
2
Martin and Jager initially attempted to appeal on behalf of Hunter Wise as well, but the
special monitor appointed to administer the entities as a result of the preliminary injunction
prevented that.
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Appellants Martin and Jager. Grossman himself is the registered agent for Lloyds
Services, LLC. Additionally, Lloyds Credit, LLC, shares a business address with
Hunter Wise. These facts paint the picture that the relationship between Hunter
Wise and Lloyds is not an arm’s-length one. By all indications, Lloyds exists only
as a pass-through for Hunter Wise’s business with dealers.
The dealers are the third category of players and the last group of
defendants. Each is a telemarketing firm that solicited retail customers for
commodity transactions, and each made an agreement with Lloyds, whereby
Lloyds agreed to provide services to facilitate sales to retail customers. The
evidence before the district court, however, was that Lloyds provided dealers no
different or additional services from those provided by Hunter Wise. The
Commission named five dealers and their four managers as defendants.3
The fourth category of participants consists of retail customers. Dealers
solicited retail customers by telephone and internet, touting physical metals as safe
investments. While a fraction of transactions were not financed, the Commission’s
enforcement action applies only to those that were. Customers typically made a
down payment of 25% and then received a loan for the balance of the purported
3
The dealers and managers named are: CD Hopkins Financial and Hard Asset Lending
Group, both LLCs whose sole member is Chadewick Hopkins; Blackstone Metals Group, LLC,
which acquired CD Hopkins’s client accounts, and its sole member, Baris Keser; Newbridge
Alliance, Inc., and its Chief Executive Officer, John King; and United States Capital Trust, LLC,
and its sole member, David Moore.
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purchase price. The credit agreement, extended to dealers for customers’ benefit,
would mature in four years. (R. 39-1 at 16, ¶ 3.1.)4 After completing a
transaction, retail customers could trade based on price movements. The values of
customers’ accounts fluctuated with the price of metals and were subject to
depletion because of fees, commission, and interest charges. None of the
transactions with retail customers occurred on a regulated commodity exchange.
B. The Enterprise and Hunter Wise’s Role
Hunter Wise provided the financing made available to retail customers and
administered the transactions. The lending arm of Hunter Wise would extend
credit to the dealer, and the dealer in turn would extend credit to the customer.
When a customer agreed to make a financed purchase, a sales agent would hold the
customer on the line while placing the order at a price determined by Hunter Wise.
Hunter Wise would enter the order in its database and approve it, at which point
the order was complete.
Moreover, Hunter Wise assisted dealers in marketing metals and managing
the transactions with retail customers. It provided training materials, including
sales pitch scripts, educational videos, and policy and procedure manuals, for
dealers’ employees. Hunter Wise gave dealers administrative support in the form
4
Document numbers in record citations refer to the document number assigned by the
electronic filing system in the district court. Similarly, and in the interest of consistency, page
numbers refer to the page numbers assigned by the electronic filing system in the district court.
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of standard form contracts, bookkeeping, and account management services.
Hunter Wise also provided access to an internet-based system called “the
Portal.” There, Hunter Wise maintained account and trading records for all
dealers’ retail customers’ transactions, accessible to both retail customers and
dealers. Customers could view their accounts and transaction information,
including monthly account statements and reports. The reports appeared to be
from individual dealers, but in actuality, Hunter Wise generated them. One report,
the “Transfer of Commodity Notice,” purported to transfer precious metals into or
out of customers’ accounts but, according to the district court’s findings, did not
give the customers any right to possess or control actual metals.
Funds passed from the customer to the dealer to Lloyds and finally to Hunter
Wise with the dealers and Lloyds each taking a cut along the way. Customers
incurred fees and costs associated with trading, including a commission to dealers,
a price spread, and interest. Dealers required retail customers to maintain 15% of
their account in equity, and if the equity fell below that figure, the customer would
receive a margin call, requiring him to deposit additional funds to maintain his
trading position. Accounts were subject to a minimum margin requirement, such
that if equity dropped below 9%, open trading accounts were liquidated to protect
dealers and Hunter Wise. (R. 4-20 at 28 (retail customer account opening
explaining that dealer reserves right to demand additional collateral or liquidate all
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or part of collateral “without any prior notice to the client”); R. 4-19 at 89
(deposition testimony explaining Hunter Wise’s Portal procedures for an “equity
call” and “force level”).)
This margin trading system mirrored Hunter Wise’s trading accounts with a
number of precious metals trading companies, which actually maintain physical
precious metals inventories. Hunter Wise’s account with A-Mark Precious Metals,
Inc., for example, was subject to the same sort of equity requirements as those of
retail customers using the Portal. A-Mark required a baseline equity figure of
15%, with margin call coming at 10%. (R. 4-17 at 25; see also R. 4-17 at 53
(describing Hunter Wise’s similar arrangement with another precious metals
trader, Standard Bank).)
Like its customers, Hunter Wise owned no metals unless it made full
payment. Though Hunter Wise occasionally purchased or sold physical metals, the
vast majority of its transactions were margin trades. (R. 4-17 at 24, 52.) The
district court found that the trading companies delivered no metal to Hunter Wise
such that it could make deliveries to retail customers. The trading companies
would only deliver metals to Hunter Wise if Hunter Wise paid in full, something it
never did on margin trades, and no title to physical metals passed as a result of
Hunter Wise’s margin trades with the trading companies. (R. 4-17 at 25–26, 54).
Based on this evidence, the district court found that Hunter Wise had no inventory
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of metals from which it could deliver to the Portal’s retail customers.
C. Procedural History
The Commission filed this enforcement action, seeking injunctive and
equitable relief as well as statutory penalties under the Act, and immediately
moved for a preliminary injunction. Appellants and Hunter Wise, along with other
defendants, opposed the preliminary injunction and moved to dismiss on the basis
that the Commission lacked statutory authority to regulate the transactions. After a
hearing, the district court granted the motion for preliminary injunction. The
district court found that the transactions were subject to the Commission’s
enforcement authority under 7 U.S.C. § 2(c)(2)(D) because they were financed
commodity transactions made with retail customers. Further, the district court
concluded that the Commission presented a prima facie case of illegality and a
likelihood of future violations. Martin and Jager then perfected this appeal.
II. STANDARD OF REVIEW
This court reviews a trial court’s decision to grant a preliminary injunction
for abuse of discretion. Sec. & Exch. Comm’n v. ETS Payphones, Inc., 408 F.3d
727, 731 (11th Cir. 2005); see also Commodity Futures Trading Comm’n v. Walsh,
658 F.3d 194, 198 (2d Cir. 2011) (reviewing for abuse of discretion the decision to
grant a preliminary injunction in a civil enforcement action brought by the
Commission). We review the underlying findings of fact for clear error and
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questions of law de novo. ETS Payphones, 408 F.3d at 731. A finding of fact is
clearly erroneous if, upon reviewing the evidence as a whole, we are “left with the
definite and firm conviction that a mistake has been committed.” Anderson v. City
of Bessemer, 470 U.S. 564, 573, 105 S. Ct. 1504, 1511 (1985) (internal quotation
marks omitted); Fed. Trade Comm’n v. AbbVie Prods. LLC, 713 F.3d 54, 69 (11th
Cir. 2013) (quoting Anderson).
III. PRELIMINARY INJUNCTION STANDARD
A court deciding whether to issue a preliminary injunction under the Act
does not employ the familiar preliminary injunction formula, which requires that a
plaintiff clearly establish a substantial likelihood of success on the merits and the
likelihood of irreparable injury, among other things. Commodity Futures Trading
Comm’n v. Muller, 570 F.2d 1296, 1300 (5th Cir. 1978).5 Rather, the standard is
lower. The Act enables district courts to issue permanent or temporary injunctions
“[u]pon a proper showing” and without bond. 7 U.S.C. § 13a-1(b). A prima facie
case of illegality is a “proper showing.” Muller, 570 F.2d at 1300. Binding
precedent in this circuit suggests, and other circuits have held, that where the
Commission seeks to enjoin future violations, it must also show a reasonable
likelihood of future violations in addition to a prima facie case of illegality. Id.
5
See Bonner v. City of Prichard, 661 F.2d 1206, 1207 (11th Cir. 1981) (en banc)
(adopting as binding precedent all of the decisions of the former Fifth Circuit handed down prior
to the close of business on September 30, 1981).
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(opining that had the Commission sought an injunction of future violations, it
might be necessary to show a likelihood of future violations); Commodity Futures
Trading Comm’n v. Co Petro Mktg. Grp., 680 F.2d 573, 582 n.16 (9th Cir. 1982)
(noting the future violations requirement, as applied to a permanent injunction);
Commodity Futures Trading Comm’n v. Hunt, 591 F.2d 1211, 1220 (7th Cir. 1979)
(requiring a showing of the likelihood of future violations).
IV. DISCUSSION
Martin and Jager argue the Commission’s statutory authority, its
“jurisdiction,” does not reach the transactions at issue, but we note at the outset
that this is not a matter of the court’s jurisdiction to hear this case. The district
court had subject matter jurisdiction over the Commission’s claims pursuant to
both 28 U.S.C. § 1331, because they arise under federal law, and 7 U.S.C. § 13a-
1(a), which allows the court to grant injunctive relief for violations of the Act.
Instead, this appeal presents a question of the Commission’s authority to bring this
enforcement action. Martin and Jager’s argument is akin to a claim that there is no
cause of action for a preliminary injunction (or otherwise) under the Act and that
the Commission has therefore not stated a claim to relief.
When the Commission brought this action, it asserted its authority under §
742 of the Dodd-Frank Act, codified at 7 U.S.C. § 2(c)(2)(D). The relevant portion
of that provision reads:
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(D) Retail commodity transactions
(i) Applicability
Except as provided in clause (ii), this subparagraph shall apply to any
agreement, contract, or transaction in any commodity that is –
(I) entered into with, or offered to (even if not entered into
with), a person that is not an eligible contract participant
or eligible commercial entity; and
(II) entered into, or offered (even if not entered into), on a
leveraged or margined basis, or financed by the offeror,
the counterparty, or a person acting in concert with the
offeror or counterparty on a similar basis.
7 U.S.C. § 2(c)(2)(D).
The Commission enjoys authority over covered retail commodity
transactions so long as no exception applies. See id. § 2(c)(2)(D)(ii) (listing
exceptions). Covered transactions are subject to the Act’s prohibitions on off-
exchange trading and fraud. Id. § 2(c)(2)(D)(iii); see also id. § 6(a) (prohibiting
commodity futures transactions not subject to the rules of an exchange); id. § 6b
(prohibiting fraud and misrepresentation in connection with commodity
transactions). Because the Commission enjoys statutory authority over these
transactions and has pleaded a prima facie case of illegality, the district court’s
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grant of a preliminary injunction is due to be affirmed.
A. The retail transactions at issue are subject to the Commission’s jurisdiction.
The Commission enjoys authority to regulate certain retail commodity
transactions. Transactions are “retail” if they are entered with or offered to “a
person that is not an eligible contract participant or eligible commercial entity.” Id.
§ 2(c)(2)(D)(i)(I). There is no dispute that the customers who entered contracts
through Hunter Wise’s Portal are not eligible contract participants. And, as the
customers are individuals, they are not eligible commercial entities. See id. §
1a(17)–(18) (defining “eligible commercial entity” and “eligible contract
participant,” respectively). Thus, these transactions were retail.
Still, the provision does not cover all retail commodity transactions; only
those entered into or offered “on a leveraged or margined basis, or financed by the
offeror, the counterparty, or a person acting in concert with the offeror or
counterparty on a similar basis” fall within the Commission’s jurisdiction. Id. §
2(c)(2)(D)(i)(II). The Act’s definitions section does not define “leveraged” or
“margined” or otherwise explain what it means for a transaction to be entered into
or offered on a “leveraged” or “margined” basis. Id. § 1a. Nor does it explain
what it means to be “financed . . . on a similar basis,” or to what “on a similar
basis” refers. Id. The district court found that because the dealers – in cooperation
with Hunter Wise – financed the transactions, the Commission’s authority reached
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the transactions. See Hunter Wise, 2013 WL 718503, at *8 (“[A]t the very least,
Hunter Wise acted in concert with those offering financed transactions.”).
Martin and Jager rely on a definition of leveraged found elsewhere in the
Act to argue these transactions differ so fundamentally from leveraged transactions
that one cannot characterize them as financed on a similar basis to margined or
leveraged transactions, or as margined or leveraged themselves. They point to 7
U.S.C. § 23, where the Act prohibits commodity transactions “under a standardized
contract commonly known to the trade as a margin account, margin contract,
leverage account, or leverage contract,” except as authorized. Id. § 23(a). Under
Commission regulations effectuating that prohibition, a leverage contract has
standardized terms and conditions and is “for the long-term (ten years or longer)
purchase . . . or sale” of a leverage commodity by a leverage customer. 17 C.F.R.
§ 31.4(w). A leverage transaction, by extension, is a deal to exchange a leverage
contract. 17 C.F.R. § 31.4(x). Martin and Jager insist the terms “leverage
account” or “leverage contract,” as used in 7 U.S.C. § 23 and defined in 17 C.F.R.
§ 31.4(w), and “contracts . . . entered into . . . on a leveraged . . . basis,” as used in
7 U.S.C. § 2, have the same meaning and durational requirement. Because
leverage contracts endure for ten years or longer while the transactions made
through Hunter Wise’s Portal mature in just four years, Martin and Jager argue that
the Portal transactions cannot be “leveraged” or financed on a basis similar to a
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leveraged transaction and that 7 U.S.C. § 2(c)(2)(D) therefore cannot authorize this
action. Martin and Jager are wrong.
“As with any question of statutory interpretation, we begin by examining the
text of the statute to determine whether its meaning is clear.” Silva-Hernandez v.
U.S. Bureau of Citizenship Servs., 701 F.3d 356, 361 (11th Cir. 2012) (internal
quotation marks omitted).
First, the ordinary meanings of the terms used in § 2(c)(2)(D) do not support
Martin and Jager’s argument. When interpreting a statute and confronted with
undefined terms, we give those terms their plain and ordinary meaning “because
we assume that Congress uses words in a statute as they are commonly
understood.” Polycarpe v. E&S Landscaping Serv., Inc., 616 F.3d 1217, 1223
(11th Cir. 2010) (internal quotation marks omitted); see also Marx v. Gen. Revenue
Corp., __ U.S. ___, 133 S. Ct. 1166, 1172 (2013) (observing that when interpreting
a statute, courts “assume that the ordinary meaning of the statutory language
accurately expresses the legislative purpose” (internal quotation marks and
alterations omitted)). We therefore interpret § 2(c)(2)(D) to use the terms
“leveraged” or “margined” as those terms are commonly understood. According to
their ordinary meaning, margin and leverage are related concepts; leverage denotes
“[t]he use of credit or borrowed funds (such as buying on margin) to improve one’s
speculative ability and to increase an investment’s rate of return,” while a margin
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is “[t]he amount of an investor’s equity in securities bought on credit through the
broker.” Black’s Law Dictionary 990, 1053 (9th ed. 2009). Hunter Wise defined
leverage similarly in a memorandum to its holding company’s potential investors;
it explained its operations by describing leverage as “the use of a smaller amount
of capital to do the work of a much larger amount.” (R. 4-4 at 21.) Taken
together, leveraging refers generally to the ability to control high-value amounts of
a commodity or a security with a comparatively small value of capital, known as
the margin. 6 These commonly understood meanings impose no specific durational
requirement, ten years or otherwise.
Second, there is no statutory authority for the position that the term
“leveraged” as used in § 2(c)(2)(D) “is the same language as presented” in § 23.
(Appellant’s Br. at 14.) The term of art “leverage contract” does not appear in §
2(c)(2)(D). The two statutory sections do not refer to one another, and §
2(c)(2)(D) contains no durational requirement. In light of this, the basis for
reading such a specific requirement into § 2(c)(2)(D) is tenuous, at best.
Third, adopting the interpretation Martin and Jager advance would render
§2(c)(2)(D) meaningless. While it is true that statutory language must be read in
context and with a view to its place in a larger statutory scheme, Roberts v. Sea-
6
Glossary, Commodity Future Trading Commission,
http://www.cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/index.htm (last
visited Feb. 11, 2014).
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Land Servs., Inc., __ U.S. ___, 132 S. Ct. 1350, 1357 (2012), it is similarly
canonical that courts must read a statute to give effect to all provisions and avoid
rendering any part “inoperative or superfluous, void or insignificant.” Corley v.
United States, 556 U.S. 303, 314, 129 S. Ct. 1558, 1566 (2009) (internal quotation
marks omitted). If, as Martin and Jager insist, “leveraged,” “margined,” and
“financed” all carry the durational requirement imposed on standardized contracts
in § 23, then § 2(c)(2)(D) only gives the Commission authority over what § 23
already prohibits.
While we need not defer to the agency’s interpretation because the statutory
text is unambiguous, Silva-Hernandez, 701 F.3d at 361, we note also that the
interpretation the court adopts today harmonizes with the Commission’s own
informal interpretation. The Commission understands its jurisdictional grant under
§ 2(c)(2)(D) to be “in addition to, and independent from,” § 23. Retail Commodity
Transactions Under Commodity Exchange Act, 76 Fed. Reg. 77670-02, 77671 n.7
(Dec. 14, 2011); see Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S. Ct. 161,
164 (1944) (holding that informal agency interpretations “constitute a body of
experience and informed judgment to which courts and litigants may properly
resort for guidance”).
Likewise, though we need not resort to legislative history, we note that it
also complements our interpretation and the plain meaning of the terms. See
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Harris v. Garner, 216 F.3d 970, 977 (11th Cir. 2000) (considering legislative
history, though strictly unnecessary in light of the plain meaning of the statute at
issue, because it “support[ed] and complement[ed]” the statutory language’s plain
meaning). Recounting the efforts of the Committee that drafted the bill, Senator
Lincoln reported during debate that the Dodd-Frank amendments to the Act
expanded the Commission’s enforcement authority and were “intended to be both
additive and complementary to the authorities” already existing. 156 Cong. Rec.
S5920, S5924-5 (daily ed. July 15, 2010) (offering the written report “to provide
clarifying legislative history”). This harmonizes with the conclusion that §
2(c)(2)(D) adds to the Commission’s enforcement authority, rather than simply
giving the Commission authority to regulate a more narrow class of standardized
contracts prohibited elsewhere.
In light of our conclusion about § 2(c)(2)(D)’s reach, the inquiry becomes
whether the Portal transactions are leveraged, margined, or similarly financed and
therefore subject to the Commission’s authority. The Commission alleged the
transactions were, and the district court did more than accept the truth of those
allegations when it found that the Commission had enforcement authority. 7 It held
a hearing, where the Commission produced evidence that Hunter Wise itself
7
We need not reach the question of whether it is enough, to establish its enforcement
authority, for the Commission to merely allege the nature of these transactions – a question the
parties themselves do not raise.
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characterized its business to include financing and providing a “‘back office’
platform for a network of Authorized Independent Dealers that transact leveraged
sales in precious metals.” (R. 4-4 at 21.) Moreover, the Commission showed that
when customers’ trading positions fell below a minimum margin requirement,
dealers would initiate a margin call and liquidate open trading positions. (R. 4-11
at 68; R. 4-20 at 28.); see also Hunter Wise, 2013 WL 718503, at *6 (making
factual findings to this effect). Review of the evidence presented at this stage does
not leave us with a definite and firm conviction that the district court erred in its
factual findings regarding the nature of the transactions, and after de novo review,
we confirm its legal conclusion that § 2(c)(2)(D) covers the transactions.
Lastly, Martin and Jager’s insistence that Hunter Wise was a wholesaler not
engaged in the retail transactions cannot save them from § 2(c)(2)(D)’s reach. The
Commission alleges Hunter Wise controlled the entire scheme with a tight fist, and
it is beyond dispute that Hunter Wise at least had its fingers – if not its hands – in
each stage of the scheme. The evidence demonstrated that Hunter Wise
administered the Portal, extended credit to retail customers through the dealers, and
finalized retail customers’ transactions. (R. 4-2 at 25–26, ¶¶ 53–59; R. 4-8 at 9; R
4-12 at 126–27; R. 64-3 at 21.) Moreover, the Commission’s jurisdiction is over
the transactions themselves. See 7 U.S.C. § 2(c)(2)(D) (providing that the
Commission’s enforcement authority “shall apply to any agreement, contract, or
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transaction in any commodity” covered by the subparagraph). The court could
assume the truth of Martin and Jager’s assertions that Hunter Wise’s dealings with
Lloyd’s and the dealers were arm’s-length, dealer-to-dealer transactions, and yet
the Commission would still have authority to regulate the transactions under §
2(c)(2)(D).
B. No exception to the Commission’s jurisdiction applies.
The Dodd-Frank amendments to the Act on retail commodity transactions
also include certain exceptions to the Commission’s authority, including
exceptions for certain contracts of sale resulting in actual delivery or which create
an enforceable obligation to deliver between parties with the ability to deliver. 7
U.S.C. § 2(c)(2)(D)(ii)(III). Martin and Jager argue that these exceptions apply
and remove the transactions from the Commission’s authority. Their arguments
rest on the supposition that the retail customers using Hunter Wise’s Portal were
buying and selling actual interests in metals, not trading on margin, and that Hunter
Wise possessed or controlled metals it could deliver. The district court concluded,
as a matter of fact, that Hunter Wise had never taken delivery of any metals as a
result of its trades and had no metals to deliver in connection with these retail
commodity transactions. Hunter Wise, 2013 WL 718503, at *7. Because those
findings were not clearly erroneous, we conclude that the district court did not err
when it found that the exceptions did not apply.
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1. Actual Delivery Exception
The Commission’s authority to regulate retail commodity transactions does
not extend to “a contract of sale that results in actual delivery within 28 days or
such other longer period as the Commission may determine by rule or regulation
based upon the typical commercial practice in cash or spot markets for the
commodity involved.” 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa). There is no dispute over
the delivery period; the question is whether Hunter Wise’s transactions ever
resulted “in actual delivery.”
Because the Act does not define the term “actual delivery,” 7 U.S.C. § 1a,
we again refer to the ordinary meaning of the term to interpret the statute.
Polycarpe, 616 F.3d at 1223. “Delivery” is “[t]he formal act of transferring
something”; it denotes a transfer of possession and control. Black’s Law
Dictionary 494 (9th ed. 2009). “Actual delivery” denotes “[t]he act of giving real
and immediate possession to the buyer or the buyer’s agent.” Id. “Actual” is that
which “exist[s] in fact” and is “real,” rather than constructive. Id. at 40.
Martin and Jager rely on the definition of delivery found in the Uniform
Commercial Code (the “Code”) to sustain their argument that the Portal
transactions fall under the actual delivery exception. They point to Article 2 of the
Code, which defines “delivery,” with respect to goods, to mean “the voluntary
transfer of physical possession or control.” U.C.C. § 2-103(1)(e). Martin and
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Jager argue that the Transfer of Commodity Notices transmitted to retail customers
via the Portal effectuated “delivery” under the Code and “actual delivery” under §
2(c)(2)(D)(ii).
First, Martin and Jager are wrong in their belief that the Code applies.
Setting aside potential preemption problems posed by the Code’s application, only
a tortured reading would make the “typical commercial practice” phrase an implicit
reference to a method of delivery, rather than the period for delivery. The
exception refers to the typical commercial practice in a clause setting out an
alternative period in which actual delivery may take place. The exception enables
the Commission to determine an alternative deadline, longer than twenty-eight
days, for actual delivery 8 and instructs the Commission to set that period “based
upon the typical commercial practice.” 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa). By its
plain reading, the exception does not use “typical commercial practice” to refer to
the form of delivery, electronic versus physical or otherwise.
Second, Martin and Jager’s urging that we graft the Code’s definition of
“delivery” onto the exception ignores the modifier preceding that term in the
exception: Delivery must be actual. The sequence of events contemplated by
Martin and Jager – in which the electronic transfer of documents indicating control
or possession effectuates delivery without physical transfer of the commodity – is
8
The Commission has yet to adopt regulations permitting a longer actual delivery period.
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by any definition constructive, rather than actual. Black’s Law Dictionary 494 (9th
ed. 2009) (defining “constructive delivery” as “[a]n act that amounts to a transfer
of title by operation of law when actual transfer is impractical or impossible”). We
need not define the precise boundaries of “actual delivery” here, as we can say
with confidence that the exception does not cover the sort of constructive delivery
Martin and Jager insist occurred. Moreover, we cannot interpret the exception
with a myopic focus on the term “delivery” at the expense of other language. If
“actual delivery” means anything, it means something other than simply
“delivery,” for we must attach meaning to Congress’s use of the modifier “actual.”
See Corley, 556 U.S. at 314, 129 S. Ct. at 1566 (restating “one of the most basic
interpretive canons”: that statutes must be construed to avoid rending language
inoperative).
Third, even if we accepted for the sake of argument that the Code applied,
these transactions still would not result in “delivery” as the term is used in the
Code, much less “actual delivery” as the term is used in the Act. The district court
found Hunter Wise had nothing to deliver, constructively or otherwise, and on the
record before us, that finding was not clearly erroneous. The evidence before the
district court showed that Hunter Wise did not own a sufficient inventory of metals
to cover its liabilities to the retail customers. (R. 4-17 at 25–26, 54.) Like its retail
customers, the evidence showed Hunter Wise had margin trading accounts with its
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suppliers subject to minimum margin requirements and margin calls. (R. 4-17 at
25; R. 4-17 at 53.) Accordingly, the district court found that Hunter Wise did not
possess or control an inventory of metals from which it could deliver to retail
customers, nor did Lloyds or the dealers. While Martin and Jager contest this
factual finding, after review of the entire record, we are not left with a definite and
firm conviction that it was error. Based on its sound factual finding and after de
novo review, the district court’s legal conclusion that the exception did not apply
was not erroneous.
Lastly, while we need not turn to the Commission’s informal interpretation
because “actual delivery” unambiguously excludes the constructive delivery
Martin and Jager argue occurred, we nonetheless observe that it complements our
conclusion. In an interpretative statement, the Commission opined that “actual
delivery” would be satisfied, among other things, by “physical[] delivery [of] the
entire quantity of the commodity purchased by the buyer, including any portion of
the purchase made using leverage, margin, or financing” into possession of the
buyer or a depository other than the seller’s. Retail Commodity Transactions
Under Commodity Exchange Act, 78 Fed Reg. 52426, 52428 (Aug. 23, 2013).
The Commission emphasized “Congress’s use of the word ‘actual’ to modify
‘delivery’” to support its interpretation. Id. It noted specifically that a book entry
purporting to show that delivery has been made or that the sale has been covered or
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hedged would not suffice. Id. The district court’s sound factual findings indicate
that “delivery” as it occurred following the Portal transactions was akin to such
book entries and unlike the situations the Commission said would satisfy the
exception’s requirements.
2. Enforceable Obligation to Deliver Exception
The Act also excepts from the Commission’s authority “a contract of sale
that creates an enforceable obligation to deliver between a seller and a buyer that
have the ability to deliver and accept delivery, respectively, in connection with”
their lines of business. 7 U.S.C. § 2(c)(2)(D)(ii)(III)(bb). Martin and Jager argue
that: (1) these transactions created such an obligation; (2) Hunter Wise can deliver
in connection with its line of business; and (3) Lloyds and the dealers can accept
delivery in connection with their lines of business.
Even if the court accepted the specious arguments that these were arm’s-
length, dealer-to-dealer transactions (rather than transactions with retail customers)
and that the transactions created some enforceable obligation to deliver, the district
court found that Hunter Wise lacked the ability to deliver because it had no
inventory of metals, as set out above. Based on the officer declarations from the
trading companies with which Hunter Wise held accounts, Hunter Wise never
owned enough metal outright to cover its liabilities for the retail transactions at
issue. (R. 4-17 at 25–26, 54.) Again, it cannot be said this is a clearly erroneous
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finding of fact, nor can it be said the district court committed an error of law in
concluding that the exception did not apply.
C. The Commission pleads a prima facie case of illegality and the likelihood of
future wrongdoing.
The Act prohibits commodity futures trading not conducted subject to the
rules of a regulated exchange. 7 U.S.C. § 6(a). The Commission pleaded and
presented ample evidence that the Portal transactions were subject to the Act and
did not take place on any exchange. Additionally, the record supports the district
court’s conclusion that the Commission alleged a prima facie violation of the fraud
provisions found at 7 U.S.C. § 6b. To establish liability for fraud, the Commission
must prove: “(1) the making of a misrepresentation, misleading statement, or a
deceptive omission; (2) scienter; and (3) materiality.” Commodity Future Trading
Comm’n v. R.J. Fitzgerald & Co., 310 F.3d 1321, 1328 (11th Cir. 2002). The
Commission pleaded facts plausibly supporting those elements and offered
evidence at the preliminary injunction hearing to support each element. It showed
that Appellants, Hunter Wise, and their co-defendants misrepresented the nature of
the Portal transactions. The Commission showed that, Hunter Wise, via the Portal,
represented to retail customers that the customers were buying and selling physical
metals and that dealers were storing metals in depositories on customers’ behalf,
(e.g., R. 4-12 at 592; R. 4-20 at 44), when in fact Appellants knew Hunter Wise
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maintained margined trading positions in metals rather than physical inventory.
(R. 4-10 at 30–31; R. 4-11 at 24–25; R. 4-17 at 24–26; R. 4-17 at 53–54.) And we
have little difficulty affirming the district court’s conclusion that these
misrepresentations were material; a reasonable investor would consider
representations about the nature of the transaction “important in deciding whether
to make an investment.” R.J. Fitzgerald & Co., 310 F.3d at 1328–29. Thus, the
Commission made a “proper showing,” a prima facie case for the illegality of the
transactions at issue. 7 U.S.C § 13a-1(b); Muller, 570 F.2d at 1300.
Additionally, to the extent such a showing is required to support a
preliminary injunction under the Act, the district court’s finding that there was a
reasonable likelihood of future wrongdoing was not error. The evidence before the
district court showed – and the district court found – that the transactions were not
isolated, one-time occurrences and that some defendants contested the illegality of
the scheme. In light of that evidence and pursuant to de novo review, we affirm
the district court’s legal conclusion that there was a reasonable likelihood of the
transactions continuing.
D. The court need not reach the Commission’s alternative basis for the
injunction.
The Commission argues that its allegations of Hunter Wise’s use of scheme
or artifice to defraud, in violation of 7 U.S.C. § 9(1), provides a separate and
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independent basis for affirming the district court’s preliminary injunction. It
asserts that even if the Commission lacked authority under § 2(c)(2)(D), it still has
authority under § 9(1), which applies broadly to fraud “in connection with . . . any
contract of sale of any commodity in interstate commerce,” irrespective of whether
the transactions are margined, leveraged, or otherwise financed. Id. § 9(1); 17
C.F.R. § 180.1. We decline to reach this question because the Commission had
authority under § 2(c)(2)(D).
V. CONCLUSION
Martin and Jager’s arguments appear to rest in large part on their insistence
that the Portal’s retail customers were buying more than a margined interest in
precious metals. That insistence is incompatible with the district court’s factual
findings at this stage, which we hold were not clear error. In light of the district
court’s factual findings and legal conclusions with which we agree, we hold that
the Commission has enforcement authority over these transactions, and no
exception applies. Because the Commission has pleaded a prima facie case of a
violation of the Act, we affirm the district court’s grant of the preliminary
injunction.
AFFIRMED.
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