U.S. Commodity Futures Trading Commission v. Southern Trust Metals, Inc. ( 2018 )

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 16-16544
________________________
D.C. Docket No. 1:14-cv-22739-JLK
U.S. COMMODITY FUTURES TRADING COMMISSION,
llllllllllllllllllllllllllllllllllllllll Plaintiff - Appellee,
versus
SOUTHERN TRUST METALS, INC.,
LORELEY OVERSEAS CORPORATION,
ROBERT ESCOBIO,
llllllllllllllllllllllllllllllllllllllll Defendants - Appellants.
________________________
Appeal from the United States District Court
for the Southern District of Florida
________________________
(January 22, 2018)
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Before JORDAN, HULL, and GILMAN, ∗ Circuit Judges.
GILMAN, Circuit Judge:
This is a commodities-fraud case. The U.S. Commodity Futures Trading
Commission (CFTC) began investigating Southern Trust Metals, Inc., Loreley
Overseas Corporation, and Robert Escobio (collectively, the Defendants) in
response to an investor’s complaint. That complaint also prompted the National
Futures Association (NFA)—a private, self-regulatory organization for the futures
industry—to open an investigation, which proceeded in tandem with the CFTC’s.
The NFA’s investigation ended in a settlement. Afterwards, the CFTC filed this
lawsuit, alleging that the Defendants violated the Commodities Exchange Act
(CEA) when they failed to register as futures commission merchants, transacted
the purchase and sale of contracts for the future delivery of a commodity (futures)
outside of a registered exchange, and promised to invest customers’ money in
precious metals (metals) but instead invested the funds in futures. The district
court, after a bench trial, entered judgment for the CFTC on all claims.
For the reasons set forth below, we AFFIRM the judgment of the district
court except as to the restitution award for the group of investors whose losses
were associated solely with the registration violations. As to that portion of the
∗
Honorable Ronald Lee Gilman, United States Circuit Judge for the Sixth Circuit, sitting
by designation.
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restitution award, we VACATE the judgment and REMAND with instructions to
consider other equitable remedies.
I. BACKGROUND
A. Factual background
Escobio is the Chief Executive Officer (CEO) and largest shareholder of the
Southern Trust Securities Holding Corporation (Holding Corporation). The
Holding Corporation owns Loreley, a British Virgin Islands corporation, which in
turn owns Southern Trust, a Florida corporation. Escobio formed Southern Trust
to provide commodities investment services, and he serves as its director and CEO.
Southern Trust represented that it was able to facilitate customers’
investment in precious metals. Its website and brochure stated that customers “can
take physical possession of [their] metals in New York or London.” The
company’s brokers told customers much the same story—that the customers were
purchasing metals stored in places like New York, London, and Hong Kong. At
least one of Southern Trust’s brokers told customers that Southern Trust charged
“storage fees” for the metals. To open a trading account at Southern Trust,
customers completed an account-opening form containing language that
“[p]hysical precious metals can either be delivered directly to the customer’s
designated point of delivery or to a recognized depository, which provides insured
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non-segregated storage.” Southern Trust also represented that it could loan
customers money to purchase metals.
But Southern Trust did not in fact deal in metals; it dealt only in contracts
for the future delivery of metals. Such contracts are a type of derivative
investment. Southern Trust, however, was not registered with the CFTC as a
futures commission merchant and thus could not trade futures on registered
exchanges. So Escobio, through Loreley, engaged two foreign brokerages—
Berkeley Futures Limited and Hantec Markets Limited—to handle the
transactions.
Escobio opened trading accounts at Berkeley and Hantec in Loreley’s name,
not in the names of Southern Trust’s customers. The accounts were numbered, and
Southern Trust maintained records linking its customers to the specific numbered
accounts.
Opening these accounts required Escobio to review documents describing
Berkeley’s and Hantec’s investment products. One of Hantec’s account-opening
documents, the “Product Disclosure Statement,” explains that “bullion trading”
“operates in the same manner as foreign exchange trading” in that “[w]hat you are
actually buying is a [c]ontract” that “derives its value from” a “physical underlying
asset” such as “Loco London Gold.” That document’s “Glossary” defines “Loco
London Gold” to “mean[] not only that the gold is held in London but also that the
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price quoted is for delivery there.” Elsewhere, the document explains that in
“bullion trading,” “[Hantec] do[es] not deliver the physical underlying assets (i.e.
gold or silver) to you, and you have no legal right to it.” The Berkeley documents
similarly confirm that the account holder intends “to speculate in derivative
products.” None of the account-opening documents mention making loans for the
purchase of metals.
After setting up the trading accounts at Berkeley and Hantec, Southern Trust
sent its customers’ money to Loreley, which in turn invested the funds, through
Berkeley and Hantec, in futures. Escobio received monthly account statements
showing that all investments were in futures, not metals. Those statements do not
reflect any loans to Southern Trust’s customers.
Southern Trust never informed its customers that their money was being
transferred to Loreley, Berkeley, or Hantec. Nor did it inform customers who
wished to invest in metals (the group comprising the vast majority of its customers)
that their money was instead being invested in futures. Southern Trust still
charged those customers interest on fictitious loans, which it falsely told them were
made in order to facilitate their investment in metals.
After receiving a complaint from one of Southern Trust’s customers, the
NFA opened an investigation. Around the same time, Escobio asked Berkeley and
Hantec about the nature of Loreley’s investments. Escobio contended at trial that
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he did so simply to confirm his understanding that Loreley was investing in metals.
The CFTC maintained, however, and the district court ultimately concluded, that
Escobio had done so in anticipation of litigation, and that he had carefully framed
his inquiries to elicit responses that would support the defense he later asserted—
that he did not know that his customers’ money was being invested in futures.
In response to Escobio’s inquiry, Hantec’s CEO said: “I can confirm that
you hold accounts with us that only trade Silver Bullion.” Hantec’s CEO clarified
at his deposition, however, that “Silver Bullion” is industry lingo for contracts for
the future delivery of silver and that he could not have intended any other meaning
because trading in “physical metals is not something that Hantec does.”
A Berkeley employee similarly responded to Escobio’s inquiry, writing that
“all Loreley accounts with the prefix XILOR were silver bullion accounts” that
“only traded in OTC [off-exchange] silver bullion and never traded any futures
contracts.” But Berkeley’s CEO testified at his deposition that Berkeley had never
delivered metals to any of its customers, including Loreley, nor stored any metals
on their behalf. He also testified that, despite Escobio’s contrary assertion, he
never told Escobio that the trades Berkeley handled for Loreley would lead to the
storage of metals.
None of Southern Trust’s investments led to the delivery of metals.
Hantec’s CEO testified that he told Escobio that Hantec could arrange for the
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delivery of metals, but that he did so only in response to a hypothetical question.
According to Hantec’s CEO, Escobio inquired in the abstract about Hantec’s
ability to arrange delivery: “It’s an inquiry from a client. Robert [Escobio] did not
tell me, ‘I would like to deliver metal.’ He asked me, ‘If I wanted to deliver a
metal, can you arrange it?’ and I said, ‘Let me go find out.’” Hantec’s CEO
continued: “I talked to . . . one of my contacts at Standard Chartered bank who
gave me information and I went back to Robert and explained” that Hantec could
arrange delivery. This response was memorialized in a letter to Escobio, stating
that “any Gold or Silver you purchase from us is held for your account and upon
full payment we are able to arrange delivery for you when requested.” But the
Defendants never asked Hantec to arrange delivery, and no delivery ever occurred.
The NFA’s investigation ended in a settlement. Although the NFA’s and the
CFTC’s investigators had cooperated with each other, their investigations were
independent. The Defendants’ settlement agreement with the NFA therefore does
not mention the CFTC or the CFTC’s investigation.
As the CFTC’s investigation moved forward, the Defendants continued to
produce documents in response to its requests. The Defendants’ lawyers knew at
the time of the NFA settlement that the CFTC might bring its own enforcement
action, but they did not suggest to the CFTC or to anyone else that such an action
would violate their settlement agreement with the NFA.
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B. Procedural background
In July 2014, the CFTC filed its complaint, seeking equitable relief and
penalties under the CEA. The complaint alleges that the Defendants engaged in
two illegal schemes, which we will refer to as the “unregistered-futures scheme”
and the “leveraged-metals scheme.”
As to the unregistered-futures scheme, the complaint alleges that, even
though the Defendants were not registered as futures commission merchants, they
accepted money from customers who wished to invest in futures. Because the
Defendants were unregistered, moreover, they could not trade futures on a
registered exchange. They therefore sought to trade indirectly, through
intermediaries. To that end, the Defendants funneled the customers’ money
through Loreley to foreign brokerage firms—Berkeley and Hantec—licensed to
trade futures. Those brokerage firms made the actual investments.
As to the leveraged-metals scheme, the complaint alleges that the
Defendants accepted money from customers who wished to invest in metals with
borrowed money. But instead of issuing loans to those customers and investing
their money in metals, the Defendants took the customers’ money and invested it
in futures. No loans existed, but the Defendants charged loan interest anyway.
At the summary-judgment stage of the case, the parties filed dueling
motions. The district court granted the CFTC’s motion in part, holding that the
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Defendants had conducted off-exchange transactions and had failed to register as
futures commission merchants. It denied the Defendants’ motion in full, rejecting
their affirmative defenses that (1) their settlement with the FTA equitably estopped
the CFTC from bringing suit, and (2) they actually delivered metals so as to bring
their transactions within an exception to the CEA’s registration requirements.
The CFTC’s fraud claim then proceeded to trial. After a bench trial, the
district court found that the Defendants had engaged in fraud, ordered them to pay
restitution in the full amount of the customers’ losses, and imposed fines. The
court also permanently enjoined the Defendants from employment in the
commodities-trading industry. On appeal, the Defendants challenge the court’s
rulings both on summary judgment and at trial.
II. ANALYSIS
A. Standard of review
On an appeal from a judgment in a bench trial, we review the district court’s
conclusions of law de novo. HGI Assocs., Inc. v. Wetmore Printing Co., 427 F.3d
867, 873 (11th Cir. 2005). We also review de novo the district court’s application
of law to facts. United States v. Frank, 599 F.3d 1221, 1228 (11th Cir. 2010). The
district court’s findings of fact, on the other hand, are evaluated under the
clear-error standard. HGI, 427 F.3d at 873. “We will not find clear error unless
our review of the record leaves us ‘with the definite and firm conviction that a
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mistake has been committed.’” Coggin v. Comm’r of Internal Revenue, 71 F.3d
855, 860 (11th Cir. 1996) (quoting United States v. Gypsum Co., 333 U.S. 364, 395
(1948)). Finally, when the district court has issued a permanent injunction, we
review the scope of the injunction under the abuse-of-discretion standard.
Commodity Futures Trading Comm’n v. Wilshire Inv. Mgmt. Corp., 531 F.3d
1339, 1343 (11th Cir. 2008).
B. Equitable estoppel does not bar the CFTC’s claims.
To start with, the Defendants challenge the district court’s summary-
judgment ruling that their settlement with the NFA does not preclude the CFTC’s
claims. The district court held that equitable estoppel does not apply because
(1) the Defendants do not dispute that the NFA is a private, nongovernmental
organization through which the commodities-trading industry regulates itself;
(2) the CFTC was not a party to the settlement; and (3) settlements with private,
nongovernmental organizations do not preclude subsequent claims by government
regulators.
Although this circuit has not yet addressed whether a settlement between a
nongovernmental regulator and a regulated company may preclude subsequent
claims by a governmental regulator, the circuits that have addressed the issue have
uniformly answered in the negative. See, e.g., Graham v. S.E.C., 222 F.3d 994,
1007 n.25 (D.C. Cir. 2000) (“Of course, even if the NASD had done something to
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bind itself, that would not have bound the SEC.”); Jones v. S.E.C., 115 F.3d 1173,
1179–81 (4th Cir. 1997) (“We have found no statutory, regulatory, or historical
reference to support [the] argument that NASD discipline of its members was
intended to preclude this disciplinary action by the SEC itself against a securities
professional.”).
In Jones, the Securities and Exchange Commission (SEC) brought
administrative claims against a securities trader after the trader settled a claim by
the National Association of Securities Dealers (NASD). 115 F.3d at 1180. The
Fourth Circuit rejected the trader’s argument that the settlement precluded the
SEC’s claims, reasoning that private and public regulators “represent distinct
interests” and “bring two separate vantage points to enforcement efforts—one from
the industry itself and the other from the regulator.” Id.
This outcome accords with the courts’ general reluctance to apply principles
of equitable estoppel to the government. “The Supreme Court has never
established that the doctrine of equitable estoppel can be applied against the
government and, in fact, has implied that it can not be.” Tovar-Alvarez v. U.S.
Atty. Gen., 427 F.3d 1350, 1353–54 (11th Cir. 2005) (citing Office of Pers. Mgmt.
v. Richmond, 496 U.S. 414, 422 (1990)). “[I]t is well settled that the [g]overnment
may not be estopped on the same terms as any other litigant.” Heckler v. Cmty.
Health Servs. of Crawford Cty., 467 U.S. 51, 60 (1984).
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This circuit has repeatedly opined that, even assuming that equitable
estoppel could apply against the government, “it would require a showing of
affirmative misconduct on the government’s part.” Tovar-Alvarez, 427 F.3d at
1354; see also Sanz v. U.S. Sec. Ins. Co., 328 F.3d 1314, 1319–20 (11th Cir. 2003)
(“[E]ven if estoppel is available against the Government, it is warranted only if
affirmative and egregious misconduct by government agents exists.”).
The present case is analogous to Jones. Here, the uncontradicted evidence
shows that the NFA, like the NASD, is a private, nongovernmental organization
and that the CFTC was not a party to the Defendants’ settlement with the NFA.
The record, moreover, contains no evidence of affirmative misconduct by the
government. So even if equitable estoppel theoretically could apply to the
government, it does not apply here.
A second, independent ground also exists for affirming the district court’s
denial of summary judgment based on the Defendants’ estoppel defense: the
record reflects a genuine dispute of material fact regarding the element of
reasonable reliance. See Heckler, 467 U.S. at 59 (noting that “the party claiming
the estoppel must have relied on its adversary’s conduct” and that the “reliance
must have been reasonable”). Especially noteworthy is the fact that the settlement
agreement makes no mention of the CFTC or its investigation, so the Defendants’
purported reliance lacks a textual basis. The only language in the agreement that
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even arguably suggests reliance is a clause providing that the agreement “shall
resolve and terminate all complaints, investigations and audits relating to [the
Defendants].”
But interpreting this language to embrace the CFTC’s investigation is
unreasonable. For one thing, the notion that the NFA would agree to terminate
investigations outside its control—and that the Defendants would accept such an
unfulfillable obligation as consideration for their own concessions—defies
common sense. Further, a literal interpretation of “all complaints, investigations
and audits relating to [the Defendants]” would impose on the Defendants
obligations that they surely did not intend, such as the obligation to terminate their
own routine, internal accounting audits. Such audits would, after all, be “audits
relating to [the Defendants].”
The lack of textual support for the Defendants’ estoppel argument creates a
genuine dispute concerning the reasonableness of their reliance. At the same time,
other evidence creates a genuine dispute about whether there was any reliance at
all. First, the Defendants continued to produce documents in response to requests
from the CFTC’s investigators after the settlement. This fact tends to negate any
reliance because the Defendants presumably would not have continued cooperating
with the CFTC if they had truly believed that their settlement with the NFA had
terminated the CFTC’s investigation. Second, the Defendants’ lawyers, while
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preparing to defend against that action, never suggested to the CFTC or anyone
else that such an action might violate the settlement agreement with the NFA. For
these reasons, we find no error in the district court’s denial of the Defendants’
motion for summary judgment based on the affirmative defense of equitable
estoppel.
C. Summary judgment in favor of the CFTC on its claims for registration
violations was appropriate.
We now turn to the merits of this case. The CEA imposes registration
requirements on commodities traders and the exchanges where they trade.
Section 6d of the CEA makes it “unlawful for any person to be a futures
commission merchant unless . . . such person shall have registered [as such] . . .
with the [CFTC].” 7 U.S.C. § 6d(a)(1). The statute also requires that all
transactions be “conducted on or subject to the rules of a board of trade which has
been designated or registered by the [CFTC].” Id. § 6(a). Together, these
provisions require that only registered traders handle transactions and that they do
so on a registered exchange.
An exception exists, however, for transactions that result in “actual delivery
within 28 days.” Id. § 2(c)(2)(D)(ii)(III)(aa). Actual delivery means “giving real
and immediate possession” of the commodity “to the buyer or the buyer’s agent.”
U.S. Commodity Futures Trading Comm’n v. Hunter Wise Commodities, LLC, 749
F.3d 967, 979 (11th Cir. 2014) (internal quotation marks omitted). “‘Actual’ is
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that which ‘exist[s] in fact’ and is ‘real,’ rather than constructive.” Id. (quoting
Black’s Law Dictionary 494 (9th ed. 2009)).
This exception is an affirmative defense on which the commodities trader
bears the burden of proof. See Schlemmer v. Buffalo, R & P R Co, 205 U.S. 1, 10
(1907) (explaining that the “general rule of law is[] that a proviso carves special
exceptions only out of the body of the act; and those who set up any such
exception must establish it”); see also Corning Glass Works v. Brennan, 417 U.S.
188, 196–97 (1974) (“[T]he application of an exemption under the Fair Labor
Standards Act is a matter of affirmative defense on which the employer has the
burden of proof.”); Mulhall v. Advance Sec., Inc., 19 F.3d 586, 590 (11th Cir.
1994) (“[T]he exceptions granted within the EPA constitute affirmative
defenses.”).
The Defendants concede that they were not registered as futures commission
merchants and that the trades at issue did not occur on a registered exchange. But
they seek refuge in the exception for transactions resulting in actual delivery.
As set forth in the factual background of this opinion, however, there is no
basis in the record for the Defendants’ contention that actual delivery ever
occurred. The record instead supports the holding of the district court that the
Defendants failed to establish their affirmative defense of “actual delivery.” See
Hunter Wise Commodities, 749 F.3d at 979. We therefore find no error in the
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court’s grant of summary judgment in favor of the CFTC on its claims that the
Defendants engaged in off-exchange transactions and failed to register as futures
commission merchants.
D. The district court did not err in concluding that the Defendants
committed fraud under 7 U.S.C. §§ 6b(a) and 9, and under 17 C.F.R.
§ 180.1.
We next turn to the issue of fraud. For our purposes, 7 U.S.C. § 6b(a),
7 U.S.C. § 9, and 17 C.F.R. § 180.1 are redundant. Section 6b(a) makes it
“unlawful . . . for any person . . . in connection with . . . any contract of sale of any
commodity . . . for future delivery . . . to cheat or defraud or attempt to cheat or
defraud the other person . . . [or] willfully to make . . . any false report or statement
. . . [or] willfully to deceive or attempt to deceive the other person by any means
whatsoever.” 7 U.S.C. §§ 6b(a). Section 9 of the same chapter is similar,
providing that “[i]t shall be unlawful for any person . . . to use . . . in connection
with any . . . contract of sale of any commodity . . . for future delivery . . . any
manipulative or deceptive device or contrivance.” Id. § 9(1). Finally, 17 C.F.R.
§ 180.1(a) declares it “unlawful for any person . . . in connection with any . . .
contract of sale of any commodity . . . or contract for future delivery . . . to
intentionally or recklessly . . . use . . . any manipulative device, scheme, or artifice
to defraud; . . . [or] [m]ake . . . any untrue or misleading statement of a material
fact or to omit to state a material fact necessary . . . to make the statements made
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not untrue or misleading; . . . [or] [e]ngage . . . in any act . . . which operates . . . as
a fraud or deceit upon any person.”
The CFTC must prove the same three elements to establish liability under
each of the above provisions: “(1) the making of a misrepresentation, misleading
statement, or a deceptive omission; (2) scienter; and (3) materiality.” Commodity
Futures Trading Comm’n v. R.J. Fitzgerald & Co., Inc., 310 F.3d 1321, 1328 (11th
Cir. 2002). “Unlike a cause of action for fraud under the common law of [t]orts,
‘reliance’ on the representations is not a requisite element . . . .” Id. at n.6.
1. Misrepresentation, misleading statement, or deceptive omission
The district court’s factual findings on the “misrepresentation” element
reflect no clear error. With the many references to “physical metals,” “physical
possession,” and “storage,” Southern Trust’s brochure, website, brokers, and
account-opening documents collectively represented that the company offered
investments in metals. Abundant evidence shows, however, that after accepting
the customers’ money, Southern Trust sent the funds to Loreley, which in turn sent
them to Berkeley and Hantec for investment in futures. The Defendants do not
dispute that the accounts at Berkeley and Hantec were in Loreley’s name, not in
the names of Southern Trust’s customers. Moreover, the evidence shows that
Southern Trust never informed its customers that their money was being
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transferred to Loreley, Berkeley, or Hantec and, consequently, that the customers
did not know that those firms held their money.
The district court correctly applied the law to these facts. “Whether a
misrepresentation has been made depends on the ‘overall message’ and the
‘common understanding of the information conveyed.’” R.J. Fitzgerald, 310 F.3d
at 1328 (quoting Hammond v. Smith Barney Harris Upham & Co., Comm. Fut. L.
Rep. (CCH) 36,657 & n.12 (CFTC Mar. 1, 1990)). We find the case of U.S.
Commodity Futures Trading Commission v. Hunter Wise Commodities, LLC,
21 F. Supp. 3d 1317 (S.D. Fla. 2014), squarely on point. The district court in
Hunter Wise concluded, after a bench trial, that the defendant “misrepresented
facts about the precious metals transactions it oversaw” and provided a deceptive
“‘overall message’” when it “led the retail customers to believe metals were stored
on their behalf.” Id. at 1338 (quoting R.J. Fitzgerald, 310 F.3d at 1328).
Moreover, the court found that the defendant “failed to inform [the retail
customers] that the metals it purchased were on a financed basis, it did not own the
metals, and the metals, if there were any at all, were not in the retail customers’
names.” Id.; see also U.S. Commodity Futures Trading Comm’n v. Hunter Wise
Commodities, LLC, 749 F.3d 967, 980–82 (11th Cir. 2014) (affirming the district
court’s issuance of a preliminary injunction because the CFTC presented a prima
facie case of fraud under 7 U.S.C. § 6b).
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Southern Trust orchestrated a nearly identical scheme in the present case. It
misrepresented to customers the fundamental nature of their investments, telling
them that they were investing in metals when in fact they were investing in futures,
and charging a fictitious storage fee despite the customers having no metals to
store. Finally, Southern Trust failed to tell the customers that it passed their money
through Loreley to Berkeley and Hantec, with the customers having no knowledge
of or relationship with these entities. The district court therefore did not err in
concluding that the CFTC satisfied its burden, under the preponderance-of-the-
evidence standard, to prove the first element necessary to establish fraud.
2. Scienter
Regarding the element of scienter, Escobio does not dispute that he was the
CEO of both Southern Trust and the Holding Corporation, and that he had
substantial prior experience in commodities trading. He also does not dispute that
he signed the account-opening documents for Loreley’s trading accounts at both
Berkeley and Hantec. Those documents, as well as the monthly account
statements that Escobio received, make clear that Loreley was investing the
customers’ money in futures, not metals. Further, Escobio knew that the accounts
at Hantec and Berkeley bore Loreley’s name, not the names of Southern Trust’s
customers. Based on these facts, the district court did not clearly err in finding that
Escobio knew that he was investing his customers’ money in futures.
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Nor did the district court clearly err in finding that Escobio knew that
Berkeley and Hantec did not make any loans to Southern Trust’s customers, even
though Southern Trust charged its customers interest on the purported loans.
Neither the account-opening documents nor the monthly statements from Berkeley
or Hantec reflect any loans from those companies. Moreover, the Defendants point
to no evidence—other than Escobio’s uncorroborated testimony—of any loans
from Berkeley or Hantec, and the district court discounted Escobio’s testimony on
that point, as on others, because it determined that he lacked credibility. This
circuit applies a “strong rule of deference” in reviewing a district court’s
determination of a witness’s credibility at a bench trial. Childrey v. Bennett, 997
F.2d 830, 834 n.5 (11th Cir. 1993). Given this standard, as well as the numerous
conflicts between Escobio’s testimony and the documentary evidence, the court
was entitled to find that Escobio lacked credibility and to discount his testimony
accordingly.
The district court also correctly applied the law to these facts. “[S]cienter is
established if Defendant intended to defraud, manipulate, or deceive, or if
Defendant’s conduct represents an extreme departure from the standards of
ordinary care.” Commodity Futures Trading Comm’n v. R.J. Fitzgerald & Co.,
Inc., 310 F.3d 1321, 1328 (11th Cir. 2002). Adapting “federal securities law” to
the commodities-fraud context, this circuit has stated that scienter is shown “when
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Defendant’s conduct involves ‘highly unreasonable omissions or
misrepresentations . . . that present a danger of misleading [customers] which is
either known to the Defendant or so obvious that Defendant must have been aware
of it.’” Id. (quoting Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1202 (11th Cir.
2001)).
The evidence shows that the Defendants either intended to mislead Southern
Trust’s customers or made highly unreasonable misrepresentations that posed an
obvious danger of misleading them. Escobio’s deep involvement in managing the
futures-trading accounts at Berkeley and Hantec, as well as his extensive industry
experience, support the inference that he knew that he was investing his customers’
money in futures. Hantec’s CEO, at his deposition, put it this way: “Under no
circumstance is [it] plausible” that Escobio believed that he was trading in metals.
Escobio also surely knew that Berkeley and Hantec had made no loans to Southern
Trust’s customers and, therefore, that the customers were being charged interest on
loans that did not exist. The district court thus did not err in concluding that the
CFTC had proved scienter.
3. Materiality
This brings us to the third and final element—materiality. “A representation
or omission is ‘material’ if a reasonable investor would consider it important in
deciding whether to make an investment.” Fitzgerald, 310 F.3d at 1328–29. The
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Defendants’ briefing on this element addresses only the materiality of their
omission that the customers’ money would pass through Loreley to Berkeley and
Hantec. If that were the only omission or misrepresentation in this case, we might
need to examine the materiality element more closely. But other
misrepresentations found by the district court easily qualify as material. The
Defendants, for example, represented that they were investing customers’ money
in metals when in fact they were investing it in futures. Moreover, the Defendants
represented that customers owed interest on loans used to purchase metals, but the
loans did not exist. A reasonable investor would consider each of these
misrepresentations important in deciding whether to invest. Accordingly, the
district court did not err in concluding that these misrepresentations were material.
We therefore agree with the district court’s overall conclusion that fraud was
established under 7 U.S.C. §§ 6b(a) and 9, and under 17 C.F.R. § 180.1.
E. The district court did not err in permanently enjoining the Defendants
from employment in the commodities-trading industry.
Turning now to the propriety of the injunction issued against the Defendants,
we note that a district court’s issuance of an injunction is reviewed under the
abuse-of-discretion standard. Commodity Futures Trading Comm’n v. Wilshire
Inv. Mgmt. Corp., 531 F.3d 1339, 1347 (11th Cir. 2008) (applying this standard to
a permanent injunction issued under the CEA). “[S]o long as [the district court’s]
decision does not amount to a clear error of judgment[,] we will not reverse even if
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we would have gone the other way had the choice been ours to make.” S.E.C. v.
ETS Payphones, Inc., 408 F.3d 727, 733 (11th Cir. 2005).
“[U]pon a proper showing,” the CEA allows a district court to grant “a
permanent or temporary injunction.” 7 U.S.C. § 13a-1(b). “‘[T]he ultimate test
[for an injunction] is whether the defendant’s past conduct indicates that there is a
reasonable likelihood of further violations in the future.’” Wilshire, 531 F.3d at
1346 (quoting SEC v. Caterinicchia, 613 F.2d 102, 105 (5th Cir. 1980)). This test
entails weighing the following six factors:
the egregiousness of the defendant’s actions, the isolated or recurrent
nature of the infraction, the degree of scienter involved, the sincerity
of the defendant’s assurances against future violations, the
defendant’s recognition of the wrongful nature of his conduct, and the
likelihood that the defendant’s occupation will present opportunities
for future violations.
SEC v. Carriba Air, Inc., 681 F.2d 1318, 1322 (11th Cir. 1982). A court need not
make a finding on every factor. See Wilshire, 531 F.3d at 1346–47 (holding that a
district court that considered only three of the six factors did not abuse its
discretion in issuing an injunction).
Escobio argues that the injunction should be vacated because the district
court, in weighing the Carriba Air factors, erred in not concluding that his
cooperation with the NFA’s investigation resolved the last three factors in his
favor. But the court had discretion in how to interpret Escobio’s cooperation with
the NFA. This discretion would have allowed the court, for example, to interpret
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Escobio’s cooperation not as contrition, but as a self-interested effort to strike a
favorable deal with the NFA and, perhaps, to avoid criminal prosecution.
Escobio’s denial of wrongdoing at his deposition, at trial, and throughout the
NFA’s and the CFTC’s investigations further belies his acceptance of
responsibility. The same is true of his attempt to deflect blame onto Berkeley and
Hantec, which he claims duped him into trading futures. In sum, the court applied
the correct legal standard, and its factual findings contain no clear error. We
therefore find no fault in its issuance of a permanent injunction.
F. Restitution is proper only for losses sustained in the leveraged-metals
scheme, not for losses sustained in the unregistered-futures scheme.
This brings us to the final issue in this case—restitution. The district court
awarded restitution for losses arising from both schemes. First, it awarded
$1,543,892 for losses sustained in the leveraged-metals scheme, in which the
Defendants accepted customers’ money for investment in metals but instead
invested the funds in futures. Second, the court awarded $559,725 for losses
sustained in the unregistered-futures scheme, in which the Defendants accepted
customers’ money for investment in futures—and actually invested the funds in
futures through Loreley’s accounts at Berkeley and Hantec—but failed to register
as futures commission merchants or to conduct the transactions on a registered
exchange. The Defendants challenge both awards, arguing that the CFTC failed to
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prove, as required by the CEA, that the Defendants’ violations of the CEA
proximately caused their customers’ losses.
1. The district court relied on a definition of proximate cause
subsequently rejected by the Supreme Court.
Under the CEA, a “court may impose . . . on any person found in the action
to have committed any violation[] equitable remedies including . . . restitution to
persons who have sustained losses proximately caused by such violation (in the
amount of such losses).” 7 U.S.C. § 13a-1(d)(3). This statutory language, by its
terms, permits restitution only for losses proximately caused by a violation.
In its restitution analysis, the district court concluded that the “Defendants’
violations proximately caused their customers’ losses” because those losses “were
a reasonably foreseeable result of the Defendants’ violations.” The court derived
this foreseeability-based formulation of proximate cause from a recent decision of
this court holding that, for proximate cause to exist under the Fair Housing Act
(FHA), “[t]he defendant must have been reasonably able to foresee the kind of
harm that was actually suffered.” See City of Miami v. Bank of Am. Corp., 800
F.3d 1262, 1282 (11th Cir. 2015).
That decision, however, was subsequently reversed by the Supreme Court in
Bank of America Corp. v. City of Miami, 137 S. Ct. 1296 (2017). The Court
concluded that, “[i]n the context of the FHA, foreseeability alone does not ensure
the close connection that proximate cause requires” between the complained-of
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conduct and the alleged harm. Id. at 1306. As the Court explained, the FHA
incorporates the concept of proximate cause developed at common law, where
“directness principles” apply. Id. Proximate cause under the FHA thus “requires
‘some direct relation between the injury asserted and the injurious conduct
alleged.’” Id. (quoting Holmes v. Sec. Inv’r Protection Corp., 503 U.S. 258, 268
(1992)). Such a “direct relation” usually does not exist “beyond the first step” in a
causal chain. Id. (quoting Hemi Group, LLC v. City of New York, N.Y., 559 U.S. 1,
10 (2010)).
We have found no circuit court opinion examining proximate cause under
the CEA, but the statute surely demands more than foreseeability alone. Section
13a-1(d)(3) of the CEA, like the FHA provision examined in Bank of America,
“sounds basically in tort” because it defines a new legal duty and authorizes the
courts to award compensation for injuries caused by a defendant’s wrongful
breach. See Curtis v. Loether, 415 U.S. 189, 195 (1974) (explaining why a
damages action under the Civil Rights Act of 1964 “is analogous to a number of
tort actions recognized at common law”).
Congress, moreover, has given no indication, either in the CEA’s text or
otherwise, that it intended to depart from the common-law conception of proximate
cause. See Bank of America, 137 S. Ct. at 1305 (“We assume Congress ‘is familiar
with the common-law rule and does not mean to displace it sub silentio’ in federal
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causes of action.” (quoting Lexmark Int’l, Inc. v. Static Control Components, Inc.,
134 S. Ct. 1377, 1390 (2014))). We thus conclude that the common-law rules
governing proximate cause apply here. Those rules include the notion that
proximate cause encompasses cause in fact, requiring proof of “but-for” causation.
W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 30 (5th ed. 1984).
2. The district court erred in finding that the registration violation
alone proximately caused any loss.
With regard to the unregistered-futures scheme, the district court’s finding of
proximate cause rested on the premise that the Defendants’ “business was illegal
from the outset” and that the Defendants “never should have accepted customer
funds for the purpose of trading futures transactions without first registering as a
futures commission merchant with the CFTC.” The court reasoned that because
the transactions were illegal, the losses were foreseeable. But such reasoning
mistakes correlation for causation. As a general matter, losing money is a
foreseeable result of investing with an unregistered trader, but this is not because a
trader’s failure to register will itself cause any loss. More likely, any loss will
result from some other factor, such as the trader’s incompetence or dishonesty,
which the failure to register correlates with but does not cause. The intrinsic
qualities of the trader—not his or her failure to register—would be the likely cause
of the loss, to say nothing of market fluctuations.
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Consider the analogous circumstance of a client being represented by an
unlicensed lawyer. The lawyer’s lack of licensure might indicate incompetence or
a lack of integrity, but normally it will not in and of itself cause a client’s loss in
court. Indeed, a client might well prevail in court despite the lawyer’s status. Or,
if there is a loss, the loss could flow from factors wholly unrelated to the lawyer’s
status, such as an unfavorable precedent, a judicial error, or a jury’s caprice.
A recent decision from this court illustrates the point that a fraudster’s
failure to observe registration requirements does not necessarily cause his victim’s
loss. In Alvarez v. United States, 862 F.3d 1297, 1300 (11th Cir. 2017), a group of
federal employees sued the defendant for negligence per se after he sold them
fraudulent, unregistered securities. The court rejected the plaintiffs’ argument that
the seller’s failure to register the securities had caused the losses, concluding
instead that the losses had occurred because the securities were fraudulent. This
point was made by the Alvarez court in the following passage:
As the district court correctly explained, “had the FEBG Bond Fund
been legitimate, the fact of its being unregistered would have had no
effect on plaintiffs. And conversely, if McLeod had registered the
fraudulent securities (lying about them to do so since they didn’t
exist), plaintiffs would still have suffered the same harm. Plaintiffs’
injuries flow from the securities and McLeod’s representations which
underlay them being fraudulent, not because they were unregistered.”
Id. at 1302 (quoting the district court’s opinion).
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The same logic applies here. In the unregistered-futures scheme, the
Defendants invested their customers’ money in futures through Loreley’s accounts
at Berkeley and Hantec. The customers who lost money in this scheme intended to
invest in futures, and the CFTC does not dispute that the Defendants in fact
facilitated the investments that those customers wished to make. According to the
district court, the Defendants’ only CEA violations in the unregistered-futures
scheme were their failure to register as futures commission traders and their failure
to disclose the roles of Berkeley, Hantec, and Loreley in making the investments.
But the record contains no evidence that the customers who lost money in
the unregistered-futures scheme did so because of these violations. As in Alvarez,
there has been no showing that the registration violations caused the losses. Nor
has the CFTC pointed to any evidence that the losses flowed from the Defendants’
omissions regarding the roles of Loreley, Berkeley, or Hantec. The CFTC has not
shown, for instance, that the customers who intended to invest in futures would
have refrained from doing so if they had known of Loreley’s, Berkeley’s, or
Hantec’s involvement. Nor has the CFTC shown that those entities’ involvement
delayed the execution of the trades or otherwise caused the investors to receive
anything less than what they had bargained for.
Because the CFTC did not prove that the Defendants’ violations in the
unregistered-futures scheme caused any loss, we vacate the restitution award
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related to that scheme and remand the issue to the district court with instructions to
consider whether any other equitable remedy is appropriate. We particularly note
the statutory subsection under which the court may order the disgorgement of
gains, in appropriate circumstances, without regard to proximate cause.
See 7 U.S.C. § 13a-1(d)(3) (“[T]he court may impose . . . on any person found . . .
to have committed any violation[] equitable remedies including . . . disgorgement
of gains received in connection with such violation.” (emphasis added)). The
district court may, but need not, consider on remand whether disgorgement is
appropriate in the present case.
3. Sufficient evidence supports the award of restitution for losses
sustained in the leveraged-metals scheme.
The district court did not err, however, in awarding restitution for losses in
the leveraged-metals scheme, in which the Defendants promised to invest the
customers’ money in metals but instead invested the funds in futures. To
constitute a proximate cause, the fraud must stand in “direct relation” to the loss.
Bank of Am. Corp. v. City of Miami, 137 S. Ct. 1296, 1306 (2017). This does not
mean that the fraud must be the “sole and exclusive cause” of the loss; it means
only that the fraud must be a “substantial” or “significant contributing cause.”
FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282, 1309 (11th Cir. 2011)
(citing Robbins v. Koger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir. 1997)).
The courts’ “‘general tendency’” when considering whether a but-for cause
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qualifies as a proximate cause is “‘not to go beyond the first step’” in the causal
chain. Bank of Am. Corp., 137 S. Ct. at 1306 (quoting Hemi Group, LLC v. City of
New York, N.Y., 559 U.S. 1, 10 (2010)).
In the present case, the fraud is directly related to the losses because the
Defendants took their customers’ money and, contrary to the customers’
instructions, invested the funds in futures. But the customers wished to invest in
metals, not futures, so there is no question that the Defendants’ unilateral act of
investing the funds in futures was a “substantial” or “significant contributing”
cause of the loss. Whether additional causes exist is irrelevant. Moreover, the
Defendants’ act of investing the customers’ funds in futures is inextricable from
the fraud because that act rendered false the Defendants’ representations about the
nature of the investments being made and directly led to the investors’ losses when
market conditions deteriorated.
The Defendants argue, however, that market conditions should be viewed as
the sole proximate cause of the losses on the theory that the drop in metals prices
would have caused the same losses even if their customers’ money had been
invested in metals. But this argument ignores crucial differences between metals
and futures. For one thing, futures involve an element of leverage, which
magnifies gains and losses:
When you speculate in the futures markets, you have the ability to
purchase contracts on margin. This means you can control a large
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amount of metal at a fraction of its value. Leverage can amplify
returns and risk. Small price swings in either direction could mean
significant gains, or you could lose significantly more than you
initially invested.
U.S. Commodity Futures Trading Comm’n, The Risks of Buying Gold,
Silver & Platinum, http://www.cftc.gov/idc/groups/public/@cpfraudawarenessandp
rotection/documents/file/cppreciousmetalsfraudbrochure.pdf; see also Thomas A.
Russo & Marlisa Vinciguerra, Financial Innovation and Uncertain Regulation:
Selected Issues Regarding New Product Development, 69 Tex. L. Rev. 1431, 1488
(1991) (explaining that “futures trading is inherently risky and involves the
possibility of losses greater than a customer’s investments of funds”).
Accordingly, the argument that the Defendants’ customers would have experienced
losses of the same magnitude if their money had been invested in metals is flawed.
Another crucial difference between metals and futures is that metals can be
held indefinitely, whereas futures almost always have expiration dates.
See Commodity Futures Trading Comm’n v. Zelener, 373 F.3d 861, 867 (7th Cir.
2004) (noting that “normal futures contracts have defined expiration or delivery
dates”); see also Patricia A. O’Hara, The Elusive Concept of Control in Churning
Claims Under Federal Securities and Commodities Law, 75 Geo. L.J. 1875, 1894
n.55 (1987) (“[C]ommodity futures are by definition a short-term investment with
a specified delivery date, generally not too removed in time. The trader must
either close his position prior to the delivery date or perform the contract.”).
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When metals prices fall, a metals investor can avoid losses by not selling the
metals until prices (hopefully) recover. But a futures investor makes or loses
money immediately when prices change. See Roberta Romano, A Thumbnail
Sketch of Derivative Securities and Their Regulation, 55 Md. L. Rev. 1, 18 (1996)
(explaining that “holders of futures contracts recognize gains and losses
immediately because of the daily settlement process”); see also id. (“Margin
accounts are adjusted daily in response to changes in the value of positions, a
process that is called ‘marking to market.’ If a customer’s position experiences a
gain, his account balance is increased and he may withdraw the profit from the
account. If he experiences a loss, his account balance is reduced.”). This means
that a futures investor cannot “ride out” unfavorable market movements in the
same way as a metals investor.
Given the inherent differences between metals and futures, the Defendants’
argument that conditions in the metals market were the sole proximate cause of
their customers’ losses is untenable. If the Defendants had placed their customers’
money in a slot machine instead of in the metals market, surely they could not
escape liability by pointing to the unpredictable odds in a casino as the sole
proximate cause for the losses. Crediting the Defendants’ argument would create
perverse incentives for commodities traders. See United States v. Turk, 626 F.3d
743, 750 (2d Cir. 2010) (rejecting a similar argument because it would “encourage
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would-be fraudsters to roll the dice on the chips of others, assuming all of the
upside benefit and little of the downside risk”). We therefore find no error in the
district court’s restitution award for losses sustained in the leveraged-metals
scheme.
III. CONCLUSION
For all of the reasons set forth above, we AFFIRM the judgment of the
district court except as to the restitution award for the group of investors whose
losses were associated solely with the registration violations. As to that portion of
the restitution award, we VACATE the judgment and REMAND with instructions
to consider other equitable remedies.
34