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U.S. Commodity Futures Trading Commission v. Monex Credit Co.

United States Court of Appeals, Ninth Circuit

July 25, 2019

U.S. Commodity Futures Trading Commission, Plaintiff-Appellant,
v.
Monex Credit Company; Monex Deposit Company; Newport Services Corporation; Michael Carabini; Louis Carabini, Defendants-Appellees.

          Argued and Submitted March 13, 2019 San Francisco, California

          Appeal from the United States District Court for the Central District of California D.C. No. 8:17-cv-01868-JVS-DFM James V. Selna, District Judge, Presiding

          Robert A. Schwartz (argued), Deputy General Counsel; Anne W. Stukes, Assistant General Counsel; Daniel J. Davis, General Counsel; U.S. Commodity Futures Trading Commission, Washington, D.C.; for Plaintiff-Appellant.

          Neil A. Goteiner (argued), Elizabeth A. Dorsi, and C. Brandon Wisoff, Farella Braun & Martel LLP, San Francisco, California, for Defendants-Appellees.

          Before: Eugene E. Siler, [*] A. Wallace Tashima, and M. Margaret McKeown, Circuit Judges.

         SUMMARY[**]

         Commodity Future Trading Commission

         The panel reversed the district court's dismissal of the Commodity Future Trading Commission's enforcement action against Monex Credit Company for alleged fraud in precious metals sales.

         The CTFC regulates commodity futures markets under the Commodity Exchange Act ("CEA"). The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amended the CEA and extended the CEA to commodity transactions offered on a leveraged or margined basis as if they were futures trades. Congress carved out an exception: the CEA does not apply to leveraged retail commodity sales that result in "actual delivery" within 28 days.

         Monex sells precious metals to investors. Through Monex's Atlas Program, investors can purchase commodities on margin, which is also known as leverage. The CFTC alleged that Atlas was an illegal and unregistered leveraged retail commodity transaction market.

         The panel held that the actual delivery exception was an affirmative defense on which the commodities trader bore the burden of proof. The panel held that actual delivery required at least some meaningful degree of possession or control by the customer. The panel further held that it was possible for this exception to be satisfied when the commodity sat in a third-party depository, but not when, as here, metals were in the broker's chosen depository, never exchanged hands, and subject to the broker's exclusive control, and customers had no substantial, non-contingent interests. The panel concluded that because this affirmative defense did not, on the face of the complaint, bar the CFTC from relief on Counts I, II, and IV, the district court erred in dismissing those claims.

         In Count III, the CFTC alleged that Monex violated CEA § 6(c)(1), 7 U.S.C. § 9(1), and 17 C.F.R. § 180.1, by fraudulently deceiving its customers, but there was no allegation that Monex manipulated the market. The panel concluded that § 6(c)(1)'s language was unambiguous, and held that the CFTC could sue for fraudulently deceptive activity, regardless of whether it was also manipulative. The panel also held that when someone violated § 6(c)(1), the CFTC could bring an enforcement action.

         The panel held that at this point, the CFTC's well-pleaded complaint must be accepted as true. Because the CFTC's claims were plausible, the panel remanded for further proceedings.

          OPINION

          SILER, CIRCUIT JUDGE

         A two-letter conjunction and a two-word phrase decide this case. At stake are hundreds of millions of dollars. Congress, acting shortly after the economy began to stabilize from the financial crisis that began a decade earlier, passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010), which amended the Commodity Exchange Act (CEA) to expand the Commodity Future Trading Commission's (CFTC) enforcement authority. This case is about the extent of those powers.

         Monex Credit Company, one of the defendants and appellees, argues that the CFTC went too far when it filed this $290 million lawsuit for alleged fraud in precious metals sales. According to Monex, Dodd-Frank extended the CFTC's power only to fraud-based manipulation claims, so stand-alone fraud claims-without allegations of manipulation-fail as a matter of law.

         Not only that, Monex argues, but Dodd-Frank also immunizes Monex from the CFTC's claims that it ran an unregistered, off-exchange trading platform. The CEA's registration provisions do not apply to retail commodities dealers who "actual[ly] deliver[]" the commodities to customers within twenty-eight days. See 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa). Monex insists that it falls within this exception.

         On both fronts, the district court agreed with Monex and dismissed the CFTC's complaint for failure to state a claim under Civil Rule 12(b)(6). We REVERSE and REMAND.

         Background

         The facts come from the CFTC's complaint, which, at this stage, we must accept as true. See Syed v. M-I, LLC, 853 F.3d 492, 499 (9th Cir. 2017).

         Monex and the Atlas Program

         California-based Monex has been a major player in the precious metal markets for decades. It sells gold, silver, platinum, and palladium to investors who have a variety of buying options, but here we focus on what Monex calls its "Atlas Program." Through Atlas, investors can purchase commodities on "margin." Also known as "leverage," the concept is simple: A customer buys precious metals by paying only a portion of the full price. The remaining amount is financed through Monex.

         Once a customer opens an account, she may take open positions in precious metals. But the trading occurs "off exchange"-that is, it does not happen on a regulated exchange or board of trade. Instead, Monex controls the platform, acts as the counterparty to every transaction, and sets the price for every trade.

         Since mid-2011, Monex has made more than 140, 000 trades for more than 12, 000 Atlas accounts, each of which requires margin of 22-25% of the account's total value. A customer who deposits $25, 000 in Atlas as margin can open positions valued at $100, 000; she owes the additional $75, 000 to Monex. Over time, the account's value changes-it goes up and down-as markets do. The difference between the account's total value and the amount the customer still owes to Monex is the account's "equity." And if that difference falls below a certain threshold, Monex can issue a "margin call"-it can require customers to immediately deposit more money into the accounts to increase the equity. Monex can do so at any time, and it can change margin requirements whenever it wants.

         Monex also retains sole discretion to liquidate trading positions without notice to the customer if equity drops too low, and it controls the price for every trade. Price spreads- the difference between the bid price and ask price-are 3% and generate much of the program's revenue. Commissions and fees make up the rest, and that money comes directly out of customer accounts' equity. Over the last eight years, Monex has made margin calls in more than 3, 000 Atlas accounts and has force-liquidated at least 1, 850.

         Atlas investors can make either "short" or "long" trades. Short trades bet on metal prices going down, and long up. Monex allows investors to place "stop" or "limit" orders to manage their trading positions. About a quarter of trading positions in leveraged ...


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