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 ...