Monex Deposit Company and two affiliated companies (collectively, “Monex”) and Louis Cabrini and Michael Cabrini, the firms’ principals, moved to dismiss charges filed against them last month by the Commodity Futures Trading Commission in a federal court in Illinois that they engaged in fraud and illegal precious metal transactions with retail clients. The defendants also asked the court to transfer the CFTC’s enforcement action to a federal court in California closer to their base of operations and a substantial portion of their customers.

According to the defendants, the CFTC misapplied applicable law when it alleged that Monex’s customers participating in its “Atlas” trading program do not take “actual delivery” of metals in connection with financed transactions. Actual delivery of precious metals occurs, said the defendants, when the metals are physically delivered to an independent depository and title is passed to each purchaser within 28 days.

The CFTC alleged in its complaint against the defendants that actual delivery to Monex’s customers does not occur. The CFTC acknowledged that metals are stored in depositories related to the customers’ Atlas transactions. However, the metals are “subject to contracts between Monex and the depositories which provide Monex with exclusive authority to instruct the depositories as to the disposition of the metals. Monex customers… do not have any contractual rights conferred upon them by the contracts between Monex and the depositories,” alleged the CFTC. (Click here for background regarding the CFTC’s charges in the article “Retail Metals Dealer and Principals Sued by CFTC for Illegal Transactions and Fraud” in the September 10, 2017 edition of Bridging the Week.)

Monex also claimed that the CFTC’s argument that it did not make actual delivery to its customers when physical transfer of metals occurred is a new CFTC position, and that the Commission’s prosecution of the defendants under this novel theory violated their due process for not giving them prior notice of this new viewpoint.

Monex additionally said that the CFTC’s allegations that it committed fraud were wrong because, at most, the statements alleged to be false or materially misleading were puffery and in any case, taken out of context when reviewed against Monex’s overall promotional literature and training materials for its salespersons.

Finally, because most of the Monex’s activities occurred in California and were centered in Newport Beach, the firm claimed that the appropriate venue for the CFTC’s enforcement action was in a federal court in California, nearer its home office.

The other two Monex companies sued by the CFTC were Monex Credit Company and Newport Service Corporation.

Legal Weeds: What constitutes “actual delivery” will be a theme underlying not only this CFTC enforcement action against Monex, but analyses of activities by trading platforms and other persons that offer and sell cryptocurrencies to retail persons with financing. (Click here for background in the article “New CFTC Commissioner Proclaims CFTC Reg AT Source Code Repository Proposal “D-E-A-D” and Warns Retail Bitcoin Exchanges Providing Financing to Fulfill Delivery Obligation” in the current edition of Bridging the Week.)

Under applicable law, all contracts for commodities for future delivery when offered to retail clients 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,” must be executed on or subject to the rules of a designated contract market. However, contracts for commodities that result in actual delivery within 28 days or create an enforceable obligation to deliver between a seller and buyer that have the ability to deliver and accept delivery, respectively, in connection with their line of business, are exempt from this requirement. (Click here to access 7 U.S.C § 2(c)(2)(D(i) and here to access 7 U.S.C. § 6(a)(1); click here to access 7 U.S.C § 2(c)(2)(D(ii)(III).)

The CFTC provided guidance on what constitutes actual delivery to a retail person in 2013. There it said that actual delivery of a commodity by a seller to a retail person occurs (including a purchase made using leverage, margin or financing) when it is physically delivered to a depository other than the seller, affiliated companies or agents, and the seller transfers title to the buyer. (Click here to access the 2013 CFTC Interpretation.)