The US Court of Appeals for the Eleventh Circuit recently decided in a case of first impression that Amendments to the Commodity Exchange Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act expand the enforcement authority of the Commodity Futures Trading Commission to a broader class of retail customer transactions made on a leveraged, margined or otherwise-financed basis.
The CFTC brought a civil enforcement action against 20 defendants, including the Chief Executive Officer and Chief Operating Officer of Hunter Wise, a brokerage firm (Appellants), alleging that they violated the Commodity Exchange Act by conducting off-exchange and fraudulent retail commodity transactions. The CFTC alleged that, contrary to Hunter Wise’s representations, the broker did not actually trade, store or transfer any precious metals, but instead was managing its risk exposure from customers’ trading positions by trading derivatives in its own margin trading accounts with off-exchange precious metal trading companies and never taking possession of any metals. The CFTC alleged that Hunter Wise financed the retail customer trades at issue through credit it extended to dealers it engaged. The dealers, in turn, extended credit to the retail customers. The credit terms of these transactions matured in four years. The CFTC moved for a preliminary injunction, which the US District Court for the Southern District of Florida granted.
The court found that the CFTC has enforcement authority over the retail transactions at issue because the Dodd-Frank amendments expanded the scope of the CFTC’s authority over retail commodity transactions offered “on a leveraged or margined basis, or financed . . . on a similar basis” (emphasis added). Appellants argued that the italicized terms, which were not expressly defined in the amendments to the statute, should be construed consistent with other provisions in the Commodity Exchange Act and accompanying regulations that limited a “leverage contract” to an agreement having a term of, at minimum,10 years. The court rejected this reading of the amendments and found that absent a specific provision in the statute to the contrary, the terms were to be construed in accordance with their plain and ordinary meanings. As there was evidence that Hunter Wise provided financing for the retail trades, and that the retail customers were subject to margin calls on their trading accounts, the statutory requirements were satisfied. Consequently, the court affirmed entry of the preliminary injunction.
U.S. Commodity Futures Trading Commission v. Hunter Wise Commodities, LLC, et al., No. 13-10993 (11th Cir. Apr. 15, 2014).