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COMMODITY FUTURES TRADING v. AM. METALS

August 31, 1991

COMMODITY FUTURES TRADING COMMISSION, STATE OF NEW JERSEY, AND STATE OF FLORIDA, PLAINTIFFS,
v.
AMERICAN METALS EXCHANGE CORP., ANGLO SWISS METALS, LTD., F.C. & M. INVESTMENT CORP., TRANS WORLD METALS CORPORATION, AMALGAMATED REDEMPTION CENTERS, INC., ROBERT MAXWELL A/K/A ROBERT LEBOVITCH, BILL FRANK, AND MICHAEL JEBROCK, DEFENDANTS.



The opinion of the court was delivered by: Harold A. Ackerman, District Judge.

        OPINION

In this action, the Commodity Futures Trading Commission and the States of Florida and New Jersey seek the issuance of injunctive and ancillary equitable relief against various persons and corporations allegedly engaged in conduct which violates the Commodity Exchange Act (the "CEA"), as amended, 7 U.S.C. § 1 et seq. (1988), the New Jersey Uniform Security Law, N.J.S.A. 49:3-50, et seq. (1989), and the Florida Investor Protection Act, Fla. Stat.Ann. § 517.101 et seq. (Westlaw 1991).

Presently before the Court are the plaintiffs' motions for summary judgment as to Counts II through VIII of the First Amended Complaint and the defendant Robert Maxwell's motions for additional living expenses and for an order to pay attorneys' fees.*fn1 For the reasons set forth below, I will grant the plaintiffs' motion for summary judgment on Counts II through VIII of the First Amended Complaint against each of the defendants. The defendant Robert Maxwell's motions for additional living expenses and attorneys' fees will be denied. The factual background is this matter is discussed in my published Opinion Commodity Futures Trading Commission v. American Metal Exchange Corp. appearing at 693 F. Supp. 168 (D.N.J. 1988), and I need not repeat it here.

Standard of Review

In considering this summary judgment motion, I shall keep in mind the Rule 56 standard of review. Rule 56 of the Federal Rules provides that "judgment . . . shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.Pro. 56(c). The moving party has the initial burden of demonstrating this summary judgment standard, See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S.Ct. 1348, 1355-56, 89 L.Ed.2d 538 (1986), which can be accomplished by simply pointing out to the Court that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986); see also Peters Tp. School Dist. v. Hartford Acc. & Indem. Co., 833 F.2d 32, 34 (3rd Cir. 1987).

In opposing summary judgment, the nonmoving party must come forward with evidence supporting a claim that there is a genuine issue of material fact in dispute which requires resolution by the trier of fact. First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 1592, 20 L.Ed.2d 569 (1968). The judge's role is "not to weigh the evidence and determine the truth of the matter," but to determine whether the evidence may reasonably be resolved in favor of either party. Metzger v. Osbeck, 841 F.2d 518, 519 (3rd Cir. 1988). "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge." Williams v. Borough of West Chester, 891 F.2d 458, 460 (3rd Cir. 1989) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). All inferences to be drawn from the facts should be resolved in favor of the nonmoving party. Peters Tp. School Dist., 833 F.2d at 34.

With these standards in mind, I turn to a discussion of the legal and factual issues involved in these motions.

I. Motion for Summary Judgment Against All Defendants on Count II of the First Amended Complaint

The plaintiffs have moved for summary judgment on Count II of the First Amended Complaint for Injunctive and Ancillary Equitable Relief under Section 4b(A) of the Commodity Exchange Act, 7 U.S.C. § 6b(A) (1988). The plaintiffs request such relief against the defendants, American Metals Exchange Corporation, ("AME"), Anglo-Swiss Metals Ltd., ("Anglo-Swiss"), F.C. & M. Investment Corp., ("FC & M"), Trans World Metals Corp., ("TWM"), Amalgamated Redemption Centers, Inc., ("Amalgamated"), Robert Maxwell, Bill Frank, and Michael Jebrock. Robert Maxwell is the only defendant who has opposed this motion.

Liability

Section 4b(A) of the CEA provides that

  [i]t shall be unlawful . . . (2) for any person in
  or in connection with any order to make . . . any
  contract of sale of any commodity for future
  delivery . . . [which] may be used for (a) hedging
  any transaction in interstate commerce in such
  commodity or, . . . (c) delivering any

  such commodity sold, shipped, or received in
  interstate commerce. . . .
  (A) to cheat or defraud or attempt to cheat or
  defraud such other person.

7 U.S.C. § 6b(A) (1988). This section declares it unlawful for any person to deceive or defraud any other person in connection with the making of a contract for the sale of any commodity for future delivery. Saxe v. E.F. Hutton & Co., Inc., 789 F.2d 105, 109 (2nd Cir. 1986). In my published Opinion in this case, 693 F. Supp. 168, 194 (D.N.J. 1988), I stated that a violation of section 4b(A) is established where, in connection with an order to make a contract of sale of a commodity for future delivery, the plaintiff has demonstrated: (1) a material misrepresentation of presently existing or past fact, (2) knowledge of the falsity by the person making the misrepresentation, (3) intent that the misrepresentation be relied upon, and (4) reliance on the misrepresentation. B.F. Hirsch v. Enright Refining Co., Inc., 751 F.2d 628, 631 (3rd Cir. 1984).

As an initial matter, the plaintiffs contend that because actual damages need not be proven in an enforcement proceeding under Section 4b(A) of the CEA reliance is irrelevant. The plaintiffs point to decisions by the Commission*fn2 as authority for their argument that proof of reliance is not needed to support a fraud claim in an enforcement action under Section 4b(A) of the CEA. The plaintiffs further argue that this Court should look to securities case law under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in interpreting Section 4b(A) of the CEA. The plaintiffs assert that it is well settled that the Securities and Exchange Commission need not show actual reliance to support a fraud claim in an enforcement action under Rule 10b-5 and likewise, the plaintiffs need not prove reliance in an enforcement proceeding under Section 4b(A).

In response the defendant argues that deference to Commission interpretation of the CEA is only appropriate where Congress has not spoken or has spoken ambiguously on the issue in question. The defendant asserts that the plain meaning of the words of Section 4b(A) make evident that Congress required proof of reliance in an enforcement action under this section and therefore, the Commission is not entitled to deference. The defendant further argues that the Commission decisions cited by the plaintiffs do not demonstrate a clear policy determination that proof of reliance is not required in an enforcement action under Section 4b of the CEA. Finally, the defendant argues that although the courts do recognize similarities between the securities and commodities laws, an independent analysis of Section 4b of the CEA makes clear that the concepts developed in cases under Rule 10b-5 and in the other cases cited by the plaintiffs are not relevant here.

I disagree with the defendant's assertion that Congress clearly and unambiguously required proof of reliance under Section 4b(A) by making it unlawful "to cheat or defraud or attempt to cheat or defraud" a person in connection with commodities transactions. 7 U.S.C. § 6b(A). Taken alone, the words of Section 4b(A) do not make clear whether Congress intended that reliance be an element in an enforcement action under this section. It would, accordingly, be appropriate for this Court to defer to Commission case law in interpreting Section 4b(A) if such case law demonstrated that the Commission had made a clear policy determination that proof of reliance is not required to support an enforcement action under Section 4b(A). See Chevron, USA Inc. v. Natural Resource Defense Council, Inc., 467 U.S. 837, 843-844, 104 S.Ct. 2778, 2781-82, 81 L.Ed.2d 694 (1984). However, none of the administrative cases cited by the plaintiffs directly or thoroughly address the issue of reliance in an enforcement action under Section 4b(A) of the CEA. For this reason I cannot base my decision on the Commission cases.

I am also not convinced by the plaintiffs' argument that I should look to securities case law under Rule 10b-5 in interpreting Section 4b(A) of the CEA. On its face, the plaintiffs' analogy to decisions under Rule 10b-5 which hold that reliance need not be shown in an enforcement action since such actions are brought to protect the public and not to redress private wrongs is persuasive. Upon further consideration, I find myself in agreement with the defendant's argument distinguishing the language of Section 4b(A) from Rule 10b-5*fn3. Section 4o of the CEA makes it unlawful for commodity trading advisors and other commodity professionals "to employ any device, scheme or artifice to defraud" a client. The use of this language, which is identical to that in Rule 10b-5, is to be contrasted with Section 4b(A) which makes it unlawful "to cheat or defraud or attempt to cheat or defraud" another in connection with a commodities transaction. I agree with the defendant in as much as Congress was capable of adopting identical language if it so intended. From the divergent language of the two statutes I conclude that Congress did not intend for Section 4b(A) to be construed identically to Rule 10b-5.*fn4 For all the above stated reasons I will follow my earlier opinion and require the plaintiffs to establish reliance in making out their claim under Section 4b(A) of the CEA.

Next, the plaintiffs argue that I should adopt the standard for scienter under Section 4b(A) of the CEA that is set forth by the Commission in Hammon v. Smith Barney, Harris Upham & Co. Inc., [1987-1990 Transfer Binder] Comm.Fut.L.Rep. (CCH) § 24,617 at 36, 659 (CFTC March 1, 1990), i.e., that the defendants acted with reckless disregard for their duties under the CEA. Section 4b(A) is ambiguous with respect to scienter and I may look to Commission decisions for guidance. See Chevron, USA Inc. v. Natural Resource Defense Council, 467 U.S. 837, 843-844, 104 S.Ct. 2778, 2781-82, 81 L.Ed.2d 694 (1984).

In my published Opinion I stated that, in making out a claim under Section 4b(A), the plaintiffs must establish that the defendants acted deliberately and with knowledge of the fraudulent nature of the false statements or omissions, but that the plaintiffs need not show that the defendants acted with an evil motive or an intent to injure. 693 F. Supp. at 194. I now hold that recklessness is sufficient to satisfy the scienter requirement of Section 4b of the CEA.*fn5 A reckless action, as the First Circuit said in reaching the same result in an appeal of a similar enforcement proceeding, "is one that departs so far from the standards of ordinary care that it is very difficult to believe the [actor] was not aware of what he was doing." First Commodity Corp. of Boston v. Commodity Futures Trading Commission, 676 F.2d 1, 7 (1st Cir. 1982). I base my decision on the language of Section 4b*fn6, together with the recent decision of the Commission in Hammon and the various Courts of Appeals which have opined that reckless disregard of a statutory duty under the CEA is sufficient to establish scienter. See Mayoza v. Heinold Commodities, Inc., 871 F.2d 672, 679 (7th Cir. 1989); Drexel Burnham Lambert Inc. v. Commodity Futures Trading Commission, 850 F.2d 742, 748 (D.C. Cir. 1988); First Commodity Corporation of Boston v. Commodity Futures Trading Commission, 676 F.2d 1, 6 (1st Cir. 1982); Commodity Futures Trading Commission v. Savage, 611 F.2d 270 (9th Cir. 1979).*fn7

Having determined that the plaintiffs must establish reckless disregard of a statutory duty and reliance as the second and fourth elements of a claim under Section 4b(A) of the CEA, I will address the merits of the plaintiffs' claim. With regard to the first element, there is no genuine issue of material fact that in connection with an order to make a contract of sale of a commodity for future delivery the defendants made material representations of existing or past facts. The defendants' misrepresentations are apparent from the face of the AME Brochure that was used by the defendants to promote the Equity Building Program. See Deposition of Robert Maxwell, dated August 7, 1990, at 207 & Exhibit 59; Deposition of Bill Frank, dated August 22, 1990, Exhibit 3. The AME Brochure describes the Equity Building Program and the alleged risk free nature of the investment. Undoubtedly, the statements listed in the AME Brochure embody representations that would be important to a reasonable investor. For instance, the AME Brochure describes the defendants' expertise, their ability to fulfill the contracts, the relatively risk-free nature of the investment and its profitability. See AME Brochure; Commodity Futures Trading Commission v. American Metal Exchange Corp., 693 F. Supp. at 194. However, the AME Brochure contains significant omissions and misrepresentations with respect to AME's experience in the precious metals business, fees associated with the Equity Building Program and the security of the clients investment. Id. at 184-185. This element is not disputed by any defendant.

Second, I must determine whether the plaintiffs have established the requisite scienter on the part of the defendants to find them liable under Section 4b(A) of the CEA. The plaintiffs argue that both the direct evidence of Mr. Maxwell's involvement in the fraud perpetrated on investors and his complete domination and control over Anglo-Swiss, AME and Amalgamated establish the necessary scienter for this Court to find Mr. Maxwell liable under Section 4b(A) of the CEA. In response, the defendant argues that there is a genuine issue of material fact with respect to Mr. Maxwell's understanding of and involvement in the preparation of the AME Brochure and its contents. The defendant also argues that there is a genuine issue of material fact as to Mr. Maxwell's involvement in and knowledge about the daily operations of AME. The defendant asserts that Mr. Maxwell's involvement in Anglo-Swiss and Amalgamated does not establish his knowing participation in a scheme to defraud.

Mr. Maxwell has come forward with an affidavit stating that he was merely an investor in AME, See Affidavit of Robert Maxwell, dated January 6, 1990, ¶¶ 6-9, that he was only a 25.01% shareholder in Anglo-Swiss, Id. at ¶ 10, that the futures contracts at issue were sold by others, such as AME, TWM, FC & M, Bill Frank, and Michael Jebrock, Id. at ¶¶ 8, 11-13, that he did not maintain daily contact with Bill Frank, Id. at ¶ 22, and that he was not involved in the development of the Brochure. Id. at ¶ 23.

On the other hand, Mr. Maxwell does not dispute that he agreed to contribute, along with two of his business partners, $5,000,000 toward the capitalization of AME, See 693 F. Supp. at 174, that his 25% interest in Anglo-Swiss was as great or greater than any other individual, Id. n. 4, that Mr. Maxwell received approximately a half a million dollars in "personal loans" from AME, Id. at 179-180 & n. 26, and that Mr. Maxwell was the last person to review the AME brochure before it was deemed final. See Affidavit of William Maderer, filed January 29, 1990 ¶ 14 and Exhibit 14. Significantly, Mr. Maxwell admits that he signed all the liquidation checks that were supplied to investors from the sales of futures contracts by AME, See Affidavit of Robert Maxwell, dated January 6, 1990, ¶ 34, and Mr. Maxwell does not dispute that he was listed as the contact for investors seeking to liquidate their future contracts. See 693 F. Supp. at 178.

At his deposition, Michael Jebrock stated that although he did not know whether Mr. Maxwell was a shareholder or officer of AME "I know he controlled the company." All management, accounting and legal decisions pertaining to AME were supposed to be made in Mr. Maxwell's offices. Mr. Jebrock stated that all offices of AME were responsible to report to Mr. Maxwell as to all operations. In fact, Mr. Maxwell monitored the operations of AME himself. Carol Kahan, who was hired by Mr. Maxwell as his personal assistant, stated during her deposition that Mr. Maxwell required her to contact AME on a daily basis regarding closing prices on the metals market, AME's sales figures, contracts sold, value of the contracts and money received. 693 F. Supp. at 175.

Based on the facts set forth above, I conclude that Mr. Maxwell had control over the affairs of AME. Although Mr. Maxwell disputes these findings in conclusory terms in his affidavit, he has failed to proffer any specific facts to support a finding that Mr. Maxwell did not understand or control the daily business operations of AME. Mr. Maxwell's honest belief that the enterprise would ultimately make money cannot justify baseless, false or reckless misrepresentations or promises made by AME while under his control. A careful consideration of the facts and circumstances of this case makes a finding of reckless behavior on the part of the defendant Robert Maxwell inevitable.

The factual evidence presented to this Court also establishes the requisite scienter on the part of the defendant Bill Frank. In my earlier Opinions I found that futures contracts were directly sold by Bill Frank. See 693 F. Supp. at 174-175; Summary Judgment Opinion, dated March 12, 1990 at 9. In a related proceeding, State of New Jersey v. Bill Frank, after a jury trial in the Superior Court of New Jersey, Law Division, Mr. Frank was found guilty of, inter alia, third degree sale of unregistered securities under N.J.S.A. 49:3-60 & 2C:2-7, second degree conspiracy under N.J.S.A. 2C:5-2, second degree theft under N.J.S.A. 2C:20-9 & 2C:2-7, and second degree theft by deception under N.J.S.A. 2C:20-4 & 2C:2-7. In pertinent part, N.J.S.A. 2C:20-4 reads:

Theft by deception

    A person is guilty of theft if he purposely
  obtains property of another by deception. A person
  deceives if he purposely:
    a. Creates or reinforces a false impression,
  including false impression as to law, value. . . .
    b. Prevents another from acquiring information
  which would affect his judgment of a transaction;
  or
    c. Fails to correct a false impression which the
  deceiver previously created or reinforced, or
  which the deceiver knows to be influencing another
  to whom he stands in a fiduciary or confidential
  relationship.

N.J.S.A. 2C:20-4 (1989).

A prior criminal conviction may work an estoppel in favor of the Government in a subsequent civil proceeding. The standard for determining whether the litigation of a question in a civil suit is barred by a prior criminal trial is whether the question was "distinctly put in issue and directly determined in the criminal prosecution. . . . In the case of a criminal conviction based on a jury verdict of guilty, issues which were essential to the verdict must be regarded as having been determined by the judgment." Kauffman v. Moss, 420 F.2d 1270, 1274 cert. denied 400 U.S. 846, 91 S.Ct. 93, 27 L.Ed.2d 84 (1970), citing Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 569, 71 S.Ct. 408, 414, 95 L.Ed. 534 (1951). Here, the issue of scienter was determined by the jury's finding that Mr. Frank purposely obtained property of another through misrepresentations in the sale of illegal futures contracts.

Based on the above stated facts and the prior criminal conviction, I find that Mr. Frank participated with reckless disregard for his duties under the CEA in a scheme to defraud in connection with the sales of illegal futures contracts.

With respect to the defendant Michael Jebrock, this Court found that Mr. Jebrock participated in the sale of illegal futures contracts. Summary Judgment Opinion, dated March 12, 1990 at 11. Mr. Jebrock was the president and sole owner of TWM and controlled its daily operations. Approximately 78% of the Equity Building Program contracts were sold by TWM. See 693 F. Supp. at 176-177; Affidavit of William Maderer, filed January 29, 1990 ¶ 6 & Exhibit B. Despite Mr. Jebrock's contentions that he was never an employee of AME or Anglo-Swiss, Mr. Jebrock signed employment agreements with both AME and Anglo-Swiss, albeit the employment agreements are not executed by either corporate entity. 693 F. Supp. at 176. AME was located in the same location as TWM and this Court has previously found that Mr. Jebrock was perceived to be an officer of AME. Id. at 177. This Court also found that Mr. Jebrock was in daily contact with the New Jersey headquarters of AME as a consequence of his presidency of AME's largest sales agent TWM, as well as his role in AME itself. Id.

Based on the above stated facts, I find that Mr. Jebrock participated with reckless disregard for his duties under the CEA in a scheme to defraud in connection with the sales of illegal future contracts.

The plaintiffs have also established the third element of a Section 4b(A) violation. The defendants made material misrepresentations of fact in the AME Brochure about the Equity Building Program with respect to the defendants' expertise, their ability to fulfill the contracts, the relatively risk-free nature of the investment and its profitability, ostensibly to sell the Equity Building Program to potential investors. After a series of evidentiary hearings on March 28, 29, 30, 31, and April 4 and 5, 1988, I found that in addition to telephone solicitations, AME and its agents distributed the Brochure to every investor who expressed an interest in the Equity Building Program. See Affidavit of Bryan Clobis, Esquire, dated October 18, 1990 at ¶ 4; Commodity Futures Trading Commission v. American Metal Exchange Corp., 693 F. Supp. at 179. No one has challenged this finding or attempted to raise an issue of fact in connection with regard to it. I accordingly find that there is no genuine issue of material fact that the AME Brochure, which contained material misrepresentations of fact, was distributed by the defendants with the intent that potential investors would rely on it and decide to invest in the Equity Building Program.

Finally, I find that the plaintiffs have established the fourth element of a Section 4b(A) violation. The evidence establishes that the defendants sold the Equity Building Program to potential investors by misrepresenting the profitability, cost and risk-free nature of the investment. The purchasers inevitably relied on these representations to their detriment. 693 F. Supp. at 194-195.

Having found that summary judgment should be granted as to the defendants Robert Maxwell, Bill Frank and Michael Jebrock on Count II, I must determine whether similar relief should be granted as against the corporate defendants AME, Anglo Swiss, FC & M and Amalgamated.

It is well accepted that the fraud of an officer of a corporation is imputed to the corporation when the officer's fraudulent conduct was (1) in the course of his employment, and (2) for the benefit of the corporation. Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 884 (3rd Cir. 1975). In my published Opinion, 693 F. Supp. 168 (D.N.J. 1988), I found that the defendants Robert Maxwell, Bill Frank and Michael Jebrock participated in an illegal commodity futures scheme by way of their positions in the defendant corporations. As my findings of fact make evident, the individual defendants were acting with actual authority and for the benefit of the corporate defendants in perpetrating the Equity Building Program. I will, accordingly, impute the fraud of the individual defendants to the defendant corporations and grant summary judgment against each of the corporate defendants on Count II.

Before considering Counts III through VIII, I must determine whether the plaintiffs Florida and New Jersey have jurisdiction to prosecute the defendants under state law. Put differently, I must determine whether the Commodity Futures Trading Commission has exclusive ...


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