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Commodity Futures Trading Commission v. Rosenberg

March 1, 2000


The opinion of the court was delivered by: Stephen M. Orlofsky United States District Judge




ORLOFSKY, District Judge

This case requires this Court to enter the realm of commodity futures and options on futures trading as regulated by the provisions of the Commodities Exchange Act, 7 U.S.C. §§ 1 et seq. (1999)("CEA"). Plaintiff, Commodity Futures Trading Commission ("CFTC"), brought this civil enforcement action against Defendant Murray I. Rosenberg ("Rosenberg") for his alleged violations of the CEA, and the regulations which have been promulgated to enforce it, 17 C.F.R. §§ 1.1 et seq. (1999). Simply stated, the CFTC alleges that Rosenberg offered to introduce James Stollenwerck ("Stollenwerck") to a registered trading firm so that Stollenwerck could open a trading account, but instead, used Stollenwerck's money to open an account in Rosenberg's own name and then pilfered the money for payment of his personal expenses. See Joint Final Pre-trial Order ("JFPO") at 3-7. The CFTC alleges that Rosenberg and his corporation, Pro Broker Service, Inc. ("Pro Broker"): (1) committed futures and options fraud, in violation of 7 U.S.C. §§ 6b(a)(i)-(iii), 6c(b) and 17 C.F.R. 33.10 (1999); (2) unlawfully converted Stollenwerck's money in violation of 7 U.S.C. § 13(a)(1); (3) acted as a futures commission merchant ("FCM") or introducing broker ("IB") without registering as such and commingled funds in violation of 7 U.S.C.§§ 6d(1)-(2) and 17 C.F.R. § 33.3(b); and (4) failed to execute commodity option orders in violation of 17 C.F.R. § 33.9(c) and failed to issue written monthly account and confirmation statements, in violation of 17 C.F.R. § 1.33(a)-(b). See id at 7-9.

Based upon my findings of fact and conclusions of law as set forth below, *fn1 I find that Rosenberg and Pro Broker have violated the Commodities Exchange Act and the regulations promulgated thereunder. Accordingly, I shall permanently enjoin Rosenberg and Pro Broker from further violations of the CEA as well as from trading commodity futures or options on futures on behalf of any other person or entity, including, but not limited to, any association, partnership, corporation, or trust. Furthermore, I shall order ancillary relief in the form of restitution.


A. The Nature of Commodity Futures and Options on Futures

This case is brought pursuant to the Commodities Exchange Act ("CEA"), 7 U.S.C. §§ 1 et seq., a comprehensive statutory scheme governing the trading of commodity futures and options on futures. See id. For the sake of clarity, this Court shall set forth a brief description of commodity trading.

Commodity futures trading involves contracts of sale for a specific quantity of a commodity *fn2 at a set price to be delivered at some future date. See 7 U.S.C. § 2(i) (1999); see also Commodity Futures Trading Comm'n v. CO Petro Mktg. Group, Inc., 680 F.2d 573, 579-80 (9th Cir. 1982); Cargill, Inc. v. Hardin, 452 F.2d 1154, 1156 (8th Cir. 1971). Options trading involves contracts under which the holder has the right to purchase a commodity futures contract at a specified price. See Harold S. Bloomenthal, 3 Securities and Federal Corporate Law § 2.92 (1999).

In Commodity Futures Trading Comm'n v. Standard Forex, Inc., No. CV-93-0088, 1996 WL 435440 (E.D.N.Y. July 25, 1996), the Court described futures contracts in the following way:

A holder of futures contracts discharges his or her legal obligations under the contract by making or accepting delivery of the underlying commodity or by engaging in an opposite (offsetting) transaction-that is, purchasers and seller may extinguish their respective obligations to accept and deliver the subject commodity by forming offsetting contracts prior to the delivery date; the price differential between the opposite contracts determines the investor's profits or loss. Investors in futures contracts rarely actually transfer ownership and possession of the underlying commodity. Usually, people invest in futures contracts for the purpose of assuming (speculating) or shifting (hedging) the risk of price change in commodities: neither do they expect actual delivery, nor does it occur. Id. at *1 (internal citations omitted).

The CEA was enacted to regulate the futures and options on futures market, and governs this enforcement action.

B. Evidentiary Issues

Before the trial, Rosenberg filed a rash of motions in limine, seeking, among other things, to exclude from evidence tape recorded conversations between Rosenberg and Stollenwerck as well as the testimony of both Raymond Kent Driskill ("K. Driskill") and Carl Raymond Driskill ("C. Driskill"). See JFPO at 53-60; Notice of "Cross Motion in limine To Exclude Witness and Tape Recordings" at 1 (filed July 1, 1998); Notice of "Cross Motion in limine To Exclude Witnesses" at 1 (filed July 1, 1998). *fn3 On May 25, 1999, I filed an unpublished Opinion in which I excluded the tape recorded conversations ("Tapes") as inadmissible settlement discussions, pursuant to Federal Rule of Evidence 408, and also the testimony of the Driskills on the ground that the in limine motion was premature. See CFTC v. Rosenberg, et al., No. 97-2927 at 16, 18 (D.N.J. filed May 25, 1999)("Rosenberg I").

This Court then conducted a three-day bench trial in this matter, from May 25, 1999 until May 27, 1999. In the course of the trial, the CFTC moved for reargument of my decision to exclude the Tapes and Rosenberg renewed his objection to the admission of the Driskills' testimony. Considering Rosenberg's status as a pro se defendant and the nature of a non-jury trial, I provisionally admitted into evidence, subject to further review based upon the post-trial submissions of the parties: (1) the Tapes (Pl.'s Ex. 2) and the transcript of the Tapes (Pl.'s Ex. 3); *fn4 and (2) the trial testimony of C. Driskill and the de bene esse deposition of K. Driskill (Pl.'s Ex. 366). *fn5 Following the conclusion of the trial, on June 21, 1999, the parties submitted post-trial memoranda on the admissibility of both the Tapes and the Driskills' testimony. See Pl.'s Post-Trial Submission for Reconsideration of Exclusion of Audiotapes (filed June 21, 1999); Pl.'s Post-Trial Submission Regarding Testimony of the Driskills (filed June 21, 1999); Def.'s Letter Br. in lieu of More Formal Post Trial Submission ("Def.'s Br.")(filed June 21, 1999). I shall now address the admissibility of the Tapes and the corresponding transcript, the court testimony of C. Driskill and the de bene esse deposition testimony of K. Driskill (Pl.'s Ex. 366).

1. The Tapes and Corresponding Transcript

In its original opposition to Rosenberg's pre-trial motion in limine to exclude the Tapes, the CFTC argued, among other things, that the conversations Rosenberg had with Stollenwerck's lawyer, Gary Sinclair, Esq. ("Sinclair"), and the tape recorded conversations between Rosenberg and Stollenwerck did not implicate Federal Rule of Evidence 408 *fn6 because of the absence of a disputed claim. See Pl.'s Opp. to Def.'s Mot. to Quash at 4. In the alternative, the CFTC contended that the de bene esse deposition of Sinclair and the Tapes were admissible because they would be offered for reasons other than to prove liability or damages, a well-established exception to Rule 408. See id. at 5. Specifically, the CFTC argued that:

[It] is offering [this evidence] to show that Mr. Rosenberg's statements . . . were part of an ongoing fraud, in that Mr. Rosenberg lied . . . in an attempt to lull . . . Mr. Stollenwerck into a false sense of security that Mr. Stollenwerck's money would be returned without resort to [the] legal process and without involving the authorities. See id. at 6; see also Rosenberg I, at 14.

In my May 25, 1999 opinion, I assumed that the conversations between Rosenberg and Stollenwerck were settlement discussions and rejected the argument that the Tapes were admissible under the exception to Rule 408. See Rosenberg I, at 14-16. The following excerpt is illustrative:

Rule 408 [] is inapplicable when the claim is based upon some wrong that was committed in the course of the settlement discussions; e.g., libel[,] assault, breach of contract." Carney [v. American Univ.], 151 F.3d at 1095-96 (holding that Rule 408 is inapplicable in such cases) (quoting 23 Charles Alan Wright & Kenneth W. Graham, Jr., Federal Practice & Procedure § 5314, at 282 (1980)). Evidence of settlement discussions is admissible to support a claim of retaliation where the underlying claim is race discrimination, see Carney, 151 F.3d at 1095, or to impose Rule 11 sanctions based on conduct during settlement discussions, see Eisenberg v. University of New Mexico, 936 F.2d 1131, 1134 (10th Cir. 1991), or even to show that the defendant prevented the plaintiff from mitigating damages. See Urico v. Parnell Oil Co., 708 F.2d 852, 854-55 (1st Cir. 1983). Such evidence, however, is not admissible as proof of an ongoing scheme, because an "ongoing" scheme is not a "separate wrong." See Carney, 151 F.3d at 1096.

In the JFPO, the CFTC did not allege that Mr. Rosenberg performed "an illegal act . . . during the course of settlement negotiations." See United States v. J.R. LaPointe & Sons, Inc., 950 F. Supp. 21, 23 (D. Me. 1996); JFPO at 3-7. Instead, the CFTC is attempting to use the Sinclair testimony and the tape recorded conversations to prove that Mr. Rosenberg committed civil fraud and not "to show that [Mr. Rosenberg] committed an entirely separate wrong." Id.; see also Fiberglass [Insulators, Inc. v. Dupuy], 856 F.2d at 655 (excluding evidence of settlement discussions offered as proof of the continuation of a dispute).

Furthermore, the distinction that the CFTC is trying to draw between "liability" and "other purposes," however, is so fine that it is invisible. To the extent that the testimony of Gary Sinclair is proof of an "ongoing fraud," it must also be evidence that the fraud existed in the first place. In other words, these settlement discussions can only be proof of a "continuing fraud," if they are also evidence that Mr. Rosenberg was attempting to settle the original alleged fraud as well. Accordingly, I will grant Mr. Rosenberg's motion to exclude the de bene esse deposition testimony of Gary Sinclair, Esq., and the tape recorded conversations between Mr. Stollenwerck and Mr. Rosenberg. Rosenberg I, at 14-16.

In its post-trial submission for "reconsideration" of the Tapes, *fn7 the CFTC advances four major contentions. First, the CFTC characterizes the conversations as efforts by Stollenwerck to close his account with Rosenberg's corporation, Pro Broker, and contends that as such, the discussions do not fall under the rubric of Rule 408. See Pl.'s Post-Trial Submission for Reconsideration of Exclusion of Audiotapes ("Pl.'s Tapes Br.") at 3. Second, and in the alternative, the CFTC re-asserts the applicability of the Rule 408 exception permitting admissibility for a purpose other than establishing liability or damages. See id. at 2. Next, the CFTC asserts that because Rosenberg was "not acting in good faith," the exclusion of the Tapes would be inconsistent with the underlying policy of Rule 408 to encourage good faith settlement discussions. See id. at 8. Finally, the CFTC urges this Court to use "surgical precision," ostensibly like the Third Circuit's decision in Affiliated Mfrs. v. Aluminum Co. of Am., 56 F.3d 521, 526 (3d Cir. 1995), and exclude only certain portions of the Tapes. See id. at 4. In opposition to the admission of the Tapes, Rosenberg relies on this Court's earlier application of Rule 408 and rejection of the Rule's exception in my unpublished opinion, Rosenberg I. See Def.'s Br. at 1.

A critical factor a court must consider in deciding whether or not a motion for reargument *fn8 should be granted is whether the court "overlooked" factual matters or controlling decisions of law that might reasonably have resulted in a different conclusion had they been considered. See Local Civ. R. 7.1(g); Damiano v. Sony Music Entertainment, Inc., 975 F.Supp. 623, 633-34 (D.N.J. 1996)(Simandle, J.). To be sure, a motion for reargument "is an extremely limited procedural vehicle," Resorts Int'l, Inc. v. Greate Bay Hotel & Casino, Inc., 830 F.Supp. 826, 831 (D.N.J. 1992)(Gerry, C.J.), and relief under the rule is granted "very sparingly." Maldonado v. Lucca, 636 F.Supp. 621, 630 (D.N.J. 1986)(Barry, J.). For the reasons set forth below, I find that in arriving at my decision in Rosenberg I, I overlooked no factual matter or decision of law that might reasonably have resulted in a different conclusion had it been considered. Accordingly, I shall exclude the Tapes (Pl.'s Ex. 2) and the corresponding transcript (Pl.'s Ex. 3) in their entireties.

In its memorandum in support of the admission of the Tapes, the CFTC seems to concede the existence of a "disputed claim" *fn9 and instead, argues that the conversations, allegedly mere efforts to close the account and obtain the money, do not involve attempts to settle or compromise a claim under Rule 408. See Pl.'s Tapes Br. at 3. In support of its interpretation of the Tapes, the CFTC cites Winchester Packaging, Inc. v. Mobil Chemical Co., 14 F.3d 316 (7th Cir. 1994), and Kraemer v. Franklin and Marshall College, 909 F.Supp. 267 (E.D.Pa. 1995) for the proposition that a mere demand for payment, even in conjunction with the threat of legal action, is not an offer of settlement. See Winchester, 14 F.3d at 319; Kraemer, 909 F.Supp. at 268.

While it is true that the Tapes reflect both Stollenwerck's attempt to close the account and his demand for the return of some amount of money, the CFTC's interpretation is remarkably incomplete. For instance, in the first conversation, Stollenwerck threatens Rosenberg with legal action *fn10 and clearly demands what he believes to be the remaining account balance, $116,498, so that negotiations could move forward. *fn11 I find that this precursor to settlement is a term or condition of the settlement negotiations, thereby bringing the conversation within the sweep of Rule 408. To find such a conversation admissible would run afoul of the policy considerations behind Rule 408 protecting frank disclosure for the purpose of compromise and settlement of disputes. See Advisory Committee's Note, Fed. R. Evid. 408; United States v. Clatworthy, No. 91-CIV-6211, 1992 WL 6179 at *3 n.6 (S.D.N.Y. Jan. 8, 1992); see generally Affiliated Mfrs., Inc. v. Aluminum Co. of Am., 56 F.3d 521, 526 (3d Cir. 1995)("[t]he policy behind Rule 408 is to encourage freedom of discussion with regard to compromise"); Fiberglass Insulators, Inc. v. Dupuy, 856 F.2d 652, 654 (4th Cir. 1988)("[t]he public policy of favoring and encouraging settlement makes necessary the inadmissibility of settlement negotiations in order to foster frank discussions"); United States v. Contra Costa County Water Dist., 678 F.2d 90, 92 (9th Cir. 1982)("[b]y preventing settlement negotiations from being admitted as evidence, full and open disclosure is encouraged, thereby furthering the policy toward settlement"); Lo Bosco v. Kure Eng'g Ltd., 891 F.Supp. 1035, 1037-38 (D.N.J. 1995)(Wolin, J.)(stating that one of the primary rationales supporting Rule 408 is the "obvious public policy interest in encouraging settlement of private disputes"). While it is unclear whether the CFTC's argument is intended to reach the second and third conversations on the Tapes, which contain Rosenberg's offer to pay Stollenwerck $100,000 per year for three years in settlement of the claim and the break down of that offer and the negotiations as a whole, the application of Rule 408 is clear. I therefore find no merit in the CFTC's argument that the substance of the Tapes removes them from the scope of Rule 408.

I need not dwell on the CFTC's policy justifications or argument that the Tapes are admissible pursuant to the exception of Rule 408 since these contentions were previously addressed in Rosenberg I and the CFTC has failed to raise any factual matters or present controlling decisions of law that this Court overlooked. See Local Civ. R. 7.1(g); Damiano v. Sony Music Entertainment, Inc., 975 F.Supp. 623, 633-34 (D.N.J. 1996)(Simandle, J.).

Finally, I find it impossible to parse the taped conversations for content that is, as the CFTC contends, "not made in the context of settlement negotiations." Pl.'s Tapes Br. at 4. The CFTC urges this Court to use "surgical precision" and exclude only "that portion of the audiotapes which concerns Mr. Rosenberg's offers to repay Mr. Stollenwerck over time." Id. (citing Affiliated Mfrs., Inc. v. Aluminum Co. of Am., 56 F.3d 521, 523 (3d Cir. 1995)). Taken to its inevitable conclusion, this argument would result in the admission into evidence of numerous damaging statements and admissions by Rosenberg concerning his involvement in Stollenwerck's trading account.

Not only am I unable to find support in Affiliated Mfrs. for such a narrow interpretation of the Rule, but the Rule's text expressly precludes such an application. Rule 408 specifically provides that "[e]vidence of conduct or statements made in compromise negotiations is . . . not admissible." See Fed. R. Evid. 408; see also Kritkos v. Palmer Johnson, Inc., 821 F.2d 418, 421-23 (7th Cir. 1987)(letters advising plaintiff of possible compromise plan prior to institution of legal action were inadmissible under Rule 408 rationale). Accordingly, the Tapes and the accompanying transcript are inadmissible in their entireties.

This Court's inquiry, however, is not at an end. During the trial, the CFTC also moved to introduce the Tapes and transcript on rebuttal for purposes of impeaching the testimony of Rosenberg. See Trial Tr. at 427-28. Rosenberg renewed his objection to their admissibility, presumably on the ground raised in his pre-trial motion in limine that Stollenwerck had taped the conversations for "blackmail" purposes. Again, I provisionally permitted the use of the Tapes and transcript to cross-examine Rosenberg, subject to my findings based upon the post- trial submissions of the parties. See id. at 428. For the reasons set forth below, I find that the Tapes and transcript are admissible for purposes of impeachment.

Numerous courts have held that the exception to Rule 408, allowing the admission of settlement negotiation evidence when offered for a purpose other than to establish liability or damages, permits the use of such evidence for purposes of rebuttal or impeachment. See Freidus v. First Nat'l Bank, 928 F.2d 793 (8th Cir. 1991); County of Hennepin v. AFG Indus., Inc., 726 F.2d 149, 153 (8th Cir. 1984); John McShain, Inc. v. Cessna Aircraft Co., 563 F.2d 632, 635 (3d Cir. 1978); Wisconsin Pub. Serv. Corp. v. Ecodyne Corp., 702 F.Supp. 217, 218 (E.D. Wis. 1988); cf. Reichenbach v. Smith, 528 F.2d 1072, 1075 (5th Cir. 1976)(because of broad discretion to conduct trial, court found no harmful error when trial judge prohibited cross-examination on settlement but stated the decision was not "an approval for the future of the trial court's approach . . . [t]he existence of a settlement agreement goes directly to the issue of credibility and usually the better approach is that codified in Rule 408"). In this case, the Tapes and transcript were properly used to rebut Rosenberg's testimony and to impeach his credibility during cross-examination. See Trial Tr. at 429, 451-52; 453-54. Yet, Rosenberg asserts that the Tapes were unlawfully made and therefore inadmissible for purposes of impeachment.

As I noted in Rosenberg I, the Tapes are inadmissible if made "for the purpose of committing any criminal or tortious act in violation of the Constitution or laws or the United States or of any State." See Rosenberg I at 16 (quoting 18 U.S.C. § 2511(2)(d)). *fn12 Rosenberg has alleged that the conversations were taped "for blackmail" purposes, see Certif. of Murray I. Rosenberg at ¶ 11 (filed July 1, 1998), while the CFTC claims that "Mr. Stollenwerck . . . audiotaped his telephone conversations with Mr. Rosenberg in an attempt to protect himself and prevent further distortions of Mr. Rosenberg's story." Pl.'s Opp. at 11. Rosenberg, as the party attempting to suppress a recording, has the burden of proving that the Tapes were made for an impermissible purpose. See United States v. Cassiere, 4 F.3d 1006, 1021 (1st Cir. 1993)(preponderance of the evidence standard); Traficant v. Commissioner of I.R.S., 884 F.2d 258, 266 (6th Cir. 1989); United States v. Phillips, 540 F.2d 319, 326 (8th Cir. 1976); United States v. Nietupski, 731 F.Supp. 881, 882-83 (C.D. Ill. 1990)(citing Traficant, 884 F.2d at 266).

Rosenberg has not submitted a shred of comprehensible evidence that Stollenwerck made the Tapes for a criminal or tortious purpose. While this Court is sympathetic to the obstacles faced by pro se litigants and the often confused submissions which result, I am unable to find any coherent support for Rosenberg's argument that he was "blackmailed." *fn13 There is no evidence that Stollenwerck used the Tapes for an unlawful purpose or even threatened to use them to blackmail Rosenberg.

That being said, even if this Court were to read into Rosenberg's statements that he sufficiently raised the issue of blackmail, a finding in Rosenberg's failure is wholly precluded by Rosenberg's incredibility as a witness. At trial, Rosenberg was evasive, uncooperative, and bordered on incorrigible. Conversely, Stollenwerck was highly credible, lending support to this Court's determination that Stollenwerck made the Tapes to prevent future distortions by Rosenberg. *fn14 Accordingly, I find that Rosenberg has failed to meet his burden of proving by a preponderance of the evidence that the Tapes were made for an illegal or improper purpose. In sum, I find the Tapes and transcript are admissible for impeachment purposes only.

1. The Testimony of Carl Raymond and Raymond Kent Driskill

Also during the course of trial, Rosenberg renewed his objection to the admission of the de bene esse deposition of Raymond Kent Driskill ("K. Driskill") and the trial testimony of Carl Raymond Driskill ("C. Driskill"). See Trial Tr. at 269-274. Again, because of Rosenberg's pro se status and the fact that the case was not tried before a jury, I provisionally admitted the testimony and deposition to allow Rosenberg a second bite at the proverbial apple. See Trial Tr. at 272. In his post-trial submission, Rosenberg contends that the trial testimony and de bene esse deposition of the Driskills' are inadmissible under Federal Rule of Evidence 404(b), presumably because they are offered to prove propensity, and under Federal Rule of Evidence 401, because they are irrelevant. See Def.'s Br. at 2-3. In support of the admission of the evidence, the CFTC argues that the testimony and deposition of the Driskills are offered to prove Rosenberg's intent and method of operation, and to show that there is a "substantial likelihood that Mr. Rosenberg will commit similar offenses unless restrained and enjoined." *fn15 Pl.'s Post-Trial Submission Regarding Testimony of the Driskills ("Pl.'s Driskill Br.") at 3. The evidence at issue includes testimony concerning the Driskills' involvement with Rosenberg from 1992-94 in a trading relationship similar to the one between Stollenwerck and Rosenberg. Specifically, the Driskills testified that Rosenberg depleted a trading account, funded by C. Driskill, by making unauthorized withdrawals for his personal expenses. See Section II, Findings of Fact, infra. For the reasons set forth below, I find both the trial testimony of C. Driskill and K. Driskill's de bene esse deposition admissible.

In United States v. DeLaurentis, -F.Supp.2d -, 2000 WL 64895 (D.N.J. Jan. 27, 2000), this Court had the opportunity to explore Federal Rule of Evidence ...

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