United States District Court, D. New Jersey, Camden Vicinage
October 4, 2005.
COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
EQUITY FINANCIAL GROUP, LLC, et al., Defendants.
The opinion of the court was delivered by: ROBERT KUGLER, Magistrate Judge
Before the Court are motions by Defendants Robert W. Shimer,
Vincent J. Firth, and Equity Financial Group, LLC, to dismiss the
Counts against them in Plaintiff Commodity Futures Trading
Commission's First Amended Complaint for lack of subject matter
jurisdiction under Federal Rule of Civil Procedure 12(b)(1) or
for failure to state a claim under Rule 12(b)(6). Also before the
Court is Defendants' motion for summary judgment. For the reasons
provided below, Defendants' motions will be denied in their
The motions presently before the Court relate to the role of
Robert W. Shimer ("Shimer"), Vincent J. Firth ("Firth"), and Equity Financial Group, LLC ("Equity"), (collectively "Equity
Defendants"), in a multi-million dollar commodity fraud operated
by Defendants Tech Traders and its president Coyt Murray. Between
June 2001 and April 2004, Tech Traders allegedly solicited over
$47 million in investments by claiming to employ a portfolio
trading system that guaranteed significant annual returns. While
Tech Traders and its supposedly independent certified public
accountant (CPA), Defendant J. Vernon Abernethy, reported
substantial monthly and quarterly gains, Tech Traders was
actually hemorrhaging money at a remarkable rate, resulting in
losses in excess of $20 million. Tech Traders lost at least $7
million in trading commodity futures contracts, and unlawfully
appropriated investors' funds to pay salaries, expenses, and make
disbursements under the guise of profit.
The Equity Defendants' liability arises from their control and
operation of a related investment group, Shasta Capital
Associates, LLC ("Shasta"), which was essentially a feeder fund
for Tech Traders. The Commodity Futures Trading Commission
("CFTC" or "Plaintiff") alleges that the Equity Defendants
solicited approximately $15 million from 74 investors between
June 2001 and March 2004, for the purpose of investing in Tech
Traders. Shasta's Private Placement Memorandum informed investors
that 99% of this money would be invested for the benefit of
Shasta and 1% would be used for management costs. Upon receipt, investor funds were deposited into Shimer's attorney escrow
account and then transmitted to Tech Traders. Tech Traders pooled
the Shasta funds with its other investment funds and used them,
in part, to trade exchange-traded commodity futures contracts and
foreign currency contracts.
Over the course of their relationship with Tech Traders, the
Equity Defendants reported tremendous trading profits, even
though Shasta was actually losing substantial sums through Tech
Traders and apparently failed to generate any profit whatsoever.
The Equity Defendants further misled investors by representing
that these profit numbers were verified by an independent CPA,
Defendant Abernethy, whose results were then affirmed by a second
CPA. The CFTC alleges that the Equity Defendants knew or should
have known that neither CPA's review was independent and that the
results were therefore unverified.
Shimer, representing himself pro se, filed a motion to dismiss
for failure to state a claim, a motion to dismiss for lack of
jurisdiction, and a motion for summary judgment on April 14,
2005. Firth joined Shimer's motions on April 15, 2005, and Equity
joined on April 28, 2005.*fn1 The motion for summary
judgment was dismissed without prejudice, pursuant to a status conference
with Magistrate Judge Ann Marie Donio. Shimer and Firth later
re-filed motions for summary judgment on July 8, 2005.
Although the Equity Defendants have filed three separate
motions, each motion uses essentially the same arguments to
dispute the same point: whether Shasta is a "commodity pool" for
the purposes of CFTC jurisdiction.*fn2 Because the parties'
dispute is essentially one of law, founded on solely legal
arguments, the standard this Court applies in resolving the
dispute is of little import. Marshall County Health Care
Authority v. Shalala, 988 F.2d 1221, 1226 (D.C. Cir. 1993)
(holding that where the question the court must address is solely
a question of law, there is "no real distinction in this context
between the question presented on a 12(b)(6) motion and a motion
for summary judgment.").*fn3 Accordingly, this Court will assess the merits of Defendants'
argument through the lens of the summary judgment standard.
Summary judgment is only appropriate where the Court is
satisfied that "there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter
of law." Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett,
477 U.S. 317, 330 (1986). The burden of establishing the nonexistence
of a "genuine issue" is on the party moving for summary judgment.
Celotex, 477 U.S. at 330. The moving party may satisfy this
burden by either (1) submitting affirmative evidence that negates
an essential element of the nonmoving party's claim; or (2)
demonstrating to the Court that the nonmoving party's evidence is
insufficient to establish an essential element of the nonmoving
party's case. Id. at 331. If the moving party has not fully
discharged its initial burden, its motion for summary judgment
must be denied. Id. at 332.
B. Commodity Pool
Congress amended the Commodity Exchange Act and established the CFTC in 1974 in an attempt to insure "fair
practice and honest dealing on the commodity exchanges and
provid[e] a measure of control over those forms of speculative
activity which often demoralize the markets to the injury of
producers, consumers, and the exchanges themselves." S. Rep. No.
1131, 93d Cong. 2d Sess., reprinted in  U.S. Code Cong. &
Ad. News, 5843, 5844; Lopez v. Dean Witter Reynolds, Inc.,
805 F.2d 880, 883 (9th Cir. 1986). Defendants now argue that their
company, Shasta, does not fall under the definition of a
commodity pool and is therefore exempt from the jurisdiction of
For the purposes of the Commodity Exchange Act, "[p]ool means
any investment trust, syndicate or similar form of enterprise
operated for the purpose of trading commodity interests."
17 CFR § 4.10 (d)(1). As amended by Congress in 1992, a "commodity pool
operator" is defined as:
any person engaged in a business that is of the
nature of an investment trust, syndicate, or similar
form of enterprise, and who, in connection therewith,
solicits, accepts, or receives from others, funds,
securities, or property, either directly or through
capital contributions, the sale of stock or other
forms of securities, or otherwise, for the purpose of
trading in any commodity for future delivery on or
subject to the rules of any contract market.
Pub L. No. 102-546, 106 Stat 3590 (1992). A commodity pool is distinguished from other investment
entities by the aggregation of investors' funds into a single
account. Funds from the account are then invested without regard
to the source of specific funds, and the profits and losses are
distributed pro rata among the investors. In Lopez v. Dean
Witter Reynolds, Inc., 805 F.2d 880
, 884 (9th Cir. 1986), the
Ninth Circuit articulated four requirements to ascertain the
presence of a commodity pool: "(1) an investment organization in
which the funds of various investors are solicited and combined
into a single account for the purpose of investing in commodity
futures contracts; (2) common funds used to execute transactions
on behalf of the entire account; (3) participants share pro rata
in accrued profits or losses from the commodity futures trading;
and (4) the transactions are traded by a commodity pool operator
in the name of the pool rather than in the name of any individual
investor." Id.; see also Nilsen v. Prudential-Bache
Securities, 761 F. Supp. 279
, 292 (S.D.N.Y. 1991) (citing
Lopez, 805 F.2d at 884) ("Essentially, a commodity pool
operator is one who manages an investment fund, similar to a
mutual fund, in which the assets of several investors are
invested together with gains or losses shared pro rata by the
participants."); Meredith v. ContiCommodity Services, Inc.,
Comm. Fut. L. Rep. (CCH) ¶ 21,107, p. 24,462 ("In a commodity
pool, all investors' funds are placed in a single account.
Transactions are then executed on behalf of the entire account and not allocated to any particular investor.
The investors' profits and losses are then allocated by shares to
individual investors based on their contribution to the fund.").
Courts have been adamant that where funds are not actually
commingled, a commodity pool does not exist. Thus, the Lopez
Court held that the enterprise at issue was not a commodity pool
because "not all accounts traded the same contracts," and
"[t]herefore, not all accounts shared a pro rata profit or loss."
Id. at 884. Similarly, in Meredith v. ContiCommodity Services,
Inc., Comm. Fut. L. Rep. (CCH) ¶ 21,107, p. 24,462 (D.D.C.
1980), a case relied upon in Lopez, the Court found that the
fact that the funds were not pooled into a single account
precluded the enterprise from being a commodity pool, since "the
profitability of plaintiff's investment was actually dependent
only upon [defendant's] success or failure in trading for
plaintiff's account even if it was coincidental with the
profitability of the accounts of other investors." Id. Although
the defendant did not give each account individual consideration
and often invested various investors' funds in similar
enterprises, the funds were not actually pooled.
Unlike the defendant entities in Lopez and Meredith, Shasta
actually pooled investor accounts. Shasta satisfies the four
factors of the Lopez test: (1) the funds of individual
investors were pooled in Defendant Shimer's equity account; (2)
these commingled funds were then transferred en masse to Tech Traders
to be invested in commodity futures, without distinguishing
between the funds of individual investors; (3) investors believed
that gains from the Tech Traders operation would be allocated pro
rata, depending on the relative amount of their investment; and
(4) trades were made on behalf of the pool rather than in the
name of individual investors. Shasta is precisely the form of
entity Congress authorized the CFTC to regulate as a commodity
The fact that Shasta did not invest in commodity futures
directly, but instead transferred funds to Tech Traders to invest
does not affect Shasta's status as a commodity pool. In fact, the
Shasta transactions mirror those in Commodities Futures Trading
Commission v. Heritage Capital Advisory Services, Ltd., Comm.
Fut. L. Rep. (CCH) ¶ 21,627, p. 26,384 (N.D. Ill. 1982), another
case formulating the basis for the Lopez decision. Heritage
involved an operation very similar to Shasta: defendants
solicited funds from individual customers, combined those funds
into a common investment account*fn5 where the funds were
commingled, and then gave those funds to a third party for
investment in the futures market. In Heritage, the Court held
that because investors expected to share profits and losses on a pro rata basis, the enterprise was a commodity pool, regardless
of the fact that it was a third party who conducted the actual
investment activities. Id.
Defendants go to great lengths to argue that because the Shasta
funds were not traded "in the name of Shasta," Shasta does not
satisfy the fourth factor of the Lopez test and cannot be a
commodity pool. Defendants' reading of the Lopez Court's
language is far too literal. The Court intended the fourth factor
to distinguish cases, such as Meredith, where investments are
made in many of the same enterprises in the name of individual
investors without pooling funds together in a single account. The
appellation given the actual transaction is irrelevant, so long
as it is a pooled fund and not conducted in the names of
individual customer accounts. See In re Slusser, 1998 WL
537342 at n. 36 (holding that entities at issue were commodity
pools even though "[t]he pools were not traded in the name of the
pool . . . [t]he key to the fourth factor is that the funds were
not traded in the name of any individual investor, as was the
case with the pools at issue here."). This pooling is clearly
Besides arguing that Tech Traders did not invest Shasta's funds
"in the name of Shasta," Defendants raise no evidence to suggest
that Shasta is not a commodity pool. Accordingly, Defendants
motions will be denied. The accompanying Order shall issue today.
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