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Stotler and Co. v. Commodity Futures Trading Commission

decided: August 25, 1988.

STOTLER AND COMPANY AND RICHARD C. ALLEN, PETITIONERS,
v.
COMMODITY FUTURES TRADING COMMISSION, RESPONDENT



Petition for Review of an Order of the Commodity Futures Trading Commission.

Cummings, Wood, Jr. and Manion Circuit Judges.

Author: Manion

MANION, Circuit Judge.

Stotler and Company ("Stotler") petitions this court to review an order of the Commodity Futures Trading Commission ("the Commission") finding Stotler, a futures trading house, vicariously liable under the Commodity Exchange Act's (the Act's)*fn1 antifraud provisions for the actions of Richard Allen, a commodity trading advisor and pool operator, in soliciting accounts he traded through Stotler. The Commission also found that Stotler violated one of the Act's registration provisions by not registering Allen as an "associated person." Having taken a fresh look at the evidence, we affirm the Commission's order for the reasons stated in its opinion. In re Stotler and Company, CFTC Docket No. 80-7, Comm. Fut. L. Rep. (CCH) para. 23,298 (CFTC Sept. 30, 1986).

I. NATURE OF THE CASE

Briefly stated, Stotler, a partnership, is a registered futures commission merchant. Allen was a commodity trading advisor who prepared a weekly tout sheet with his advice. He was also a commodity pool operator who traded discretionary accounts for his clients.

Sometime in 1975, Stotler's managing partner, Howard Stotler, agreed on behalf of Stotler to rebate to Allen half of the gross commissions generated on all accounts Allen brought to Stotler. Allen subsequently registered as a commodity trading advisor and commodity pool operator, but did not register as an associated person of Stotler's.*fn2 At the time of this agreement--and up to the present -- a futures commission merchant could lawfully share commissions with trading advisors as well as with associated persons.

The relationship between Stotler and Allen encompassed more than sharing the commissions generated by the trades that Allen placed with Stotler. Stotler's internal business records listed Allen as a salesman and Stotler assigned Allen a salesman number. Stotler gave to Allen its own literature and forms to distribute to those people Allen solicited. In addition, Stotler permitted Allen to place his trades directly through its clerks on the floors of the commodities exchanges.

At the hearing before the administrative law judge, one of Allen's and Stotler's joint clients, Arthur Lipton, testified that he received from Allen the trading authorization and customer agreement forms necessary to open an account with Stotler. Allen had told Lipton that Stotler was the only brokerage house through which Lipton could trade. Subsequently, when Lipton had a question about his monthly statement from Stotler, Edwin Hansen, who testified that he was "in charge of" Stotler's futures trading department, told Lipton to direct his inquiry to "the broker on the account," whom Hansen identified as Allen.

Patrick Thompson, a Commission investigator, testified that Allen dealt exclusively with Stotler. Allen had told this investigator that he had

proposed to Mr. Stotler that he wanted to put his business through one merchant and that he was trying to arrive at what would be an acceptable rate for putting his business through one merchant, and they negotiated whatever the rate was . . . and . . . he then began to put through all of his business through Stotler & Company.

It is undisputed that Allen not only failed to disclose the commission-sharing arrangement with Stotler to his clients and potential clients, but that he also affirmatively misrepresented how he was compensated. In particular, Allen told clients that he was paid only a percentage of the client's profits and that he received no part of any commissions. For example, Allen wrote to client Lipton as follows:

My single purpose is to make money for you. I receive no part of the commissions or any type of reward for the trading I do on your behalf. This simply means that if I make you money I will make money.

For purposes of this appeal, Stotler does not dispute the Commission's finding that Allen willfully engaged in statutory commodities fraud in soliciting the commodities accounts that were traded through Stotler.

II. NATURE OF THE PROCEEDINGS

In October, 1979, the Commission filed an administrative enforcement complaint against Stotler and Allen for violations occurring in the period between April 1, 1977 through July 1, 1978. The Commission brought the first count (Count I) pursuant to § 4b of the Act, 7 U.S.C. § 6b (1976), and the second (Count II) pursuant to § 4 o, 7 U.S.C. § 6 o (1976). Both counts arose from the same underlying factual allegations that Allen failed to disclose and instead affirmatively misrepresented the commission-sharing arrangement. Both counts charged Stotler not only as aiding and abetting Allen but also as Allen's principal under § 2(a)(1) (A), 7 U.S.C. § 4 ...


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