The opinion of the court was delivered by: HARRY D. LIENENWEBER
Plaintiffs are investors who purchased interests in certain commodity pools operated by Waters, Tan & Co. ("Waters Tan"). Defendant, G.H. Miller & Co. ("Miller"), is a Futures Commission Merchant ("FCM").
Statutory and Regulatory Provisions
The Commodity Futures Trading Commission ("Commission" or "CFTC") regulates the operation of commodity pools, FCMs and a host of other functions involved in the commodity markets. See 7 U.S.C. § 1 et seq. ("Commodity Exchange Act" or the "Act"); and 17 CFR § 1 et seq. ("Regulations"). A commodity pool operator is defined in the Act and Regulations as any
person engaged in a business which is of the nature of an investment trust, syndicate, or similar form of enterprise, and who, in connection wherewith, 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 or commodity option. . . .
7 U.S.C. § 1a(4); 17 CFR § 1.3(5)(cc). Thus, the Act and Regulations permit a pool operator to receive money from his customers. Pool operators are required to register with the National Futures Association ("NFA"). 17 CFR § 3.
The Act and Regulations also define a Commodity Trading Advisor as a person who, for compensation or profit, is in the business of advising others in the trading of commodity futures or options. 7 U.S.C. § 1a(5).
The Act and Regulations define an introducing broker as
any person. . . engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market who does not accept any money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom.
7 U.S.C. § 2(a)(1)(A); 17 CFR § 1.3(mm). Therefore, under the Regulations and the Act, an introducing broker is not permitted to accept money from clients. Introducing brokers are also required to register with the NFA.
A "Futures Commission Merchant" ("FMC") is also defined by the Act and Regulations to include anyone engaged in the solicitation or acceptance of orders for purchase of commodity futures but with the important difference that the FMC is permitted to accept "money, securities, or property" in return for the purchase. 7 U.S.C. § 1a(12); 7 CFR § 1.3(p).
The Regulations require an introducing broker, as a condition of registration, to meet certain minimum financial requirements or, in the alternative, furnish a written guarantee agreement executed by the FCM for whom he works. 17 CFR § 1.17; § 1.10 (a)(ii)(C) and (j). The form of the guarantee agreement is specified by regulation. (17 CFR § 1.3(nn).
In 1982, Dennis K. Tan ("Tan"), and his partner, John Waters ("Waters"), started an investment club. By mid-1983, the club had begun to lose money, a fact which Tan and Waters hid from their investors by the artifice of sending false reports. They obtained money to fund the withdrawal of a club member by soliciting new customers. In 1984, in order to raise more money, they organized their first commodity pool. From November 8, 1984 until September 30, 1985, they formed additional pools and registered them with the NFA under the corporate name of Waters, Tan and Co. Waters Tan was also registered as a commodity trading advisor. As an associated person ("AP"), Tan was personally involved in all aspects of the Waters Tan ...