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In re Application to Enforce an Admin. Subpoena of U.S. Commodity Futures Trading Commission

United States District Court, N.D. Illinois, Eastern Division

December 17, 2014

In the Matter of an Application to Enforce an Administrative Subpoena of the U.S. Commodity Futures Trading Commission, Applicant,
v.
Monex Deposit Company, et al., Respondents

For U.S. Commodity Futures Trading Commission, Plaintiff: Carlin R Metzger, LEAD ATTORNEY, United States Commodity Futures Trading Commission, Chicago, IL; David A. Terrell, LEAD ATTORNEY, U.S. Commodity Futures Trading Commission, Chicago, IL; Joseph A. Konizeski, LEAD ATTORNEY, Commodity Futures Trading Commission, Chicago, IL.

For Monex Deposit Company, Monex Credit Company, Newport Service Corporation, Defendants: Benjamin C. Geiger, Neil A. Goteiner, PRO HAC VICE, Farella, Braun & Martel LLP, San Francisco, CA; Oscar L. Alcantara, Stephanie J. Harris, Goldberg Kohn Ltd., Chicago, IL.

MEMORANDUM OPINION AND ORDER

SIDNEY I. SCHENKIER, United States Magistrate Judge.

This matter comes before the Court on the United States Commodities Futures Trading Commission's (" CFTC") Application for an Order to Show Cause and Order Requiring Compliance with Administrative Subpoena against Respondent Monex Deposit Co. and affiliate companies Monex Credit Co. and Newport Service Corp. (collectively, " Monex"). The CFTC is a regulatory agency charged with authority under the Commodities Exchange Act, 7 U.S.C.A. § § 1 et seq . (the " Act"), as amended by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, Pub.L. No. 111-203, Title VII § § 701-774, 124 Stat. 1376 (enacted July 21, 2010) (" Dodd-Frank"), to regulate " transactions involving swaps or contracts of sale of a commodity for future delivery." 7 U.S.C.A. § 2(a)(1)(A). Monex is a California-based retail buyer and seller of precious metals.

On January 30, 2014, the CFTC commenced an investigation into Monex's " Atlas" precious metals investment program, seeking to determine whether Monex, through this program, is violating various provisions of the Act, including an exchange trading requirement, an antifraud provision, registration requirements, and various record-keeping and reporting requirements (doc. # 19, CFTC Mem. at 5; doc. # 27, CFTC Reply at 1). In connection with that investigation, the CFTC issued a subpoena to Monex requiring the production of a variety of documents relating to the financed commodity transactions Monex offers to its customers (CFTC Mem. at 6-7). Chief among the items sought by the subpoena is a database containing various fields of information that would inform the CFTC as to how Monex generates and manages customer trading accounts, transaction statements, and internal reports (Id. at 7).[1] The subpoena also sought unredacted hard copies of certain documents, including customer account statements and financing statements (Id.).

In response to the subpoena, Monex produced more than 533, 000 documents, including more than 400, 000 monthly statements from some 46, 000 customer accounts (doc. # 20, Monex Opp'n at 8). However, Monex redacted customer contact information from that hard copy production (Id.). In addition, Monex declined to produce the " electronic back-up data to certain documents, " objecting that the information was irrelevant to the CFTC investigation and would invade customer privacy (Id.). This refusal led to the filing of the instant application, which sought full compliance with the subpoena (CFTC Mem. at 1).

Monex responded to the application by arguing that the CFTC lacks authority to obtain this information about the Atlas Program pursuant to Section 2(c)(2)(D)(ii)(III)(aa) of the Act--a provision that exempts from CFTC jurisdiction those retail commodity transactions that " result[ ] in actual delivery within 28 days" (Monex Opp'n at 1). Monex contends that under the Atlas program, it always provides for " actual delivery within 28 days after payment by transfer of title to the customer" (Id. at 5). Further, Monex argues that the CFTC lacks any other jurisdictional basis upon which to regulate its activities, including, most specifically, Section 6(c)(1) of the Act, as amended, 7 U.S.C. § 9(1), which is the statutory provision regulating deceptive conduct in connection with a contract of sale of a commodity in interstate commerce (Id. at 3).[2]

In reply, the CFTC contends that the issue of " actual delivery" of the metals is a " factual inquiry turning on the possession of and control over the metals" (CFTC Reply at 1). Monex's transactions, the CFTC maintains, are arguably covered by Section 2(c)(2)(D), as it is far from clear that Monex customers have " actual" possession or control over the metals. According to the CFTC, Monex customers may have only constructive possession of their metals, which is insufficient to satisfy the exemption set forth in Section 2 (Id. at 4). The CFTC also asserts that Section 6(c)(1) provides it with an independent basis to pursue this investigation into Monex's Atlas program (Id. at 13).

Monex filed a surreply in which it fought back against the CFTC's constructive possession argument, contending that " CFTC concedes by silence that there is no factual indication that Monex has ever failed to actually deliver even one ounce of customer metals to depositories" (doc. # 28, Monex Surreply at 1 (emphasis in original)). Accordingly, Monex argues that this case involves a purely legal question regarding actual delivery that should be resolved in its favor pursuant to the Seventh Circuit's decision in EEOC v. Sidley Austin Brown & Wood, 315 F.3d 696 (7th Cir. 2002) (Id.).

We have considered the parties' lengthy submissions, as well as the discussion during oral argument held on November 17, 2014. From the parties' briefs, we note that Monex attempts to distill into a single legal issue its objection to CFTC's subpoena, as follows: that " CFTC lacks any jurisdiction to seek customer contact information and a digital database showing customer trading performance for Monex's thousands of individual customers" (Monex Opp'n at 1). However, the Court finds it useful to consider embedded within that articulation of Monex's position three separate arguments: (1) that the CFTC lacks jurisdiction over Monex's financed retail commodity transactions pursuant to Section 2(c)(2)(D) of the Act because Monex always provides for " actual delivery" within 28 days and thus the transactions are not futures contracts subject to CFTC oversight; (2) that, at a minimum, the question of CFTC jurisdiction is sufficiently doubtful such that the CFTC should be limited at this time to obtaining information relevant to whether it has jurisdiction, and thus the CFTC's application is overly broad because it seeks information that has nothing to do with that question; and (3) that Section 6 does not create an independent basis for the CFTC to investigate Monex over precious metals transactions that are otherwise exempted by Section 2.

I.

At the outset, we note that during oral argument the CFTC narrowed the scope of the dispute by stating--at least for now--that it would not seek disclosure of the customer contact information (11/17/14 Tr. at 60-61). As a result, we deem the part of the CFTC application seeking that information to be withdrawn without prejudice.

II.

We next address the question of whether the CFTC may investigate Monex's precious metals sales pursuant to Section 2 of the Act. In so doing, we start with the proposition that an agency's investigative authority is broad. In United States v. Morton Salt Co., 338 U.S. 632, 642-43, 70 S.Ct. 357, 94 L.Ed. 401, 46 F.T.C. 1436 (1950), the Supreme Court recognized that, much like a grand jury, a regulatory agency is empowered to investigate conduct " merely on suspicion that the law is being violated, or even just because it wants assurances that it is not." For this reason, an administrative agency is not like a judicial court, which " is reluctant if not unable to summon evidence until it is shown to be relevant to issues in litigation." Id. at 643. Rather, an administrative agency has a " power of inquisition, " which is not derived from the judicial function. Id. Accordingly, a regulatory agency such as the CFTC may commence an ...


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