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DOCKET NO. 13-10993
United States Court of Appeals
for the
Eleventh Circuit
HAROLD EDWARD MARTIN, JR., AND FRED JAGER,
Appellants,
v.
UNITED STATES COMMODITY FUTURES TRADING COMMISSION,
Appellee.
_____________________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF FLORIDA
IN CIVIL DOCKET FOR CASE #: 9:12-cv-81311-DMM
(Hon. Donald M. Middlebrooks)
OPENING BRIEF OF APPELLANTS
JAY BRUCE GROSSMAN
WILLIAM L. TUCKER
J.B. GROSSMAN P.A.
200 East Olas Boulevard, Suite 1660
Fort Lauderdale, FL 33301
Telephone: (954) 452-1118
Facsimile: (954) 916-4448
Counsel for Appellants
Counsel Press, LLC (804) 648-3664 * (800) 275-0668
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Statement Regarding Oral Argument
Appellants respectfully request oral argument in this matter, as the case
presents significant issues of first impression concerning the jurisdiction of the
Commodity Futures Trading Commission (the “CFTC”), and the extent, if any, of
its jurisdictional rights to bring a prayer for preliminary injunctive relief. The case
presents significant issues regarding the interpretation of the recently passed Dodd-
Frank Act, CFTC promulgations purportedly authorized by Dodd-Frank, and the
CFTC’s claim that said authority preempts sections of each state’s Uniform
Commercial Code concerning physical sales from inventories.
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Table of Contents
Certificate of Interested Persons and Corporate Disclosure Statement ...... C-1
Statement Regarding Oral Argument .............................................................. i
Table of Contents ............................................................................................ ii
Table of Authorities ....................................................................................... iv
Table of Record References ......................................................................... viii
Statement of Jurisdiction ................................................................................. 1
Statement of Issues .......................................................................................... 1
Statement of the Case ...................................................................................... 2
A. Procedural History ............................................................................... 2
B. Factual Summary ................................................................................. 3
i. The Parties .................................................................................. 3
ii. The Business ............................................................................. 4
a. The Back Services of Hunter Wise .................................. 6
b. The Transaction Between Hunter Wise and the
Suppliers ........................................................................... 7
c. The Transaction Between Hunter Wise and The
Retail Dealers ................................................................... 8
d. Ensuring Metals Sold by Hunter Wise Did Not
Exceed Metals Purchased by Hunter Wise ...................... 9
Standard of Review ....................................................................................... 11
Summary of the Argument ............................................................................ 12
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Argument....................................................................................................... 14
I. Definition of Leveraged, Margined, and Financed Transactions ....... 14
A. The Meaning of “Leveraged” and “Margined” Under the
CEA .......................................................................................... 14
B. The Effect of the Phrase “Financed . . . on a Similar Basis” ... 18
C. The CFTC’s Interpretation of “Leveraged,” “Margined,”
and “Financed” is Controlled by the Chevron Deference
Doctrine .................................................................................... 22
D. The District Court Erred in its Determination Regarding the
Application of Section 2(c)(2)(D)(i)(II) of the CEA ............... 25
II. The “Actual Delivery” Exception....................................................... 26
A. The CFTC’s Interpretation of “Actual Delivery” is Directly
Contrary to the Uniform Commercial Code............................. 28
B. The CFTC’s Interpretation of “Actual Delivery” is Directly
Contrary to Congress’s Intent .................................................. 39
C. The District Court Erred in its Determination Regarding the
Application of Section 2(c)(2)(D)(ii)(III)(aa) of the CEA ....... 42
III. The “Enforceable Obligation to Deliver” Exception ......................... 44
A. The District Court Erred in its Determination Regarding the
Application of Section 2(c)(2)(D)(ii)(III)(bb) of the CEA ...... 50
Conclusion .................................................................................................... 51
Certificate of Compliance
Certificate of Service
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Table of Authorities
Cases
American Petrofina, Inc. v. PPG Industries, Inc.,
679 S.W. 2d 740 (Tex. App. 2d Dist. 1984) ....................................... 35
*Babbitt v. Sweet Home Chapter of Communities for a Great Oregon,
515 U.S. 687, 115 S.Ct. 2407 (1995) ................................................. 21
Bowen v. Georgetown Univ. Hosp.,
488 U.S. 204, 109 S.Ct. 468 (1988) ................................................... 23
*CFTC v. 20/20 Trading Comp., Inc.,
2011 WL 2221177 (C.D. Cal. June 7, 2011) ...................................... 15
*CFTC v. American Precious Metals,
845 F.Supp.2d 1279 (S.D. Fla. 2011) ........................................... 15, 17
CFTC v. Matrix Trading Group, Inc.,
2002 WL 31936799 (S.D. Fla. 2002) ................................................. 51
*CFTC v. P.I.E., Inc.,
853 F.2d 721 (9th Cir. 1988) ........................................................ 17, 24
*CFTC v. Zelener,
373 F.3d 861 (7th Cir. 2004) .............................................................. 15
*Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
467 U.S. 837, 104 S.Ct. 2778 (1984) ..................................... 22, 23, 24
Circuit City Stores, Inc. v. Commissioner of Revenue,
790 N.E.2d 636 (Mass. 2003) ................................................. 35, 36, 37
Coeur Alaska, Inc. v. Southeast Alaska Conservation Council,
557 U.S. 261, 129 S.Ct. 2458 (2009) ................................................. 23
*First Nat’l Monetary Corp. v. CFTC,
860 F.2d 654 (6th Cir. 1988) .............................................................. 17
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* Food and Drug Admin. v. Brown & Williamson Tobacco Corp.,
529 U.S. 120, 120 S.Ct. 1291 (2000) ......................................................... 40
*Freeman v. Quicken Loans, Inc.,
__ U.S. __, __, 132 S.Ct. 2934 (2012) ............................................... 21
Gustafson v. Alloyd Company, Incorporated,
513 U.S. 561, 568, 115 S.Ct. 1061, 1066 (1995) ............................... 14
Haken v. Scheffler,
180 N.W.2d 206 (Mich. Ct. App. 1970) ............................................. 38
Hawaii v. Office of Hawaiian Affairs,
556 U.S. 163, 129 S.Ct. 1436 (2009) ................................................. 20
In Re Ashby Enters. Ltd.,
2 62 B.R. 905 (Bankr. D. Md. 2001) .................................................. 33
Hibbs v. Winn,
542 U.S. 88 (2004).............................................................................. 21
Koons Buick Pontiac GMC, Inc. v. Nigh,
543 U.S. 50, 125 S.Ct. 460 (2004) ..................................................... 20
*Mohamad v. Palestinian Authority,
132 S.Ct. 1702 (2012) ......................................................................... 21
*Morissette v. U.S.,
342 U.S. 246, 72 S.Ct. 240 (1952) ..................................................... 20
Morrison Enter., LLC v. Dravo Corp.,
638 F.3d 594 (8th Cir. 2011) ........................................................ 40, 42
Nat’l Treasury Employees Union v. Chertoff,
452 F.3d 839 (D.C. Cir. 2006) ............................................................ 21
Owasso Indep. Sch. Dist. No. I-011 v. Falvo,
534 U.S. 426, 434 (2002). .................................................................. 21
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Paul Mercury Ins. Co. v. Mountain West Farm Bureau Mut. Ins. Co.,
210 Cal.App.4th 645 (Cal. App. 2d Dist. 2012) ................................. 48
Robinson v. Shell Oil Co.,
19 U.S. 337, 117 S.Ct. 843 (1997) ..................................................... 42
S.D. Warren Co. v. Maine Bd. of Environmental Protection,
547 U.S. 370, 126 S.Ct. 1843 (2006) ................................................. 21
Salomon Forex, Inc. v. Tauber,
8 F.3d 966 (4th Cir. 1993) .................................................................. 20
SEC v. ETS Payphones, Inc.,
408 F.3d 727 (11th Cir. 2005) .................................... 11, 26, 44, 51, 52
Sierra Club, Inc. v. Leavitt,
488 F.3d 904 (11th Cir. 2007) ............................................................ 23
U.S. v. Williams,
553 U.S. 285, 128 SCt. 1830 (2008) ............................................ 21, 43
Udall v. Tallman,
380 U.S. 1, 85 S.Ct. 792 (1965) ......................................................... 24
Rules, Statutes, and Other Authorities
15 U.S.C. § 52 ............................................................................................... 35
17 C.F.R. § 31.4 ................................................................................ 15, 16, 17
7 U.S.C. § 2(c)(2)(D) ............................................................................. passim
7 U.S.C. § 23 ..................................................................................... 14, 16, 17
28 U.S.C. § 1292 ............................................................................................. 1
49 Fed. Reg. 5498-01 .................................................................................... 17
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76 Fed. Reg. 77670-02 .......................................................... 28, 29, 30, 39, 40
U.C.C. § 87–92 ............................................................................................. 36
U.C.C. § 1-201(b)(15). .................................................................................. 32
U.C.C. § 1-201(b)(16) ................................................................................... 32
U.C.C. § 1-201(b)(18) ............................................................................. 31, 34
U.C.C. § 2-103(1)(e). .................................................................................... 31
U.C.C. § 2-308 .................................................................................. 31, 34, 38
U.C.C. § 2-401 ....................................................................................... passim
U.C.C. § 2-501(1) ................................................................................... 31, 33
U.C.C. § 7-102(a)(1) ..................................................................................... 32
U.C.C. § 7-102(a)(10) ............................................................................. 31, 32
U.C.C. § 7-106(a) .......................................................................................... 31
U.C.C. § 7-504(a). ......................................................................................... 31
Bank Activities Involving the Sale of Precious Metals,
Comm. Fut. L. Rep. (CCH) ¶ 22,673 (CFTC Aug. 6, 1985) .............. 17
COLO. REV. STAT. § 11-53-105 (2012) ................................................... 41, 42
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TABLE OF RECORD REFERENCES
Brief Page # Document Docket #
2, 3, 12, 19, 27, 39, 41, 50 Complaint for Injunctive Relief 1
1, 13, 14, 25, 27, 42, 44, 50 Order on Plaintiff’s Motion 79
2 Order Temporarily Appointing
Special Corporate Monitor 77
2 Exhibit A: Letter 92-1
3, 4, 5, 7, 8, 9, 46, 49 Declaration of Harold Edward
Martin, Jr. 38-1
4, 5, 6, 7, 8, 9, 10, 11, 25, 26 Transcript of Preliminary Hearing 86
4, 6, 10 Exhibit 1: Financial Statement 137-1
6 Declaration of Andrea Riggio Hunter
Wise Commodities 35-1
7 Account Statement 4-20
7 Exhibit 3: Trade Confirmation 137-3
7 Exhibit 4 A-D: Transfer of
Commodity Records 137-4
7, 8, 9, 46, 47, 48, 49, 50 Appendix of Exhibits (Part I of II) 39-1
8 A-Mark Precious Metals Statement 137-5
8 Standard Bank Ledger Statement 137-6
12, 13,14, 25, 26 Defendant’s Motion to Dismiss 33
13 Defendants Response in Opposition 36
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15, 25, 26 Hunter Wise Defendants Reply 73
27, 43, 47, 48 Declarations, 4/27/12 and 6/13/12 4-17
31 CFTC’s Response 63
46, 49, 50 Appendix of Exhibits (Part II of II) 40-1
46 Plaintiff’s Motion for an Order of
Preliminary Injunction 4
49, 50 Appendix of Declarations 4-2
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Statement of Jurisdiction
Jurisdiction for this appeal is found under Rules 3 and 4 of the Federal Rules
of Appellate Procedure and 28 U.S.C. § 1292. On February 25, 2013 the U.S.
District Court for the Southern District of Florida issued its Order on Plaintiff’s
Motion for Preliminary Injunction (the “Injunctive Order”) and granted a
preliminary injunction against the Appellants and all other defendants. See Order
on Pl.’s Mot. for Prelim. Inj. [DE 79] [hereinafter “Injunctive Order”]. Pursuant to
28 U.S.C. § 1292(a)(1), the interlocutory Injunctive Order is immediately
appealable to the U.S. Eleventh Circuit Court of Appeals.
Statement of the Issues
1. Whether the issuance of the preliminary injunction was improper
because Section 742 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act did not bring the Hunter Wise precious and industrial metals
transactions within the regulatory scope of the Commodity Exchange Act.
2. Whether the United States Commodity Futures Trading Commission’s
interpretation of Section 742 preempts the Uniform Commercial Code’s settled law
concerning typical commercial practices in the sale of inventories.
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Statement of the Case
A. Procedural History
This appeal arises out of an action filed by the U.S. Commodity Futures
Trading Commission (the “CFTC”). The CFTC filed a thirteen-count complaint
on December 5, 2012, naming twelve business entity defendants and eight
individual defendants. Among those named were Hunter Wise Commodities,
LLC, Hunter Wise Services, LLC, Hunter Wise Credit, LLC, Hunter Wise
Trading, LLC (the “HW Entity Defendants”) and the individual principals of
Hunter Wise Commodities, LLC, Harold Edward Martin, Jr. and Fred Jager (the
“Appellants”).1
1 The undersigned firm represented the HW Entity Defendants and Messrs.
Martin and Jager during the CFTC investigation that preceded the filing of the
Complaint in the United States District Court for the Southern District of Florida.
See Compl. [DE 1]. The undersigned firm continued to represent both the HW
Entity Defendants and Messrs. Martin and Jager during the February 22, 2013
Preliminary Injunctive Hearing (the “Injunctive Hearing”). On February 22, 2013,
following the Injunctive Hearing the district court issued a preliminary injunction
against all named defendants and appointed a Special Monitor and Corporate
Manager (the “February 22 Order”). See Order Temporarily Appointing Special
Corporate Monitor [DE 77]. By letter dated February 25, 2013, the Special
Monitor and Corporate Manager terminated the undersigned firm’s representation
of the HW Entity Defendants and on April 19, 2013, the district court denied the
HW Entity Defendants’ Motion to Reinstate Counsel. See Defs.’ Mot. to Reinstate
Counsel and to Unfreeze Assets Exh. A [DE 92-1] and ensuing April 19, 2013
Order [DE-113]. Before the termination and subsequent ruling from the district
court, it was the intent of the undersigned and its clients to appeal on behalf of the
HW Entity Defendants and Messrs. Martin and Jager.
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The CFTC asserts that it holds jurisdiction over the HW Entity Defendants,
and the individual Appellants through Section 742 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank”), codified in the Commodity
Exchange Act (“CEA”) at 7 U.S.C. § 2(c)(2)(D). Compl. ¶ 8 [DE 1]. Despite its
assertion, the CFTC and the Injunctive Order have failed to demonstrate proper
CFTC jurisdiction and the preliminary injunction issued by the district court must
be dissolved.
B. Factual Summary
i. The Parties
The HW Entity Defendants are in the line of business of buying and selling
precious metals. Martin Decl. ¶ 2 [DE 38-1]. The HW Entity Defendants include
four companies: 1) Hunter Wise Commodities (“HW Commodities”) a holding
company and owner of the following three subsidiaries; 2) Hunter Wise Trading
(“HW Trading”); 3) Hunter Wise Credit (“HW Credit”); and 4) Hunter Wise
Services (“HW Services”). Martin Decl. ¶¶ 2, 8, 35 [DE 38-1]. Each of these three
subsidiaries is responsible for different aspects within HW Commodities business
as a wholesale precious and industrial metals dealer. Id.
• HW Commodities buys and sells precious and industrial metals exclusively
with banks, financial institutions and other wholesale dealers. Martin Decl. ¶
2 [DE 38-1].
• HW Trading facilitated the purchase and sale of metals between HW
Commodities and retail metals dealers. Id. at ¶¶ 3–5 [DE 38-1]. HW
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Trading provided a two way trading market giving retail dealers access to
metals inventories used to offer purchases and sales of metals to retail
customers. Id. [DE 38-1].
• HW Credit offered retail dealers the ability to finance their metals purchases
and also provided retail dealers with the ability to take “short” positions on
metals. Id. at ¶ 8 [DE 38-1].
• HW Services provided the retail dealers that bought and sold metals through
HW Trading with back office services. Martin Decl. ¶¶ 35–37 [DE 38-1].
The retail dealers could use the back office services to provide their retail
customers with information concerning the value, activity, and charges
associated with their metals purchases and sales. Id. at ¶ 35 [DE38-1].
Appellant Martin was the President of HW Commodities and was a 35
percent shareholder in the entity. [DE 137-1], Independent Auditors’ Reports 2009
through 2011 at 17 (hereinafter “Auditors’ Report). Martin ran the day to day
operations of HW Commodities. Prelim. Inj. Hr’g Tr. 126:24–127:7 [DE 86].
Appellant Jager was the CEO and Chairman of HW Commodities and was a
41 percent shareholder in the entity through his ownership of South Peak Texas
Investments, Inc. Auditors’ Report at 17 [DE 137-1]. Jager was not involved in
the day to day operations of HW Commodities. Prelim. Inj. Hr’g Tr. 127:8–16 [DE
86].
ii. The Business
HW Commodities acted as a dealer of precious and industrial metals
purchasing and selling to or from wholesale metals suppliers, other wholesale
dealers, and retail dealers. Id. at 54:9–16 [DE 86]; Martin Decl. ¶ 2 [DE 38-1].
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Hunter Wise offered physical (also known as spot or cash) metals transactions to
these dealers. Id. at 108:4–13, 159:6–10 [DE 86]. Derivative products (non-
physical products), such as futures or forwards, were not used to cover metals sold
to retail dealers but futures products were used by Hunter Wise trading managers
to avoid market risk when hedging any excess metal that Hunter Wise held that
had not been sold to a dealer. Id. at 123:6–10, 123:13–22 [DE 86]. Retail dealers
could purchase or sell metals through HW Commodities by calling HW Trading.
Prelim. Inj. Hr’g Tr. 76:1–77:7 [DE 86]. HW Trading would provide the retail
dealer with a price based on price feeds reflecting the current spot (physical)
market price for a particular metal. Id. at 148:6–19 [DE 86]. HW Trading
executed the trades on behalf of its customers, the retail dealers, but did not trade
for the retail customers of those retail dealers. Id. at 78:11–18, 152:17–25 [DE 86].
After placing its trade with HW Trading, the retail dealer could allocate its
purchase or sale of metals to one (or a group) of its retail customers by sending
HW Services an Excel spreadsheet indicating the appropriate allocation, which
HW Services entered into a database, or the retail dealer would enter the
information into the database itself through an online tracking system. Id. at 76:1–
77:7, 78:16–25 [DE 86].
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a. The Back Office Services of Hunter Wise
The online tracking system that HW Services made available to retail dealers
was commonly referred to as the Portal and was provided pursuant to a services
agreement between HW Commodities and retail dealers. Prelim. Inj. Hr’g
Tr.79:13–17, 80:2–6; Andrea Riggio Decl. ¶ 2 [D 35-1]; Riggio Decl. Exh. C [35-
2]. The Portal was a computer database created by HW Commodities that a retail
dealer could choose to utilize. Prelim. Inj. Hr’g Tr. at 79:15–17, 82:17–22 [DE 86].
The Portal was a service that allowed the retail dealer to view its account with HW
Commodities, keep track of current metals positions, and view daily statements. Id.
at 81:25–82:5, 103:9–13 [DE 86]. Similarly, if the retail dealer chose to use the
Portal, that dealer could also provide access to its retail customers so they may
view their individual account information with the retail dealer. Id. at 82:6–16,
103:9–13 [DE 86]. However, the retail dealer was under no obligation to use the
Portal or provide its retail client allocation to Hunter Wise and, in fact, HW
Services acted at the direction of the retail dealer and could only provide services if
the retail dealer took affirmative steps to activate them. Id. at 82:6–22 [DE 86];
Martin Decl. ¶ 37 [DE 38-1]
The Portal also provided a retail dealer with the ability to have its customers
automatically receive paper notices via email. Prelim. Inj. Hr’g Tr. 103:18–104:7
[DE 86]. These various notices would provide the retail dealer’s customers with
up-to-date information on a daily basis concerning purchases or sales that occurred
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in their accounts. Id. at 104:14–21, 105:4–7 [DE 86]; Trade Confirmation [DE
137-3]; Transfer Notice 2–4 [137-4]; Account Statement [DE 4-20 Exh G]. If a
retail dealer chose to allow its customers access to view the Portal the retail dealer
could, at the same time, authorize its client to receive the paper notices. Prelim. Inj.
Hr’g Tr. at 104:4–13 [DE 86]. There was a check box that gave the retail dealer
the choice to have the paper notices sent directly to its customers email or, if the
dealer did not check the box, the paper notices were sent to the dealer who would
decide if and how to distribute the notices to its clients. Id. 104:25–105:3 [DE 86].
b. The Transaction Between Hunter Wise and the Suppliers
HW Commodities used various suppliers to purchase the metals it sold to
retail dealers. Id. at 56:18–21, 59:19–60:6, 122:18–123:1 [DE 86]. HW
Commodities purchased the majority of its inventory through Standard Bank, Plc.
while also maintaining supply relationships with NTR Bullion Group, A-Mark
Precious Metals, Natixis Commodities Markets, Ltd and Fidelitrade, Inc. Id. [DE
86]. The agreement governing the sale of metals between HW Commodities and
its suppliers provided HW Commodities with the ability to purchase metals using
financing provided by the suppliers subject to a lien. Martin Decl. ¶ 15 [DE 38-1];
Prelim. Inj. Hr’g Tr. 73:15–18 [DE 86]; see also Trading Agreement with A-Mark
Precious Metals, Inc. [DE 39-1 Exh. 4] and Trading Agreement with Standard
Bank, Plc. [DE 39-1 Exh. 7]. Under the terms of these agreements Hunter Wise
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could purchase metals and leave its physical metal with the seller by making a
down payment to the supplier and financing the balance. A-Mark Agreement ¶ 2B
[DE 39-1]. The supplier would retain a security interest in the purchased metals
and would charge interest on the loan balance to Hunter Wise during the term of
the loan; however, Hunter Wise could pay off the loan balance and take physical
delivery at any time. A-Mark Agreement ¶¶ 2B, 8 [DE 39-1]; Prelim. Inj. Hr’g Tr.
124:24–125:5 [DE 86]. The Hunter Wise suppliers, including Standard Bank and
A-Mark, charged interest on a monthly basis which was reflected on the suppliers’
monthly statements. Prelim. Inj. Hr’g Tr. 124:24–125:5, 125:24–126:21, 152:6–14
[DE 86]; A-Mark Precious Metals Statement at 2 [DE 137-5]; Standard Bank Cash
Ledger Statement at 2, 6 [DE 137-6].
c. The Transaction Between Hunter Wise and the Retail Dealers
Similar to the agreements between Hunter Wise and its suppliers, the retail
dealers could also choose to finance their purchase of metals and would enter into
a Dealer Loan, Security & Storage Agreement (the “Financing Agreement”).
Martin Decl. ¶ 9 [DE 38-1]; Financing Agreement [DE 39-1]. In the Hunter Wise
financed transaction, HW Credit extended credit to the retail dealer for the
purchase of metal, the retail dealer paid HW Trading a down payment on the
purchase price, and the outstanding portion of the purchase price was due to HW
Trading within four years. Martin Decl. ¶ 9 [DE 38-1]; see also Financing
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Agreement ¶ 3.1 [DE 39-1]. Pursuant to the Financing Agreement, the purchased
metals were held at a depository until the loan was paid in full or the position was
liquidated. Financing Agreement ¶ 9.1 [DE 39-1]. The Financing Agreement
explained that metals held on behalf of the retail dealer were held as fungible
portions of an identified mass and held in safekeeping with the metals of other
retail dealers. Financing Agreement ¶ 9.2 [DE 39-1].
d. Ensuring Metals Sold by Hunter Wise Did Not Exceed Metals
Purchased by Hunter Wise
Hunter Wise had employees and computer tracking systems designed to
ensure that all metals transactions were properly accounted for and that all metals
sales were covered by sufficient physical metals purchases. Prelim. Inj. Hr’g Tr. at
75:15–20, 80:20–25, 81:6–8 [DE 86]. Daily, Hunter Wise would ensure that it had
enough metal purchased and inventoried to cover all of its sales to retail dealers.
Id. at 75:16–20 [DE 86]. To do this, Hunter Wise looked at each retail dealer’s
metal purchases, marked their position to the market each day, and then compared
the aggregate of all retail dealer purchases with the inventories Hunter Wise had
purchased at its various suppliers. Id. at 80:10–25 [DE 86]. As an added caution,
Hunter Wise also used third-party entities to confirm that its internal
reconciliations of assets (physical metals owned) to liabilities (physical metals
sold) were equal. Id. at 51:5–11, 120:9–15 [DE 86].
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Hunter Wise reached an agreement with Delaware Depository Services
Company (“DDSC”) where DDSC agreed to reconcile Hunter Wise’ assets and
liabilities on a weekly basis. Prelim. Inj. Hr’g Tr. at 119:11–17 [DE 86]. DDSC is
an Exchange Approved precious metals depository. Id. at 120:1–2 [DE 86]. In
return for a fee, DDSC agreed to reconcile the liabilities of Hunter Wise, as
reported by Hunter Wise, with the assets held by Hunter Wise, as reported by the
suppliers that sold Hunter Wise metal. Id. 119:11–17 [DE 86]. By providing this
service, DDSC was verifying that Hunter Wise had purchased sufficient metals to
equal or exceed the total metals sold to retail dealers. Id. at 120:9–15 [DE 86].
Additionally, the Hunter Wise entities were audited by Haskell & White,
LLP a certified public accounting firm based in California. Prelim. Hr’g Tr. at
51:5–11 [DE 86]. The Haskell & White audits were conducted in 2009, 2010, and
2011. Id. at 54:9–11. The audit tested the way Hunter Wise booked their financed
metals business. Id. at 54:22–24. The Haskell & White audit that tested the Hunter
Wise inventory used in its financed metals business confirmed that “as of
December 31, 2011 and 2010, the market value of commodities held by dealers
(suppliers) for HW Trading, HWIT and IRA Services were more than sufficient to
cover their obligations to dealers (customers) as of the same dates.” Id. at 59:5–9
[DE 86]; Auditors’ Report at 14 [DE 137-1]. The Haskell & White audit
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confirmed that Hunter Wise had purchased sufficient metals to equal or exceed the
total metals sold to retail dealers. Prelim. Inj. Hr’g Tr. 59:10–13 [DE 86].
Furthermore, Haskell & White determined that the product sold by Hunter
Wise was not a derivative product, such as a future or forward, explaining that
during the audit process it considered all Hunter Wise transactions and it found that
the number of derivative transactions (those that were not physical purchases/sales
of metals and only used to offset the market risk of metals it had purchased from
its suppliers and not yet sold to a retail dealer) represented only a minor portion of
all Hunter Wises’ transactions. Id. at 67:2–7 [DE 86]. Moreover, Haskell & White
found that Hunter Wise was engaging in metals purchases with its suppliers and
that Hunter Wise was exposed to market risk on the entire amount of those
purchases not just the down payment portion the suppliers required when
financing. Id. at 73:1–5, 73:19–25 [DE 86]. HW Trading’s head trader, Herb Choi,
acknowledged that Hunter Wise was liable to its suppliers for market risk on 100
percent of the metals it purchased in a financed transaction not just for the portion
covered by the down payment. Id. at 157:10–16, 157:24–158:5 [DE 86].
Standard of Review
A district court’s order which grants a preliminary injunction involves a
mixed standard of review. The district court’s decision to grant an injunction is
reviewed under the abuse of discretion standard. SEC v. ETS Payphones, Inc., 408
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F.3d 727, 731 (11th Cir. 2005). The district court’s determinations of law are
reviewed de novo. Id. The district court’s findings of fact are reviewed for clear
error. Id. For this Court to sustain the preliminary injunction on a question of
jurisdiction, the plaintiff (i.e., the CFTC) must establish a “reasonable probability
of ultimate success upon the question of jurisdiction when the action is tried on the
merits.” Id.
Summary of the Argument
The CFTC has stated that it holds jurisdiction over the Appellants (and their
business operations) via Section 742(a) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank Act”), which has been codified in the
Commodity Exchange Act (“CEA”) at 7 U.S.C. § 2(c)(2)(D). Compl. ¶ 8 [DE 1].
See also Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R.
4173, 111th Cong., § 742(a) (2010); 7 U.S.C. § 2(c)(2)(D) (2012). The CFTC’s
statement of jurisdiction via the Dodd-Frank Act is their only claim of jurisdiction
over the Appellants.2 Compl. ¶¶ 7–9 [DE 1]. Therefore, the entire legal action
brought by the CFTC against the Appellants (including the request for a
preliminary injunction) is dependent upon establishing jurisdiction under Section
742(a) of the Dodd-Frank Act – a burden the CFTC fails to meet.
2 The actual claim of jurisdiction made by the CFTC states the following: “The
Commission has jurisdiction over the conduct and transactions at issue in this case
pursuant to Section 2(c)(2)(D) of the Act, as amended by the Dodd-Frank Act, 7
U.S.C. § 2(c)(2)(D).” Compl. ¶ 8 [DE 1].
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Prior to the Injunctive Order, the Appellants presented arguments explaining
why Section 742(a) of the Dodd-Frank Act does not apply to them (and their
business operations). See Defs.’ Mot. To Dismiss [DE 33]; see also Defs.’ Resp.
in Opp’n to Pl.’s Mot. for Prelim. Inj. [DE 36]. However, the district court found
jurisdiction over the Appellants (via Section 742(a) of the Dodd-Frank Act) despite
the Appellants’ numerous arguments; yet, the district court has failed to directly
and specifically address why the Appellants’ legal arguments were inadequate or
incorrect. See Injunctive Order 19–20 [DE 79]. Moreover, the district court
misstates that the Appellants’ Response to the Plaintiff’s Motion for Preliminary
Injunction raises different jurisdictional arguments than those raised within the
Appellants’ Motion to Dismiss the Plaintiff’s Complaint. Injunctive Order 19 n.29
[DE 79]. The district court utilizes this mischaracterization to avoid the substantial
jurisdictional issues raised by the Appellants, constructs no legal analysis to
address these substantial jurisdictional issues, and then issues the Injunctive Order
granting a preliminary injunction against the Appellants (stating that the district
court will address these substantial jurisdictional issues within its order regarding
the Appellants’ Motion to Dismiss the Plaintiff’s Complaint).3 Id.
3 As of the date for filling this Principal Brief with the U.S. Eleventh Circuit
Court of Appeals, the Appellants’ Motion to Dismiss has been fully briefed before
the U.S. District Court for the Southern District of Florida for 115 days (as of June
10), yet the district court has not issued an order regarding the Appellants’ Motion.
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Argument
I. Definition of Leveraged, Margined, and Financed Transactions
In order for the CFTC to hold jurisdiction over a transaction under Section
2(c)(2)(D), the transaction must be “any agreement, contract, or transaction in any
commodity,” and involve a transaction which is “entered into, or offered . . . on a
leveraged or margined basis, or financed . . . on a similar basis.” 7 U.S.C. §
2(c)(2)(D)(i)(II). The phrase “on a leveraged or margined basis” is not defined
under Section 2(c)(2)(D); however, that phrase is defined elsewhere in the CEA,
and by the CFTC within its regulations. The phrase “on a leveraged or margined
basis” is the same language as presented in Section 19 of the CEA. See 7 U.S.C. §
23. Consequently, the inquiry begins with a determination of the meaning of the
phrase “on a leveraged or margined basis” as applied under the provisions of the
CEA (specifically, Section 19(a) of the CEA). See 7 U.S.C. § 23(a). See also
Gustafson v. Alloyd Company, Incorporated, 513 U.S. 561, 568, 115 S.Ct. 1061,
1066 (1995) (statutory terms should be construed consistently throughout the
statute).
A. The Meaning of “Leveraged” and “Margined” Under the CEA
The plain language of Section 19 (i.e., 7 U.S.C. § 23), regulations
promulgated by the CFTC, relevant case law, and opinions issued by the CFTC,
See Defs.’ Mot. to Dismiss [DE 33]. However, the Injunctive Order remains in
effect against the Appellants. See Injunctive Order [DE 79].
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make it clear that the term “margin account, margin contract, leverage account, or
leverage contract” are utilized synonymously to define the type of long-term
standardized4 contract governed by the CEA. See 7 U.S.C. §§ 23(a)–(b); 17 C.F.R.
§ 31.4 (2012); CFTC v. American Precious Metals, 845 F.Supp.2d 1279 (S.D. Fla.
2011);5 CFTC v. 20/20 Trading Comp., Inc., 2011 WL 2221177 (C.D. Cal. June 7,
2011).6 Therefore, and according to the CFTC’s rules and regulations, and as
interpreted by American Precious Metals and 20/20 Trading Comp., Inc., a
4
In organized futures markets, people buy and sell contracts, not
commodities. Terms are standardized, and each party's obligation
runs to an intermediary, the clearing corporation. All contracts that
expire in a given month are identical; each calls for delivery of the
same commodity in the same place at the same time. Forward and
spot contracts, by contrast, call for sale of the commodity; no one
deals "in the contract"; it is not possible to close a position by
buying a traded offset, because promises are not fungible; delivery
is idiosyncratic rather than centralized.
CFTC v. Zelener, 373 F.3d 861, 865–66 (7th Cir. 2004).
5 In CFTC v. American Precious Metals, the court held that the transactions at
issue, lasted for terms of only five (5) years; and thus, these transactions do not fall
under the definition of “margin account, margin contract, leverage account, or
leverage contract” as promulgated by the CFTC under its regulations. [845
F.Supp.2d 1279, (S.D. Fla. 2011),] 1284. The court deferred to the CFTC’s prior
position embodied in its regulations stating that a “margin account, margin
contract, leverage account, or leverage contract” is a transaction which has a
duration of ten (10) years or longer. Id. at 1287.
6 The metals contracts at issue before the court in 20/20 Trading Corp., Inc. were
the precise contracts before the district court in this matter. See Defs.’ Reply to
Pl.’s Resp. and Opp’n to Defs.’ Mot. to Dismiss 6 [DE 73]; see also Riggio Decl.
Exh. B ¶¶ 3.1–3.2 [DE 35-2], (four year duration).
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transaction cannot be “leveraged” and/or “margined” unless the transaction is
standardized as to its terms and consists of a time duration of at least ten (10)
years. See 17 C.F.R. §§ 31.4(w)–(x).
Section 19(a) of the CEA grants the CFTC jurisdiction over:
A standardized contract commonly known to the trade as a
margin account, margin contract, leverage account, or leverage
contract, or under any contract, account, arrangement, scheme,
or device that the Commission determines serves the same
function or function as such a standardized contract, or is
marketed or managed in substantially the same manner as such a
standardized contract.
7 U.S.C. § 23(a) (emphasis added). While Congress declined to define the
meaning of “leverage” and/or “margin” under the CEA, the CFTC has issued
comprehensive regulations to govern leverage/margin transactions, and in doing
so, set forth a narrow definition of a leverage/margin transactions within CFTC
Regulation 31.4. CFTC Regulation 31.4(x) defines a “leverage transaction” as
“the purchase or sale of any leverage contract, the repurchase or resale of any
leverage contract, the delivery of the leverage commodity, or the liquidation or
rescission of any such leverage contract by or to the leverage transaction
merchant.” 17 C.F.R. § 31.4(x) (emphasis added). Therefore, according to the
CFTC’s own definition, a “leverage transaction” must involve a “leverage
contract.” Furthermore, CFTC Regulation 31.4(w) defines a “leverage contract” as
“a contract, standardized as to terms and conditions, for the long-term (ten years or
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longer) purchase (‘long leverage contract’) or sale (‘short leverage contract’) by a
leverage customer of a leverage commodity. . . .” 17 C.F.R. § 31.4(w) (emphasis
added).7 The CFTC stated that by defining a “leverage contract” in CFTC
Regulation 31.4(w), the CFTC had “exercised its authority to specify the
standardized contracts that Congress expected to be regulated under Section 19 of
the [CEA] and are not subject to Commission registration and regulation pursuant
to Part 31.” Regulation of Certain Leverage Transactions, 49 Fed. Reg. 5498-01, at
5498 (CFTC Feb. 13, 1984) (emphasis added).8 A metals transaction that lacks
7 According to case law, “[u]nder the [CFTC]’s interpretation of the [CEA], there
can be no such thing as a leverage contract with a duration of less than ten years.”
CFTC v. P.I.E., Inc., 853 F.2d 721, 724 (9th Cir. 1988); First Nat’l Monetary Corp.
v. CFTC, 860 F.2d 654, 658 (6th Cir. 1988) (determining that the metal firm’s
“contracts would not constitute leverage contracts under the [ ] [CFTC’s]
regulations because, inter alia, they fail to satisfy the durational requirement (ten
years or longer). . . .).
8 Additionally, the CFTC issued Interpretative Letter No. 85-2 which
contemplated whether certain transactions involving the purchase and sale of
precious and industrial metals qualified as leverage contracts under 7 U.S.C. § 23
or futures contracts under 7 U.S.C. § 6(a), and were therefore subject to regulation
under the CEA. Bank Activities Involving the Sale of Precious Metals, Comm.
Fut. L. Rep. (CCH) ¶ 22,673 (CFTC Aug. 6, 1985). As the CFTC’s General
Counsel declared: “In analyzing whether these transactions are subject to
regulation under the [CEA], it is necessary to determine whether the transactions
may be either leverage contracts [or] transactions involving contracts of sale of a
commodity for future delivery within the meaning of the [CEA] and applicable
Commission regulations.” Id. at 2. The facts surrounding the transactions at issue
in this opinion letter were: (i) dealers would purchase precious metals from a bank,
(ii) the bank would either deliver the metals to the dealer or segregate them in
holding vaults, (iii) the dealer would resell the metals to retail customers in
exchange for full payments or payments pursuant to a financing agreement that
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standardized terms or is less than ten (10) years in duration is not a transaction
conducted on a leveraged/margined basis.
B. The Effect of the Phrase “Financed . . . on a Similar Basis”
With the meaning of leveraged/margined transactions settled, now the
inquiry becomes what is the result of the phrase “financed . . . on a similar basis.”
See 7 U.S.C. § 2(c)(2)(D)(i)(II). Section 742(a) of the Dodd-Frank Act states it
applies to “any agreement, contract, or transaction in any commodity . . . entered
into, or offered . . . on a leveraged or margined basis, or financed . . . on a similar
basis.” Dodd-Frank Act, § 742(a)(i)(II); 7 U.S.C. § 2(c)(2)(D)(i)(II) (emphasis
added). Congress could have defined the phrase “on a leveraged or margined
basis, or financed . . . on a similar basis” when drafting the legislation, or the
CFTC could have defined the phrase by promulgating new regulations; however,
neither Congress nor the CFTC has taken action to define the significance of this
phrase. Therefore, the courts, attorneys, and business entities are left with the
were completed within two (2) to seven (7) business days, and (iv) the dealer
would direct the bank to transfer title of the metals to the customers. Id. at 1. In
the CFTC’s opinion, the transactions did not qualify as leverage contracts, and
therefore did not fall under the CFTC’s jurisdiction, because they were not ten (10)
years or more in duration as required by CFTC Regulation 31.4(w). Id. Moreover,
the CFTC determined the transactions were not “futures contracts” because
payment for the precious metal is completed within two (2) to seven (7) days and
transfer of title to this metal is completed upon this payment; thus, the translation
lacks futurity. Id. at 2–3. The fact that the purchase of the precious metal is made
in-full by the purchaser or financed by a third-party is irrelevant to determine if
the transaction is a “futures contract.” See id. at 1–3 (emphasis added).
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definitions of CFTC Regulation 31.4 for legal guidance in determining the
significance of the phrase “on a leveraged or margined basis, or financed . . . on a
similar basis.”
From a practical standpoint, the difference in terminology between
“leveraged,” “margined,” and “financed” is insignificant in regards to the
underlying precious and industrial metals transactions. In certain industries, there
is a distinction made between the terms, but within the industry in which the
Appellants operate (i.e., buying and selling precious and industrial metals), the
three terms are interchangeable equivalents as established by the language of
Section 2(c)(2)(D)(i)(II) of the CEA. Additionally, the CFTC makes use of the
disjunctive “or” when discussing the Appellants’ transactions, Compl. ¶¶ 27, 31,
102, 107 [DE 1], and specifically, when discussing the transactions, the CFTC
states that Appellants engaged in such sales of “precious metals on a leveraged or
financed basis between March 22, 2010 and the present.” Compl. ¶ 102 [DE 1]
(emphasis added). In its Complaint, the CFTC utilizes the terms “leveraged” and
“financed” interchangeably. The CFTC is treating the terms leveraged, margined,
and financed as synonymous, interchangeable terms (which is the correct result
given the express language of Section 742(a) of the Dodd-Frank Act and the legal
history of Section 19 of the CEA). See Dodd-Frank Act, § 742(a)(i)(II); 7 U.S.C. §
2(c)(2)(D)(i)(II).
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Congress’s choice to utilize these same terms, when creating Section 742(a) of the
Dodd-Frank Act, indicates that the definition of leverage/margin under Section
742(a) applies to precious and industrial metal transactions in a like manner as
Section 19 of the CEA.9 See Morissette v. U.S. , 342 U.S. 246, 263, 72 S.Ct. 240,
250 (1952) (noting that where Congress borrows terms of art it “presumably knows
and adopts the cluster of ideas that were attached to each borrowed word”). As the
U.S. Supreme Court has said, while statutory interpretation is a “holistic
endeavor,” meaning that extrinsic evidence can be considered as a part of the
process, the statutory interpretation “[b]egins, as always, with the text of the
statute.” Hawaii v. Office of Hawaiian Affairs, 556 U.S. 163, 173, 129 S.Ct. 1436;
1443 (2009); Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 60, 125 S.Ct.
460, 466–67 (2004). But, a word gathers meaning from the words around it, from
its context, and setting. Babbitt v. Sweet Home Chapter of Communities for a
9 “The analysis begins, as with the interpretation of any legislative enactment,
with the language of the Act, and if that conclusively reveals Congress’s intent, the
analysis ends. In arriving at the plain meaning, we apply long recognized
principles of interpretation. We assume that the legislature used words that meant
what it intended; that all words had a purpose and were meant to be read
consistently; and that the statute’s true meaning provides a rational response to the
relevant situation. Conversely, we presume that language added by amendment
was not mere surplusage; that undefined terms mean no more than the language
imports; and that a statute is not self-contradictory or otherwise irrational. The
interpretive process is thus a holistic endeavor to derive intent from statutory
language and structures.” Salomon Forex, Inc. v. Tauber, 8 F.3d 966, 975 (4th Cir.
1993).
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Great Oregon, 515 U.S. 687, 694 –95, 115 S.Ct. 2407, 2411–12 (1995).10
Thus,
the doctrine of noscitur a sociis arises and interpretation of the new statute must
recognize that a word is given more precise meaning from its neighboring words
because the connection with which words and phrases are used in statutes affects
their meaning.11
Freeman v. Quicken Loans, Inc., __ U.S. __, __, 132 S.Ct.
2934, 2042 (2012); U.S. v. Williams, 553 U.S. 285, 294 –95, 128 S.Ct. 1830, 1839
–40 (2008). Courts interpret words in a statute by the company they keep and a
string of statutory terms raises the presumption that words grouped in a list should
be given a related meaning. S.D. Warren Co. v. Maine Bd. of Environmental
Protection, 547 U.S. 370, 378–79, 126 S.Ct. 1843, 1949 (2006).
When drafting Section 742(a) of the Dodd-Frank Act, Congress was aware
of the definition of “leverage” and “margin” under the CEA. See Nat’l Treasury
Employees Union v. Chertoff, 452 F.3d 839, 857 (D.C. Cir. 2006) (stating that
10
It is a fundamental canon of statutory construction that the words of a statute
must be read in their context and with a view to their place in the overall statutory
scheme. Hibbs v. Winn, 542 U.S. 88, 101, 124 S.Ct. 2276, 2285–86 (2004);
Owasso Indep. Sch. Dist. No. I-011 v. Falvo, 534 U.S. 426, 434, 122 S.Ct. 934,
939-40 (2002).
11
The words in a statute that can have more than one meaning are given content
by their surroundings, and any unclear or ambiguous terms or phrases in a statute
may take meaning from the surrounding terms which are defined. Mohamad v.
Palestinian Authority, 132 S.Ct. 1702, 1708 (2012); U.S. v. Stevens, 130 S.Ct.
1577, 1588–90 (2010).
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“[t]here is a presumption that Congress uses the same term consistently in different
statutes”). Congress drafted Section 742(a) of the Dodd-Frank Act, including the
terms leveraged, margined, and financed in one phrase to describe the type of long-
term standardized transactions (i.e., transactions with a duration of ten years and
longer) that Congress intended to place under the CFTC’s jurisdiction.
Furthermore, the CFTC has not altered its express definition of the terms
“leverage” and “margin” transactions, nor did the CFTC promulgated a new
regulation expressly defining the phrase “on a leveraged or margined basis, or
financed . . . on a similar basis” to mean anything separate from the existing
definition of “leverage” and “margin” transactions. Therefore, the Appellants do
not fall under the jurisdiction of 2(c)(2)(D) because Section 742(a) (which created
Section 2(c)(2)(D)) applies only to “financed” transactions that operate in a similar
manner to leveraged/margined transactions, which the Appellants’ transactions are
not, never having a duration that exceeds ten (10) years.
C. The CFTC’s Interpretation of “Leveraged,” “Margined,” and
“Financed” is Controlled by the Chevron Deference Doctrine
The Chevron deference doctrine holds that an agency’s formal
interpretations of its own rules, regulations, and statutes are presumptively correct,
while arguments made by the agency in litigation are not entitled to deference.
Thus, the CFTC is bound by its formal interpretations and cannot invent
convenient arguments in litigation to defeat its previous interpretations. See
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Chevron, U.S.A. , Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 104 S.Ct.
2778 (1984). . Under the Chevron deference doctrine, “[w]hen an agency
interprets a statute that the agency is responsible for administering, courts must
give the agency’s interpretation due deference if (1) Congress has delegated
interpretive authority to the agency; (2) the statute is silent or ambiguous with
respect to the issue at hand; and (3) the agency’s interpretation of the statute is
reasonable.” Sierra Club, Inc. v. Leavitt, 488 F.3d 904, 911–12 (11th Cir. 2007)
(citing Chevron, 467 U.S. at 843). The courts must resolve a statutory ambiguity
by “look[ing] first to the agency regulations, which are entitled to deference if they
resolve the ambiguity in a reasonable manner.”
Coeur Alaska, Inc. v. Southeast Alaska Conservation Council, 557 U.S. 261, 277-
78, 129 S.Ct. 2458, 2469 (2009). Therefore, the CFTC is precluded from
expanding its jurisdiction under the CEA by re-writing its prior, formal
interpretations during this litigation. See, e.g., Bowen v. Georgetown Univ. Hosp.,
488 U.S. 204, 213, 109 S.Ct. 468, 474 (1988) (holding that courts have recognized
that “[d]eference to what appears to be nothing more than an agency’s convenient
litigating position would be entirely inappropriate.” The Chevron deference
doctrine applies to this case because the CFTC is construing a jurisdictional
provision of the CEA — a statute it is responsible for administering.
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Udall v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 801 (1965) (noting that Congress
has charged the CFTC with administration of the CEA).
In CFTC v. P.I.E., Inc., the court demonstrated how the Chevron deference
doctrine applies to the CFTC’s interpretations of the CEA by holding that the
CFTC had a basis for its determination of the “margin account, margin contract,
leverage account, or leverage contract” definition and, therefore, the court would
not now invalidate the definition. 853 F.2d 721, 724 (9th Cir. 1988). It is
undisputed that Congress delegated to the CFTC the authority to define the type of
contracts that are “margin accounts, margin contracts, leverage accounts, or
leverage contracts” under the CEA. Id. That delegation led to CFTC Regulation
31.4, which expressly and clearly states that only leveraged/margined transactions
with a duration of ten (10) years or more are within the CFTC’s jurisdiction under
the CEA. Id.
The metal transactions executed by the Appellants cannot be leveraged,
margined, or financed transactions because they are not standardized, and do not
have a duration of ten (10) years or longer. The CFTC is not permitted to change
its formal definitions within its current litigations to create a convenient litigation
position. Because Section 2(c)(2)(D)(i)(II) utilizes the phrase “financed . . . on a
similar basis” (which directly relates back to its neighboring words of “on a
leveraged or margined basis”), and the CFTC has previously defined the terms
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leveraged/margined under CFTC Regulation 31.4, the CFTC is required to respect
its formal interpretation. Therefore, this Court must apply the CFTC’s formal
definition of a leverage/margin transaction to also define the phrase “financed on a
similar basis” and hold that the CFTC fails to possess jurisdiction via Section
2(c)(2)(D) over the Appellants’ transactions. See 7 U.S.C. § 2(c)(2)(D)(i)(II).
D. The District Court Erred in its Determination Regarding the
Application of Section 2(c)(2)(D)(i)(II) of the CEA
The district court addressed the Appellants’ arguments regarding the phrase
“on a leveraged or margined basis, or financed . . . on a similar basis” in one short
paragraph within the Injunctive Order. Injunctive Order 19 [DE 79]. The district
court substantially misunderstands the Appellants’ argument, stating that the
Appellants’ argument “ignores the language of the amendment [Section
2(c)(2)(D)], which encompasses transactions on a financed basis.” Id. In fact, the
Appellants have substantially acknowledged the term “financed” in their filed
court papers and during oral argument to the district court. Defs.’ Mot. to Dismiss
¶¶ 29, 33, 35–40 [DE 33]; Defs.’ Reply to Pl.’s Resp. and Opp’n to Defs.’ Mot. to
Dismiss 5–6 [DE 73]; Prelim. Inj. Hr’g Tr. 34:4–8, 35:16–22, 37:1–5, 48:14–49:11
[DE 86]. The district court, however, focused solely on the term “financed” in a
vacuum and ignores Appellants’ argument that the term “financed” must be viewed
in conjunction with the phrase “on a similar basis” and thus, in light of its
neighboring words “on a leveraged or margined basis.” Injunctive Order 19 [DE
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79]; Defs.’ Mot. to Dismiss ¶¶ 29, 33, 35–40 [DE 33]; Defs.’ Reply to Pl.’s Resp.
and Opp’n to Defs.’ Mot. to Dismiss 5–6 [DE 73]; Prelim. Inj. Hr’g Tr. 34:4–8,
35:16–22, 37:1–5, 48:14–49:11 [DE 86]. The district court fails to address the
Appellants’ argument that the phrase “financed . . . on a similar basis” directly
relates back to its neighboring words of “on a leveraged or margined basis;” and
therefore, the terms leveraged, margined, or financed under Section 2(c)(2)(D) are
all interchangeable, synonymous words that refer to transactions which are
standardized and of a duration lasting ten (10) years or longer.
The Appellants business does not fall under the jurisdiction of Section
2(c)(2)(D) of the CEA because the Appellants do not engage in transactions
satisfying the definition of leveraged, margined, and/or financed. See 7 U.S.C. §
2(c)(2)(D)(i)(II). Therefore, the Appellants respectfully request this Court to
reverse the Interlocutory Order granting a Preliminary Injunction because the
CFTC has failed to demonstrate a “reasonable probability of ultimate success upon
the question of jurisdiction when the action is tried on the merits.” ETS
Payphones, 408 F.3d at 731.
II. The “Actual Delivery” Exception
Section 2(c)(2)(D)(ii) creates five exceptions to its own statutory coverage.
Dodd-Frank Act, § 742(a)(ii)(I)–(V); 7 U.S.C. §§ 2(c)(2)(D)(ii)(I)–(V). One of
these exceptions, entitled the “actual delivery” exception, directly contemplates the
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Appellants’ transactions; yet, this exception has been inappropriately cast aside as
an afterthought by the CFTC as “not applicable here.” Complaint 8 ¶ 27 [DE 1].
Furthermore, the exception was not addressed by the court in the February 25,
2013 Preliminary Injunctive Order [DE 79] other than to say because Hunter Wise
did not really have metal inventory, they could not deliver. The finding, however,
of whether Hunter Wise owned metal inventory requires analysis on whether
Hunter Wise’ methodology of buying inventory, in accordance with the terms of
the Uniform Commercial Code (“U.C.C.”), from its suppliers, were purchases of
inventory.12
The “actual delivery” exception states, “[t]his subparagraph shall not apply
to a contract of sale that results in actual delivery within 28 days or such other
longer period as the Commission may determine . . . based upon the typical
commercial practice in cash or spot markets.” Dodd-Frank Act, §
742(a)(ii)(III)(aa); 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa) (emphasis added). The term
“actual delivery” is not defined under the CEA (or under any case law related to
the CEA); however, the CFTC has recently issued guidance defining the term
12
The court relies on the declarations of Thor Gjurdrum of A-Mark, [DE 4-17],
and Albertus Marteens of Standard Bank, [DE 4-17 and 4-18], who contrary to the
terms of the contracts attached to their declarations claim that although they sold
metals to Hunter Wise “title” did not pass. The passage of title, however, is a legal
determination, not a layman’s estimation.
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“actual delivery” under Section 2(c)(2)(D)(ii)(III)(aa) of the CEA.13
See Retail
Commodity Transactions under the Commodity Exchange Act Section 2(c)(2)(D),
76 Fed. Reg. 77670-02 (CFTC, Dec. 14, 2011) [hereinafter 76 Fed. Reg. 77670-
02]. However, the CFTC’s “guidance” is inherently flawed because it is in direct
contravention with the U.C.C. and Congress’s intent when enacting Section 742(a)
of the Dodd-Frank Act.
A. The CFTC’s Interpretation of “Actual Delivery” is Directly Contrary
to the Uniform Commercial Code
The CFTC Regulation attempts to define the term “actual delivery” to be the
functional equivalent of the term “physical delivery.” See 76 Fed. Reg. 77670-02.
The CFTC states that “actual delivery” will be accomplished if the seller (1) has
physically delivered the entire quantity of the commodity purchased by the buyer
into the possession of the buyer (plus transferred title of the commodity to the
buyer), or (2) physically placed the commodity into the possession of a depository
13
The CFTC originally issued its proposed interpretation of how the term “actual
delivery” within this new Section 2(c)(2)(D)(ii)(III)(aa) of the CEA will be
construed by the CFTC. See CFTC Interpretive Letter, Retail Commodity
Transactions under Commodity Exchange Act Section 2(c)(2)(D), Interpretation;
Request for Comments, RIN 3038-AD64 (CFTC Office of General Counsel, Dec.
1, 2011). Although “actual delivery” was scheduled to be discussed at the CFTC’s
open meeting on December 5, 2011, it was later announced in a CFTC press
release on December 2, 2011 that “[t]he Commission voted on the Interpretation,
and will no longer consider the item at the open meeting on December 5.” See
CFTC Release PR6151-11 (Dec. 2, 2011). Essentially, the CFTC decided to
ignore many public comments regarding the construction of the term “actual
delivery” under Section 2(c)(2)(D)(ii)(III)(aa).
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not affiliated with the seller (plus transferred title of the commodity to the buyer
and in each case the delivery, being required must include any portion of the
purchase made using leverage, margin or financing).14
See 76 Fed. Reg. 77670-02,
at 77672. Given the CFTC’s interpretation of the term “actual delivery,”
Congress’s statutory exception under Section 2(c)(2)(D)(ii)(III)(aa) is completely
irrelevant unless the seller physically delivers the commodity to the buyer or the
buyer’s depository within twenty-eight (28) days of the initial purchase/sale
transaction.15
See 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa); 76 Fed. Reg. 77670-02. The
CFTC’s interpretation of the term “actual delivery” is incorrect and impracticable;
and furthermore, it is in direct conflict with the U.C.C., and thus does not meet the
14
According to the CFTC’s interpretation, “actual delivery” will not occur if the
seller fails to make physical delivery of the commodity even though: (1) the seller
has created a book entry that the purchase of the commodity by the buyer has been
covered or hedged by the seller through a third party contract; (2) the seller
transferred title to the buyer but the title document fails to identify the physical
location of the commodity, the quality specifications of the commodity, the
identity of the party transferring title of the commodity, and the
segregation/allocation status of the commodity; or (3) the seller rolls-over, off-sets,
or nets-out the purchase of the commodity with another transaction or settles in
cash with the buyer. 76 Fed. Reg. 77670, at 77672.
15 It seems odd that the Commission would be attempting to define “actual
delivery” to signify the same as “physical delivery” when Congress could have
made use of the term “physical delivery” when drafting Section 742(a) of the
Dodd-Frank Act (i.e., Section 2(c)(2)(D) of the CEA). The Model State
Commodity Code made sure to use the term “physical delivery” within the
statutory language, see Model State Commodity Code § 1.04(a)(2), and this Model
State Commodity Code predates the drafting and implementation of Section 742(a)
of the Dodd-Frank Act (i.e., Section 2(c)(2)(D) of the CEA) by many years.
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7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa) standard imposed upon the CFTC that any rule it
promulgates concerning delivery must be based upon the typical commercial
practice in cash or spot markets for the commodity involved.16
Section 2(c)(2)(D)(ii)(III)(aa) states, “based upon the typical commercial
practice in cash or spot markets for the commodity involved.” 7 U.S.C. §
2(c)(2)(D)(ii)(III)(aa). Additionally, within Section 743 of the Dodd-Frank Act,
Congress expressly and specifically preserved any applicable State law by
declaring that “unless otherwise provided by the amendments made by this
subtitle, the amendments made by this subtitle do not divest any appropriate . . .
Federal or State agency of any authority derived from any other applicable law.”17
See Dodd-Frank Act § 743. From these two phrases, it can be logically deduced
that Section 742(a) of the Dodd-Frank Act, Section 2(c)(2)(D) of the CEA, does
not intend to override State law regarding the purchase/sale of commodities, such
16
The CFTC’s interpretation (i.e., 76 Fed. Reg. 77670-02) attempts to define
what is meant by the Section 2(c)(2)(D)(ii)(III)(aa) obligation of “actually
delivery.” Yet, Section 2(c)(2)(D)(ii)(III)(aa) does not by its own express language
give the CFTC the authority to define what is, or what is not, “actual delivery”
under the CEA. Rather, that statutory provision only provides the CFTC with the
authority to lengthen the delivery term, but no other regulatory rights are given to
the CFTC, to wit, “results in actual delivery within 28 days or such other longer
period as the Commission may determine by rule or regulation based upon the
typical commercial practice in cash or spot markets for the commodity involved.”
7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa).
17 The “subtitle” referenced in Section 743 of the Dodd-Frank Act is “Subtitle A—
Regulation of Over-the-Counter Swaps Markets” which includes both Section 742
and Section 743.
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as the U.C.C. (specifically in this case, for example: Article 1 – General
Provisions, Definitions, and Rules; Article 2 – Sale of Goods; and Article 7 –
Storage and Bailment of Goods). Hence, any claim by the CFTC that Section
742(a) of the Dodd-Frank Act was intended to pre-empt (and therefore override)
all other Federal and State laws regarding commodity transactions is entirely
incorrect. See Pl.’ Resp. in Opp’n to Defs.’ Mot. to Dismiss 4 n.6 [DE 63].
The CFTC’s interpretation of the term “actual delivery” is at odds with the
term “delivery” as defined under the U.C.C. Article 2. The U.C.C. Article 2
defines “delivery” as “the voluntary transfer of physical possession or control of
goods.” U.C.C. § 2-103(1)(e). Thus, all that is required under the U.C.C. Article 2
to effectuate a “delivery” is to have a voluntary transfer of either physical
possession or control of the goods, and the “delivery” of the goods under the
U.C.C. Article 2 may be accomplished via electronic documents. See U.C.C. §§ 1-
201(b)(15); 1-201(b)(16); 1-201(b)(18); 2-308(b); 2-401(1); 2-401(3); 2-403(1); 2-
501(1); 7-102(a)(10); 7-106(a); 7-504(a). Therefore, pursuant to the U.C.C.,
“delivery” is completed where there is a voluntary passing of “control” over the
electronic documents that represent the goods.18
See U.C.C. § 7-106(a) (stating
18
“A transferee of a document of title, whether negotiable or nonnegotiable, to
which the document has been delivered but not duly negotiated, acquires the title
and rights that its transferor had or had actual authority to convey.” U.C.C. § 7-
504(a) (emphasis added).
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that a person has “control” of an electronic document of title if the system in which
the electronic document is maintained “reliably establishes that person as the
person to which the electronic document was issued or transferred”).
Additionally, U.C.C. Article 1 states that delivery “with respect to an
instrument, document of title, or chattel paper, means voluntary transfer of
possession.” U.C.C. § 1-201(b)(15). A “document of title” is defined as any
document: (i) “which in the regular course of business or financing is treated as
adequately evidencing that the person in possession of it is entitled to receive, hold,
and dispose of the document and the goods it covers,” and (ii) “purport[s] to be
issued by or addressed to a bailee and purport[s] to cover goods in the bailee’s
possession which are either identified or are fungible portions of an identified
mass.”19
U.C.C. § 1-201(b)(16). Specifically, an electronic document of title
means any document of title evidenced by a record consisting of information
stored in an electronic medium (such as the Appellants’ 24-hour a day electronic
Portal) and does not have to be a hardcopy written document but can also be such
documents as the Appellants trade confirmations, delivery notices or monthly
statements. See U.C.C. §§ 1-201(b)(16); 7-102(a)(10). Such electronic tracking
and notice of sales versus inventories is the “typical commercial practice in cash or
19
The term “bailee” is defined as any person “that by a warehouse receipt, bill of
lading, or other document of title acknowledges possession of goods and contracts
to deliver them.” U.C.C. § 7-102(a)(1) (emphasis added).
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spot markets for the commodity [i.e., metals] involved” as provided for by
Congress. See 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa).
Furthermore, U.C.C. Article 2 provides that when “delivery” is to be made
without moving the goods, if the goods are at the time of contracting already
identified and no documents of title are to be delivered, title to the goods passes at
the time and place of contracting.20
U.C.C. § 2-401(3)(b). Although the Retail
20
The stipulation to this concept is that in order for title to pass, the goods must
be identified. See U.C.C. § 2-401(1). Identification is the process that transforms
unascertained goods into specific goods so they become the goods to which the
contract refers. See In Re Ashby Enters. Ltd., 262 B.R. 905, 912 (Bankr. D. Md.
2001). Once the goods exist, identification may be made in any manner “explicitly
agreed to by the parties.” U.C.C. § 2-501(1). In the absence of an explicit
agreement between the parties, then identification occurs when “the contract is
made if it is for the sale of goods already existing and identified.” U.C.C. § 2-
501(1)(a). This may seem a bit confusing, but what it all means is that no special
identifying step need be taken where the goods are in existence and identified
when the contract is created because goods recognized by both the buyer and seller
as being the subject matter of the transaction have already passed through the
process of identification (and it would be a nonsensical formalism to require yet
another act to make these goods known as those covered by the contract).
In fact, the U.C.C. does not place real importance upon the concept of
identification, and provides that “the general policy is to resolve all doubts in favor
of identification [occurring].” U.C.C. § 2-501, cmt. 2. And when it comes to
fungible goods, an undivided share in an identified bulk of fungible goods is
sufficiently identified to be sold although the quantity of the bulk is not
determined, and any agreed proportion of a fungible bulk agreed upon by weight or
number or any other measure is enough to effectuate a sale. U.C.C. § 2-105(4).
Finally, in an official comment, the U.C.C. Article 2 expressly provides:
Undivided shares in an identified fungible bulk, such as grain in
an elevator or oil in a storage tank, can be sold. The mere
making of the contract with reference to an undivided share in
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Dealers do not obtain physical possession of the purchased metal if the transaction
is financed through the Appellants, delivery is made “as an undivided share of a
fungible lot and held in safekeeping on a fungible basis with the commodities of
other Depository Dealers.”21
Thus, the Appellants transfer the control of goods via
the contractual right of the retail dealers to obtain the metal upon paying the
purchase price in-full.22
Furthermore, the physical possession of the metal is not
with the Appellants; but rather, physical possession of the metal is placed with the
secured depository. “Actual delivery” is possible — and is always made —
because the Appellants either have physical metal on hand, or have enforceable
obligations with several institutions for the supply of metal. Because the metals
an identified fungible bulk is enough under [Section 2-501(a)] to
effect an identification if there is no explicit agreement
otherwise.
U.C.C. § 2-501, cmt. 5.
21
The definition of “fungible goods” under the U.C.C. is stated as: “(A) goods of
which any unit, by nature or usage of trade, is the equivalent of any other like unit;
or (B) goods that by agreement are treated as equivalent.” U.C.C. § 1-201(b)(18).
22
The physical possession of the metal remains with the secured depository (and
not the Appellants) unless the client pays the purchase price of the metal in-full
and requests physical delivery of the metal to a specific location. However, upon
the execution of the contract, the client gains the economic control of the metal
regardless of the payment method because the client holds the contractual right to
the metal, including all the benefits and burdens of owning such metal. Therefore,
according to the U.C.C. the title to the metal passes at the time and place of
contracting (and thus, the delivery requirement is satisfied). See U.C.C. §§ 2-
103(1)(e); 2-308(b); 2-401(3)(b).
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are to be delivered without being moved, title to the metals passes “at the time and
place of contracting,” and no acknowledgment by the Suppliers or the Appellants
is needed to effectuate the transfer of title and ownership of the metals to the
customers. See U.C.C. § 2-401(3)(b).
Therefore, under U.C.C. Article 2, which has been substantially adopted by
every State, and is the leading authority on commercial transactions worldwide,23
the concept of “delivery” can be accomplished in ways other than physically
picking-up the commodity that was purchased/sold and transferring it into the
physical possession of the buyer. See, e.g., Circuit City Stores, Inc. v.
Commissioner of Revenue, 790 N.E.2d 636, 638–39 (Mass. 2003) (holding that the
defendant had performed its delivery obligations when the sale was entered as an
alternative location sale into Circuit City’s DPS system and the purchased
merchandise was “reserved” for the customer at the designated location);
American Petrofina, Inc. v. PPG Industries, Inc., 679 S.W. 2d 740, 751–53 (Tex.
App. 2d Dist. 1984) (stating that when oil was purchased, but for convenience was
retained at the facility of the oil producer, ownership of the oil transferred at the
23
See United Nations Convention on Contracts for the International Sale of
Goods (CISG), S. Treaty Doc. No. 9, 98th Cong., 1st Sess. 22 (1983), reprinted at
15 U.S.C. App. 52 (2012). This United Nations Convention has been adopted by
the United States (and many other countries which are trading partners with the
United States) and is a multilateral treaty that governs the rights and obligations of
parties to international sales contracts, so it is the international, and functional,
equivalent of the U.C.C. Article 2, Sale of Goods employed by the States.
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time of contracting). See also Lawrence’s Anderson on the Uniform Commercial
Code, U.C.C. §§ 2-401:87–92 (3d ed., rev. 2002) (explaining that a seller is always
required to make delivery, but performance of this duty may range from merely
making the goods available to the buyer, shipping the goods to the buyer, or
transferring title to the goods without there being any delivery of either goods or
documents).
In Circuit City Stores, Inc., Circuit City was offering a sales option that
would allow a customer to purchase fungible merchandise at one store, but elect to
pick-up the merchandise at an alternative store location in an effort to save
customers money on sales tax. Id. at 637. The focus of the disagreement was
when the sale was actually executed; either when the customer placed and paid for
their order, or when the customer actually received physical possession of the
merchandise where the company was accepting payment in one state for
merchandise located in another state, while simultaneously “reserving” the
merchandise with understanding that the customer would take possession at his/her
convenience. Id. at 639–40. The court examined the Massachusetts Commercial
Code and held that the sale was executed, and title to the merchandise was
transferred to the customer, when payment occurred, and not when physical
possession of the goods was taken by the customer. Id. at 642. The court found
that the relevant inquiry centered not on the transfer of goods themselves, but
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instead whether the goods were placed within the actual or constructive possession
of another and provided, “[h]ere, Circuit City performed its obligations with
respect to delivery when the sale was entered as an alternative location sale into
Circuit City’s DPS system and the purchased merchandise was ‘reserved’ for the
customer at the designated location.” Id.
The Appellants’ business model operates in like-manner to that in the Circuit
City Stores case. While the issues before this Court and the Circuit City Stores
court are different from one another, the “delivery” concept is the same. After a
Retail Dealer places an order with the Appellants, an entry is recorded on the
books of the Appellants and the amount of metal that was purchased by the Retail
Dealer is transferred to the Retail Dealer’s account held with the Appellants.
Among other accounting documentation, a “Transfer of Commodity” document is
issued for every transaction that occurs, which details the amount and value of the
metal that was moved into (or out from) the account. Furthermore, in situations
where the customer purchased metal, the “Transfer of Precious and Industrial
Metal” (which form replaced the industry historical form “Transfer of
Commodity” notice after July 2012) evidences the proof that the customer can, at
any time, take physical possession of the metal, assuming the customer has paid-
off any financed portions of the purchase.
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Moreover, the Appellants’ transactions are in accord with Section 2-308 of
the U.C.C. Section 2-308(b) provides that, unless otherwise agreed upon by the
parties, in a contract for sale of identified goods that, at the time of contracting, are
in some other place than in the possession of the seller, that location is the place for
the delivery of such goods. U.C.C. § 2-308(b). See also Haken v. Scheffler, 180
N.W.2d 206, 207 (Mich. Ct. App. 1970) (holding that where the location of the
brick, stone, and mill irons were located on the seller’s farm, there was a delivery
of such “bulky goods” without the necessity of the buyer’s removal of the goods
from their original site). Furthermore, Official Comment 2 to this Section 2-308
provides the following:
Under paragraph (b) when the identified goods contracted for
are known to both parties to be in some location other than the
seller’s place of business or residence, the parties are presumed
to have intended that place to be the place of delivery. This
paragraph also applies . . . to a bulk of goods in the possession of
a bailee. In such a case, however, the seller has the additional
obligation to procure the acknowledgment by the bailee of the
buyer’s right to possession.
U.C.C. § 2-308, cmt. 2. Both the Appellants and its buyers are aware that the
metal (which is being purchased/sold) is securely located in one of the depositories
from which the Appellants purchase their supply of metal. There is no definitive
agreement between the parties as to a specific place for delivery, only that if the
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customer so chooses to have the metal physically delivered to a specified location,
the customer has that right (on the condition that the purchase price is paid in-full
prior to the metal being physically delivered).24
Consequently, the Appellants’
transactions satisfy the standards of the U.C.C. Article 2, and the CFTC has failed
to establish its jurisdiction over the Appellants in regards to the State law (e.g., the
U.C.C.) specifically preserved under the Dodd-Frank Act via Section 743. Compl.
¶¶ 7–9, 27, 31, 46, 50–52 [DE 1].
B. The CFTC’s Interpretation of “Actual Delivery” is Directly Contrary
to Congress’s Intent
The CFTC makes the bold assertion that its interpretative approach best
accomplishes Congress’s intent when it enacted Section 742(a) of the Dodd-Frank
Act, but cites no authority whatsoever in support of equating the words “actual”
and “physical.” See 76 Fed. Reg. 77670-02. In fact, the legislative history of the
Dodd-Frank Act indicates that Congress intended for the transactions executed by
the Appellants (and all transactions similar to those of the Appellants) to be
exempted from CFTC regulation. On May 20, 2010, the U.S. Senate passed H.R.
4173, and within the Senate’s version of Section 742(a) was the then (soon to be
rejected) subsection:
24
Also, the U.C.C. Article 2 states that “[s]ubject to these provisions and to the
provisions of Article 9, title to goods passes from the seller to the buyer in any
manner and on any conditions explicitly agreed on by the parties.” U.C.C. § 2-
401(1).
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(v) ACTUAL DELIVERY – For purposes of clause (ii)(III), the
term ‘actual delivery’ does not include delivery to a third party
in a financed transaction in which the commodity is held as
collateral.
Dodd-Frank Wall Street Reform and Consumer Protection Act, S. 4173, 111th
Cong., § 742(a)(2)(D)(v) (2010).25
This version of the bill was rejected by the
Conference Committee, which recommended the U.S. House version that did not
contain the spurious limitation on “actual delivery.” The accepted version by the
U.S. House accurately describes the exact transactions in which the Appellants
engage (i.e., the Appellants’ market transactions would be permitted in accordance
with the Conference Committee enactment which terminated the limitation upon
“actual delivery” within clause (v) of the U.S. Senate version of the bill).
The CFTC’s interpretation attempts to re-establish the rejected pre-
conference committee rule. See Morrison Enter., LLC v. Dravo Corp., 638 F.3d
594, 609 (8th Cir. 2011) (stating that the courts must “avoid interpreting a statute
in a manner that renders any section of the statute superfluous or fails to give effect
to all of the words used by Congress”). Consequently, the Appellants’ transactions
satisfy the definition of “actual delivery” under Section 2(c)(2)(D)(ii)(III)(aa) of
25
The Senate’s subpart “(v),” which was rejected, attempted to define the “actual
delivery” term in precisely the same manner the CFTC now attempts to define
“actual delivery” through its “guidance” statement in 76 Fed. Reg. 77670-02. The
CFTC should not be permitted to use a definition of actual delivery that was
specifically rejected by Congress. Food and Drug Admin. v. Brown & Williamson
Tobacco Corp., 529 U.S. 120, 132-133, 161, 120 S.Ct. 1291, 1299, 1315–16
(2000).
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the CEA; thus, the CFTC lacks jurisdiction over the Appellants because the
Appellants are exempt from Section 2(c)(2)(D)(i) of the CEA. Compl. ¶¶ 27, 31,
46, 50–52 [DE 1].
Moreover, we need to look no further than the Colorado Commodity Code,
one of the first states to adopt the Model State Commodity Code, as an example of
a legislative action which involved the explicit decision to differentiate between
“actual delivery” and “physical delivery.” The Colorado Commodity Code makes
use of the term “physical delivery” rather than the term “actual delivery.” See
COLO. REV. STAT. § 11-53-105 (2012). For example, the statute lists as an
exemption from the ban on all commodity transactions:26
A commodity contract for the purchase of one or more precious
metals which requires, and under which the purchaser receives,
within twenty-eight calendar days from the payment in good
funds of any portion of the purchase price, physical delivery of
the quantity of the precious metals purchased by such payment;
except that, for purposes of this paragraph (b), physical delivery
shall be deemed to have occurred if, within such twenty-eight-
day period: Such quantity of precious metals purchased by such
payment is delivered (whether in specifically segregated or
fungible bulk form) into the possession of a depository (other
than the seller). . . .
26
The ban on commodity transactions states that “[e]xcept as otherwise provided
in section 11-53-104 [exempt person transactions] or 11-53-105 [exempt
transactions], no person shall sell or purchase or offer to sell or purchase any
commodity under any commodity contract or under any commodity option or offer
to enter into or enter into as seller or purchaser any commodity contract or any
commodity option.” COLO. REV. STAT. § 11-53-103.
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COLO. REV. STAT. § 11-53-105(b) (emphasis added). Given the explicit language
of this exemption, under the Colorado Commodity Code, it is apparent that
Congress created its exemption under Section 2(c)(2)(D)(ii)(III)(aa) of the CEA
because it acknowledged the Model State Commodity Code. Congress could have
used the term “physical delivery,” but instead decided to use the term “actual
delivery” because “actual delivery” carries a different meaning than “physical
delivery.” Thus, the CFTC’s interpretation of “actual delivery,” to be the
equivalent of “physical delivery,” is contrary to Congress’s unambiguous statutory
intent. See Robinson v. Shell Oil Co. , 519 U.S. 337, 340 –41, 117 S.Ct. 843, 846
(1997) (finding “[t]he plainness or ambiguity of statutory language is determined
by reference to the language itself, the specific context in which that language is
used, and the broader context of the statute as a whole. [citation omitted]”);
Morrison Enter., LLC, 638 F.3d at 609; Williams, 553 U.S. at 294–95, 128 S.Ct. at
1839 - 40 (2008) (stating that it is “the precept of statutory construction that effect
should be given to every clause and word of the statute”).
C. The District Court Erred in its Determination Regarding the
Application of Section 2(c)(2)(D)(ii)(III)(aa) of the CEA
The district court addressed the Appellants’ arguments regarding the “actual
delivery” exception stated within Section 2(c)(2)(D)(ii)(III)(aa) of the CEA in one
short paragraph within the Injunctive Order. Injunctive Order 20 [DE 79]. The
district court attempts to avoid the Appellants’ arguments by stating that the focus
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of the issue should be placed upon the transactions with the retail public investors
and not those transactions between the Appellants and its Retail Dealers. Id. This
statement is nonsensical because the Appellants do not hold privity of contract
with the retail public investors. The Appellants deal solely with other business
entities, such as with their Suppliers and the Retail Dealers (the only parties
holding privity of contract with the retail customers). Additionally, and regardless
of whether the transactions involve the retail public investors, the determination of
the “actual delivery” exception under Section 2(c)(2)(D)(ii)(III)(aa) of the CEA
does not depend upon (in any manner) which individuals or entities are the parties
to the transactions.
Additionally, the district court states that “actual delivery cannot occur
where [the Appellants] have no metals to deliver.” Id. Each declarant asserts that
although its representative institution sold metals to the HW Entity Defendants,
because their sales were financed, title never passed to the HW Entity Defendants.
Thor Gjerdrum Decl. ¶¶ 5–8, 14 [DE 4-17]; Albertus Maartens Decl. ¶ 14 [DE 4-
17]. This statement ignores the fact that the Appellants have contractual
obligations with its Suppliers for the purchase/sale of the metals. The district court
reached its conclusion (that the Appellants have no metal which they can deliver)
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based solely upon two affidavits.27
These affidavits are from two individuals
employed by two of the Appellants’ Suppliers. Despite the affidavits, the contracts
between the Appellants and their Suppliers contemplate the actual purchase/sale of
physical metals; yet, the district court failed to address this evidence, which stands
in sharp contrast to the CFTC’s claims.
The Appellants do not fall under the jurisdiction of Section 2(c)(2)(D) of the
CEA because the Appellants’ transactions are exempted by the “actual delivery”
exception within Section 742(a) of the Dodd-Frank Act. See 7 U.S.C. §
2(c)(2)(D)(ii)(III)(aa). The Appellants respectfully request this Court to reverse
the Injunctive Order because the CFTC has failed to demonstrate a “reasonable
probability of ultimate success upon the question of jurisdiction when the action is
tried on the merits.” ETS Payphones, 408 F.3d at 731.
III. The “Enforceable Obligation to Deliver” Exception
Another exemption under Section 742(a) of the Dodd-Frank Act states that
the requirements of Section 2(c)(2)(D) do not apply to a “contract of sale that
creates an enforceable obligation to deliver between a seller and a buyer that have
27
The district court calls the two affidavits “testimony.” Injunctive Order 20 n.30
[DE 79]. The term “testimony” is inaccurate because these two individuals were
not subject to any form of cross-examination by the Appellants, whether in formal
court proceeding or in deposition before the district court rendered its Injunctive
Order. As will be demonstrated later within this Initial Brief, these two affidavits
suffer from serious inconsistencies and are highly inaccurate and misleading.
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the ability to deliver and accept delivery, respectively, in connection with the line
of business of the seller and buyer.” Dodd-Frank Act, § 742(a)(ii)(III)(bb); 7
U.S.C. § 2(c)(2)(D)(ii)(III)(bb) (emphasis added). There are four elements to this
exception and the Appellants satisfy all four. See 7 U.S.C. §
2(c)(2)(D)(ii)(III)(bb).
First, the Appellants enter into a Dealer Purchase & Sale Agreement which
governs all sales between them and any Retail Dealer with whom they transact
business. Second, the Dealer Purchase & Sale Agreement creates an enforceable
obligation for the Appellants to deliver metals to the Retail Dealers. Riggio Decl.
Exh. B [DE 35-2]. Third, both the Appellants and the Retail Dealers are business
entities with the means to make and accept deliveries of precious and industrial
metals (i.e., monetary resources, logistics, and facilities). Fourth and lastly, the
Appellants only contract with, and sell to, the Retail Dealers (as opposed to
individual retail consumers in the public); and thus, the Appellants and the Retail
Dealers are purchase/sale counterparties to all the metal transactions originating
from each party’s line of business (i.e., the purchase and sale of metals).
The Appellants and dealers are in the line of business of buying and selling
precious metals. The dealers were not mere “intermediaries” or agents for the
Appellants and the parties had enforceable obligations against one another as
purchasers and sellers of metal for the payment and delivery of that metal. Martin
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Decl. ¶¶ 6–9, 24 [DE 38-1]; see also Martin Decl. Exh. 1, 3 [DE 39-1]. Indeed,
Lloyds Commodities, LLC (a dealer that transacted business with the Appellants)
described itself as “a wholesale precious metals dealer, offering clients two way
access to precious and industrial metals.” Martin Decl. ¶ 23 [DE 38-1]; see also
Martin Decl. Ex. 11 [DE 40-1]. The dealers were not authorized to enter, and did
not enter, into any agreements with their customers, or any other entity, on behalf
of any of the Appellants. Martin Decl. ¶ 24 [DE 38-1]. Any monies the dealers
earned from the purchase or sale of metal, including interest and fees related to any
credit the dealers extended, was the property of the dealers alone. Id. None of the
Appellants paid any commissions, salaries, or other compensation to the dealers or
their principals. Id.
The CFTC disputes the existence of any actual metal, claiming that the
Appellants simply manage their “exposure to retail customer trading positions by
trading derivatives in its own over-the-counter margin trading accounts.” Pl.’s Mot.
for Prelim. Inj. 6 [DE 4]. None of these statements are accurate. The Appellants
have contracted with various companies (e.g., FideliTrade Incorporated, A-Mark
Precious Metals, Inc., Standard Bank, and Natixis Commodity Markets Limited) to
obtain sufficient metal to cover obligations to the dealers. Martin Decl. ¶¶15–17
[DE 38-1]. The Appellants did maintain futures trading accounts with R.J.
O’Brien and OANDA; however, the purpose of those accounts was to hedge
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against any intra-day, or overnight, price risk exposure from purchases that the
Appellants elected to hold rather than sell. Id. ¶ 14.
Similar to the Dealer Purchase & Sale Agreement, the A-Mark Agreement
provides for the purchase and sale of metal “for immediate physical delivery at the
full cash price of the [m]etal” or with physical possession of the metal deferrable
“for up to two years after the purchase of the [m]etals.” Id. ¶ 16; see also Martin
Decl. Exh. 4 ¶¶ 2.A and 2.B [DE 39-1]. Financing is provided by A-Mark and
requires a “down payment” and the payment of interest on a monthly basis on the
outstanding loan balance. Id. The CFTC submits a declaration from Mr. Thor
Gjerdrum, A-Mark’s CFO, to bolster its theory that the Appellants never actually
purchase metal. Gjerdrum Decl. [DE 4-17]. Mr. Gjerdrum’s declaration, however,
is directly contradicted by the terms of the A-Mark agreement and therefore this
parol document offered by the CFTC should not be given any evidentiary weight.
See, e.g., St. Paul Mercury Ins. Co. v. Mountain West Farm Bureau Mut. Ins. Co.,
210 Cal.App.4th 645, 658 (Cal. App. 2d Dist. 2012) (holding that under California
law, the parol evidence rule prohibits the use of extrinsic evidence to establish the
meaning of an agreement where the agreement is unambiguous.). For example,
notwithstanding the clear language of Paragraph 2 of the A-Mark Agreement, that
the purchase transaction occurs at the time of down payment, Mr. Gjerdrum insists
that the Appellants “do not own any metals as a result of its margin trades with A-
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Mark” and that the Appellants “have the right to purchase the quantity of metals
associated with any individual margin trade at the trade price, but only after it
makes full payment.” Compare Martin Decl. Exh. 4 ¶ 2.B [DE 39-1], with
Gjerdrum Decl. ¶ 14 [DE 4-17] (emphasis added).
Mr. Gjerdrum also denies that the Appellants acquire an ownership interest
in the metal even though he makes an earlier reference to the minimum “equity”
level the Appellants must maintain at any given time in connection with these
financed transactions. Gjerdrum Decl. ¶¶ 11, 14 [DE 4-17]. The term “equity”
infers an ownership interest. Likewise, while he claims that A-Mark does not store
any metals for the Appellants in connection with its so-called margin trades, he
states earlier that “A-Mark maintains sufficient inventory of physical metals to
meet its obligations to HW Commodities and A-Mark’s other customers.” Id. ¶¶ 8,
14. Because purchases accompanied by full payment result in the immediate
physical delivery of the metal to the purchaser, Mr. Gjerdrum’s reference to the
storage of metal to meet its obligations to the Appellants can only be a reference to
Appellants’ financed metal purchases and A-Mark’s need to have sufficient metal
on-hand to meet its obligation to make immediate physical delivery to the
Appellants should they pay the unpaid loan balance on those transactions.
Mr. Gjerdrum’s most enlightening statement is that “only after Hunter Wise
pays in full will A-Mark allocate, segregate and deliver any metals to Hunter
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Wise.” Id. ¶14 (emphasis added). While it may well be true that A-Mark does not
“allocate” specific metal for the Appellants prior to full payment, Mr. Gerjdrum’s
statement does not deny that metals purchased on a financed basis are kept in
storage as part of an unallocated, fungible mass of metal sufficient to meet A-
Mark’s obligations to the Appellants and its other customers — exactly the
methodology used by the Appellants in connection with the dealers’ metal
purchases financed through the Appellants.
The agreements between the Appellants and FideliTrade, Natixis, and
Standard Bank likewise reflect the terms under which the Appellants may purchase
and sell metal. Martin Decl. ¶ 17 [DE 38-1]; see also Martin Decl. Exh. 5–7 [DE
39-1]. Account statements from A-Mark and Natixis show purchases and sales of
metal on a financed basis with interest charged on the unpaid loan balance. Martin
Decl. ¶¶ 19–20 [DE 38-1]; see also Martin Decl. Exh. 8–9 [DE 39-1, DE 40-1].
The Natixis statement further indicates that it was holding stocks of gold and silver
bullion in a vault at JP Morgan Chase Bank. Martin Decl. ¶ 19 [DE 38-1]; see also
Martin Decl. Exh. 8 [DE 39-1]. The CFTC’s summary of a phone conversation
with Natixis representatives in which Natixis allegedly stated that no metal is
stored for the Appellants is hearsay and directly contravened by this account
statement. Johnson Decl. ¶ 50 [DE 4-2]. The “Metal Ledger Statement” from
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Standard Bank also shows holdings of platinum, palladium, gold, and silver.
Martin Decl. ¶ 21 [DE 39-1]; see also Martin Decl. Exh. 10 [DE 40-1].
The Appellants plainly hold physical metal, or have enforceable obligations
with its Suppliers for the physical delivery of metal. Thus, the Appellants certainly
have the ability to make and take delivery of precious metals in connection with
any purchases made by dealers. Therefore, the Appellants are exempt from the
CFTC’s jurisdiction via Section 2(c)(2)(D)(ii)(III)(bb) of the CEA because the
transactions in which the Appellants engage meet all four elements of the
exemption. Compl. at ¶¶ 8, 27, 31, 40, 41, 45–46, 48, 50–52 [DE 1]; 7 U.S.C. §
2(c)(2)(D)(ii)(III)(bb).
A. The District Court Erred in its Determination Regarding the
Application of Section 2(c)(2)(D)(ii)(III)(bb) of the CEA
The district court addressed the Appellants’ arguments regarding the
“enforceable obligation to deliver” exception stated within Section
2(c)(2)(D)(ii)(III)(bb) of the CEA in one short paragraph within the Injunctive
Order. Injunctive Order 19–20 [DE 79]. The district court states that the
“enforceable obligation to deliver” exception does not apply to “transactions
between the [Retail Dealers] and the retail customers.” Id. 20. The Appellants did
not deal with retail customers, nor did they contract with any retail customers. The
district court casts this fact aside and states that because the Appellants allegedly
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had a “leading role in the scheme”28
they cannot satisfy the elements of the
exception. Id.
The Appellants do not fall under the jurisdiction of Section 2(c)(2)(D) of the
CEA because the Appellants’ transactions are exempted by the “enforceable
obligation to deliver” exception within Section 742(a) of the Dodd-Frank Act. See
7 U.S.C. § 2(c)(2)(D)(ii)(III)(bb). The Appellants respectfully request this Court to
reverse the Injunctive Order because the CFTC has failed to demonstrate a
“reasonable probability of ultimate success upon the question of jurisdiction when
the action is tried on the merits.” ETS Payphones, 408 F.3d at 731.
CONCLUSION
The district court abused its discretion in granting a preliminary injunction
against the Appellants because the district court failed to appropriately (and
28
The district court makes the statement that the Appellants are the “leading role
in the scheme” but does not make any findings of fact that the Appellants
controlled, ordered, directed, or held an agency relationship with the Retail Dealers
(i.e., the persons who contacted and solicited orders from the retail public
investors). Also, it is not possible for the district court to have relied upon the
aiding and abetting provision of the CEA because the district court did not make a
determination of law that the Appellants had violated a provision of the CEA. See
7 U.S.C. § 13c(a); CFTC v. Matrix Trading Group, Inc., 2002 WL 31936799, at
**8–9 (S.D. Fla. 2002) (stating that claim for aiding and abetting under the CEA
involves three elements: (1) the CEA was violated; (2) the defendant had
knowledge of the wrongdoing underlying the CEA violation; and (3) the defendant
intentionally assisted the primary wrongdoer). Consequently, the district court
erred in holding that the “enforceable obligation to deliver” exception under
Section 2(c)(2)(D)(ii)(III)(bb) of the CEA cannot apply to the Appellants merely
because the Retail Dealers entered into metals transaction with the retail public
investors.
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competently) address the Appellants’ jurisdictional arguments prior to issuing the
Interlocutory Order granting a Preliminary Injunction. ETS Payphones, 408 F.3d
at 731. For the aforementioned reasons, the Interlocutory Order granting a
Preliminary Injunction issued by the U.S. District Court for the Southern District
of Florida against the Appellants should be reversed.
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csimpson
Typewritten Text
13,541
Page 68
CERTIFICATE OF SERVICE
I hereby certify that on June 17, 2013, one originally signed brief and 6
copies, along with one original and one copy of the record excerpts, were
dispatched for delivery to the Clerk’s Office of the United States Court of Appeals
for the Eleventh Circuit by third-party commercial carrier for overnight delivery at
the following address:
John Ley, Clerk
U.S. Court of Appeals for the 11th
Circuit
56 Forsyth Street N.W.
Atlanta, Georgia 30303
On this same date one copy of the brief and one copy of the record excerpt
were sent to the following, by third-party commercial carrier, for delivery within
three calendar days:
Anne Stukes
U.S. Commodity Futures Trading
Commission
1155 21st St NW
Washington, DC 20581-0001
202-418-5000
Carlin Ray Metzger
US Commodity Futures Trading
Commission
525 W Monroe Street, Ste 1100
Chicago, IL 60661
312-596-0536
Filing and Service were performed by Direction of Counsel
Counsel Press, LLC
1011 East Main Street
Richmond, VA 23219
(804) 648-3664
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