CFTC’s reparations jurisdiction extends to registered party for one entity whose violation was committed while acting on behalf of different, non-registered entity - 11 October 2021
The CFTC's reparations jurisdiction extended to a party who was registered in one capacity as to a particular entity but whose alleged violation was committed while acting solely on behalf of a different, non-registered entity.
The CFTC reversed the dismissal of the fraudulent-solicitation claim against a registered person. The CFTC held that the CFTC’s reparations jurisdiction extended to a party who was registered in one capacity as to a particular entity but whose alleged violation was committed while acting solely on behalf of a different, non-registered entity. The CFTC reached this conclusion based on the plain language of Section 14, as confirmed by that provision’s structure, history, and purpose and consistent with longstanding CFTC’s practice (Jarrell v. Spears, October 5, 2021).
Procedural history. An investor brought a reparations complaint against natural persons and corporate entities, some registered with the CFTC and some not, seeking more than $65,000 in damages for fraudulent solicitation. The complaint turned on a putatively automated trading program for S&P 500 E-mini futures where the investor invested $78,000 to be traded by that program after he was led to believe it would execute a proprietary strategy without human intervention. As a result of extreme market volatility, in which the S&P 500 Index fell by 4.1 percent in a single day, the developers of that program, which did not have a formal stop-loss protocol, manually entered a sell order before the end of that day’s trading. The investor lost $65,345.
The following categories of respondents were at issue: (1) Optimized Trading, LLC and Spears. Optimized was the developer of the trading system, which was co-founded by Spears; (2) Lakefront Futures & Options LLC and Spears. Lakefront held the account the investor traded on and was an Introducing Broker (IB) registered with the CFTC. Distinct from his role as co-owner of Optimized, Spears was an Associated Person (AP) of Lakefront. Spears was thus acting in two capacities: (1) Spears was acting as an AP of Lakefront, the capacity in which he was registered; and (2) Spears was acting as the co-owner of non-registrant Optimized, the capacity in which he allegedly misrepresented to the investor the putatively automated nature of Optimized’s trading program.
Despite finding that Spears had fraudulently solicited the investor’s investment, the Judgment Officer dismissed the investor’s claim against Spears for lack of jurisdiction. Observing that Spears’s capacity at the time of the fraudulent solicitation was the central legal problem, the Judgment Officer concluded that Section 14 did not extend to Spears for activities undertaken within the scope of his employment at non-registered Optimized. The investor appealed.
Reparations jurisdiction. The CFTC found that Spears, who was a registered AP of Lakefront but engaged in the alleged wrongdoing solely on behalf of non-registrant Optimized, was subject to Section 14 reparations jurisdiction. First, the plain language of Section 14 provides that the CFTC’s reparations jurisdiction encompasses any person who is registered under this chapter and that is true regardless of the capacity in which a registered person committed the alleged violation. The CFTC found that Section 14’s structure, history, and purpose confirm this plain-language reading. Second, the CFTC found that a capacity requirement is likewise inconsistent with Section 14 precedent given that the CFTC has long taken a flexible approach to deciding whether a particular party is a person who is registered under this Act.
Third, the CFTC found that several policy considerations counsel against imposing a capacity requirement. First, to the extent that restricting reparations jurisdiction to registered parties raises fairness concerns, that reflects Congress’s judgment that establishing a bright-line jurisdictional rule will ensure a more effective and efficient reparations program overall. Second, imposing a capacity requirement would produce countervailing unfair outcomes where an otherwise prevailing claimant may still be denied any meaningful relief when, at the end of a years-long adjudicatory process, the respondent can show that the relevant misconduct occurred outside the capacity in which he or she is registered. Third, a capacity requirement would raise the costs and reduce the efficiency of Section 14 proceedings. Because determining the capacity in which a particular respondent may have been acting at particular times is a highly fact-specific inquiry, extensive evidentiary development through the adversarial process would be required to establish jurisdiction over particular conduct.
This is CFTC Docket No. 18-R027.
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