Commodity Trend Service, Inc. v. Commodity Futures Trading Commission, Commodity Futures Trading Commission v. Dennis Blitz and Nick Van Nice, in Re: Cts Financial Publishing, Inc., F/k/a Commodity Trend Service, Inc., Dennis Blitz, Nick Van Nice, and Dearborn Financial Publishing, Inc.
Docket: 99-4142
Court: Court of Appeals for the Seventh Circuit; November 27, 2000; Federal Appellate Court
Commodity Trend Service, Inc. (now CTS Financial Publishing, Inc.) appeals a ruling affirming its subjectivity to the antifraud provisions of the Commodity Exchange Act (CEA). The appeal involves CTS principals Dennis Blitz and Nick Van Nice contesting an administrative subpoena issued by the Commodity Futures Trading Commission (CFTC). The court upheld both decisions made by the district court.
CTS provides general advice on commodities markets through publications and communications without tailoring its advice to individual customers and does not execute trades on their behalf. The CFTC initiated an investigation in July 1996 to ascertain whether CTS should register as a commodity trading advisor under 7 U.S.C. § 6m. During this investigation, the CFTC sought documents related to CTS's advertisements and publications. CTS challenged the CEA's registration requirements on First Amendment grounds, arguing they were overly broad and inapplicable. The district court initially ruled that CTS's claims were unripe, but this was reversed in a prior decision by the Seventh Circuit.
CTS continued its First Amendment challenges to registration requirements and added arguments against antifraud provisions under 7 U.S.C. sec. 6b and 7 U.S.C. sec. 6o, as well as 17 C.F.R. sec. 4.41. The district court ruled that the registration requirements constitute a prior restraint violating the Constitution but upheld the applicability of sec. 6o and Regulation 4.41 to CTS, rejecting CTS's statutory and constitutional arguments. The court granted the CFTC's motion to enforce subpoenas for investigating CTS's activities related to antifraud laws, denied CTS's motion to stay enforcement, and mandated the release of documents to the CFTC. CTS appealed the ruling on antifraud provisions, while Nice and Blitz appealed the subpoena enforcement. CTS did not contest its classification as a Commodity Trading Advisor (CTA).
Following these developments, the CFTC initiated an administrative enforcement proceeding against CTS based on materials obtained from the subpoenas. CTS sought an injunction against these proceedings, which became moot due to the court's decision.
The case involves a three-part analysis: determining the ripeness of CTS's challenges, assessing the applicability of the CEA provisions and CFTC regulation to CTS, and evaluating the constitutional implications of these laws as applied to CTS. The CFTC contended that CTS's challenges were not ripe for judicial review, but the court found them suitable for resolution, aside from one constitutional issue. The court reaffirmed that CTS continues to face hardships from compliance and speech restrictions, satisfying the hardship aspect of the ripeness test. The CFTC argued that further factual development was necessary before judicial intervention, as CTS no longer admitted to committing fraud under the relevant CEA provisions.
The court asserts that the CFTC's argument is invalidated by a previous ruling stating that a case is ripe under Abbott Laboratories if the conditions of Babbitt v. United Farm Workers National Union are met. In Babbitt, plaintiffs contested a law penalizing false advertising in agriculture, claiming that unintentional misstatements could lead to prosecution, thereby infringing on their First Amendment rights. The Supreme Court ruled that their reasonable fear of prosecution rendered the case ripe without needing further factual development.
CTS's situation mirrors that of the Babbitt plaintiffs, as they assert no intention to make false statements but acknowledge that inaccuracies may occur, exposing them to CFTC investigations. Because CTS demonstrated a reasonable fear of facing administrative proceedings due to CFTC’s investigations and subpoenas, the court holds that their challenge regarding the applicability of fraud provisions of the CEA is ripe.
In subpoena enforcement proceedings, the court typically conducts limited reviews of agency actions, focusing on whether the subpoena reasonably relates to the agency's investigative authority, is relevant, follows proper procedures, and is not for illegitimate purposes. An agency can investigate if a party's conduct seemingly falls within its jurisdiction, provided there is no overreach. However, exceptions exist; if the investigation is excessively burdensome and threatens the party's business operations, judicial review may be warranted to assess compliance with the statute or regulations.
The CFTC's subpoenas meet the established four-part test for validity; however, the excessive burden exception applies due to the impact on CTS's operations. As a registered Commodity Trading Advisor (CTA) under the Commodity Exchange Act (CEA), CTS does not dispute its subject status. The subpoenas are deemed sufficiently specific and relevant for investigating potential violations of the CEA's antifraud provisions. There are no claims of procedural impropriety or bad faith by the CFTC. Nevertheless, the subpoenas have disrupted CTS's normal business functions, leading to a significant decline in sales and the eventual layoff of employees. Furthermore, two columnists have refrained from writing due to fears of governmental repercussions, highlighting the subpoenas' adverse effects on business.
CTS argues that the CEA's antifraud provisions do not apply to impersonal commodity advisors, asserting that the term "client" implies a personalized advisory relationship. The court applies Chevron deference, assessing whether Congress has addressed this issue. If not, it will defer to the CFTC's interpretation if reasonable. The relevant statutory and regulatory provisions prohibit CTAs from defrauding clients, but CTS contends that its impersonal advisory role precludes liability under these laws, challenging the ambiguity of the term "client" as used in the statute.
CTS argues that the term "client" in the context of the CEA (Commodity Exchange Act) should be limited to brokers or personalized advisors, citing the Supreme Court's ruling in Lowe v. SEC, which established that impersonal advisors are exempt from the Investment Advisers Act (IAA). The Court's reasoning included the distinction that the IAA refers specifically to "clients" rather than "subscribers" and that the SEC failed to demonstrate any individualized relationship between Lowe and his subscribers. The Court concluded that as long as the interactions remained impersonal, Lowe and his entities were not subject to the IAA.
However, the argument that "client" in the CEA is similarly restricted is challenged on two grounds. First, the CEA has a broader scope than the IAA. The Supreme Court's ruling in Lowe indicated that impersonal advisors are excluded from the IA definition due to their classification as publishers, which is not limited to incidental advice. Thus, bona fide publishers are excluded from being designated as investment advisers, while the CEA allows for a broader inclusion of advisors, as it only exempts publishers whose advice is entirely incidental to their publishing activities.
Second, CTS, as a commodity trading advisor (CTA), is subject to all CEA provisions, including anti-fraud regulations. If "client" were interpreted as limited to personalized relationships, CTS could be classified as a CTA yet remain largely exempt from CEA regulations, leading to an illogical outcome. This inconsistency undermines CTS's position that the term "client" is confined to those with whom an advisor has a personalized relationship.
Congress asserts a national public interest in the activities of Commodity Trading Advisors (CTAs), which includes a range of advisory services and their contractual arrangements with clients, as outlined in the Commodity Exchange Act (CEA) at 7 U.S.C. § 6l. The language suggests that impersonal advisors are also included under the CTA definition, subjecting them to the CEA's antifraud provisions. The term "client" is not explicitly defined in the CEA, leading to a reliance on its ordinary meaning. While dictionaries typically define "client" as someone receiving personalized advice, they also recognize "customer" as someone who purchases services without personal interaction, indicating ambiguity in the statutory language.
CTS argues that "client" implies a personalized relationship, while "subscriber" refers to those receiving impersonal advice. However, the presence of both terms in the CEA suggests that "subscriber" is a subset of "client," thus challenging the notion that these words can be treated as entirely separate without rendering one redundant. The interpretation that "client" includes those receiving impersonal advice is supported by the statutory context, particularly in 7 U.S.C. § 6l, which categorizes subscriptions as arrangements with clients.
CTS further contends that this interpretation could lead to absurdities, such as conflicting fiduciary duties if parties on opposite sides of a transaction relied on CTS's products. While the CFTC acknowledges the antifraud provisions impose fiduciary duties, it clarifies that the nature of these duties can differ based on the type of CTA involved.
The Commodity Exchange Act (CEA) does not impose fiduciary duties on impersonal advisors. The precedent set in *Savage v. CFTC* indicates fiduciary obligations for Commodity Trading Advisors (CTAs) but only applies to those providing personalized advice. Section 6o of the CEA does not reflect Congressional intent to extend fiduciary duties to impersonal advisors. Similarly, Section 17(a) of the Securities Act of 1933 and Section 206 of the Investment Advisers Act (IAA) do not create new fiduciary responsibilities but enforce existing ones. The definition of investment advisers is limited to those who have fiduciary relationships with clients, as established in *SEC v. Capital Gains Research Bureau*. The CEA acknowledges existing fiduciary duties for personalized advisors but does not extend such obligations to impersonal advisors, who are only held accountable for fraud or deceptive practices.
Additionally, CTS's argument that the CEA's antifraud provisions raise constitutional concerns is unconvincing. The issues presented do not warrant applying the constitutional avoidance canon, which should be used cautiously to prevent distortion of legislative intent. While CTS suggests that the Supreme Court's ruling in *Lowe* regarding the IAA was influenced by constitutional considerations, these concerns primarily pertained to registration requirements for impersonal advisors, which are more significant than the antifraud provisions at issue. Recent CFTC regulations exempt impersonal advisors from registration, alleviating the constitutional issues raised in *Lowe*.
The court determined that the antifraud provisions of the Commodity Exchange Act (CEA), when considered independently from the registration requirement, do not present significant constitutional issues regarding the definition of "client." The term "client" is ambiguous, potentially encompassing both those receiving personalized advice and those receiving general services. As a result, the court concluded that the initial step of Chevron deference favors the Commodity Futures Trading Commission (CFTC), leading to an evaluation of the reasonableness of the CFTC’s interpretation. The court found no arguments from CTS challenging the reasonableness of the CFTC’s interpretation, affirming that Congress intended a broad application of the CEA, thus supporting the CFTC's interpretation of "client" as applicable to CTS.
Regarding section 6b(a) of the CEA, the court analyzed the phrase "for or on behalf of" and found that it relates to "any contract," implying that any individual committing fraud in connection with a contract for another person violates section 6b, not just brokers. However, the court agreed with CTS that the CFTC's interpretation would render the phrase redundant, as it does not account for the possibility of self-defrauding contracts. Thus, the court concluded that section 6b only applies to those with an agency relationship, which CTS does not have with its customers.
Lastly, the court addressed CTS's constitutional claims against sections 6o and Regulation 4.41, particularly concerning First Amendment rights. CTS argued that these provisions cannot apply to an impersonal speaker discussing commodities markets because they lack a scienter requirement and that compelled disclosures violate its free speech rights. The court will first assess whether the antifraud provisions can penalize CTS for its speech and then consider the implications of forcing CTS to disclose information.
Laws targeting fraudulent speech are constitutionally permissible, even if they apply to fully protected speech. Notable cases, including McIntyre v. Ohio Elections Commission and Riley v. National Federation of the Blind, support the notion that the government can implement measures to prevent fraud, but these must be narrowly tailored and not overly broad, as this could infringe on First Amendment rights. The definition of fraud typically involves the speaker's intent (scienter). While advertising receives less First Amendment protection, misleading or deceptive advertising is subject to regulation, provided that any restrictions are narrowly drawn to further a significant government interest.
The Commodity Exchange Act (CEA) and Commodity Futures Trading Commission (CFTC) regulations distinguish between two types of prohibitions: one requiring scienter for actions that defraud and another that focuses on the fraudulent impact of practices on investors, which does not require proof of intent.
CTS contends that the government cannot penalize impersonal, public speech on matters of public interest without demonstrating scienter, arguing that certain provisions of the Commodity Exchange Act (CEA) lack this requirement and thus would be unconstitutional if applied to it. However, the court finds that the provisions challenged by CTS, specifically Section 6o(1)(A) and Regulation 4.41(a)(1), which do require scienter, are constitutional as they merely prohibit common law fraud in commodities transactions.
The remaining provisions, while not requiring scienter, are limited in scope. One provision addresses deceptive advertising and is classified as commercial speech, permitting government regulation to prevent misleading advertising without additional justification. The other provision is narrowly tailored to address fraudulent statements presenting factual information, requiring only a showing of negligence. The court emphasizes that any broader application by the CFTC that restricts protected speech without evidence of fraud would raise significant constitutional concerns, particularly regarding opinions or beliefs rather than demonstrably false statements.
CTS also seeks to challenge any compelled disclosures mandated by the CFTC, arguing that the lack of specific reasons or content for such disclosures renders its claims unripe for judicial review. The court notes that while the government may impose affirmative disclosures in commercial advertising to prevent deception, such requirements must be narrowly tailored to address the misleading nature of the advertising. This evaluation is fact-intensive, necessitating careful examination of the specific speech in question to determine the appropriateness of the government's remedy.
The CFTC's findings regarding CTS's statements remain unspecified, including the nature of any deceptive or misleading claims and the required affirmative disclosures for CTS's advertisements. Due to this lack of clarity, CTS's challenge to these disclosures is unripe for judicial review. The government's authority to compel speech is constitutionally equivalent to its power to restrict it, and narrowly tailored laws aimed at preventing fraud do not violate the First Amendment. However, sufficient factual development is needed to assess whether the CFTC's affirmative disclosure requirements would infringe upon CTS's constitutional rights.
CTS's statutory and some constitutional challenges are deemed ripe for resolution. Section 6o and Regulation 4.41 apply to CTS under Chevron deference, while Section 6b is limited to agency relationships, excluding impersonal advisors like CTS. The Commodity Exchange Act (CEA) provisions that prohibit fraud or regulate misleading advertising are constitutional. CTS's request for a temporary injunction is rendered moot, and the district court's partial summary judgment against CTS and the enforcement of CFTC subpoenas are upheld.
The opinion notes that the CFTC had previously appealed a decision regarding the constitutionality of registration requirements but later dismissed that appeal. A new rule exempting certain CTAs from registration has been adopted. The court also indicates that the interpretation of statutory language, rather than legislative history, guides the understanding of Congress's intent regarding antifraud provisions. Relevant case law supports a broad interpretation of the statute, but does not clarify the specific phrase "for or on behalf of," which is crucial to CTS's situation. Finally, CTS claims its advertisements include both commercial and non-commercial speech, and this distinction will affect the standard applied by the CFTC in determining liability.
