In Nationwide Issue of First Impression, Panel Holds that Commodity Futures Trading Commission May Regulate Retail Commodity Transactions Offered on a Leveraged Basis

U.S. Commodity Futures Trading Comm’n v. Hunter Wise Commodities, LLC, et al., No. 13-10993, from SDFla

Senior Judge Dubina, joined by Judge Marcus and Senior Judge Walker (2d Cir)

Summary:  This case arose when the U.S. Commodity Futures Trading Commission ("the Commission") brought a civil enforcement action against the defendants alleging that they conducted fraudulent retail commodity transactions.  The defendants contended that the Commission lacked statutory authority for this enforcement action.  The district court rejected their argument, finding that certain amendments to the Commodity Exchange Act (“CEA”) made by the Dodd-Frank Act Consumer Protection Act of 2010 expanded the enforcement authority of the Commission.  Specifically, some of the amendments authorized the Commission to regulate retail commodity transactions that were offered on a leveraged or margined basis or financed by the offeror.  See 7 U.S.C. § 2(c)(2)(D).

As the panel noted, this case raised an issue of first impression in both the Eleventh Circuit and throughout the nation.  The defendants were involved in a multi-entity scheme that was organized as follows. One group of companies made margin trades in precious metals with the actual holders of precious metals.  These companies would then "sell" interests in these margin trades to retail customers through two layers of intermediary customers. The customers who "bought" these interests believed they were buying actual stakes in precious metals, but they were in fact only buying leveraged "interests" of the companies in precious metals. 

The issue was whether 7 U.S.C. § 2(c)(2)(D) granted the Commission the authority to seek a preliminary injunction against these transactions under the CEA.  The panel held that the Commission had authority to seek the injunction because the scheme involved a retail commodity transaction and the transactions at issue were leveraged, margined, or similarly financed. The Commission also made a sufficient showing a prima facie case of fraud.  Accordingly, the panel affirmed the district court's entry of a preliminary injunction.

Note: To obtain a preliminary injunction under the CEA, the Commission must simply make a prima facie showing of illegality.