The United States Court of Appeals for the Ninth Circuit recently reversed a district court’s dismissal of an enforcement action against Monex for alleged fraud in precious metals sales.
In United States CFTC v. Monex Credit Co., 2021 U.S. App. LEXIS 21416 *; __ Fed. Appx. __; 2021 WL 3057072 (Cir. 9 July 20, 2021), the Ninth Circuit affirmed a preliminary injunction in the Commodity Futures Trading Commission’s anti-fraud enforcement action against Monex and its affiliated companies and principals.
This is the second time the agency has been successful in the Ninth Circuit in the Monex case.
The CTFC regulates commodity futures markets under the Commodity Exchange Act (“CEA”). The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amended the CEA and extended the CEA to commodity transactions offered on a leveraged or margined basis as if they were futures trades. However, Congress made one exception: the CEA does not apply to leveraged retail commodity sales that result in “actual delivery” within 28 days. That exception is the key to this case.
California-based Monex has been a major player in the retail precious metal markets for decades. It sells gold, silver, platinum, and palladium to investors who have a variety of buying options. One such option is its Atlas Program, where investors can buy commodities on margin, which is also known as leverage. The CFTC claimed that Atlas was an illegal and unregistered leveraged retail commodity transaction market. Monex is the counterparty to every transaction. Customers who finance their purchase must, pursuant to the Atlas Account Agreement, authorize a third-party depository as their agent to accept custody of their delivered metals. As a result, Monex retains exclusive authority to direct the depository how to handle the metals.
The CFTC filed its lawsuit in the Northern District of Illinois in 2017, alleging violations for engaging in off-exchange retail commodity transactions; fraud; and for failing to register as a Futures Commission Merchant. At the same time, the CFTC also moved for a preliminary injunction to halt Monex’s off-exchange leveraged commodity trading through its Atlas platform.
In the CFTC’s 2017 enforcement action, Monex was charged with defrauding thousands of retail customers out of hundreds of millions of dollars, while executing thousands of illegal, off-exchange leveraged commodity transactions.
Monex moved to dismiss the complaint, which the Court granted. The Court also denied as moot the CFTC’s motion for preliminary injunction. Further, the Court dismissed Counts 1, II, and IV of the complaint on the basis that Monex’s Atlas transactions fit within the actual delivery exception to the CFTC’s jurisdiction, and Count III based on its ruling that the CFTC may bring only fraud-based manipulation claims. The CFTC appealed, and the Ninth Circuit reversed and remanded.
The Ninth Circuit’s decision in July 2019 focused on whether the “actual delivery exception is an element of a CEA claim or an affirmative defense” and whether the relevant statute covers fraud claims in the absence of manipulation. As to the former, the Ninth Circuit found that the actual delivery affirmative defense required “the transfer of some degree of possession or control” and did not, on the face of the complaint, bar the CFTC from relief on Counts I, II, and IV. As to the latter, the Ninth Circuit found that the statute covered fraud claims in the absence of manipulation.
The Ninth Circuit held so, not only the basis of the ordinary meaning of actual delivery and other courts’ interpretations of it as well, but also based on the “broader statutory context.” Even in the context of leveraged commodity sales, there was no reason why the buyer couldn’t control the commodity. The Ninth Circuit opined, “[i]n many financing contexts, some degree of buyer possession or control is commonplace. While permitting customers to obtain significant control over or possession of metals might be practically difficult here, that fact does not displace the statute’s plain meaning.”
The Ninth Circuit also examined whether Monex’s transfer of title constitutes actual delivery. The court noted that physical transfer to an independent depository plus transfer of title to the buyer may constitute actual delivery only if the process is not a sham. But the Court also found:
- Monex’s customers have no contractual rights to the metal;
- Monex, not customers, has a relationship with depositories;
- Monex maintains total control over accounts and can liquidate at any time in its own discretion; and
- The entire transaction is merely a book entry.
According to the Ninth Circuit, this process was a sham, and therefore, Monex’s transfer of title didn’t constitute actual delivery. Moreover, the Ninth Circuit affirmed the CFTC’s authority to bring enforcement cases against alleged fraud and held that “actual delivery” of commodities in leveraged retail commodity transactions requires transfer of a meaningful degree of possession or control of the commodity to the retail customer.
On remand, the district court granted the injunction for the CFTC and Monex appealed.
Monex’s Argument on Appeal
In a memorandum opinion by Circuit Judges Tashima, McKeown, and Christen, the Ninth Circuit wrote in July that Monex advanced a preliminary injunction standard below that it then challenges as error on appeal. The Ninth Circuit panel stated that, despite this change in position and the CFTC’s response to Monex’s argument on the merits, the Court had discretion to conclude that issues were waived or forfeited. The panel concluded that Monex forfeited the argument it raised on appeal. As a result, the Court declined to review Monex’s challenge to the applicable legal standard.
Monex asserted that the record established that its practices satisfy the “actual delivery” exception. The panel said that the district court considered the evidence and arguments Monex pressed on appeal, and found that the trial court’s factual findings were consistent with that evidence and not clearly erroneous. As such, the Ninth Circuit upheld the district court’s conclusion.
The Ninth Circuit’s Decision
The panel held that given the district court’s factual findings and its conclusion that Monex’s leveraged Atlas transactions are likely unlawful, the district court did not abuse its discretion in tailoring the preliminary injunction as it did.
CFTC Acting Chairman Rostin Behnam said, “We are pleased with the Ninth Circuit Court’s decision, which reaffirms important protections established by Congress for markets and individuals.”
Likewise, Acting General Counsel Rob Schwartz added, “The Ninth Circuit’s decision is clearly correct and bolsters our Division of Enforcement’s efforts to root out unlawful trading activity conducted by companies and individuals attempting to elude regulation under the Commodity Exchange Act (CEA).”
The Ninth Circuit’s recent decision may motivate the CFTC to undertake more aggressive enforcement action where they contend that there has been fraud or lack of “actual delivery”. The absence of clear regulations governing the precious metals industry invites uncertainty and pitfalls for precious metals dealers. The Attorneys at Eanet, PC work regularly with a select group of clients in the precious metals industry. If you have questions, please contact us.