“All that glitters is not gold. And even if it is, the CFTC might come after you for selling it at a markup.”
That’s how U.S. District Judge Brantley Starr begins his order from July in a case in Texas that questions whether gold and silver are commodities under the Commodities Exchange Act (CEA).
The Commodity Futures Trading Commission (CFTC) and 30 states (the “government”) have been engaged in a long running civil fraud trial against Lucas Asher and Simon Batashvili and their company, Metals.com.
Both the CFTC and the defendants moved for summary judgment—asking the court to resolve some or all of the issues in the case without trial
Background
This case deals with Metals.com and the precious metals it sold to consumers from 2017 to 2020. Through Metals.com, TMTE, Inc., Chase Metals, LLC, and Chase Metals, and later through Barrick Capital, Asher and Batashvili sold gold and silver bullion to customers on their website and over the phone.
The government alleges that When customers opened Metals.com, a running ticker told them the live spot price for gold and silver. After completing a purchase, customers received a Shipping and Transaction Agreement (Transaction Agreement) that had disclosures about the gold or silver they purchased and the risks of buying such products. The government claims that the precious metals dealers were defrauding customers by misrepresenting the “spread”— the difference between the price at which Metals purchased bullion from suppliers and the price at which they sold it
The CFTC initiated this action under § 6c of the Commodities Exchange Act. In a 30-count complaint, the government alleged that Asher and Batashvili, as the principals of Metals and Barrick, defrauded at least 1,600 people into buying gold and silver bullion at inflated prices.
Metals.com, Asher, and Batashvili were not registered as investment advisors in any state. The government claimed that the Asher and Batashvili deceived their mostly elderly or retirement-age investors through material misrepresentations and omissions.
Judge Starr explained that the heart of this alleged fraud scheme was the discrepancy between the potential spread presented in the Transaction Agreements and the actual spread on three main coins.
Are Gold and Silver Commodities Under the CEA?
In its analysis, the court addressed the question of whether gold and silver are commodities under the CEA. Judge Starr wrote in a biting remark that the CFTC “misunderstands how its own enforcement mechanisms interact.”
The CFTC argued that § 1(a)(9) of the CEA defining commodities includes catch-all language for “all other goods and articles… on which contracts for future delivery are presently or in the future dealt with.” But the district court found that this section was meant to apply to agricultural goods and articles (and strangely movie tickets), holding that “section 1 does not encompass precious metals as commodities because they are neither agricultural products nor movie tickets.”
Judge Starr went on to opine that § 19 was the only place in the CEA that expressly mentions metals or precious metals of any kind. Subsection 19(a) prohibits people from entering “any transaction for the delivery of any commodity under a standardized contract.” The judge goes on to write:
Section 1(a)(9)’s list has a clear common denominator: it names twenty-five agricultural goods (thirty if you count its further enumeration of fats and oils) from wheat and barley to wool and livestock. The Court is familiar with farms and gold mines but not a gold farm.
Subsection (b) prohibits people from entering “any transaction for the delivery of silver bullion, gold bullion, bulk silver coins, bulk gold coins, or platinum under a standardized contract described in subsection (a).” However, the CFTC never addressed § 19; instead, the judge wrote that the CFTC “operates as though gold and silver are the types of agricultural products that section 1 defines as commodities.” But as the court stated, § 1 doesn’t apply.
As a consequence, the court did not analyze whether this section applies. The parties didn’t brief the issue and “the Court cannot resolve this thorny legal question at this stage, given the absence of briefing. Assuming the case goes to trial, the Court asked the parties to brief this legal question in trial briefs.
Other Issues
The court also raised a few other issues which offer some potential good news for the industry. This includes Judge Starr’s reasoning that Dodd-Frank may be entirely inapplicable if the transactions weren’t offered on a margined, leveraged, or finance basis; however, the court didn’t resolve this issue because it purportedly can’t say that this was conclusively established.
The district court decision won’t be binding authority in other cases or courts. Nonetheless, it will surely be cited in opposition enforcement actions going forward. The decision chips away at the CFTC’s arguments for jurisdiction over precious metals dealers and could mark the beginning of a radical change in the CFTC’s enforcement authority.
The individual Defendants Asher and Batashvili have filed a Motion to Reconsider the Court’s ruling on the Motion for Summary Judgment— “in light of subsequent conversations among the parties—which confirm Plaintiffs’ claims are not supported by law or fact.”
In addition, Batashvili was recently indicted on criminal charges for allegedly devising a scheme to defraud investors.
Bottom Line
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