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Commodity Futures Trading Commission v. JBW Capital, LLC

United States Court of Appeals, First Circuit

January 29, 2016

COMMODITY FUTURES TRADING COMMISSION, Plaintiff, Appellee/Cross-Appellant,
v.
JBW CAPITAL, LLC; JOHN B. WILSON, Defendants, Appellees/Cross-Appellees.

APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Richard G. Stearns, U.S. District Judge]

Philip M. Giordano, with whom Siobhan M. Tolan, Giordano & Company, P.C., and Reed & Giordano, P.A. were on brief, for appellants.

Ajay B. Sutaria, Counsel, Commodity Futures Trading Commission, with whom Jonathan L. Marcus, General Counsel, and Robert A. Schwartz, Deputy General Counsel, were on brief, for appellee.

Before Torruella, Lynch, and Barron, Circuit Judges.

LYNCH, Circuit Judge.

In this commodity trading fraud case brought by the Commodity Futures Trading Commission ("CFTC" or "Commission") against John B. Wilson and JBW Capital LLC ("JBW"), the Massachusetts federal district court granted on summary judgment the CFTC's request for a finding of liability, and imposed injunctive relief and civil penalties. It declined to award restitution, as measured by loss to pool participants. As a result, both sides have appealed.

Specifically, Wilson and JBW contest the district court's conclusion that they are liable under the Commodity Exchange Act ("CEA") for failing to register with the CFTC, in violation of 7 U.S.C. § 6m(1), and for violating two commodity fraud provisions, §§ 7 U.S.C. 6b(a)(1) and 6o(1). They claim that there are disputed issues of material fact, that the district court erred as a matter of law in its analysis of scienter under 7 U.S.C. § 6o(1)(A) and (B), and that the district court was required to give them an evidentiary hearing with regard to remedies and civil penalties. The CFTC cross-appeals, arguing that the district court erred in its decision not to award restitution. We affirm.

I.

On review of an order granting summary judgment, we recite the facts "in the light most favorable to the nonmoving party." Del Valle-Santana v. Servicios Legales De Puerto Rico, Inc., 804 F.3d 127, 129 (1st Cir. 2015). Here, in violation of the Federal Rules of Appellate Procedure, Wilson and JBW[1] have provided no recitation of the facts with citations to the record, instead devoting almost their entire brief to simply asserting there are many issues of fact in their argument section.[2]Nonetheless, we have tried to recite the facts from the record in the light most favorable to Wilson.

On July 23, 2007, JBW (which stands for "John B. Wilson") was registered as a Massachusetts limited liability company. JBW's Operating Agreement stated that its "specific business purposes and activities contemplated by the founders of this LLC" included to "invest in stocks, bonds, derivatives, commodity futures, financial futures, stock index futures, options on stocks, and options on futures."

Wilson was listed as the only registered agent in the Operating Agreement and the Certificate of Organization, and in an affidavit, Wilson said that he was the "manager and sole administrator" of JBW. Wilson was also listed as the only manager in the Operating Agreement, which said that except as otherwise specified or provided under state law, "all management decisions relating to the LLC's business shall be made by and be the sole responsibility of the Manager." Wilson testified[3] that he was the only person with trading authority over JBW's account.

Wilson did not register as a commodity pool operator ("CPO") with the CFTC, nor did he file a notice with the National Futures Association ("NFA") stating he was exempt from registration. Before his tenure with JBW, Wilson had been registered with the NFA from about 2005 to 2006 as an associated person of Tradex Group LLC. He also previously had a personal commodity futures account, which Wilson testified was not profitable.

In September 2007, Wilson's brother and a number of acquaintances invested in JBW. Wilson referred to these investors as "founders." Their investments were used to create a fund, and JBW began trading in October 2007, in part using an algorithm called the "Humphrey Program." By January 2008, JBW had thirteen investors and approximately $369, 890 in contributions. According to a CFTC Division of Enforcement investigator, JBW's bank records showed that between 2007 and 2008, at least twenty-five investors deposited about $2 million in JBW's bank account.

Wilson testified that he did not tell his investors that he "had limited experience trading on commodities, " though he agreed that he "had limited experience." There was no requirement that the investors have trading experience, and as far as Wilson was aware, the investors, other than his brother, had "no experience in futures trading." He said that he told some, but not all, of the investors about the risks involved with commodity futures trading, and there was no document of any kind given to investors describing the risks of engaging in commodity futures trading.

JBW began trading in October 2007 and stopped trading in September 2009, and its account at MF Global, Inc., a commodity broker, was closed in May 2010. Wilson lost almost $1.8 million in trades and returned about $227, 000 to investors.

Wilson e-mailed investors with JBW's Net Asset Value ("NAV") on a weekly, biweekly, or quarterly basis. On at least four instances, Wilson's e-mails overstated JBW's value. First, a December 1, 2007, e-mail stated that as of November 30, 2007, "Today's NAV" was $159, 460.95, while JBW's November 30, 2007, bank statement listed its "Account Value at Market" as $147, 281.51. Second, a December 21, 2007, e-mail stated that as of December 21, "Today's NAV" was $180, 071.71, while JBW's December 31, 2007, bank statement listed its account value at market as $177, 385.40.[4]Third, a March 1, 2008, e-mail said that "Today's NAV" was $566, 076.07, while JBW's February 29, 2008, bank statement listed its account value at market as $553, 523.54. Fourth, a May 30, 2008, e-mail said that "Today's NAV" was $2, 029, 271.45, while JBW's May 30, 2008, bank statement listed its account value at market as $1, 041, 399.80.

As to this last egregious overstatement, Wilson said that the amount provided as "Today's NAV" in the May 30, 2008, eĀ­mail was an "estimate, " but he acknowledged that the word ...


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