Commodity Trend v. CFTR , 233 F.3d 981 ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 99-4142, 99-4143 & 00-3734
Commodity Trend Service, Inc.,
Plaintiff-Appellant,
v.
Commodity Futures Trading Commission,
Defendant-Appellee.
Commodity Futures Trading Commission,
Petitioner-Appellee,
v.
Dennis Blitz and Nick Van Nice,
Respondents-Appellants.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern
Division.
Nos. 97 C 2362 & 98 C 6057--Wayne R. Andersen,
Judge.
In Re:
CTS Financial Publishing, Inc.,
f/k/a Commodity Trend Service, Inc.,
Dennis Blitz, Nick Van Nice, and
Dearborn Financial Publishing, Inc.,
Petitioners.
Petition for Writ of Injunction against the
Commodity Futures Trading Commission
No. 00-34
Argued November 9, 2000--Decided November 28,
2000
Before Flaum, Chief Judge, and Ripple and
Kanne, Circuit Judges.
Flaum, Chief Judge. Plaintiff Commodity
Trend Service, Inc., now known as CTS
Financial Publishing, Inc. ("CTS"),
appeals the determination that it is
subject to the antifraud provisions of
the Commodity Exchange Act ("CEA"). The
principals of CTS, Dennis Blitz and Nick
Van Nice, appeal the enforcement of an
administrative subpoena issued by the
Commodity Futures Trading Commission
("CFTC"). For the reasons stated herein,
we affirm both of the district court’s
decisions.
I. Background
CTS provides impersonal advice about the
commodities markets to its customers
through a number of publications and
other means, such as faxes and telephone
messages. CTS does not tailor its advice
based on the particular circumstances or
financial goals of its customers, nor
does it execute any trades on their
behalf. In addition to these products,
CTS distributes advertisements that
provide both information regarding its
wares and testimonials about the profits
that can be generated by following CTS’s
recommendations. In July 1996, the CFTC
began investigating CTS to determine
whether the business should be required
to register as a commodity trading
advisor ("CTA") under 7 U.S.C. sec. 6m.
The CFTC sought to subpoena a wide range
of documents from Nice and Blitz
regarding CTS’s advertisements,
publications, and other products. CTS
filed a complaint claiming on First
Amendment grounds that the CEA’s
registration requirements were both
overbroad and could not be applied to
CTS. The district court held that CTS’s
claims were unripe, but we reversed in
the first decision regarding this case.
See Commodity Trend Serv. v. CFTC, 149
F.3d 679 (7th Cir. 1998).
On remand, CTS continued its facial and
as-applied First Amendment challenges to
the registration requirements and added
new arguments attacking 7 U.S.C. sec. 6b
and 7 U.S.C. sec. 6o, which are antifraud
provisions of the CEA, as well as 17
C.F.R. sec. 4.41, which is an antifraud
regulation promulgated by the CFTC that
applies to advertising. After considering
CTS’s arguments, the district court found
that the registration requirements of the
CEA as applied to an impersonal advisor
such as CTS are a prior restraint that
violates the Constitution. However, the
court also held that sec. 6o and
Regulation 4.41 apply to CTS, rejecting
CTS’s statutory and constitutional
arguments (the court did not reach the
question of whether sec. 6b covers CTS).
On the basis of its decision, the
district court granted the CFTC’s motion
to enforce its administrative subpoenas
to the extent that the CFTC was seeking
to investigate CTS regarding activities
prohibited by the CEA’s antifraud laws.
The court denied CTS’s motion to stay the
enforcement of the subpoenas pending this
appeal, and CTS was required to turn over
various products and documents to the
CFTC.
CTS appeals the district court’s
decision that it is subject to the CEA’s
antifraud provisions, and Nice and Blitz
appeal the subpoena enforcement based on
that decision./1 CTS does not challenge
the determination that it falls within
the definition of a CTA. Shortly before
oral argument in this case, the CFTC, in
part because of the materials discovered
through its subpoenas, issued a complaint
against CTS, initiating an administrative
enforcement proceeding. CTS filed a
motion to enjoin these proceedings until
this court decided the instant case.
CTS’s request for an injunction is
rendered moot by this decision.
II. Discussion
This case presents three stages of
analysis. Initially, we must determine
whether CTS’s challenges are ripe for
resolution by the courts. If this case is
ripe, then we must consider if two
provisions of the CEA and one CFTC
regulation apply to CTS as a matter of
statutory interpretation. Finally, if CTS
is covered by any of these statutes or
regulations, we must determine whether
these laws are constitutional as applied
to CTS.
A. Ripeness
The CFTC argues that neither CTS’s
statutory and as-applied First Amendment
challenges nor its identical claims in
the subpoena enforcement proceeding are
ripe for judicial decision. Analyzing
each case under the applicable legal
standards, we reject the CFTC’s
contentions and find that both cases are
susceptible of judicial resolution with
the exception of one constitutional issue
discussed below.
1. CTS’s complaint.
The legal standards for determining when
an as-applied constitutional challenge is
ripe are set forth in Commodity Trend
Service, 149 F.3d at 688-90, and need not
be reiterated at length here. An
administrative determination is ripe for
review if (1) it is fit for judicial
resolution, and (2) the parties would
endure hardship from the withholding of
court consideration. See Ohio Forestry
Ass’n v. Sierra Club, 523 U.S. 726, 733
(1998) (citing Abbott Labs. v. Gardner,
387 U.S. 136, 149 (1967)). CTS is still
suffering from the same hardships of
curbing the content of its publications,
being chilled from engaging in speech,
and undergoing costly compliance with the
CFTC’s investigation that we previously
found sufficient to satisfy the hardship
prong of the Abbott Laboratories test.
149 F.3d at 689-90. Thus, the second part
of the ripeness test is satisfied.
The CFTC focuses its challenge on the
first part of the ripeness determination.
The CFTC claims that this case presented
a purely legal question the first time
because CTS admitted that it was covered
by the registration requirements of sec.
6m, and so no facts were in dispute. By
contrast, in the current stage of this
litigation, CTS does not admit that it is
committing fraud punishable under the
relevant provisions of the CEA. The CFTC
argues that further factual development
through administrative procedures in
order to determine whether CTS is
committing fraud is necessary before a
court should intervene.
The CFTC’s argument is foreclosed by
this court’s prior decision, where we
held that a case is ripe under Abbott
Laboratories when Babbitt v. United Farm
Workers Nat’l Union, 442 U.S. 289 (1979)
is satisfied. 149 F.3d at 687 & n.3. In
Babbitt, the plaintiffs challenged a
statute that made "dishonest, untruthful,
and deceptive publicity" an unfair labor
practice when used to discourage
consumers from purchasing agricultural
products. 442 U.S. at 301. The plaintiffs
alleged that they did not deliberately
intend to publicize falsely, but that
erroneous statements are inevitable in
the course of public speaking. These
innocent falsehoods could subject the
plaintiffs to prosecution under the
statute, which could be avoided only by
the plaintiffs curtailing the exercise of
their First Amendment rights. The Supreme
Court stated that these circumstances
were sufficient for the plaintiffs to
have a reasonable fear of prosecution and
that no further factual development was
necessary. The Court thus held that the
challenge in Babbitt was ripe. Id. at
302.
CTS’s position is identical in all
relevant respects to the Babbitt
plaintiffs. CTS alleges that it does not
intend to make false statements about the
commodities markets, but given the volume
of its publications some misstatements
are inevitable. Such falsehoods would
subject them to administrative
investigation and proceedings by the
CFTC. Because CTS had a reasonable fear
of being subject to administrative
proceedings at the time CTS filed
itscomplaint, given CFTC’s investigation
and subpoenas, no further factual
development is necessary. We hold that
the purely legal question presented by
CTS’s challenge--namely, is an impersonal
trading advisor subject to the fraud
provisions of the CEA--combined with
these facts showing a reasonable fear of
prosecution satisfy the first part of the
Abbott Laboratories test. Thus, CTS’s
complaint is ripe.
2. Subpoena enforcement proceedings.
A court exercises only limited review of
an agency’s actions in a subpoena
enforcement proceeding and does not
normally consider the merits of a party’s
claim that it has not violated a statute
administered by the agency. As a general
rule, courts enforce an administrative
subpoena if: (1) it reasonably relates to
an investigation within the agency’s
authority, (2) the specific inquiry is
relevant to that purpose and is not too
indefinite, (3) the proper administrative
procedures have been followed, and (4)
the subpoena does not demand information
for an illegitimate purpose. See CFTC v.
Tokheim, 153 F.3d 474, 477 (7th Cir.
1998); EEOC v. Quad/Graphics, Inc., 63
F.3d 642, 645 (7th Cir. 1995). An agency
may investigate to determine whether it
has jurisdiction over a party as long as
the party’s conduct superficially appears
to bring it within the jurisdiction of
the agency, that is, as long as the
agency is not engaged in impermissible
overreaching. See Tokheim, 153 F.3d at
477-78. However, this general rule of
limited judicial scrutiny of
administrative subpoenas is subject to
certain exceptions. In particular,
judicial review to determine whether a
party has violated the statute or
regulations is appropriate at the
subpoena enforcement stage if the
investigation is excessively burdensome
so as to threaten the normal operation of
the party’s business. See id. at 478;
Quad/Graphics, 63 F.3d at 648-49.
We hold that the CFTC’s subpoenas
satisfy the four-part test, but that the
excessive burden exception applies. 7
U.S.C. sec. 12(a) gives the CFTC the
power to investigate persons that are
covered by the CEA; CTS does not contest
that it is a CTA and so subject to the
CEA. The subpoenas are reasonably
definite in requesting materials from CTS
that are relevant to investigating
whether the CEA’s antifraud provisions
have been violated. There is no
allegation that the CFTC has not followed
the proper procedures or is acting in bad
faith. However, the issuance of the
subpoenas has altered the normal
operations of CTS’s business, as related
in this court’s first opinion, and their
enforcement would (and did) exacerbate
these effects. 149 F.3d at 689-90. CTS
has diluted its current publications, and
has decided to abandon plans to expand
its business to produce additional
products. Between 1996 and 1998, CTS’s
sales decreased by more than twenty-five
percent, a drop that CTS attributes to
the CFTC’s investigation and subpoenas.
CTS has been forced to phase out three of
its employee positions in response to its
declining revenues. In addition, two of
CTS’s columnists have refused to write
articles for fear of government reprisal.
Such facts demonstrate that the subpoenas
have changed the normal operations of
CTS’s business, and thus the merits of
CTS’s legal challenge can be considered
at the subpoena enforcement stage./2
B. Statutory Interpretation
Having found that CTS’s challenges are
ripe, we address its statutory arguments.
CTS claims that the antifraud provisions
of the CEA do not apply to impersonal
commodity advisors as a matter of
interpretation. The CFTC’s construction
of the CEA is entitled to Chevron
deference. See CFTC v. Schor, 478 U.S.
833, 844 (1986); Indosuez Carr Futures,
Inc. v. CFTC, 27 F.3d 1260, 1264 (7th
Cir. 1994); Geldermann, Inc. v. CFTC, 836
F.2d 310, 315 (7th Cir. 1987). Under
Chevron, we first determine whether
Congress has addressed the question at
issue. See FDA v. Brown & Williamson
Tobacco Corp., 529 U.S. 120, 120 S.Ct.
1291, 1300 (2000). If not, then we defer
to the CFTC’s construction of the CEA as
long as it is reasonable. Id.
1. 7 U.S.C. sec. 6o and 17 C.F.R. sec.
4.41.
7 U.S.C. sec. 6o(1) states in relevant
part:
It shall be unlawful for a commodity
trading advisor . . . by use of the mails
or any means or instrumentality of
interstate commerce, directly or
indirectly--
(A) to employ any device, scheme, or
artifice to defraud any client . . . or
prospective client . . .; or
(B) to engage in any transaction,
practice, or course of business which
operates as a fraud or deceit upon any
client . . . or prospective client . . .
.
The relevant part of 17 C.F.R. sec.
4.41(a) contains nearly identical
language and prohibits CTAs from
advertising in a manner that violates
sec. 6o(1). Both the statute and the
regulation speak of defrauding "clients."
CTS argues that the plain meaning of
"client" is one who receives personalized
advice within a fiduciary relationship or
one on whose behalf a broker executes
trades. Because CTS provides only
impersonal advice and is not a broker,
CTS claims that holding it liable under
sec. 6o or Regulation 4.41 would be
contrary to the intent of Congress. Under
the first step of Chevron, we must
determine whether the word "client" as
used in the statute is ambiguous./3 CTS
provides a number of reasons as to why
"client" unambiguously refers to only
brokers or those who provide personalized
advice, but none of these is convincing.
CTS first argues that the Supreme Court
has held that "client" is limited to
personalized relationships or to brokers
in a similar statute. Lowe v. SEC, 472
U.S. 181 (1985) held that impersonal
advisors are exempt from regulation under
the Investment Advisers Act ("IAA"). The
Court stated that two factors were
"significant" in reaching its conclusion
that the IAA applies only to those "who
provide personalized advice attuned to a
client’s concerns." Id. at 207-08 & n.54,
210 n.57. First, the Court noted that the
IAA "repeatedly refers to ’clients,’ not
’subscribers.’" Id. at 208 n.54; see also
id. at 201 n.45. Second, the SEC did not
establish that Lowe and the other
petitioners had "authority over the funds
of subscribers," "been delegated
decisionmaking authority to handle
subscribers’ portfolios or accounts," or
"individualized, investment-related
interactions" with their subscribers. Id.at 210 n.57. Also, the Court concluded by
stating that Lowe and his corporations
were presumptively not within the IAA as
long as "the communications between
petitioners and their subscribers remain
entirely impersonal and do not develop
into the kind of fiduciary, person-to-
person relationships . . . that are
characteristic of investment adviser-
client relationships." Id. at 210.
However, at least two reasons exist for
deciding that the word "client" in the
CEA is not limited to personalized
relationships or brokers. First, the CEA
has a broader scope than the IAA. In
Lowe, the Supreme Court held that
impersonal advisors are excluded from the
key definition of "investment adviser"
("IA") in the IAA because they fit within
the exception for publishers. 15 U.S.C.
sec. 80b-2(a) (11)(D); 472 U.S. at 206.
While some persons are excluded from the
definition of an IA only if their advice
concerning securities is solely
incidental to their other activities, the
exceptions for publishers is not so
limited. 15 U.S.C. sec. 80b-2(a)(11).
Thus, bona fide publishers are not IAs
even if their entire business concerns
giving impersonal securities trading
advice. Moreover, because impersonal
advisors are excluded from the definition
of IAs, they are wholly exempt from the
IAA because the antifraud and other
provisions of that Act apply only to IAs.
By contrast, the CEA exempts publishers
from the definition of CTA only if their
giving of advice concerning the
commodities markets is solely incidental
to their publishing business. 7 U.S.C.
sec. 1a(5). Impersonal publishers such as
CTS, whose commodities advising is
conceded to be more than solely
incidental to its publishing activities,
are included within the definition of
CTA, even though an analogous publisher
would be excluded from the definition of
IA. Because CTS is a CTA, all of the
provisions of the CEA regarding CTAs,
including sec. 6o and Regulation 4.41,
are applicable to CTS. If the antifraud
provisions did not apply to CTS because
the use of the word "client" limited
these provisions only to personalized
relationships, then CTS would be subject
to the CEA because of its status as a
CTA, but almost none of the CEA’s
provisions would apply to it (the
significance of the one part of the
statute that appears to draw a
distinction between "subscribers" and
"clients" is addressed below). This
anomalous result casts doubt on CTS’s
claim that "client" refers only to those
with whom an advisor has a personalized
relationship or for whom a person serves
as a broker.
Second, in the CEA section that
announces congressional findings,
Congress states that CTAs’ "advice,
counsel, publications, writings,
analyses, and reports . . . and
theircontracts, solicitations,
subscriptions, agreements, and other
arrangements with clients" are affected
with a national public interest. 7 U.S.C.
sec. 6l. The breadth of the language used
in this statement indicates that Congress
intended to include impersonal advisors
within the definition of CTA and intended
to subject such advisors to the antifraud
provisions of the CEA. In particular,
this section shows that "subscriptions"
are a kind of arrangement with "clients,"
indicating that even those who merely
subscribe to impersonal publications are
"clients" of a CTA. Admittedly, this
section does not explicitly state that
clients include those who receive
impersonal advice, but its broad language
brings the opposite assertion into
question.
CTS’s second claim is that the
definition of "client" in everyday
language includes only those with whom
one has a personalized or fiduciary
relationship. The CEA does not define
client, so we assume that Congress
intended the word to have its ordinary
meaning. See, e.g., Williams v. Taylor,
___ U.S. ___, 120 S. Ct. 1479, 1488
(2000). The primary definition of
"client" in modern dictionaries is a
person who receives services or advice
from a professional such as an attorney,
indicating personalized advice. However,
dictionaries also include "customer,"
which is one who simply purchases a
product without any personalization, as a
definition of "client." See Encarta World
English Dictionary 340-41 (1999)
("CUSTOMER a person or organization to
whom goods or services are provided and
sold"); The American Heritage Dictionary
356 (3d. ed. 1992) ("A customer or
patron: clients of the hotel"); 3 The
Oxford English Dictionary 320 (2d. ed.
1989) ("a customer"); The Random House
Dictionary 386 (2d. ed. 1987) ("a
customer"); Webster’s Third New
International Dictionary (1981) ("PATRON,
CUSTOMER") (all capitalization and
italics in originals). "The existence of
alternative dictionary definitions of" a
word, "each making some sense under the
statute, itself indicates that the
statute is open to interpretation" and
the word is ambiguous as between the two
meanings. National R.R. Passenger Corp.
v. Boston & Maine Corp., 503 U.S. 407,
418 (1992); see also MCI Telecomms. Corp.
v. AT & T Co., 512 U.S. 218, 226-27
(1994).
The use of both "client" and
"subscriber" in one provision of the CEA,
7 U.S.C. sec. 6n(3)(A), and in some of
the CFTC’s regulations, 17 C.F.R.
sec.sec. 4.33(a), 166.1(c), forms the
basis of CTS’s third contention. CTS
claims that "subscriber" covers customers
who receive only impersonal advice while
"client" means customers who receive
personal advice. If "client" includes
those who receive impersonal advice, then
"subscriber" will be rendered mere
surplusage in contravention of the
interpretive canon that all words in a
statute should, if possible, be given
effect. See Dunn v. CFTC, 519 U.S. 465,
472 (1997); Bailey v. United States, 516
U.S. 137, 145-46 (1995). However, the
surrounding context of the statute can
overcome the presumption of a canon. See,
e.g., Dewsnup v. Timm, 502 U.S. 410, 417
(1992). As described above, 7 U.S.C. sec.
6l indicates that subscriptions are a
type of arrangement with clients for the
purposes of the CEA and so "subscribers"
are a type of "client." Thus, the
statutory text implies that the word
"subscriber" is subsumed by the word
"client," which is sufficient to rebut
the canon that each word or phrase in a
statute should be given independent
meaning. Therefore, the presumption
against treating statutory terms as
surplusage does not aid CTS.
CTS’s fourth argument is that
interpreting "client" to include
impersonal advisors would lead to absurd
results because the CFTC has interpreted
the CEA’s antifraud provisions to impose
fiduciary duties. CTS posits examples
such as parties on opposite sides of a
commodities transaction each relying on
CTS’s products, in which case CTS would
have violated its duty of loyalty to both
parties. The CFTC agrees that the CEA
imposes fiduciary obligations, but claims
that the content of these duties varies
depending on the type of CTA.
However, the CEA does not impose
fiduciary duties on impersonal advisors.
The leading authority for the proposition
that the CEA imposes fiduciary
obligations on all CTAs is Savage v.
CFTC, 548 F.2d 192, 197 (7th Cir. 1977).
However, Savage cannot be read so
broadly; the party in that case offered
personalized advice, id. at 194, and so
would be considered a fiduciary under the
common law. Nothing in sec. 6o indicates
an intent on the part of Congress to
impose fiduciary duties on impersonal
advisors. Section 17(a) of the Securities
Act of 1933, 15 U.S.C. sec. 77q(a), which
contains language similar to 7 U.S.C.
sec. 6o, does not impose fiduciary
duties. See Trussell v. United
Underwriters, Ltd., 228 F. Supp. 757, 762
(D. Colo. 1964); see also SEC v. Maio, 51
F.3d 623, 631 (7th Cir. 1995) (holding
that a breach of a fiduciary duty
connected with trading on material
nonpublic information is necessary for a
violation of sec. 17(a), indicating that
sec. 17(a) does not impose any
independent fiduciary duties by its own
language). Similarly, sec. 206 of the
IAA, 15 U.S.C. sec. 80b-6, does not
impose any new fiduciary duties, but only
enforces already existing duties between
clients and IAs. As the Supreme Court
held in Lowe, the definition of IAs is
limited to personalized advisors who have
fiduciary relationships with their
clients as a matter of common law. See
SEC v. Capital Gains Research Bureau,
Inc., 375 U.S. 180, 194 (1963) ("Congress
recognized the investment adviser to be"
"a fiduciary."); id. at 201 ("The
statute, in recognition of the adviser’s
fiduciary relationship to his clients,
requires that his advice be
disinterested.") (emphasis added). An
analogous interpretation applies to the
CEA, which effectuates the extant
fiduciary duties of personalized advisors
and other agents but does not impose
fiduciary obligations on impersonal
advisors. See generally Hlavinka v. CFTC,
867 F.2d 1029, 1033 (7th Cir. 1989)
(stating that a commodities advisor is
not a fiduciary for purposes of the CEA
where the customer makes his own
independent trading decisions); CFTC v.
Heritage Capital Advisory Servs., Ltd.,
823 F.2d 171, 173 (7th Cir. 1987)
(rejecting breach of fiduciary duty claim
under the CEA because only brokers who
operate discretionary accounts are
fiduciaries). Section 6o does not permit
the CFTC to impose fiduciary duties on
impersonal CTAs such as CTS. Rather,
these provisions permit the CFTC to bring
proceedings against impersonal CTAs who
commit fraud or engage in practices that
operate as fraud and impose remedies to
correct such violations. Thus, CTS’s fear
of being subjected to wide-ranging
fiduciary duties is not a persuasive
reason to decide that "client"
unambiguously refers only to those who
provide personal advice.
Fifth and finally, CTS claims that the
antifraud provisions of the CEA raise
serious constitutional questions and we
should interpret the statute to avoid
such issues. See, e.g., Jones v. United
States, 526 U.S. 227, 239-40 (1999).
However, the parts of the CEA at issue do
not present such grave questions that the
constitutional avoidance canon should be
employed. See Rust v. Sullivan, 500 U.S.
173, 191 (1991); see also Almendarez-
Torres v. United States, 523 U.S. 224,
237-38 (1997) (stating that the avoidance
canon must be applied judiciously in
order to avoid distorting policy choices
of elected representatives). CTS claims
that constitutional questions led the
Supreme Court in Lowe to hold that the
IAA applies only to impersonal advisors.
To the extent that constitutional
concerns motivated the majority’s opinion
in Lowe, these were directed at the IAA’s
registration requirements. 472 U.S. at
210. Registration for impersonal advisors
raises much more serious constitutional
questions than antifraud provisions
because registration operates as a form
of prior restraint, which bears a strong
presumption of unconstitutionality. See
Schultz v. City of Cumberland, 228 F.3d
831, 851 (7th Cir. 2000). Because of the
CFTC’s recent regulation exempting imper
sonal advisors from registration under
the CEA, 17 C.F.R. sec. 4.14(a)(9), the
constitutional issues that concerned the
Supreme Court in Lowe are not present in
the instant case. We find that the
antifraud provisions alone, detached from
the registration requirement, do not
raise the grave constitutional concerns
that would require this court to
determine that "client" unambiguously
refers to only those receiving
personalized advice. See R&W Technical
Servs. Ltd. v. CFTC, 205 F.3d 165, 175-76
(5th Cir. 2000).
None of CTS’s contentions demonstrates
that the word "client" as used in the CEA
unambiguously means only those who
receive personalized advice. Instead, the
definition of "client" is uncertain
because it can refer to merely those who
receive tailored advice from
professionals or those who receive any
kind of service regardless of whether it
is personalized. Thus, the first step of
Chevron is satisfied in favor of the CFTC
and we proceed to the second step:
determining whether the agency’s
interpretation is reasonable. CTS does
not make any arguments on this point, and
we find no reason to conclude that the
CFTC’s construction is unreasonable. 7
U.S.C. sec. 6l indicates that Congress
intended for the CEA to have a broad
reach, and the CFTC appears to be
effectuating that purpose. Thus, we defer
to the CFTC’s interpretation of "client"
in applying the CEA and conclude that
sec. 6o and Regulation 4.41 can be
applied to CTS.
2. sec. 6b.
The relevant part of 7 U.S.C. sec. 6b(a)
states that:
It shall be unlawful . . . (2) for any
person, in or in connection with any
order to make, or the making of, any
contract of sale of any commodity for
future delivery, made, or to be made, for
or on behalf of any other person if such
contract for future delivery is or may be
used for . . . (B) determining the price
basis of any transaction in interstate
commerce in such commodity . . . --[to
commit fraud, willful deception, or
certain manipulative acts].
CTS claims that the "for or on behalf of"
language relates back to "any person."
According to CTS, sec. 6b only applies to
people who make contracts "for or on
behalf of" other people, that is, brokers
and other agents. The CFTC claims that
this key phrase relates back to "any
contract," and thus any person, not just
a broker, who commits fraud in connection
with a contract made for another person
has violated sec. 6b./4
CTS is correct regarding the meaning of
sec. 6b. The CFTC’s reading would render
the "for or on behalf of" language mere
surplusage. According to the CFTC, this
phrase only specifies that the contract
must be made on behalf of someone other
than the party committing fraud. Since a
person cannot defraud him or herself
through contract or otherwise, Congress
could have omitted "for or on behalf of"
and the statute would have the exact same
meaning as the CFTC now proposes. Thus,
the CFTC’s construction contravenes the
aforementioned canon that each word or
phrase in a statute should be given
effect if possible. See Dunn, 519 U.S. at
472. Unlike in the above discussion of
sec. 6n(3)(A), where the CFTC pointed to
sec. 6l as indicating that a subscriber
is a type of client, the CFTC does not
provide any evidence that Congress
intended "for or on behalf of" to be
subsumed by some other part of sec.
6b(a). Thus, "for or on behalf"
unambiguously refers to "any person," and
therefore the provision applies only to
brokers or others who have an agency
relationship with their clients./5
Because CTS does not have such a
relationship with its customers, sec. 6b
cannot be applied to CTS.
C. Constitutionality
Because sec. 6o and Regulation 4.41 as
reasonably construed by the CFTC apply to
CTS’s activities, we must consider CTS’s
constitutional claims. CTS contends that
sec. 6o and Regulation 4.41 cannot be
applied to an impersonal speaker on a
public topic, such as the commodities
markets, consistent with the First
Amendment because parts of these
provisions lack a scienter requirement.
CTS also objects on constitutional
grounds to any attempt by the CFTC to
force CTS to make affirmative
disclosures, claiming that this compelled
speech violates CTS’s First Amendment
rights. We first examine whether the
antifraud provisions can be used to
punish CTS for speaking, and then
consider whether CTS can be forced to
speak.
1. Restricted speech.
a) Overview of fraud and the First
Amendment.
The case law regarding fraudulent speech
and the First Amendment establishes a
number of general principles which guide
this court’s inquiry. Laws directly
punishing fraudulent speech survive
constitutional scrutiny even where
applied to pure, fully protected speech.
See McIntyre v. Ohio Elections Com’n, 514
U.S. 334, 357 (1995); Riley v. National
Fed’n of the Blind of N.C., Inc., 487
U.S. 781, 795, 800 (1988); Village of
Schaumburg v. Citizens for a Better
Environment, 444 U.S. 620, 637 (1980);
Schneider v. State, 308 U.S. 147, 164
(1939); CFTC v. Vartuli, 228 F.3d 94, 110
(2d Cir. 2000); R&W Technical Servs., 205
F.3d at 175. Fraud is normally defined as
requiring that the speaker act with
scienter. See Capital Gains, 375 U.S.
180, 192 (1963); Black’s Law Dictionary
670-71 (7th ed. 1999). The government is
not limited only to explicit antifraud
measures to prevent its citizens from
being defrauded; certain other narrowly
tailored measures with a direct
relationship to preventing fraud may be
used as well. See McIntyre, 514 U.S. 334,
349-51, 353; Riley, 487 U.S. at 795, 800;
Village of Schaumburg, 444 U.S. at 637-
38. However, the government cannot
overreach in its attempts to protect the
public from fraud. Laws that primarily
prohibit fully protected speech along
with potentially fraudulent speech often
violate the First Amendment, even if the
law’s stated purpose is to prevent fraud;
instead, more precise measures must be
used. See McIntyre, 514 U.S. at 343-44,
350-51, 357; Riley, 487 U.S. at 795;
Village of Schaumburg, 444 U.S. at 637.
Likewise, the government cannot label
certain speech as fraudulent so as to
deprive it of First Amendment protection.
See Riley, 487 U.S. at 794 n.8; Secretary
of State of Md. v. Joseph H. Munson Co.,
467 U.S. 947, 966-67 (1984); Village of
Schaumburg, 444 U.S. at 637.
Commensurate with its subordinate
position within the First Amendment
hierarchy, advertising receives less pro
tection from regulation than fully
protected speech. Misleading or deceptive
advertising may be prohibited in addition
to fraudulent commercial speech. See
Florida Bar v. Went For It, Inc., 515
U.S. 618, 623-24 (1995); Edenfield v.
Fane, 507 U.S. 761, 768 (1993); Virginia
State Bd. of Pharm. v. Virginia Citizens
Consumer Council, Inc., 425 U.S. 748,
771-72 (1976). Statutes that prohibit
truthful and nonmisleading commercial
speech in addition to fraudulent or
deceptive speech survive constitutional
scrutiny if the restriction is narrowly
drawn and directly and materially
advances a substantial state interest.
See Went For It, 515 U.S. at 624;
Edenfield, 507 U.S. at 768-69.
b) The CEA provision and the CFTC’s
regulation.
To understand CTS’s challenge, a
distinction between the two parts
contained in both sec. 6o(1) and
Regulation 4.41(a) must be recognized.
The first part of each of the CEA
provision and CFTC regulation prohibit a
CTA from employing "any device, scheme,
or artifice to defraud." 7 U.S.C. sec.
6o(1) (A); 17 C.F.R. sec. 4.41(a)(1).
This language requires that a CTA act
with scienter before being punished for
violating the statute. See Aaron v. SEC,
446 U.S. 680, 696 (1980); Messer v. E.F.
Hutton & Co., 847 F.2d 673, 677-78 (11th
Cir. 1988)./6 The second part of each
law punishes "any transaction, practice,
or course of business which operates as a
fraud or deceit." 7 U.S.C. sec. 6o(1)(B);
17 C.F.R. sec. 4.41(a) (2). This language
focuses upon the effect a CTA’s conduct
has on its investing customers rather
than the CTA’s culpability, and so does
not require a showing of scienter. See
Aaron, 446 U.S. at 696-97; Messer, 847
F.2d at 679. CTS argues that any
impersonal, public speech about a topic
of public interest cannot be punished by
the government absent a showing of
scienter. Because certain parts of the
CEA do not have such a requirement, CTS
asserts that applying these provisions to
it would be unconstitutional.
Applying the principles elaborated in
the previous section to the CEA antifraud
laws, we hold that all of the provisions
challenged by CTS pass constitutional
muster. Section 6o(1)(A) and Regulation
4.41(a)(1) require scienter and do no
more than prohibit common law fraud in
commodities transactions. Explicit
antifraud measures such as these do not
violate the First Amendment. While the
remaining two provisions do not require
scienter, both are of limited scope. Each
prohibits only certain activities that
deceive or defraud a CTA’s customers,
Messer, 847 F.2d at 679-80, and a showing
of negligence is required, see SEC v.
Hughes Capital Corp., 124 F.3d 449, 454
(3d Cir. 1997). Section 4.41(a)(2) is
constitutional because it applies only to
advertising, which is to say commercial
speech./7 The government can directly
regulate deceptive advertising without
any further justification. Section
6o(1)(B) is constitutional because it is
a narrowly tailored measure that is
directly related to preventing fraud in
statements that purport to convey factual
information. The provision is narrow
because it targets only a certain group
of deceptive activities and requires
negligence, and is directly related to
fraud because it punishes only a limited
group of activities that deceive or
defraud a CTA’s customers or potential
customers.
On the limited record before us, we must
assume that the CFTC intends to regulate
CTS only within the limits prescribed by
these provisions. If the CFTC were to
apply these laws more broadly to restrict
protected speech that cannot be shown to
be fraudulent as a matter of fact, then a
different case would be presented. In
particular, if the CFTC were to attempt
to punish statements that are more a
matter of opinion or belief, rather than
statements that could be empirically
shown to be false or deceptive, then more
serious constitutional issues would
exist. Cf. Riley, 487 U.S. at 803(Scalia, J., concurring) ("It is
axiomatic that, although fraudulent
misrepresentations of facts can be
regulated, the dissemination of ideas
cannot be regulated to prevent it from
being unfair or unreasonable.")
(citations omitted); Argello v. City of
Lincoln, 143 F.3d 1152 (8th Cir. 1998)
(holding that city’s interest in
preventing fraud could not justify
municipal ordinance against fortune-
telling).
2. Compelled speech.
CTS seeks to prevent the CFTC from
imposing any affirmative disclosure
obligations on its publications. The
judicial tests for compelled speech, as
elaborated below, require that a court
know the specific reason why the
disclosure was required and the content
of the disclosure. Because we have
neither of these facts, we hold that
CTS’s challenges are unripe. We divide
the discussion between commercial speech
and non-commercial speech.
The government can impose affirmative
disclosures in commercial advertising if
these are reasonably related to
preventing the public from being deceived
or misled. See Zauderer v. Office of
Disciplinary Counsel, 471 U.S. 626, 651
(1985); Vartuli, 228 F.3d at 108. Such a
disclosure must be no broader than
necessary to prevent the deceptive or
misleading advertising engaged in by the
party. See Encyclopaedia Britannica, Inc.
v. FTC, 605 F.2d 964, 972 (7th Cir.
1979); Porter & Dietsch, Inc. v. FTC, 605
F.2d 294, 307 (7th Cir. 1979); National
Comm’n on Egg Nutrition v. FTC, 570 F.2d
157, 164 (7th Cir. 1977). This inquiry is
inherently fact-intensive because a court
must examine the particular speech that
the government claims deceives or
misleads the public and determine whether
the specific affirmative disclosure
remedy imposed is no broader than
necessary to cure this problem. In the
instant case, we do not know what
statements of CTS’s that the CFTC has
found to be deceiving or misleading or
why. Nor do we know the language of the
affirmative disclosure that the CFTC may
impose on CTS’s advertisements. Because
of the absence of these crucial facts,
CTS’s challenge to any affirmative
disclosures in its commercial advertising
are not fit for judicial decision and are
thus unripe.
Regarding CTS’s fully protected speech,
the government’s power to compel speech
is "constitutional[ly] equivalen[t]" to
its power to silence speech. See Riley,
487 U.S. at 797. As explained above,
narrowly drawn laws that have a direct
relationship to preventing fraud about
factual matters do not violate the First
Amendment. Concomitantly, narrowly drawn
affirmative disclosures that directly
cure fraudulent speech are
constitutionally permissible. As with
commercial speech, affirmative
disclosures required in more protected
forms of speech must also be no broader
than necessary. We do not have sufficient
facts to apply these principles to any
potential affirmative disclosures that
may be required of CTS by the CFTC
because of the same lack of factual
development described above.
III. Conclusion
CTS’s statutory challenge and some of
its constitutional claims are ripe for
judicial resolution. Section 6o and
Regulation 4.41 apply to CTS because of
Chevron deference. Section 6b is limited
by its own language to agency
relationships and thus does not encompass
impersonal advisors such as CTS. The CEA
provisions either prohibit fraud,
regulate misleading commercial
advertising, or are narrowly drawn and
have a direct relationship to preventing
fraud, and thus are constitutional.
Further factual development is necessary
before we can determine whether
affirmative disclosure requirements by
the CFTC would violate the First
Amendment. This decision moots CTS’s
request for a temporary injunction. The
district court’s decisions granting
partial summary judgment against CTS and
enforcing in part the CFTC’s subpoenas
are Affirmed.
/1 The CFTC originally appealed the district court’s
decision that the registration requirements of
sec. 6m are unconstitutional as applied to CTS,
but voluntarily dismissed that appeal. The CFTC
has recently adopted a rule exempting from
registration CTAs that do not direct client
accounts and provide only impersonal trading
advice. 17 C.F.R. sec. 4.14(a)(9).
/2 Both parties focus on FTC v. Miller, 549 F.2d
452, 460-61 (1977), which appears to include a
broad exception to the normal rule that judicial
review of a party’s legal challenges in a
subpoena enforcement proceeding are limited.
Because the extreme burden exception applies to
CTS, we need not determine whether and how
subsequent decisions have limited Miller.
/3 Neither CTS nor the CFTC rely on the legislative
history of the CEA as a means of determining
Congress’s intent. Thus, the only evidence we use
to determine whether Congress intended for the
antifraud provisions to apply only to
personalized advisors or brokers is the statutory
language.
/4 The CFTC also directs this court’s attention to
a number of cases that have given a broad
interpretation to the "in or in connection with"
language in the statute, such as Hirk v.
Agri-Research Council, Inc., 561 F.2d 96, 103-04
(7th Cir. 1977). Such cases do not address the
"for or on behalf of" phrase and thus provide
minimal aid in resolving the specific issue
raised by CTS.
/5 In addition, we note that the CFTC has
interpreted sec. 6b to apply only to agency
relationships. See Hammond v. Smith Barney,
Harris Upham & Co., [1987-1990 Transfer Binder]
Comm. Fut. L. Rep. (CCH) para. 24,617 at 36,658
n.16 (CFTC 1990) ("Section 4b(A) of the Act only
applies where there is an agency-like
relationship between the damaged party and the
wrongdoer (i.e., when the wrongdoer is acting
"for or on behalf of [the] other person,) . .
.").
/6 While Aaron interpreted Section 17(a) of the
Securities Act of 1933, 15 U.S.C. sec. 77q(a),
this statute contains language almost identical
to the commodity laws in question. Thus, like the
Eleventh Circuit in Messer, we rely on judicial
interpretations of Section 17(a) in interpreting
7 U.S.C. sec. 6o(1).
/7 CTS alleges that its advertisements contain both
commercial and non-commercial speech. Assuming
this is true, the analysis is not seriously
affected. Commercial speech is separable from
other kinds of speech, and the CFTC must apply
the appropriate standard to the speech on which
it seeks to hang CTS’s liability. See City of
Cincinnati v. Discovery Network, Inc., 507 U.S.
410, 426 n.21 (1993); Board of Trustees of State
Univ. of N.Y. v. Fox, 492 U.S. 469, 474-75
(1989).