849 F2d 1475 Graham v. Commodity Futures Trading Commission

849 F.2d 1475

Unpublished Disposition

Charles E. GRAHAM, Petitioner,
Securities, Inc., Respondents.

NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel.

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No. 87-7411.


United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 7, 1988.
Decided June 20, 1988.


Before BRUNETTI and DAVID R. THOMPSON, Circuit Judges, and CARL A. MUECKE,** District Judge.




Mr. Charles E. Graham, the petitioner, seeks review of an Order of the Commodity Futures Trading Commission ("Commission") arising from a reparations proceeding. The Commission's Order affirmed an Administrative Law Judge's ("ALJ") findings of fact and conclusions of law denying Mr. Graham additional discovery and dismissing his complaint due to insufficiency of evidence. Graham's complaint alleged that Prudential Bache Securities Inc., the respondent, had violated the anti-fraud provisions of the Commodity Exchange Act ("Act") by using pressure tactics and misrepresentations in connection with the exchange of commodity futures contracts. Because the ALJ did not abuse his discretion in denying further discovery and the preponderance of evidence supports his findings of fact and conclusions of law, this Court will deny Graham's petition and affirm the Commission's Order.



Charles Graham has traded commodity futures contracts through various brokers since April of 1982. On December 7, 1983, he opened a non-discretionary commodity account with Prudential Bache ("Prudential"), a futures commission merchant duly registered under the Act. See 7 U.S.C. Section 2 (1982). Mr. Graham's account with Prudential was managed by Mr. Bruce Eisen, an account executive at Prudential.1 Eisen is registered under the Act as an associated person. See 7 U.S.C. Section 6(K) (1982). Because Graham's account was nondiscretionary, Eisen could not trade on the account without Graham's prior approval. Graham had previously dealt with Mr. Eisen when Eisen was employed by another brokerage firm. In fact, Mr. Graham transferred his account to Prudential in response to Eisen's employment move.


Upon transferring to Prudential, Mr. Eisen would occasionally call Graham in the early morning to inform him of current market prices and price fluctuations and how they affected his commodity account. Graham unprofitably traded his commodities after receiving such information on four separate occasions. On other occasions Graham received several allegedly improper margin calls from Prudential requiring him to deposit additional monies in order to maintain his accounts. None of Graham's future contracts was ever liquidated due to the margin calls, however.2 Mr. Graham believed that these communications involved misrepresentations used by Prudential to induce him to trade on his account regardless of profit in order to increase Prudential's exchange commissions.

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Mr. Graham closed his account with Prudential on October 15, 1984. He had a debit balance of thirty two thousand dollars. His out-of-pocket losses totaled just under thirty seven thousand dollars.



On November 13, 1984, Mr. Graham filed a complaint with the Commission pursuant to Section 14(a) of the Act. See 7 U.S.C. Section 18(a) (1982). Section 14(a) sets forth a "reparations procedure through which disgruntled customers of professional commodity brokers [may] seek redress for the brokers' violation of the Act...." Commodity Futures Trading Commission v. Schor, 478 U.S. 833, 835 (1986). Graham's complaint was three-pronged; it alleged that 1) his account "was mismanaged [with] possible intent to commit fraud"; 2) his account was "churn[ed] ... when a trusted relationship was misused to influence [him] to make more trades in [his] account"; and, similarly, 3) Prudential's unremitting "scare tactics and pressures" induced him to unprofitably alter his futures contract holdings. The complaint, as the ALJ correctly observed, failed to precisely specify what facts or conditions were misrepresented. Nevertheless, the ALJ concluded that the essence of the Mr. Graham's complaint was that Prudential misrepresented commodity prices and market conditions in order to intimidate him into accelerating trading in violation of Section 4(b) of the Act. See 7 U.S.C. 6(b) (1982).3 Significantly, the complaint failed to allege any irregularities between the time Graham placed his order with Prudential and the time Prudential actually placed the order with a particular board of trade.


After discovery and briefing, an evidentiary hearing was held on March 5, 1986. Although Mr. Graham's counsel informed the ALJ that he believed that a pretrial conference rather than a hearing was scheduled, the ALJ concluded that the evidentiary hearing would proceed. In the face of the hearing, Graham's counsel then requested leave for additional discovery concerning "branch order tickets," despite the fact that the discovery deadlines had long since expired. Branch order tickets record the time a commodity order is placed by a customer with his broker. Graham contended, for the first time, that there was a gap between the time he placed his order with Prudential and the time Prudential placed the order with the board of trade. Graham argued that the gap was significant because market conditions could have fluctuated adversely between the two order times. The branch order tickets would establish the existence of the gap.


Responding to Graham's request, Prudential stated that they had already provided him with all the branch order tickets on his account. Graham did not dispute this; rather, he was evidently unsatisfied with the tickets because several bore illegible time stamps. The ALJ noted the untimeliness of the request but nonetheless ordered Prudential to provide Graham with all the boards of trades' floor order tickets on Graham's account after the hearing in the hope of obtaining legible time stamps. Floor order tickets record the time that the branch order tickets were received and executed by the board. Thereafter, the ALJ set forth a post-hearing briefing schedule in which Mr. Graham was afforded the right to file a final reply to Prudential's response to Graham's initial post-hearing brief. Graham's post-hearing briefs were to include any evidence derived from his belated discovery requests.


Before Graham could file his timely reply, however, the ALJ determined that because Graham had failed to sufficiently substantiate his allegations of misrepresentation and intimidation, his complaint would be dismissed. Although not initially considered by the ALJ, Graham's reply argued that Prudential had failed to comply with the ALJ's order to provide Graham the floor order tickets. Upon receiving the ALJ's determination, Graham appealed directly to the Commission arguing that the ALJ improperly rendered his decision before the time provided by the ALJ to reply had actually expired.4 Concluding that the reply would have raised "apparently serious issues of discovery," on September 17, 1986, the Commission remanded the matter back to the ALJ with instructions to consider the discovery issues raised by the reply.


After considering the arguments presented in the reply and entertaining additional briefing, the ALJ concluded that Graham was not entitled to any additional discovery because the request was untimely and the requested information was outside the allegations of his complaint. Moreover, the ALJ found that Prudential had in fact provided Graham with all the ticket orders he requested pursuant to the March 5 order. The ALJ concluded that, despite the additional discovery, Mr. Graham had not satisfied his burden of proof. Accordingly, on November 6, 1986, the ALJ reinstated his May 27, 1986 determination. Mr. Graham appealed to the Commission once again, however. On August 19, 1987, "satisfied that the [ALJ's] initial decision [was] substantially correct in result ... and that no important question of law or policy ha[d] been raised," the Commission summarily affirmed the ALJ without opinion.


Mr. Graham's timely petition for review before this Court was filed on September 2, 1987.5



Mr. Graham's opening brief presents two arguments: 1) the ALJ's denial of Graham's request for additional discovery deprived him of due process of law as provided by the fifth amendment of the United States Constitution; and 2) the ALJ's findings of fact and conclusions of law were not supported by substantial evidence. Each argument will be discussed in turn.


A. Discovery.


As indicated above, Mr. Graham argues that the ALJ's denial of his request for additional discovery concerning the various ticket orders violated the fifth amendment's due process clause. However, "there is no basic constitutional right to pretrial discovery in [Commission] proceedings." Chapman v. Commodity Futures Trading Commission, 788 F.2d 408, 410 (CA7 1986), cf. Premex, Inc. v. Commodity Trading Commission, 785 F.2d 1403, 1408 (CA9 1986). "Nevertheless, the due process clause does insure the fundamental fairness of the [proceeding]. [Therefore], administrative convenience or even necessity cannot override the constitutional requirement of due process. However, in administrative hearings the [Commission] has wide latitude as to all phases of the conduct of the hearing, including the manner in which the hearing will proceed." Silverman v. Commodity Futures Trading Commission, 549 F.2d 28, 33 (CA7 1977) (citations omitted). Thus, if the proceeding was fundamentally fair, the ALJ's discovery rulings should only be reviewed for an abuse of discretion. Chapman, supra, at 411 and, Jett v. Sunderman, 86-6525, slip op. at 2676 (CA9 March 3, 1988) (in a securities case, district court's denial of discovery reviewed for abuse of discretion).


Perusal of the record in this matter reveals that, even assuming that the ALJ denied Graham's request for further discovery, the denial did not constitute an abuse of discretion or fundamental unfairness. To the contrary, Mr. Graham was afforded ample opportunity to obtain and submit evidence. Any discovery problems Graham encountered resulted from his violation of regulations of which he was fully aware. In fact, the record is replete with examples of Graham's unsanctioned disregard of the Act's discovery regulations. For example, although represented by counsel throughout the proceedings, Graham failed to file a single timely discovery request. Nonetheless, the ALJ still allowed Graham to proceed with post-hearing discovery. Graham obtained the branch order tickets, the floor order tickets and Prudential's other records on his account. While the ALJ did chastise Graham for dilatory discovery tactics and attempting to augment his complaint at the eleventh hour, in the end, the ALJ considered all of Graham's evidence and arguments and deemed them insufficient. Upon review, the Commission concurred. The alleged denial of discovery is illusory. Accordingly, this Court concludes that the ALJ did not abuse his discretion or offend fundamental fairness in denying Graham additional discovery. A contrary conclusion would turn the policy of "efficient and expeditious" reparations proceedings on its head.


The real question in this case is the sufficiency of evidence.


B. Sufficiency of Evidence.


The ALJ found that Mr. Graham had failed to establish that Prudential 1) mismanaged his account with intent to defraud; 2) churned his account or; 3) used scare tactics to pressure him to unprofitably trade. The Commission affirmed this finding on appeal. This Court must also affirm the finding "if supported by the weight of evidence." 7 U.S.C. Section 9, as incorporated by reference in 7 U.S.C. Section 18(e) (1982). In the Ninth Circuit, the "weight of evidence" is defined as the "preponderance of evidence." Premex, Inc. v. Commodity Futures Trading Commission, 785 F.2d 1403, 1407 n. 11 (CA9 1986). The ALJ's credibility findings, moreover, "are given great deference and upheld unless they are inherently incredible or patently unreasonable." Dohmen-Ramirez v. Commodity Futures Trading Commission, 86-7725, slip op. at 785-786 (CA9 January 20, 1988).


The evidence supporting each of Graham's highly related claims will be examined in turn.


1. Mismanagement with intent to defraud.


Graham first contended that Prudential attempted to defraud him by rendering inaccurate information about commodity price fluctuations in order to induce him to trade on his account. For example, Graham alleged that Mr. Eisen called him in the early morning on several occasions and told him that the market was moving against his account. Based on Mr. Eisen's forecasts, Graham was allegedly forced to trade on his account or suffer even greater losses. After having traded in accordance with Eisen's advice, Mr. Graham discovered that if he would not have so traded the market would have eventually gone in his favor and he would have made money. Hence, Graham argued that there was no reason to trade in the first place and Eisen only pressured him into trading to increase his trade commissions.


In evaluating this allegation, the ALJ noted that Graham was a seasoned investor who never received more than indirect trading advice from Eisen. Graham had held three unprofitable non-discretionary accounts with other brokers before transferring his account to Prudential. Graham also read several commodity related trade publications and kept daily price charts on approximately thirteen commodities. In fact, Graham even testified that "[Eisen] let [him] make the [trading] decisions." Moreover, Graham would not elect to trade immediately upon receiving a call from Eisen. Rather, he would review his price charts and sometimes opt not to trade at all. The ALJ therefore concluded that Eisen was not as influential as Graham contended.


Nor could the ALJ conclude that Eisen committed fraud merely by making allegedly inaccurate market projections. Graham adduced no direct evidence that Eisen was not operating in good faith in making the forecasts and the ALJ had no reason to infer bad faith. Moreover, Graham failed to even establish that the projections were actually incorrect. To the contrary, Graham testified that when he compared Eisen's projections with the figures published in the Wall Street Journal the next day, the projections "were always within [the appropriate] range."


Similarly, Graham's contention that Prudential mismanaged his account by delaying the filing of his orders is not supported by the record. Both Eisen and Prudential's branch manager testified that Graham's orders were placed immediately upon receipt. Moreover, Graham was unable to demonstrate that he lost money because of any delays. He failed to show one adverse price movement in between the time he placed his order with Prudential and the time that Prudential allegedly placed his order with the board of trade.


Accordingly, the ALJ concluded that Graham had failed to prove that he was defrauded by Prudential. Graham was unable to show reliance, misrepresentation, mismanagement or damages resulting from any delayed order executions. Because this finding is supported by the preponderance of evidence and is not "inherently incredible or patently unreasonable," this Court affirms the finding.


2. Churning.


Graham also charged that Prudential "churned" his account. Churning occurs "when a broker exercising control over the volume and frequency of trades, abuses his customer's confidence for personal gain by initiating transactions that are excessive in view of the character of [the] account and the customer's objectives as expressed to the broker." Lopez v. Dean Witter Reynolds, Inc., 805 F.2d 880, 882 n. 1 (CA9 1986) (quoting Black's Law Dictionary 220 [5th ed. 1979]. Because churning need not involve misrepresentations, Graham's churning claim is not identical to his fraud claim.


In order to establish churning, Graham was required to prove that Eisen controlled his account. Id. Furthermore, because Graham's account was non-discretionary, Graham had the more difficult burden of demonstrating that Eisen exercised de facto control of his account. See Lehman v. Madda Trading Company, [1984-1986] Comm.Fut.L.Rep. (CCH) 22,417 (1984). As he concluded in reference to Graham's fraud claim, the ALJ found that Mr. Graham made all the investment decisions for his account and therefore Eisen lacked de facto control of Graham's account. Thus, Graham's churning claim also failed.


There is no reason for this Court to conclude the contrary.


3. Scare tactics and undue pressure.


Lastly, Graham alleged that Prudential employed "scare tactics" and undue "pressure" in order to induce him to trade on his account. The scare tactics and pressure consisted of the early morning telephone calls from Eisen warning of adverse market price movements. While this allegation involves consideration of the same factors as the two claims discussed above, it is discussed separately in order to underscore the essentially factual character of all of Mr. Graham's contentions.


At the March 5 hearing, the ALJ asked Mr. Graham to describe as simply as possible what Eisen had done "wrong." Graham replied that "I am just suing him because I think [that] he put pressure on me to trade at odd times." Graham proceeded to elaborate that Eisen never called him in the early morning until after Eisen had transferred to Prudential. Whenever Graham and Eisen communicated at Eisen's former brokerage house, Graham would initiate the telephone call not Eisen. Thus, Graham contended that Eisen's morning telephone calls reporting adverse market fluctuations were so extraordinary that they forced him to unprofitably trade before he could do further research.


In contrast, Eisen testified that his patterns of communicating with Graham did not change upon transferring to Prudential. Moreover, Mr. Graham also testified that he occasionally called Eisen in the early morning to inquire about market prices. In light of this testimony, the ALJ could have reasonably concluded that there was nothing extraordinary about Eisen's morning calls. In fact, the ALJ could have found that Graham and Eisen had established a pattern of early morning communications in order to keep Graham informed of opening commodity prices.


The ALJ's finding is neither incredible nor otherwise unreasonable; this Court accordingly affirms.



Because the ALJ did not abuse his discretion in denying Mr. Graham further discovery and his findings of fact and conclusions of law are supported by the weight of evidence, the Commission's Order is AFFIRMED.


This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Circuit Rule 36-3


The Honorable Carl A. Muecke, Senior United States District Judge for the District of Arizona, sitting by designation


Because Eisen acted as Prudential's Agent, Prudential was liable for Eisen's alleged misrepresentations under Section 2(a)(1) of the Act. See 7 U.S.C. Section 4 (1982)


Because Graham did not challenge the ALJ's finding regarding margin calls in his brief before the Commission, he has waived this issue on appeal. See Dohmen-Ramirez v. Commodity Futures Trading Commission, 86-7540, slip op. at 792 (CA9 January 20, 1988)


Section 4(b) prohibits fraudulent representations and devices in connection with commodity exchanges


17 C.F.R. Section 12.401(a) (1987) provides the Commission jurisdiction to review orders of the ALJ


Section 14(e) of the Act confers jurisdiction to review reparation orders to the Circuit in which the reparations hearing was held. See 7 U.S.C. Section 18(e) (1982). In this case, the hearing was held in Los Angeles, California