BOWNES, Circuit Judge.
This case is before us on the petition of Precious Metals Associates, Inc. (PMA) and John W. Carter to review an order of the Commodity Futures Trading Commission (Commission) requiring appellants to cease and desist from the sale of options in violation of the Commodity Exchange Act (Act), as amended in 1976, Pub.L. 95-405, 92 Stat. 867, 7 U.S.C. §§ 1 et seq., and regulations promulgated thereunder. Our jurisdiction over this direct appeal is based upon 7 U.S.C. §§ 9 and 13b.
On November 22, 1978, the Division of Enforcement (Division) of the Commission issued a seven-count complaint alleging that appellants, from June 13 through October, 1978, engaged in the offer and sale of $1.2 million in investment vehicles known as limited risk forward contracts, LRFs, to approximately two hundred clients and that, because LRFs were options, such solicitations and sales violated the agency-imposed ban on the sale of options which went into effect on June 1, 1978.
Arguing that the Commission and the public would be best served by a speedy resolution of the issues of license revocation and imposition of a cease and desist order, the Division urged that Counts I, II, III, and VII, charging the illegal sale of options and futures, be severed and hearings on those counts expedited.
Upon receipt of the complaint on November 27, 1978, PMA moved, in the United States District Court for the District of Massachusetts, for a temporary order restraining the December 4th public hearing. The district court ordered a ten-day stay of proceedings and granted an additional ten-day extension upon the expiration of the initial order. It declined to issue a preliminary injunction, finding that a waiver of the requirement of exhaustion of administrative remedies was not warranted. The hearing was held on February 21, 1978. The ALJ's findings and recommendations were that: (1) appellants did not violate section 4h (7 U.S.C. § 6h) (illegal futures trading); (2) they did violate sections 4c(b) and 4c(c) (7 U.S.C. § 6c(b) and 6c(c)) (illegal option trading); (3) the facts warranted the imposition of a cease and desist order; and (4) PMA's registration as a futures commission merchant and a commodity trading adviser, and the registration of Carter as an associated person should be suspended for six months pursuant to 7 U.S.C. § 6(b). The Commission adopted the ALJ's findings of fact; issued the cease and desist order; but, with two commissioners dissenting, declined to suspend the registration of PMA and Carter.
The issues are: (1) whether the regulatory scheme under which appellants are charged is void for vagueness; (2) whether the doctrines of equitable estoppel and/or laches should be applied; (3) whether the procedures invoked by the Commission comported with fundamental fairness; and (4) whether the sanctions imposed by the Commission are to be sustained.
The Commodity Futures Trading Act provides that "the findings of the Commission as to the facts, if supported by the weight of the evidence, shall . . . be conclusive." 7 U.S.C. § 9. Thus, our function on appeal is "to review the record with the purpose of determining whether the finder of fact was justified, i. e., acted reasonably, in concluding that the evidence, including the demeanor of the witnesses, the reasonable inferences drawn therefrom and other pertinent circumstances, supported [its] findings." Great Western Food Distributors, Inc. v. Brannan, 201 F.2d 476, 479-80 (7th Cir.), cert. denied, 345 U.S. 997, 73 S.Ct. 1140, 97 L.Ed. 1404 (1953).
PMA is a Delaware corporation with its sole office located in Boston, Massachusetts. It is registered with the Commission as a futures commission merchant, commodity trading adviser, and commodity pool operator. Appellant Carter, an associated person within the meaning of 7 U.S.C. § 6k, purchased PMA in June of 1978, after serving as the firm's vice-president of sales and marketing. Carter was a real estate sales-person before entering the commodities field.
PMA engaged in the sale of London commodity options prior to June 1, 1978, the effective date of Commission Rule 32.11 prohibiting traffic in most commodity options. When the ban went into effect, PMA ceased selling options and sought to
In late June, 1978, Carter instituted, in his words, an "experimental" LRF program. Shortly thereafter, appellants became engaged in the extensive nationwide offer and sale of LRFs for sugar, coffee, copper, and silver.
PMA, prior to Carter's ascendancy, had been plagued by legal problems not relevant to this appeal. During the LRF sales campaign, PMA was embroiled in litigation focusing on prior operating procedures. The Commission attorney handling PMA's other legal problems was aware that PMA was selling LRFs, but did not comment on the program or start proceedings against appellants on LRF grounds at that time.
PMA's sales literature described the LRF as a "hedged contract to buy or sell a specific commodity for a specific price on or before a specific date." The brochure then gave an explanation of the risks involved in an LRF transaction.
The mechanics of "LRFs" and "options" are almost identical. In exchange for a nonrefundable fee, the purchase price, PMA sold a client the right to buy or sell a specified amount of a particular commodity at a fixed (strike) price on or before the predetermined "declaration date." If the commodity's selling price on the "declaration date" exceeded the purchase price of the LRF (or option) plus the "strike price," there would be a profit.
While the LRF program was in effect, the Commission and appellants attempted to work out a settlement prior to institution
THE REGULATORY SCHEME
The business of trading contracts for specified amounts of commodities to be sold or bought in the future is an integral component of the American investment scheme. Essentially, two distinct contract forms are involved. A commodity futures contract is an agreement to buy or sell a specified quantum of a specified commodity for a pre-determined price at a specified future date. A commodity option contract, on the other hand, gives a right to buy or sell a specified quantum of a specified commodity for a predetermined price (strike price) at a specified future date. A contract entitling its owner to purchase a commodity is referred to within the industry as a "put"; one authorizing a sale is a "call."
From the beginning, the inherent speculativeness of commodity trading and the absence of government regulation spawned a breeding ground for unscrupulous tactics, manipulation, and irresponsible trading. See S.Rep.No. 93-1131, 93d Cong., 2d Sess., reprinted in  U.S.Code Cong. & Admin.News, pp. 5843, 5852-55. Early in this century, Congress attempted to curb some commodity trading abuses by enacting the Grain Futures Act of 1922. The Commodity Exchange Act of 1936 broadened the regulatory scheme to include more commodities and empowered the Department of Agriculture to prosecute for fraudulent practices. The 1968 amendments to the Act instituted requirements designed to promote the fiscal responsibility of those selling to the public, and authorized the issuance of cease and desist orders for violations.
By 1973, commodity trading had burgeoned into a $500 billion business. Grave concern with manipulative practices within the industry prompted Congress to enact legislation reflective of current market conditions.
The Commodity Futures Trading Act of 1974, Pub.L. 93-463, 88 Stat. 1389, 7 U.S.C. §§ 1-22 (1975), created the Commodity Futures Trading Commission as an independent regulatory agency, 7 U.S.C. § 4a (1974). The 1974 Act vested the agency with exclusive jurisdiction to regulate commodities and "all other goods and articles, except onions
To enable the Commission to deal effectively with any emergency,
To combat rampant abuses in the sale of options, the Commission adopted registration, disclosure, recordkeeping, and antifraud rules in 1976. 17 C.F.R. § 32.1-.10 (1978). Nevertheless, it was apparent in 1978 that "`the offer and sale of commodity options in the United States is fraught with fraud and other illegal and unsound practices and represents substantial risks to members of the general public.'" Futures Trading Act of 1978, S.Rep.No. 95-850, 95th Cong., 2d Sess. 14, 24, reprinted in  U.S.Code Cong. & Admin.News 2087, 2112. Accordingly, on April 17, 1978, the Commission imposed a temporary ban on the solicitation and sale of most commodity options. 17 C.F.R. § 32.11 (1979).
THE VAGUENESS CLAIM
Appellants challenge the constitutionality of the statutes and rules which they were found to have violated as void for vagueness under the fifth amendment. Although the sanctions imposed on appellants are civil in nature, the Commodity Futures Trading Act contains criminal penalties. Should the Department of Justice elect to institute criminal proceedings on those charges which remain to be heard, appellants, if found guilty, would be subject to fines and imprisonment. Because the Act itself treats the offenses of which appellants were found guilty as criminal in nature, and because the unresolved charges arise out of the same operative facts, we must examine the Act and regulations to assure that they are "so framed as to provide a constitutionally adequate warning to those whose activities are governed." Diebold, Inc. v. Marshall, 585 F.2d 1327, 1336 (6th Cir. 1978). Fair play requires that notice of proscribed conduct be given the potential offender in advance of the offense. United States v. Harriss, 347 U.S. 612, 617, 74 S.Ct. 808, 811, 98 L.Ed. 989 (1954). This principle acknowledges one's freedom to chart a course comporting with the state of the law. "Vague laws may trap the innocent by not providing fair warning." Grayned v. City of Rockford, 408 U.S. 104, 108, 92 S.Ct. 2294, 2299, 33 L.Ed.2d 222 (1972). A statute is vague if it "either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application
The 1974 Act vested exclusive jurisdiction in the Commission over "any transaction which is of the character of, or is commonly known to the trade as, an `option', `privilege', `indemnity', `bid', `offer', `put', `call', `advance guaranty', or `decline guaranty'. . . ." 7 U.S.C. § 2. The interim regulations adopted by the Commission on November 2, 1976, defined "commodity option transaction" and "commodity option" as "any transaction or agreement in interstate commerce which is or is held out to be of the character of, or is commonly known to the trade as, an `option', `privilege', `indemnity', `bid', `offer', `put', `call', `advance guaranty', or `decline guaranty' involving any commodity regulated under the Act. . . ." 17 C.F.R. § 32.1 (1978).
Neither the Act nor the rules promulgated thereunder specifically define "option." The term, however, has certain uniformly accepted characteristics. For example,
British American Commodity Options Corp. v. Bagley, 552 F.2d 482, 484-85 (2d Cir.), cert. denied, 434 U.S. 938, 98 S.Ct. 427, 54 L.Ed.2d 297 (1977);
Commodity Futures Trading Commission v. British American Commodity Options Corp., 2 Comm.Fut.L.Rep. (CCH) ¶ 20,662 at 22-699 (S.D.N.Y.1978);
A. Corbin, Contracts, § 259, n. 3 (1952), quoting Century Dictionary.
We might have some concern over the statutory language if it levied sanctions on laypersons. But it does not. The ambit of the statute is limited to members of contract markets, futures commission merchants, and floor brokers. The Act exposes to penalties only highly specialized members
The statutory and regulatory language is sufficient to put a broker on notice that attempts to circumvent the statute by a change of the name will not be tolerated.
The United States District Court for the Southern District of New York confronted an analogous situation in CFTC v. Morgan, Harris & Scott, Ltd., 2 Comm.Fut.L.Rep. (CCH) ¶ 20.901 (S.D.N.Y.1979). Defendants attempted to circumvent the June 1, 1978, option ban by offering "deferred delivery" contracts. The court examined the underlying economic reality of the contracts and ruled that they were options in disguise. The court noted that "[t]he requirements of the Act and the Commission's rule cannot be avoided by a defendant who merely gives his illegal activities obfuscatory names." 2 Comm.Fut.L.Rep. ¶ 20,901 at 23,660.
In CFTC v. Goldex International Limited, 2 Comm.Fut.L.Rep. (CCH) ¶ 20,839 (N.D.Ill. 1979), 7 U.S.C. § 6c(c) and 17 C.F.R. § 32.11 were found to give warning sufficient to survive a vagueness attack. Defendants argued that "deferred delivery" contracts are not options within the meaning of the statute. The court, declining to accept this rationale, ruled that the term "option" is reasonably well understood in the market place" and found that as applied to the defendant corporation and employees, it was not vague. 2 Comm.Fut.L.Rep. ¶ 20,839 at 23,441. Moreover, appellants cannot escape their own brochure definitions. "A Limited Risk Forward, or LRF, is a hedged contract to buy or sell a specific commodity for a specific price on or before a specific date." An option is "a right to buy (or sell) a commodity (sugar, tin, silver, etc.) at a fixed price, for a fixed length of time." The essential distinction between the two definitions is hard to discern. We find that the pertinent statutory sections and regulations easily pass constitutional muster, both facially and as applied.
The doctrine of equitable estoppel operates to preclude a party, both at law and in equity,
2 J. Pomeroy, Equity Jurisprudence § 804 at 1421-22 (3d ed. 1905). The standard for a valid estoppel was articulated by this circuit in Bergeron v. Mansour, 152 F.2d 27, 30 (1st Cir. 1945): "A person is estopped from denying the consequences of his conduct where that conduct has been such as to induce another to change his position in good faith or such that a reasonable man would rely upon the representations made."
While we recognize that there still is some question as to whether the doctrine of equitable estoppel can apply to the government at all and, if it can, under
The Sixth Circuit confronted a similar argument in United States v. Mattucci, 502 F.2d 883 (6th Cir. 1974). Defendants claimed that government agents' failure to advise them of the illegality of the Barbut game (a gambling game) gave rise to estoppel. Rejecting that argument, the court stated:
Id. at 890 (emphasis added).
The regulation banning the sale of options was clear. The 1974 Act did not mandate that the Commission answer requests for interpretation. Moreover, "the Commission's employees are not . . . required to provide advice. . . . " CFTC Interpretative Letter No. 77-17, reprinted in 2 Comm.Fut.L.Rep. (CCH) ¶ 20,449 at 22,065.
Appellants engaged in a hedging operation with the Commission as to the legality of the LRF program. They cannot now complain that they hedged on the wrong side of the law. There is no basis for invoking the doctrine of equitable estoppel.
Intertwined with appellants' equitable estoppel notion is the claim that laches should be invoked because the Commission failed to take instant action upon discovering that PMA had embarked upon an LRF program.
As with equitable estoppel, there is a basic question as to whether laches can be invoked against the government. The Supreme Court has held, "[i]t is well settled that the United States is not . . . subject to the defense of laches in enforcing its rights." United States v. Summerlin, 310 U.S. 414, 416, 60 S.Ct. 1019, 1020, 84 L.Ed. 1283 (1940). Nevertheless, courts have not construed this as an absolute bar where unreasonable agency delay has caused hardship. Equal Emp. Opportunity Com'n v. Liberty Loan Corp., 584 F.2d 853, 857-58 (8th Cir. 1978) (four-year delay unreasonable where relevant papers discarded and witnesses moved).
In any event, the facts here do not support estoppel by laches. Appellants commenced their LRF program and sent their
Appellants attack the bifurcation of the charges against them and the expedition of the proceedings on the counts at issue here.
We note at the outset that due process mandates that an administrative hearing will constitute "a fair trial, conducted in accordance with fundamental principles of fair play and applicable procedural standards established by law." Swift & Co. v. United States, 308 F.2d 849, 851 (7th Cir. 1962). Since "[t]ime is of the essence in futures markets," In the Matter of Wiscope, S. A., 2 Comm.Fut.L.Rep. (CCH) ¶ 20,757 at 23,108 (1978), aff'd, 2 Comm.Fut.L.Rep. (CCH) ¶ 20,785 (1979), the Division of Enforcement moved for bifurcation and expedition so that there could be an immediate determination of whether a cease and desist order should issue. Commission Rule 1.03(b), 17 C.F.R. § 10.3(b), authorizes the Commission to expedite a hearing if it deems that no party will be prejudiced and the ends of justice will be served thereby. If these criteria are met, due process is satisfied. Silverman v. CFTC, 562 F.2d 432, 439 (7th Cir. 1977).
The broad grant of authority given the Commission to protect the public interest indicates legislative intent that the Commission employ the appropriate procedures to assure the financial well-being of the investing public. This reflected the Congressional concern over the abuses in option and futures sales.
The Commission responded to the Congressional mandate, in the instant case, by expediting hearings on those issues having an immediate impact on investors. The approach of bifurcation and expedition was justified.
Appellants claim inadequate notice of the proceeding which was originally scheduled for December 4, 1978. All that is required under the statute is three days notice. 7 U.S.C. § 9. Appellants received formal notification seven days prior to the scheduled date. In addition, the Commission and appellants attempted to negotiate a settlement prior to the institution of formal
The Commission prosecuted appellants at an enforcement proceeding held pursuant to 7 U.S.C. § 6(b) and 17 C.F.R. § 10.21-26. Appellants contend that the Commission should have employed the rulemaking procedure of 17 C.F.R. § 13.1-6. This argument misapprehends the purpose of rulemaking and overlooks the syllogism inherent in the facts of this case: LRFs are options; option sales were effectively banned on June 1, 1978; therefore, LRFs were banned on June 1, 1978.
Rulemaking proceedings are properly employed to resolve disputed questions of law. They are designed to fill in the interstices of a statute. Securities Com'n v. Chenery Corp., 332 U.S. 194, 202, 67 S.Ct. 1575, 1580, 91 L.Ed. 1995 (1947), and to "promulgat[e] policy-type rules or standards . . .." United States v. Florida East Coast R. Co., 410 U.S. 224, 245, 93 S.Ct. 810, 821, 35 L.Ed.2d 223 (1973).
Congress vested the Commission with authority to institute an enforcement proceeding.
In the context of the facts of this case, a rulemaking proceeding would have been inappropriate. The rule, "it shall be unlawful on or after June 1, 1978 . . . for any person to solicit or accept for . . . the purchase or sale of any commodity option . . ." 17 C.F.R. § 32.11, is not ambiguous. No interstices need to be filled. In addition, a rule promulgated pursuant to 17 C.F.R. § 13.1-6 would have prospective application only. Had the Commission chosen this route, appellants could have sold the options with impunity while awaiting the announcement of a rule that merely reiterated what the law already said. The Commission did not abuse its discretion when it elected to hold an enforcement proceeding.
The Commission ordered appellants to cease and desist from the solicitation and sale of options.
Id. at 185-86.
The sanction here is neither "unwarranted in law [n]or without justification in fact." Appellants argue that the order was not justified because they voluntarily discontinued their LRF program. A cease and desist order is justified when the party who commits statutory transgressions is likely to persist in the contumacy in the future, unless restrained. A solitary infraction may be insufficient to support a cease and desist order, see NLRB v. Beth Israel Hospital, 554 F.2d 477, 483 (1st Cir. 1977), but a proclivity to violate the law can be proved "when a record discloses persistent attempts to interfere with legislatively protected rights . . .." NLRB v. Union Nacional de Trabajadores, 540 F.2d 1, 11 (1st Cir. 1976), cert. denied, 429 U.S. 1039, 97 S.Ct. 736, 50 L.Ed.2d 750 (1977).
The regulatory ban effective June 1, 1978, did not deter appellants from continuing their option program under another name, even though they had doubts as to its legality. Appellants' plea for mitigation has a hollow ring. One of the factors in ending the program was that it was not profitable. But the profitability picture could change. Having no assurance that, without imposition of a cease and desist order with its attendant penalties for violation, appellants would not adopt the same game plan for an option under yet another name, the Commission was justified in imposing a cease and desist order.
Counts IV (fraud allegations), V (misrepresentation) and VI (revocation of registration) were severed. Appellants were found guilty of the illegal sale of options charged in Counts I, II, and III, and not guilty of the illegal sale of futures (Count VII).
Purchase Price of LRF $1,000.00 Strike Price 2,000.00 _________ Break Even Figure $3,000.00
Profit is made if selling price of commodity exceeds $3,000.00. The record indicates that a minimum one thousand dollar investment was required to open an LRF account.
In recent years, the consumer has become increasingly aware that futures markets have a direct effect on such matters as his grocery bill and the cost of his home. Properly operating futures markets help to hold down consumer prices by reducing middleman costs. However, improperly operating futures markets can have the opposite result. In order to assure that futures markets operate properly and that the prices consumers pay are not artificially high, careful and efficient supervision of the markets is essential.  U.S.Code Cong. & Admin. News at 5859.
Futures Trading Act of 1978, S.Rep.No. 95-850, 95th Cong., 2d Sess. 23-24, reprinted in  U.S.Code Cong. & Admin.News, pp. 2111-12.