appellants' opening brief 061413

DOCKET NO. 13-10993

United States Court of Appeals

for the

Eleventh Circuit

HAROLD EDWARD MARTIN, JR., AND FRED JAGER,

Appellants,

v.

UNITED STATES COMMODITY FUTURES TRADING COMMISSION,

Appellee.

_____________________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF FLORIDA

IN CIVIL DOCKET FOR CASE #: 9:12-cv-81311-DMM

(Hon. Donald M. Middlebrooks)

OPENING BRIEF OF APPELLANTS

JAY BRUCE GROSSMAN

WILLIAM L. TUCKER

J.B. GROSSMAN P.A.

200 East Olas Boulevard, Suite 1660

Fort Lauderdale, FL 33301

Telephone: (954) 452-1118

Facsimile: (954) 916-4448

Counsel for Appellants

Counsel Press, LLC (804) 648-3664 * (800) 275-0668

Case: 13-10993 Date Filed: 06/14/2013 Page: 1 of 68

i

Statement Regarding Oral Argument

Appellants respectfully request oral argument in this matter, as the case

presents significant issues of first impression concerning the jurisdiction of the

Commodity Futures Trading Commission (the “CFTC”), and the extent, if any, of

its jurisdictional rights to bring a prayer for preliminary injunctive relief. The case

presents significant issues regarding the interpretation of the recently passed Dodd-

Frank Act, CFTC promulgations purportedly authorized by Dodd-Frank, and the

CFTC’s claim that said authority preempts sections of each state’s Uniform

Commercial Code concerning physical sales from inventories.


ii

Table of Contents

Certificate of Interested Persons and Corporate Disclosure Statement ...... C-1

Statement Regarding Oral Argument .............................................................. i

Table of Contents ............................................................................................ ii

Table of Authorities ....................................................................................... iv

Table of Record References ......................................................................... viii

Statement of Jurisdiction ................................................................................. 1

Statement of Issues .......................................................................................... 1

Statement of the Case ...................................................................................... 2

A. Procedural History ............................................................................... 2

B. Factual Summary ................................................................................. 3

i. The Parties .................................................................................. 3

ii. The Business ............................................................................. 4

a. The Back Services of Hunter Wise .................................. 6

b. The Transaction Between Hunter Wise and the

Suppliers ........................................................................... 7

c. The Transaction Between Hunter Wise and The

Retail Dealers ................................................................... 8

d. Ensuring Metals Sold by Hunter Wise Did Not

Exceed Metals Purchased by Hunter Wise ...................... 9

Standard of Review ....................................................................................... 11

Summary of the Argument ............................................................................ 12


iii

Argument....................................................................................................... 14

I. Definition of Leveraged, Margined, and Financed Transactions ....... 14

A. The Meaning of “Leveraged” and “Margined” Under the

CEA .......................................................................................... 14

B. The Effect of the Phrase “Financed . . . on a Similar Basis” ... 18

C. The CFTC’s Interpretation of “Leveraged,” “Margined,”

and “Financed” is Controlled by the Chevron Deference

Doctrine .................................................................................... 22

D. The District Court Erred in its Determination Regarding the

Application of Section 2(c)(2)(D)(i)(II) of the CEA ............... 25

II. The “Actual Delivery” Exception....................................................... 26

A. The CFTC’s Interpretation of “Actual Delivery” is Directly

Contrary to the Uniform Commercial Code............................. 28

B. The CFTC’s Interpretation of “Actual Delivery” is Directly

Contrary to Congress’s Intent .................................................. 39

C. The District Court Erred in its Determination Regarding the

Application of Section 2(c)(2)(D)(ii)(III)(aa) of the CEA ....... 42

III. The “Enforceable Obligation to Deliver” Exception ......................... 44

A. The District Court Erred in its Determination Regarding the

Application of Section 2(c)(2)(D)(ii)(III)(bb) of the CEA ...... 50

Conclusion .................................................................................................... 51

Certificate of Compliance

Certificate of Service


iv

Table of Authorities

Cases

American Petrofina, Inc. v. PPG Industries, Inc.,

679 S.W. 2d 740 (Tex. App. 2d Dist. 1984) ....................................... 35

*Babbitt v. Sweet Home Chapter of Communities for a Great Oregon,

515 U.S. 687, 115 S.Ct. 2407 (1995) ................................................. 21

Bowen v. Georgetown Univ. Hosp.,

488 U.S. 204, 109 S.Ct. 468 (1988) ................................................... 23

*CFTC v. 20/20 Trading Comp., Inc.,

2011 WL 2221177 (C.D. Cal. June 7, 2011) ...................................... 15

*CFTC v. American Precious Metals,

845 F.Supp.2d 1279 (S.D. Fla. 2011) ........................................... 15, 17

CFTC v. Matrix Trading Group, Inc.,

2002 WL 31936799 (S.D. Fla. 2002) ................................................. 51

*CFTC v. P.I.E., Inc.,

853 F.2d 721 (9th Cir. 1988) ........................................................ 17, 24

*CFTC v. Zelener,

373 F.3d 861 (7th Cir. 2004) .............................................................. 15

*Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,

467 U.S. 837, 104 S.Ct. 2778 (1984) ..................................... 22, 23, 24

Circuit City Stores, Inc. v. Commissioner of Revenue,

790 N.E.2d 636 (Mass. 2003) ................................................. 35, 36, 37

Coeur Alaska, Inc. v. Southeast Alaska Conservation Council,

557 U.S. 261, 129 S.Ct. 2458 (2009) ................................................. 23

*First Nat’l Monetary Corp. v. CFTC,

860 F.2d 654 (6th Cir. 1988) .............................................................. 17


v

* Food and Drug Admin. v. Brown & Williamson Tobacco Corp.,

529 U.S. 120, 120 S.Ct. 1291 (2000) ......................................................... 40

*Freeman v. Quicken Loans, Inc.,

__ U.S. __, __, 132 S.Ct. 2934 (2012) ............................................... 21

Gustafson v. Alloyd Company, Incorporated,

513 U.S. 561, 568, 115 S.Ct. 1061, 1066 (1995) ............................... 14

Haken v. Scheffler,

180 N.W.2d 206 (Mich. Ct. App. 1970) ............................................. 38

Hawaii v. Office of Hawaiian Affairs,

556 U.S. 163, 129 S.Ct. 1436 (2009) ................................................. 20

In Re Ashby Enters. Ltd.,

2 62 B.R. 905 (Bankr. D. Md. 2001) .................................................. 33

Hibbs v. Winn,

542 U.S. 88 (2004).............................................................................. 21

Koons Buick Pontiac GMC, Inc. v. Nigh,

543 U.S. 50, 125 S.Ct. 460 (2004) ..................................................... 20

*Mohamad v. Palestinian Authority,

132 S.Ct. 1702 (2012) ......................................................................... 21

*Morissette v. U.S.,

342 U.S. 246, 72 S.Ct. 240 (1952) ..................................................... 20

Morrison Enter., LLC v. Dravo Corp.,

638 F.3d 594 (8th Cir. 2011) ........................................................ 40, 42

Nat’l Treasury Employees Union v. Chertoff,

452 F.3d 839 (D.C. Cir. 2006) ............................................................ 21

Owasso Indep. Sch. Dist. No. I-011 v. Falvo,

534 U.S. 426, 434 (2002). .................................................................. 21


vi

Paul Mercury Ins. Co. v. Mountain West Farm Bureau Mut. Ins. Co.,

210 Cal.App.4th 645 (Cal. App. 2d Dist. 2012) ................................. 48

Robinson v. Shell Oil Co.,

19 U.S. 337, 117 S.Ct. 843 (1997) ..................................................... 42

S.D. Warren Co. v. Maine Bd. of Environmental Protection,

547 U.S. 370, 126 S.Ct. 1843 (2006) ................................................. 21

Salomon Forex, Inc. v. Tauber,

8 F.3d 966 (4th Cir. 1993) .................................................................. 20

SEC v. ETS Payphones, Inc.,

408 F.3d 727 (11th Cir. 2005) .................................... 11, 26, 44, 51, 52

Sierra Club, Inc. v. Leavitt,

488 F.3d 904 (11th Cir. 2007) ............................................................ 23

U.S. v. Williams,

553 U.S. 285, 128 SCt. 1830 (2008) ............................................ 21, 43

Udall v. Tallman,

380 U.S. 1, 85 S.Ct. 792 (1965) ......................................................... 24

Rules, Statutes, and Other Authorities

15 U.S.C. § 52 ............................................................................................... 35

17 C.F.R. § 31.4 ................................................................................ 15, 16, 17

7 U.S.C. § 2(c)(2)(D) ............................................................................. passim

7 U.S.C. § 23 ..................................................................................... 14, 16, 17

28 U.S.C. § 1292 ............................................................................................. 1

49 Fed. Reg. 5498-01 .................................................................................... 17


vii

76 Fed. Reg. 77670-02 .......................................................... 28, 29, 30, 39, 40

U.C.C. § 87–92 ............................................................................................. 36

U.C.C. § 1-201(b)(15). .................................................................................. 32

U.C.C. § 1-201(b)(16) ................................................................................... 32

U.C.C. § 1-201(b)(18) ............................................................................. 31, 34

U.C.C. § 2-103(1)(e). .................................................................................... 31

U.C.C. § 2-308 .................................................................................. 31, 34, 38

U.C.C. § 2-401 ....................................................................................... passim

U.C.C. § 2-501(1) ................................................................................... 31, 33

U.C.C. § 7-102(a)(1) ..................................................................................... 32

U.C.C. § 7-102(a)(10) ............................................................................. 31, 32

U.C.C. § 7-106(a) .......................................................................................... 31

U.C.C. § 7-504(a). ......................................................................................... 31

Bank Activities Involving the Sale of Precious Metals,

Comm. Fut. L. Rep. (CCH) ¶ 22,673 (CFTC Aug. 6, 1985) .............. 17

COLO. REV. STAT. § 11-53-105 (2012) ................................................... 41, 42


viii

TABLE OF RECORD REFERENCES

Brief Page # Document Docket #

2, 3, 12, 19, 27, 39, 41, 50 Complaint for Injunctive Relief 1

1, 13, 14, 25, 27, 42, 44, 50 Order on Plaintiff’s Motion 79

2 Order Temporarily Appointing

Special Corporate Monitor 77

2 Exhibit A: Letter 92-1

3, 4, 5, 7, 8, 9, 46, 49 Declaration of Harold Edward

Martin, Jr. 38-1

4, 5, 6, 7, 8, 9, 10, 11, 25, 26 Transcript of Preliminary Hearing 86

4, 6, 10 Exhibit 1: Financial Statement 137-1

6 Declaration of Andrea Riggio Hunter

Wise Commodities 35-1

7 Account Statement 4-20

7 Exhibit 3: Trade Confirmation 137-3

7 Exhibit 4 A-D: Transfer of

Commodity Records 137-4

7, 8, 9, 46, 47, 48, 49, 50 Appendix of Exhibits (Part I of II) 39-1

8 A-Mark Precious Metals Statement 137-5

8 Standard Bank Ledger Statement 137-6

12, 13,14, 25, 26 Defendant’s Motion to Dismiss 33

13 Defendants Response in Opposition 36


ix

15, 25, 26 Hunter Wise Defendants Reply 73

27, 43, 47, 48 Declarations, 4/27/12 and 6/13/12 4-17

31 CFTC’s Response 63

46, 49, 50 Appendix of Exhibits (Part II of II) 40-1

46 Plaintiff’s Motion for an Order of

Preliminary Injunction 4

49, 50 Appendix of Declarations 4-2


1

Statement of Jurisdiction

Jurisdiction for this appeal is found under Rules 3 and 4 of the Federal Rules

of Appellate Procedure and 28 U.S.C. § 1292. On February 25, 2013 the U.S.

District Court for the Southern District of Florida issued its Order on Plaintiff’s

Motion for Preliminary Injunction (the “Injunctive Order”) and granted a

preliminary injunction against the Appellants and all other defendants. See Order

on Pl.’s Mot. for Prelim. Inj. [DE 79] [hereinafter “Injunctive Order”]. Pursuant to

28 U.S.C. § 1292(a)(1), the interlocutory Injunctive Order is immediately

appealable to the U.S. Eleventh Circuit Court of Appeals.

Statement of the Issues

1. Whether the issuance of the preliminary injunction was improper

because Section 742 of the Dodd-Frank Wall Street Reform and Consumer

Protection Act did not bring the Hunter Wise precious and industrial metals

transactions within the regulatory scope of the Commodity Exchange Act.

2. Whether the United States Commodity Futures Trading Commission’s

interpretation of Section 742 preempts the Uniform Commercial Code’s settled law

concerning typical commercial practices in the sale of inventories.


2

Statement of the Case

A. Procedural History

This appeal arises out of an action filed by the U.S. Commodity Futures

Trading Commission (the “CFTC”). The CFTC filed a thirteen-count complaint

on December 5, 2012, naming twelve business entity defendants and eight

individual defendants. Among those named were Hunter Wise Commodities,

LLC, Hunter Wise Services, LLC, Hunter Wise Credit, LLC, Hunter Wise

Trading, LLC (the “HW Entity Defendants”) and the individual principals of

Hunter Wise Commodities, LLC, Harold Edward Martin, Jr. and Fred Jager (the

“Appellants”).1

1 The undersigned firm represented the HW Entity Defendants and Messrs.

Martin and Jager during the CFTC investigation that preceded the filing of the

Complaint in the United States District Court for the Southern District of Florida.

See Compl. [DE 1]. The undersigned firm continued to represent both the HW

Entity Defendants and Messrs. Martin and Jager during the February 22, 2013

Preliminary Injunctive Hearing (the “Injunctive Hearing”). On February 22, 2013,

following the Injunctive Hearing the district court issued a preliminary injunction

against all named defendants and appointed a Special Monitor and Corporate

Manager (the “February 22 Order”). See Order Temporarily Appointing Special

Corporate Monitor [DE 77]. By letter dated February 25, 2013, the Special

Monitor and Corporate Manager terminated the undersigned firm’s representation

of the HW Entity Defendants and on April 19, 2013, the district court denied the

HW Entity Defendants’ Motion to Reinstate Counsel. See Defs.’ Mot. to Reinstate

Counsel and to Unfreeze Assets Exh. A [DE 92-1] and ensuing April 19, 2013

Order [DE-113]. Before the termination and subsequent ruling from the district

court, it was the intent of the undersigned and its clients to appeal on behalf of the

HW Entity Defendants and Messrs. Martin and Jager.


3

The CFTC asserts that it holds jurisdiction over the HW Entity Defendants,

and the individual Appellants through Section 742 of the Dodd-Frank Wall Street

Reform and Consumer Protection Act (“Dodd-Frank”), codified in the Commodity

Exchange Act (“CEA”) at 7 U.S.C. § 2(c)(2)(D). Compl. ¶ 8 [DE 1]. Despite its

assertion, the CFTC and the Injunctive Order have failed to demonstrate proper

CFTC jurisdiction and the preliminary injunction issued by the district court must

be dissolved.

B. Factual Summary

i. The Parties

The HW Entity Defendants are in the line of business of buying and selling

precious metals. Martin Decl. ¶ 2 [DE 38-1]. The HW Entity Defendants include

four companies: 1) Hunter Wise Commodities (“HW Commodities”) a holding

company and owner of the following three subsidiaries; 2) Hunter Wise Trading

(“HW Trading”); 3) Hunter Wise Credit (“HW Credit”); and 4) Hunter Wise

Services (“HW Services”). Martin Decl. ¶¶ 2, 8, 35 [DE 38-1]. Each of these three

subsidiaries is responsible for different aspects within HW Commodities business

as a wholesale precious and industrial metals dealer. Id.

• HW Commodities buys and sells precious and industrial metals exclusively

with banks, financial institutions and other wholesale dealers. Martin Decl. ¶

2 [DE 38-1].

• HW Trading facilitated the purchase and sale of metals between HW

Commodities and retail metals dealers. Id. at ¶¶ 3–5 [DE 38-1]. HW


4

Trading provided a two way trading market giving retail dealers access to

metals inventories used to offer purchases and sales of metals to retail

customers. Id. [DE 38-1].

• HW Credit offered retail dealers the ability to finance their metals purchases

and also provided retail dealers with the ability to take “short” positions on

metals. Id. at ¶ 8 [DE 38-1].

• HW Services provided the retail dealers that bought and sold metals through

HW Trading with back office services. Martin Decl. ¶¶ 35–37 [DE 38-1].

The retail dealers could use the back office services to provide their retail

customers with information concerning the value, activity, and charges

associated with their metals purchases and sales. Id. at ¶ 35 [DE38-1].

Appellant Martin was the President of HW Commodities and was a 35

percent shareholder in the entity. [DE 137-1], Independent Auditors’ Reports 2009

through 2011 at 17 (hereinafter “Auditors’ Report). Martin ran the day to day

operations of HW Commodities. Prelim. Inj. Hr’g Tr. 126:24–127:7 [DE 86].

Appellant Jager was the CEO and Chairman of HW Commodities and was a

41 percent shareholder in the entity through his ownership of South Peak Texas

Investments, Inc. Auditors’ Report at 17 [DE 137-1]. Jager was not involved in

the day to day operations of HW Commodities. Prelim. Inj. Hr’g Tr. 127:8–16 [DE

86].

ii. The Business

HW Commodities acted as a dealer of precious and industrial metals

purchasing and selling to or from wholesale metals suppliers, other wholesale

dealers, and retail dealers. Id. at 54:9–16 [DE 86]; Martin Decl. ¶ 2 [DE 38-1].


5

Hunter Wise offered physical (also known as spot or cash) metals transactions to

these dealers. Id. at 108:4–13, 159:6–10 [DE 86]. Derivative products (non-

physical products), such as futures or forwards, were not used to cover metals sold

to retail dealers but futures products were used by Hunter Wise trading managers

to avoid market risk when hedging any excess metal that Hunter Wise held that

had not been sold to a dealer. Id. at 123:6–10, 123:13–22 [DE 86]. Retail dealers

could purchase or sell metals through HW Commodities by calling HW Trading.

Prelim. Inj. Hr’g Tr. 76:1–77:7 [DE 86]. HW Trading would provide the retail

dealer with a price based on price feeds reflecting the current spot (physical)

market price for a particular metal. Id. at 148:6–19 [DE 86]. HW Trading

executed the trades on behalf of its customers, the retail dealers, but did not trade

for the retail customers of those retail dealers. Id. at 78:11–18, 152:17–25 [DE 86].

After placing its trade with HW Trading, the retail dealer could allocate its

purchase or sale of metals to one (or a group) of its retail customers by sending

HW Services an Excel spreadsheet indicating the appropriate allocation, which

HW Services entered into a database, or the retail dealer would enter the

information into the database itself through an online tracking system. Id. at 76:1–

77:7, 78:16–25 [DE 86].


6

a. The Back Office Services of Hunter Wise

The online tracking system that HW Services made available to retail dealers

was commonly referred to as the Portal and was provided pursuant to a services

agreement between HW Commodities and retail dealers. Prelim. Inj. Hr’g

Tr.79:13–17, 80:2–6; Andrea Riggio Decl. ¶ 2 [D 35-1]; Riggio Decl. Exh. C [35-

2]. The Portal was a computer database created by HW Commodities that a retail

dealer could choose to utilize. Prelim. Inj. Hr’g Tr. at 79:15–17, 82:17–22 [DE 86].

The Portal was a service that allowed the retail dealer to view its account with HW

Commodities, keep track of current metals positions, and view daily statements. Id.

at 81:25–82:5, 103:9–13 [DE 86]. Similarly, if the retail dealer chose to use the

Portal, that dealer could also provide access to its retail customers so they may

view their individual account information with the retail dealer. Id. at 82:6–16,

103:9–13 [DE 86]. However, the retail dealer was under no obligation to use the

Portal or provide its retail client allocation to Hunter Wise and, in fact, HW

Services acted at the direction of the retail dealer and could only provide services if

the retail dealer took affirmative steps to activate them. Id. at 82:6–22 [DE 86];

Martin Decl. ¶ 37 [DE 38-1]

The Portal also provided a retail dealer with the ability to have its customers

automatically receive paper notices via email. Prelim. Inj. Hr’g Tr. 103:18–104:7

[DE 86]. These various notices would provide the retail dealer’s customers with

up-to-date information on a daily basis concerning purchases or sales that occurred


7

in their accounts. Id. at 104:14–21, 105:4–7 [DE 86]; Trade Confirmation [DE

137-3]; Transfer Notice 2–4 [137-4]; Account Statement [DE 4-20 Exh G]. If a

retail dealer chose to allow its customers access to view the Portal the retail dealer

could, at the same time, authorize its client to receive the paper notices. Prelim. Inj.

Hr’g Tr. at 104:4–13 [DE 86]. There was a check box that gave the retail dealer

the choice to have the paper notices sent directly to its customers email or, if the

dealer did not check the box, the paper notices were sent to the dealer who would

decide if and how to distribute the notices to its clients. Id. 104:25–105:3 [DE 86].

b. The Transaction Between Hunter Wise and the Suppliers

HW Commodities used various suppliers to purchase the metals it sold to

retail dealers. Id. at 56:18–21, 59:19–60:6, 122:18–123:1 [DE 86]. HW

Commodities purchased the majority of its inventory through Standard Bank, Plc.

while also maintaining supply relationships with NTR Bullion Group, A-Mark

Precious Metals, Natixis Commodities Markets, Ltd and Fidelitrade, Inc. Id. [DE

86]. The agreement governing the sale of metals between HW Commodities and

its suppliers provided HW Commodities with the ability to purchase metals using

financing provided by the suppliers subject to a lien. Martin Decl. ¶ 15 [DE 38-1];

Prelim. Inj. Hr’g Tr. 73:15–18 [DE 86]; see also Trading Agreement with A-Mark

Precious Metals, Inc. [DE 39-1 Exh. 4] and Trading Agreement with Standard

Bank, Plc. [DE 39-1 Exh. 7]. Under the terms of these agreements Hunter Wise


8

could purchase metals and leave its physical metal with the seller by making a

down payment to the supplier and financing the balance. A-Mark Agreement ¶ 2B

[DE 39-1]. The supplier would retain a security interest in the purchased metals

and would charge interest on the loan balance to Hunter Wise during the term of

the loan; however, Hunter Wise could pay off the loan balance and take physical

delivery at any time. A-Mark Agreement ¶¶ 2B, 8 [DE 39-1]; Prelim. Inj. Hr’g Tr.

124:24–125:5 [DE 86]. The Hunter Wise suppliers, including Standard Bank and

A-Mark, charged interest on a monthly basis which was reflected on the suppliers’

monthly statements. Prelim. Inj. Hr’g Tr. 124:24–125:5, 125:24–126:21, 152:6–14

[DE 86]; A-Mark Precious Metals Statement at 2 [DE 137-5]; Standard Bank Cash

Ledger Statement at 2, 6 [DE 137-6].

c. The Transaction Between Hunter Wise and the Retail Dealers

Similar to the agreements between Hunter Wise and its suppliers, the retail

dealers could also choose to finance their purchase of metals and would enter into

a Dealer Loan, Security & Storage Agreement (the “Financing Agreement”).

Martin Decl. ¶ 9 [DE 38-1]; Financing Agreement [DE 39-1]. In the Hunter Wise

financed transaction, HW Credit extended credit to the retail dealer for the

purchase of metal, the retail dealer paid HW Trading a down payment on the

purchase price, and the outstanding portion of the purchase price was due to HW

Trading within four years. Martin Decl. ¶ 9 [DE 38-1]; see also Financing


9

Agreement ¶ 3.1 [DE 39-1]. Pursuant to the Financing Agreement, the purchased

metals were held at a depository until the loan was paid in full or the position was

liquidated. Financing Agreement ¶ 9.1 [DE 39-1]. The Financing Agreement

explained that metals held on behalf of the retail dealer were held as fungible

portions of an identified mass and held in safekeeping with the metals of other

retail dealers. Financing Agreement ¶ 9.2 [DE 39-1].

d. Ensuring Metals Sold by Hunter Wise Did Not Exceed Metals

Purchased by Hunter Wise

Hunter Wise had employees and computer tracking systems designed to

ensure that all metals transactions were properly accounted for and that all metals

sales were covered by sufficient physical metals purchases. Prelim. Inj. Hr’g Tr. at

75:15–20, 80:20–25, 81:6–8 [DE 86]. Daily, Hunter Wise would ensure that it had

enough metal purchased and inventoried to cover all of its sales to retail dealers.

Id. at 75:16–20 [DE 86]. To do this, Hunter Wise looked at each retail dealer’s

metal purchases, marked their position to the market each day, and then compared

the aggregate of all retail dealer purchases with the inventories Hunter Wise had

purchased at its various suppliers. Id. at 80:10–25 [DE 86]. As an added caution,

Hunter Wise also used third-party entities to confirm that its internal

reconciliations of assets (physical metals owned) to liabilities (physical metals

sold) were equal. Id. at 51:5–11, 120:9–15 [DE 86].


10

Hunter Wise reached an agreement with Delaware Depository Services

Company (“DDSC”) where DDSC agreed to reconcile Hunter Wise’ assets and

liabilities on a weekly basis. Prelim. Inj. Hr’g Tr. at 119:11–17 [DE 86]. DDSC is

an Exchange Approved precious metals depository. Id. at 120:1–2 [DE 86]. In

return for a fee, DDSC agreed to reconcile the liabilities of Hunter Wise, as

reported by Hunter Wise, with the assets held by Hunter Wise, as reported by the

suppliers that sold Hunter Wise metal. Id. 119:11–17 [DE 86]. By providing this

service, DDSC was verifying that Hunter Wise had purchased sufficient metals to

equal or exceed the total metals sold to retail dealers. Id. at 120:9–15 [DE 86].

Additionally, the Hunter Wise entities were audited by Haskell & White,

LLP a certified public accounting firm based in California. Prelim. Hr’g Tr. at

51:5–11 [DE 86]. The Haskell & White audits were conducted in 2009, 2010, and

2011. Id. at 54:9–11. The audit tested the way Hunter Wise booked their financed

metals business. Id. at 54:22–24. The Haskell & White audit that tested the Hunter

Wise inventory used in its financed metals business confirmed that “as of

December 31, 2011 and 2010, the market value of commodities held by dealers

(suppliers) for HW Trading, HWIT and IRA Services were more than sufficient to

cover their obligations to dealers (customers) as of the same dates.” Id. at 59:5–9

[DE 86]; Auditors’ Report at 14 [DE 137-1]. The Haskell & White audit


11

confirmed that Hunter Wise had purchased sufficient metals to equal or exceed the

total metals sold to retail dealers. Prelim. Inj. Hr’g Tr. 59:10–13 [DE 86].

Furthermore, Haskell & White determined that the product sold by Hunter

Wise was not a derivative product, such as a future or forward, explaining that

during the audit process it considered all Hunter Wise transactions and it found that

the number of derivative transactions (those that were not physical purchases/sales

of metals and only used to offset the market risk of metals it had purchased from

its suppliers and not yet sold to a retail dealer) represented only a minor portion of

all Hunter Wises’ transactions. Id. at 67:2–7 [DE 86]. Moreover, Haskell & White

found that Hunter Wise was engaging in metals purchases with its suppliers and

that Hunter Wise was exposed to market risk on the entire amount of those

purchases not just the down payment portion the suppliers required when

financing. Id. at 73:1–5, 73:19–25 [DE 86]. HW Trading’s head trader, Herb Choi,

acknowledged that Hunter Wise was liable to its suppliers for market risk on 100

percent of the metals it purchased in a financed transaction not just for the portion

covered by the down payment. Id. at 157:10–16, 157:24–158:5 [DE 86].

Standard of Review

A district court’s order which grants a preliminary injunction involves a

mixed standard of review. The district court’s decision to grant an injunction is

reviewed under the abuse of discretion standard. SEC v. ETS Payphones, Inc., 408


12

F.3d 727, 731 (11th Cir. 2005). The district court’s determinations of law are

reviewed de novo. Id. The district court’s findings of fact are reviewed for clear

error. Id. For this Court to sustain the preliminary injunction on a question of

jurisdiction, the plaintiff (i.e., the CFTC) must establish a “reasonable probability

of ultimate success upon the question of jurisdiction when the action is tried on the

merits.” Id.

Summary of the Argument

The CFTC has stated that it holds jurisdiction over the Appellants (and their

business operations) via Section 742(a) of the Dodd-Frank Wall Street Reform and

Consumer Protection Act (“Dodd-Frank Act”), which has been codified in the

Commodity Exchange Act (“CEA”) at 7 U.S.C. § 2(c)(2)(D). Compl. ¶ 8 [DE 1].

See also Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R.

4173, 111th Cong., § 742(a) (2010); 7 U.S.C. § 2(c)(2)(D) (2012). The CFTC’s

statement of jurisdiction via the Dodd-Frank Act is their only claim of jurisdiction

over the Appellants.2 Compl. ¶¶ 7–9 [DE 1]. Therefore, the entire legal action

brought by the CFTC against the Appellants (including the request for a

preliminary injunction) is dependent upon establishing jurisdiction under Section

742(a) of the Dodd-Frank Act – a burden the CFTC fails to meet.

2 The actual claim of jurisdiction made by the CFTC states the following: “The

Commission has jurisdiction over the conduct and transactions at issue in this case

pursuant to Section 2(c)(2)(D) of the Act, as amended by the Dodd-Frank Act, 7

U.S.C. § 2(c)(2)(D).” Compl. ¶ 8 [DE 1].


13

Prior to the Injunctive Order, the Appellants presented arguments explaining

why Section 742(a) of the Dodd-Frank Act does not apply to them (and their

business operations). See Defs.’ Mot. To Dismiss [DE 33]; see also Defs.’ Resp.

in Opp’n to Pl.’s Mot. for Prelim. Inj. [DE 36]. However, the district court found

jurisdiction over the Appellants (via Section 742(a) of the Dodd-Frank Act) despite

the Appellants’ numerous arguments; yet, the district court has failed to directly

and specifically address why the Appellants’ legal arguments were inadequate or

incorrect. See Injunctive Order 19–20 [DE 79]. Moreover, the district court

misstates that the Appellants’ Response to the Plaintiff’s Motion for Preliminary

Injunction raises different jurisdictional arguments than those raised within the

Appellants’ Motion to Dismiss the Plaintiff’s Complaint. Injunctive Order 19 n.29

[DE 79]. The district court utilizes this mischaracterization to avoid the substantial

jurisdictional issues raised by the Appellants, constructs no legal analysis to

address these substantial jurisdictional issues, and then issues the Injunctive Order

granting a preliminary injunction against the Appellants (stating that the district

court will address these substantial jurisdictional issues within its order regarding

the Appellants’ Motion to Dismiss the Plaintiff’s Complaint).3 Id.

3 As of the date for filling this Principal Brief with the U.S. Eleventh Circuit

Court of Appeals, the Appellants’ Motion to Dismiss has been fully briefed before

the U.S. District Court for the Southern District of Florida for 115 days (as of June

10), yet the district court has not issued an order regarding the Appellants’ Motion.


14

Argument

I. Definition of Leveraged, Margined, and Financed Transactions

In order for the CFTC to hold jurisdiction over a transaction under Section

2(c)(2)(D), the transaction must be “any agreement, contract, or transaction in any

commodity,” and involve a transaction which is “entered into, or offered . . . on a

leveraged or margined basis, or financed . . . on a similar basis.” 7 U.S.C. §

2(c)(2)(D)(i)(II). The phrase “on a leveraged or margined basis” is not defined

under Section 2(c)(2)(D); however, that phrase is defined elsewhere in the CEA,

and by the CFTC within its regulations. The phrase “on a leveraged or margined

basis” is the same language as presented in Section 19 of the CEA. See 7 U.S.C. §

23. Consequently, the inquiry begins with a determination of the meaning of the

phrase “on a leveraged or margined basis” as applied under the provisions of the

CEA (specifically, Section 19(a) of the CEA). See 7 U.S.C. § 23(a). See also

Gustafson v. Alloyd Company, Incorporated, 513 U.S. 561, 568, 115 S.Ct. 1061,

1066 (1995) (statutory terms should be construed consistently throughout the

statute).

A. The Meaning of “Leveraged” and “Margined” Under the CEA

The plain language of Section 19 (i.e., 7 U.S.C. § 23), regulations

promulgated by the CFTC, relevant case law, and opinions issued by the CFTC,

See Defs.’ Mot. to Dismiss [DE 33]. However, the Injunctive Order remains in

effect against the Appellants. See Injunctive Order [DE 79].


15

make it clear that the term “margin account, margin contract, leverage account, or

leverage contract” are utilized synonymously to define the type of long-term

standardized4 contract governed by the CEA. See 7 U.S.C. §§ 23(a)–(b); 17 C.F.R.

§ 31.4 (2012); CFTC v. American Precious Metals, 845 F.Supp.2d 1279 (S.D. Fla.

2011);5 CFTC v. 20/20 Trading Comp., Inc., 2011 WL 2221177 (C.D. Cal. June 7,

2011).6 Therefore, and according to the CFTC’s rules and regulations, and as

interpreted by American Precious Metals and 20/20 Trading Comp., Inc., a

4

In organized futures markets, people buy and sell contracts, not

commodities. Terms are standardized, and each party's obligation

runs to an intermediary, the clearing corporation. All contracts that

expire in a given month are identical; each calls for delivery of the

same commodity in the same place at the same time. Forward and

spot contracts, by contrast, call for sale of the commodity; no one

deals "in the contract"; it is not possible to close a position by

buying a traded offset, because promises are not fungible; delivery

is idiosyncratic rather than centralized.

CFTC v. Zelener, 373 F.3d 861, 865–66 (7th Cir. 2004).

5 In CFTC v. American Precious Metals, the court held that the transactions at

issue, lasted for terms of only five (5) years; and thus, these transactions do not fall

under the definition of “margin account, margin contract, leverage account, or

leverage contract” as promulgated by the CFTC under its regulations. [845

F.Supp.2d 1279, (S.D. Fla. 2011),] 1284. The court deferred to the CFTC’s prior

position embodied in its regulations stating that a “margin account, margin

contract, leverage account, or leverage contract” is a transaction which has a

duration of ten (10) years or longer. Id. at 1287.

6 The metals contracts at issue before the court in 20/20 Trading Corp., Inc. were

the precise contracts before the district court in this matter. See Defs.’ Reply to

Pl.’s Resp. and Opp’n to Defs.’ Mot. to Dismiss 6 [DE 73]; see also Riggio Decl.

Exh. B ¶¶ 3.1–3.2 [DE 35-2], (four year duration).


16

transaction cannot be “leveraged” and/or “margined” unless the transaction is

standardized as to its terms and consists of a time duration of at least ten (10)

years. See 17 C.F.R. §§ 31.4(w)–(x).

Section 19(a) of the CEA grants the CFTC jurisdiction over:

A standardized contract commonly known to the trade as a

margin account, margin contract, leverage account, or leverage

contract, or under any contract, account, arrangement, scheme,

or device that the Commission determines serves the same

function or function as such a standardized contract, or is

marketed or managed in substantially the same manner as such a

standardized contract.

7 U.S.C. § 23(a) (emphasis added). While Congress declined to define the

meaning of “leverage” and/or “margin” under the CEA, the CFTC has issued

comprehensive regulations to govern leverage/margin transactions, and in doing

so, set forth a narrow definition of a leverage/margin transactions within CFTC

Regulation 31.4. CFTC Regulation 31.4(x) defines a “leverage transaction” as

“the purchase or sale of any leverage contract, the repurchase or resale of any

leverage contract, the delivery of the leverage commodity, or the liquidation or

rescission of any such leverage contract by or to the leverage transaction

merchant.” 17 C.F.R. § 31.4(x) (emphasis added). Therefore, according to the

CFTC’s own definition, a “leverage transaction” must involve a “leverage

contract.” Furthermore, CFTC Regulation 31.4(w) defines a “leverage contract” as

“a contract, standardized as to terms and conditions, for the long-term (ten years or


17

longer) purchase (‘long leverage contract’) or sale (‘short leverage contract’) by a

leverage customer of a leverage commodity. . . .” 17 C.F.R. § 31.4(w) (emphasis

added).7 The CFTC stated that by defining a “leverage contract” in CFTC

Regulation 31.4(w), the CFTC had “exercised its authority to specify the

standardized contracts that Congress expected to be regulated under Section 19 of

the [CEA] and are not subject to Commission registration and regulation pursuant

to Part 31.” Regulation of Certain Leverage Transactions, 49 Fed. Reg. 5498-01, at

5498 (CFTC Feb. 13, 1984) (emphasis added).8 A metals transaction that lacks

7 According to case law, “[u]nder the [CFTC]’s interpretation of the [CEA], there

can be no such thing as a leverage contract with a duration of less than ten years.”

CFTC v. P.I.E., Inc., 853 F.2d 721, 724 (9th Cir. 1988); First Nat’l Monetary Corp.

v. CFTC, 860 F.2d 654, 658 (6th Cir. 1988) (determining that the metal firm’s

“contracts would not constitute leverage contracts under the [ ] [CFTC’s]

regulations because, inter alia, they fail to satisfy the durational requirement (ten

years or longer). . . .).

8 Additionally, the CFTC issued Interpretative Letter No. 85-2 which

contemplated whether certain transactions involving the purchase and sale of

precious and industrial metals qualified as leverage contracts under 7 U.S.C. § 23

or futures contracts under 7 U.S.C. § 6(a), and were therefore subject to regulation

under the CEA. Bank Activities Involving the Sale of Precious Metals, Comm.

Fut. L. Rep. (CCH) ¶ 22,673 (CFTC Aug. 6, 1985). As the CFTC’s General

Counsel declared: “In analyzing whether these transactions are subject to

regulation under the [CEA], it is necessary to determine whether the transactions

may be either leverage contracts [or] transactions involving contracts of sale of a

commodity for future delivery within the meaning of the [CEA] and applicable

Commission regulations.” Id. at 2. The facts surrounding the transactions at issue

in this opinion letter were: (i) dealers would purchase precious metals from a bank,

(ii) the bank would either deliver the metals to the dealer or segregate them in

holding vaults, (iii) the dealer would resell the metals to retail customers in

exchange for full payments or payments pursuant to a financing agreement that


18

standardized terms or is less than ten (10) years in duration is not a transaction

conducted on a leveraged/margined basis.

B. The Effect of the Phrase “Financed . . . on a Similar Basis”

With the meaning of leveraged/margined transactions settled, now the

inquiry becomes what is the result of the phrase “financed . . . on a similar basis.”

See 7 U.S.C. § 2(c)(2)(D)(i)(II). Section 742(a) of the Dodd-Frank Act states it

applies to “any agreement, contract, or transaction in any commodity . . . entered

into, or offered . . . on a leveraged or margined basis, or financed . . . on a similar

basis.” Dodd-Frank Act, § 742(a)(i)(II); 7 U.S.C. § 2(c)(2)(D)(i)(II) (emphasis

added). Congress could have defined the phrase “on a leveraged or margined

basis, or financed . . . on a similar basis” when drafting the legislation, or the

CFTC could have defined the phrase by promulgating new regulations; however,

neither Congress nor the CFTC has taken action to define the significance of this

phrase. Therefore, the courts, attorneys, and business entities are left with the

were completed within two (2) to seven (7) business days, and (iv) the dealer

would direct the bank to transfer title of the metals to the customers. Id. at 1. In

the CFTC’s opinion, the transactions did not qualify as leverage contracts, and

therefore did not fall under the CFTC’s jurisdiction, because they were not ten (10)

years or more in duration as required by CFTC Regulation 31.4(w). Id. Moreover,

the CFTC determined the transactions were not “futures contracts” because

payment for the precious metal is completed within two (2) to seven (7) days and

transfer of title to this metal is completed upon this payment; thus, the translation

lacks futurity. Id. at 2–3. The fact that the purchase of the precious metal is made

in-full by the purchaser or financed by a third-party is irrelevant to determine if

the transaction is a “futures contract.” See id. at 1–3 (emphasis added).


19

definitions of CFTC Regulation 31.4 for legal guidance in determining the

significance of the phrase “on a leveraged or margined basis, or financed . . . on a

similar basis.”

From a practical standpoint, the difference in terminology between

“leveraged,” “margined,” and “financed” is insignificant in regards to the

underlying precious and industrial metals transactions. In certain industries, there

is a distinction made between the terms, but within the industry in which the

Appellants operate (i.e., buying and selling precious and industrial metals), the

three terms are interchangeable equivalents as established by the language of

Section 2(c)(2)(D)(i)(II) of the CEA. Additionally, the CFTC makes use of the

disjunctive “or” when discussing the Appellants’ transactions, Compl. ¶¶ 27, 31,

102, 107 [DE 1], and specifically, when discussing the transactions, the CFTC

states that Appellants engaged in such sales of “precious metals on a leveraged or

financed basis between March 22, 2010 and the present.” Compl. ¶ 102 [DE 1]

(emphasis added). In its Complaint, the CFTC utilizes the terms “leveraged” and

“financed” interchangeably. The CFTC is treating the terms leveraged, margined,

and financed as synonymous, interchangeable terms (which is the correct result

given the express language of Section 742(a) of the Dodd-Frank Act and the legal

history of Section 19 of the CEA). See Dodd-Frank Act, § 742(a)(i)(II); 7 U.S.C. §

2(c)(2)(D)(i)(II).


20

Congress’s choice to utilize these same terms, when creating Section 742(a) of the

Dodd-Frank Act, indicates that the definition of leverage/margin under Section

742(a) applies to precious and industrial metal transactions in a like manner as

Section 19 of the CEA.9 See Morissette v. U.S. , 342 U.S. 246, 263, 72 S.Ct. 240,

250 (1952) (noting that where Congress borrows terms of art it “presumably knows

and adopts the cluster of ideas that were attached to each borrowed word”). As the

U.S. Supreme Court has said, while statutory interpretation is a “holistic

endeavor,” meaning that extrinsic evidence can be considered as a part of the

process, the statutory interpretation “[b]egins, as always, with the text of the

statute.” Hawaii v. Office of Hawaiian Affairs, 556 U.S. 163, 173, 129 S.Ct. 1436;

1443 (2009); Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 60, 125 S.Ct.

460, 466–67 (2004). But, a word gathers meaning from the words around it, from

its context, and setting. Babbitt v. Sweet Home Chapter of Communities for a

9 “The analysis begins, as with the interpretation of any legislative enactment,

with the language of the Act, and if that conclusively reveals Congress’s intent, the

analysis ends. In arriving at the plain meaning, we apply long recognized

principles of interpretation. We assume that the legislature used words that meant

what it intended; that all words had a purpose and were meant to be read

consistently; and that the statute’s true meaning provides a rational response to the

relevant situation. Conversely, we presume that language added by amendment

was not mere surplusage; that undefined terms mean no more than the language

imports; and that a statute is not self-contradictory or otherwise irrational. The

interpretive process is thus a holistic endeavor to derive intent from statutory

language and structures.” Salomon Forex, Inc. v. Tauber, 8 F.3d 966, 975 (4th Cir.

1993).


21

Great Oregon, 515 U.S. 687, 694 –95, 115 S.Ct. 2407, 2411–12 (1995).10

Thus,

the doctrine of noscitur a sociis arises and interpretation of the new statute must

recognize that a word is given more precise meaning from its neighboring words

because the connection with which words and phrases are used in statutes affects

their meaning.11

Freeman v. Quicken Loans, Inc., __ U.S. __, __, 132 S.Ct.

2934, 2042 (2012); U.S. v. Williams, 553 U.S. 285, 294 –95, 128 S.Ct. 1830, 1839

–40 (2008). Courts interpret words in a statute by the company they keep and a

string of statutory terms raises the presumption that words grouped in a list should

be given a related meaning. S.D. Warren Co. v. Maine Bd. of Environmental

Protection, 547 U.S. 370, 378–79, 126 S.Ct. 1843, 1949 (2006).

When drafting Section 742(a) of the Dodd-Frank Act, Congress was aware

of the definition of “leverage” and “margin” under the CEA. See Nat’l Treasury

Employees Union v. Chertoff, 452 F.3d 839, 857 (D.C. Cir. 2006) (stating that

10

It is a fundamental canon of statutory construction that the words of a statute

must be read in their context and with a view to their place in the overall statutory

scheme. Hibbs v. Winn, 542 U.S. 88, 101, 124 S.Ct. 2276, 2285–86 (2004);

Owasso Indep. Sch. Dist. No. I-011 v. Falvo, 534 U.S. 426, 434, 122 S.Ct. 934,

939-40 (2002).

11

The words in a statute that can have more than one meaning are given content

by their surroundings, and any unclear or ambiguous terms or phrases in a statute

may take meaning from the surrounding terms which are defined. Mohamad v.

Palestinian Authority, 132 S.Ct. 1702, 1708 (2012); U.S. v. Stevens, 130 S.Ct.

1577, 1588–90 (2010).


22

“[t]here is a presumption that Congress uses the same term consistently in different

statutes”). Congress drafted Section 742(a) of the Dodd-Frank Act, including the

terms leveraged, margined, and financed in one phrase to describe the type of long-

term standardized transactions (i.e., transactions with a duration of ten years and

longer) that Congress intended to place under the CFTC’s jurisdiction.

Furthermore, the CFTC has not altered its express definition of the terms

“leverage” and “margin” transactions, nor did the CFTC promulgated a new

regulation expressly defining the phrase “on a leveraged or margined basis, or

financed . . . on a similar basis” to mean anything separate from the existing

definition of “leverage” and “margin” transactions. Therefore, the Appellants do

not fall under the jurisdiction of 2(c)(2)(D) because Section 742(a) (which created

Section 2(c)(2)(D)) applies only to “financed” transactions that operate in a similar

manner to leveraged/margined transactions, which the Appellants’ transactions are

not, never having a duration that exceeds ten (10) years.

C. The CFTC’s Interpretation of “Leveraged,” “Margined,” and

“Financed” is Controlled by the Chevron Deference Doctrine

The Chevron deference doctrine holds that an agency’s formal

interpretations of its own rules, regulations, and statutes are presumptively correct,

while arguments made by the agency in litigation are not entitled to deference.

Thus, the CFTC is bound by its formal interpretations and cannot invent

convenient arguments in litigation to defeat its previous interpretations. See


23

Chevron, U.S.A. , Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 104 S.Ct.

2778 (1984). . Under the Chevron deference doctrine, “[w]hen an agency

interprets a statute that the agency is responsible for administering, courts must

give the agency’s interpretation due deference if (1) Congress has delegated

interpretive authority to the agency; (2) the statute is silent or ambiguous with

respect to the issue at hand; and (3) the agency’s interpretation of the statute is

reasonable.” Sierra Club, Inc. v. Leavitt, 488 F.3d 904, 911–12 (11th Cir. 2007)

(citing Chevron, 467 U.S. at 843). The courts must resolve a statutory ambiguity

by “look[ing] first to the agency regulations, which are entitled to deference if they

resolve the ambiguity in a reasonable manner.”

Coeur Alaska, Inc. v. Southeast Alaska Conservation Council, 557 U.S. 261, 277-

78, 129 S.Ct. 2458, 2469 (2009). Therefore, the CFTC is precluded from

expanding its jurisdiction under the CEA by re-writing its prior, formal

interpretations during this litigation. See, e.g., Bowen v. Georgetown Univ. Hosp.,

488 U.S. 204, 213, 109 S.Ct. 468, 474 (1988) (holding that courts have recognized

that “[d]eference to what appears to be nothing more than an agency’s convenient

litigating position would be entirely inappropriate.” The Chevron deference

doctrine applies to this case because the CFTC is construing a jurisdictional

provision of the CEA — a statute it is responsible for administering.


24

Udall v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 801 (1965) (noting that Congress

has charged the CFTC with administration of the CEA).

In CFTC v. P.I.E., Inc., the court demonstrated how the Chevron deference

doctrine applies to the CFTC’s interpretations of the CEA by holding that the

CFTC had a basis for its determination of the “margin account, margin contract,

leverage account, or leverage contract” definition and, therefore, the court would

not now invalidate the definition. 853 F.2d 721, 724 (9th Cir. 1988). It is

undisputed that Congress delegated to the CFTC the authority to define the type of

contracts that are “margin accounts, margin contracts, leverage accounts, or

leverage contracts” under the CEA. Id. That delegation led to CFTC Regulation

31.4, which expressly and clearly states that only leveraged/margined transactions

with a duration of ten (10) years or more are within the CFTC’s jurisdiction under

the CEA. Id.

The metal transactions executed by the Appellants cannot be leveraged,

margined, or financed transactions because they are not standardized, and do not

have a duration of ten (10) years or longer. The CFTC is not permitted to change

its formal definitions within its current litigations to create a convenient litigation

position. Because Section 2(c)(2)(D)(i)(II) utilizes the phrase “financed . . . on a

similar basis” (which directly relates back to its neighboring words of “on a

leveraged or margined basis”), and the CFTC has previously defined the terms


25

leveraged/margined under CFTC Regulation 31.4, the CFTC is required to respect

its formal interpretation. Therefore, this Court must apply the CFTC’s formal

definition of a leverage/margin transaction to also define the phrase “financed on a

similar basis” and hold that the CFTC fails to possess jurisdiction via Section

2(c)(2)(D) over the Appellants’ transactions. See 7 U.S.C. § 2(c)(2)(D)(i)(II).

D. The District Court Erred in its Determination Regarding the

Application of Section 2(c)(2)(D)(i)(II) of the CEA

The district court addressed the Appellants’ arguments regarding the phrase

“on a leveraged or margined basis, or financed . . . on a similar basis” in one short

paragraph within the Injunctive Order. Injunctive Order 19 [DE 79]. The district

court substantially misunderstands the Appellants’ argument, stating that the

Appellants’ argument “ignores the language of the amendment [Section

2(c)(2)(D)], which encompasses transactions on a financed basis.” Id. In fact, the

Appellants have substantially acknowledged the term “financed” in their filed

court papers and during oral argument to the district court. Defs.’ Mot. to Dismiss

¶¶ 29, 33, 35–40 [DE 33]; Defs.’ Reply to Pl.’s Resp. and Opp’n to Defs.’ Mot. to

Dismiss 5–6 [DE 73]; Prelim. Inj. Hr’g Tr. 34:4–8, 35:16–22, 37:1–5, 48:14–49:11

[DE 86]. The district court, however, focused solely on the term “financed” in a

vacuum and ignores Appellants’ argument that the term “financed” must be viewed

in conjunction with the phrase “on a similar basis” and thus, in light of its

neighboring words “on a leveraged or margined basis.” Injunctive Order 19 [DE


26

79]; Defs.’ Mot. to Dismiss ¶¶ 29, 33, 35–40 [DE 33]; Defs.’ Reply to Pl.’s Resp.

and Opp’n to Defs.’ Mot. to Dismiss 5–6 [DE 73]; Prelim. Inj. Hr’g Tr. 34:4–8,

35:16–22, 37:1–5, 48:14–49:11 [DE 86]. The district court fails to address the

Appellants’ argument that the phrase “financed . . . on a similar basis” directly

relates back to its neighboring words of “on a leveraged or margined basis;” and

therefore, the terms leveraged, margined, or financed under Section 2(c)(2)(D) are

all interchangeable, synonymous words that refer to transactions which are

standardized and of a duration lasting ten (10) years or longer.

The Appellants business does not fall under the jurisdiction of Section

2(c)(2)(D) of the CEA because the Appellants do not engage in transactions

satisfying the definition of leveraged, margined, and/or financed. See 7 U.S.C. §

2(c)(2)(D)(i)(II). Therefore, the Appellants respectfully request this Court to

reverse the Interlocutory Order granting a Preliminary Injunction because the

CFTC has failed to demonstrate a “reasonable probability of ultimate success upon

the question of jurisdiction when the action is tried on the merits.” ETS

Payphones, 408 F.3d at 731.

II. The “Actual Delivery” Exception

Section 2(c)(2)(D)(ii) creates five exceptions to its own statutory coverage.

Dodd-Frank Act, § 742(a)(ii)(I)–(V); 7 U.S.C. §§ 2(c)(2)(D)(ii)(I)–(V). One of

these exceptions, entitled the “actual delivery” exception, directly contemplates the


27

Appellants’ transactions; yet, this exception has been inappropriately cast aside as

an afterthought by the CFTC as “not applicable here.” Complaint 8 ¶ 27 [DE 1].

Furthermore, the exception was not addressed by the court in the February 25,

2013 Preliminary Injunctive Order [DE 79] other than to say because Hunter Wise

did not really have metal inventory, they could not deliver. The finding, however,

of whether Hunter Wise owned metal inventory requires analysis on whether

Hunter Wise’ methodology of buying inventory, in accordance with the terms of

the Uniform Commercial Code (“U.C.C.”), from its suppliers, were purchases of

inventory.12

The “actual delivery” exception states, “[t]his subparagraph shall not apply

to a contract of sale that results in actual delivery within 28 days or such other

longer period as the Commission may determine . . . based upon the typical

commercial practice in cash or spot markets.” Dodd-Frank Act, §

742(a)(ii)(III)(aa); 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa) (emphasis added). The term

“actual delivery” is not defined under the CEA (or under any case law related to

the CEA); however, the CFTC has recently issued guidance defining the term

12

The court relies on the declarations of Thor Gjurdrum of A-Mark, [DE 4-17],

and Albertus Marteens of Standard Bank, [DE 4-17 and 4-18], who contrary to the

terms of the contracts attached to their declarations claim that although they sold

metals to Hunter Wise “title” did not pass. The passage of title, however, is a legal

determination, not a layman’s estimation.


28

“actual delivery” under Section 2(c)(2)(D)(ii)(III)(aa) of the CEA.13

See Retail

Commodity Transactions under the Commodity Exchange Act Section 2(c)(2)(D),

76 Fed. Reg. 77670-02 (CFTC, Dec. 14, 2011) [hereinafter 76 Fed. Reg. 77670-

02]. However, the CFTC’s “guidance” is inherently flawed because it is in direct

contravention with the U.C.C. and Congress’s intent when enacting Section 742(a)

of the Dodd-Frank Act.

A. The CFTC’s Interpretation of “Actual Delivery” is Directly Contrary

to the Uniform Commercial Code

The CFTC Regulation attempts to define the term “actual delivery” to be the

functional equivalent of the term “physical delivery.” See 76 Fed. Reg. 77670-02.

The CFTC states that “actual delivery” will be accomplished if the seller (1) has

physically delivered the entire quantity of the commodity purchased by the buyer

into the possession of the buyer (plus transferred title of the commodity to the

buyer), or (2) physically placed the commodity into the possession of a depository

13

The CFTC originally issued its proposed interpretation of how the term “actual

delivery” within this new Section 2(c)(2)(D)(ii)(III)(aa) of the CEA will be

construed by the CFTC. See CFTC Interpretive Letter, Retail Commodity

Transactions under Commodity Exchange Act Section 2(c)(2)(D), Interpretation;

Request for Comments, RIN 3038-AD64 (CFTC Office of General Counsel, Dec.

1, 2011). Although “actual delivery” was scheduled to be discussed at the CFTC’s

open meeting on December 5, 2011, it was later announced in a CFTC press

release on December 2, 2011 that “[t]he Commission voted on the Interpretation,

and will no longer consider the item at the open meeting on December 5.” See

CFTC Release PR6151-11 (Dec. 2, 2011). Essentially, the CFTC decided to

ignore many public comments regarding the construction of the term “actual

delivery” under Section 2(c)(2)(D)(ii)(III)(aa).


29

not affiliated with the seller (plus transferred title of the commodity to the buyer

and in each case the delivery, being required must include any portion of the

purchase made using leverage, margin or financing).14

See 76 Fed. Reg. 77670-02,

at 77672. Given the CFTC’s interpretation of the term “actual delivery,”

Congress’s statutory exception under Section 2(c)(2)(D)(ii)(III)(aa) is completely

irrelevant unless the seller physically delivers the commodity to the buyer or the

buyer’s depository within twenty-eight (28) days of the initial purchase/sale

transaction.15

See 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa); 76 Fed. Reg. 77670-02. The

CFTC’s interpretation of the term “actual delivery” is incorrect and impracticable;

and furthermore, it is in direct conflict with the U.C.C., and thus does not meet the

14

According to the CFTC’s interpretation, “actual delivery” will not occur if the

seller fails to make physical delivery of the commodity even though: (1) the seller

has created a book entry that the purchase of the commodity by the buyer has been

covered or hedged by the seller through a third party contract; (2) the seller

transferred title to the buyer but the title document fails to identify the physical

location of the commodity, the quality specifications of the commodity, the

identity of the party transferring title of the commodity, and the

segregation/allocation status of the commodity; or (3) the seller rolls-over, off-sets,

or nets-out the purchase of the commodity with another transaction or settles in

cash with the buyer. 76 Fed. Reg. 77670, at 77672.

15 It seems odd that the Commission would be attempting to define “actual

delivery” to signify the same as “physical delivery” when Congress could have

made use of the term “physical delivery” when drafting Section 742(a) of the

Dodd-Frank Act (i.e., Section 2(c)(2)(D) of the CEA). The Model State

Commodity Code made sure to use the term “physical delivery” within the

statutory language, see Model State Commodity Code § 1.04(a)(2), and this Model

State Commodity Code predates the drafting and implementation of Section 742(a)

of the Dodd-Frank Act (i.e., Section 2(c)(2)(D) of the CEA) by many years.


30

7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa) standard imposed upon the CFTC that any rule it

promulgates concerning delivery must be based upon the typical commercial

practice in cash or spot markets for the commodity involved.16

Section 2(c)(2)(D)(ii)(III)(aa) states, “based upon the typical commercial

practice in cash or spot markets for the commodity involved.” 7 U.S.C. §

2(c)(2)(D)(ii)(III)(aa). Additionally, within Section 743 of the Dodd-Frank Act,

Congress expressly and specifically preserved any applicable State law by

declaring that “unless otherwise provided by the amendments made by this

subtitle, the amendments made by this subtitle do not divest any appropriate . . .

Federal or State agency of any authority derived from any other applicable law.”17

See Dodd-Frank Act § 743. From these two phrases, it can be logically deduced

that Section 742(a) of the Dodd-Frank Act, Section 2(c)(2)(D) of the CEA, does

not intend to override State law regarding the purchase/sale of commodities, such

16

The CFTC’s interpretation (i.e., 76 Fed. Reg. 77670-02) attempts to define

what is meant by the Section 2(c)(2)(D)(ii)(III)(aa) obligation of “actually

delivery.” Yet, Section 2(c)(2)(D)(ii)(III)(aa) does not by its own express language

give the CFTC the authority to define what is, or what is not, “actual delivery”

under the CEA. Rather, that statutory provision only provides the CFTC with the

authority to lengthen the delivery term, but no other regulatory rights are given to

the CFTC, to wit, “results in actual delivery within 28 days or such other longer

period as the Commission may determine by rule or regulation based upon the

typical commercial practice in cash or spot markets for the commodity involved.”

7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa).

17 The “subtitle” referenced in Section 743 of the Dodd-Frank Act is “Subtitle A—

Regulation of Over-the-Counter Swaps Markets” which includes both Section 742

and Section 743.


31

as the U.C.C. (specifically in this case, for example: Article 1 – General

Provisions, Definitions, and Rules; Article 2 – Sale of Goods; and Article 7 –

Storage and Bailment of Goods). Hence, any claim by the CFTC that Section

742(a) of the Dodd-Frank Act was intended to pre-empt (and therefore override)

all other Federal and State laws regarding commodity transactions is entirely

incorrect. See Pl.’ Resp. in Opp’n to Defs.’ Mot. to Dismiss 4 n.6 [DE 63].

The CFTC’s interpretation of the term “actual delivery” is at odds with the

term “delivery” as defined under the U.C.C. Article 2. The U.C.C. Article 2

defines “delivery” as “the voluntary transfer of physical possession or control of

goods.” U.C.C. § 2-103(1)(e). Thus, all that is required under the U.C.C. Article 2

to effectuate a “delivery” is to have a voluntary transfer of either physical

possession or control of the goods, and the “delivery” of the goods under the

U.C.C. Article 2 may be accomplished via electronic documents. See U.C.C. §§ 1-

201(b)(15); 1-201(b)(16); 1-201(b)(18); 2-308(b); 2-401(1); 2-401(3); 2-403(1); 2-

501(1); 7-102(a)(10); 7-106(a); 7-504(a). Therefore, pursuant to the U.C.C.,

“delivery” is completed where there is a voluntary passing of “control” over the

electronic documents that represent the goods.18

See U.C.C. § 7-106(a) (stating

18

“A transferee of a document of title, whether negotiable or nonnegotiable, to

which the document has been delivered but not duly negotiated, acquires the title

and rights that its transferor had or had actual authority to convey.” U.C.C. § 7-

504(a) (emphasis added).


32

that a person has “control” of an electronic document of title if the system in which

the electronic document is maintained “reliably establishes that person as the

person to which the electronic document was issued or transferred”).

Additionally, U.C.C. Article 1 states that delivery “with respect to an

instrument, document of title, or chattel paper, means voluntary transfer of

possession.” U.C.C. § 1-201(b)(15). A “document of title” is defined as any

document: (i) “which in the regular course of business or financing is treated as

adequately evidencing that the person in possession of it is entitled to receive, hold,

and dispose of the document and the goods it covers,” and (ii) “purport[s] to be

issued by or addressed to a bailee and purport[s] to cover goods in the bailee’s

possession which are either identified or are fungible portions of an identified

mass.”19

U.C.C. § 1-201(b)(16). Specifically, an electronic document of title

means any document of title evidenced by a record consisting of information

stored in an electronic medium (such as the Appellants’ 24-hour a day electronic

Portal) and does not have to be a hardcopy written document but can also be such

documents as the Appellants trade confirmations, delivery notices or monthly

statements. See U.C.C. §§ 1-201(b)(16); 7-102(a)(10). Such electronic tracking

and notice of sales versus inventories is the “typical commercial practice in cash or

19

The term “bailee” is defined as any person “that by a warehouse receipt, bill of

lading, or other document of title acknowledges possession of goods and contracts

to deliver them.” U.C.C. § 7-102(a)(1) (emphasis added).


33

spot markets for the commodity [i.e., metals] involved” as provided for by

Congress. See 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa).

Furthermore, U.C.C. Article 2 provides that when “delivery” is to be made

without moving the goods, if the goods are at the time of contracting already

identified and no documents of title are to be delivered, title to the goods passes at

the time and place of contracting.20

U.C.C. § 2-401(3)(b). Although the Retail

20

The stipulation to this concept is that in order for title to pass, the goods must

be identified. See U.C.C. § 2-401(1). Identification is the process that transforms

unascertained goods into specific goods so they become the goods to which the

contract refers. See In Re Ashby Enters. Ltd., 262 B.R. 905, 912 (Bankr. D. Md.

2001). Once the goods exist, identification may be made in any manner “explicitly

agreed to by the parties.” U.C.C. § 2-501(1). In the absence of an explicit

agreement between the parties, then identification occurs when “the contract is

made if it is for the sale of goods already existing and identified.” U.C.C. § 2-

501(1)(a). This may seem a bit confusing, but what it all means is that no special

identifying step need be taken where the goods are in existence and identified

when the contract is created because goods recognized by both the buyer and seller

as being the subject matter of the transaction have already passed through the

process of identification (and it would be a nonsensical formalism to require yet

another act to make these goods known as those covered by the contract).

In fact, the U.C.C. does not place real importance upon the concept of

identification, and provides that “the general policy is to resolve all doubts in favor

of identification [occurring].” U.C.C. § 2-501, cmt. 2. And when it comes to

fungible goods, an undivided share in an identified bulk of fungible goods is

sufficiently identified to be sold although the quantity of the bulk is not

determined, and any agreed proportion of a fungible bulk agreed upon by weight or

number or any other measure is enough to effectuate a sale. U.C.C. § 2-105(4).

Finally, in an official comment, the U.C.C. Article 2 expressly provides:

Undivided shares in an identified fungible bulk, such as grain in

an elevator or oil in a storage tank, can be sold. The mere

making of the contract with reference to an undivided share in


34

Dealers do not obtain physical possession of the purchased metal if the transaction

is financed through the Appellants, delivery is made “as an undivided share of a

fungible lot and held in safekeeping on a fungible basis with the commodities of

other Depository Dealers.”21

Thus, the Appellants transfer the control of goods via

the contractual right of the retail dealers to obtain the metal upon paying the

purchase price in-full.22

Furthermore, the physical possession of the metal is not

with the Appellants; but rather, physical possession of the metal is placed with the

secured depository. “Actual delivery” is possible — and is always made —

because the Appellants either have physical metal on hand, or have enforceable

obligations with several institutions for the supply of metal. Because the metals

an identified fungible bulk is enough under [Section 2-501(a)] to

effect an identification if there is no explicit agreement

otherwise.

U.C.C. § 2-501, cmt. 5.

21

The definition of “fungible goods” under the U.C.C. is stated as: “(A) goods of

which any unit, by nature or usage of trade, is the equivalent of any other like unit;

or (B) goods that by agreement are treated as equivalent.” U.C.C. § 1-201(b)(18).

22

The physical possession of the metal remains with the secured depository (and

not the Appellants) unless the client pays the purchase price of the metal in-full

and requests physical delivery of the metal to a specific location. However, upon

the execution of the contract, the client gains the economic control of the metal

regardless of the payment method because the client holds the contractual right to

the metal, including all the benefits and burdens of owning such metal. Therefore,

according to the U.C.C. the title to the metal passes at the time and place of

contracting (and thus, the delivery requirement is satisfied). See U.C.C. §§ 2-

103(1)(e); 2-308(b); 2-401(3)(b).


35

are to be delivered without being moved, title to the metals passes “at the time and

place of contracting,” and no acknowledgment by the Suppliers or the Appellants

is needed to effectuate the transfer of title and ownership of the metals to the

customers. See U.C.C. § 2-401(3)(b).

Therefore, under U.C.C. Article 2, which has been substantially adopted by

every State, and is the leading authority on commercial transactions worldwide,23

the concept of “delivery” can be accomplished in ways other than physically

picking-up the commodity that was purchased/sold and transferring it into the

physical possession of the buyer. See, e.g., Circuit City Stores, Inc. v.

Commissioner of Revenue, 790 N.E.2d 636, 638–39 (Mass. 2003) (holding that the

defendant had performed its delivery obligations when the sale was entered as an

alternative location sale into Circuit City’s DPS system and the purchased

merchandise was “reserved” for the customer at the designated location);

American Petrofina, Inc. v. PPG Industries, Inc., 679 S.W. 2d 740, 751–53 (Tex.

App. 2d Dist. 1984) (stating that when oil was purchased, but for convenience was

retained at the facility of the oil producer, ownership of the oil transferred at the

23

See United Nations Convention on Contracts for the International Sale of

Goods (CISG), S. Treaty Doc. No. 9, 98th Cong., 1st Sess. 22 (1983), reprinted at

15 U.S.C. App. 52 (2012). This United Nations Convention has been adopted by

the United States (and many other countries which are trading partners with the

United States) and is a multilateral treaty that governs the rights and obligations of

parties to international sales contracts, so it is the international, and functional,

equivalent of the U.C.C. Article 2, Sale of Goods employed by the States.


36

time of contracting). See also Lawrence’s Anderson on the Uniform Commercial

Code, U.C.C. §§ 2-401:87–92 (3d ed., rev. 2002) (explaining that a seller is always

required to make delivery, but performance of this duty may range from merely

making the goods available to the buyer, shipping the goods to the buyer, or

transferring title to the goods without there being any delivery of either goods or

documents).

In Circuit City Stores, Inc., Circuit City was offering a sales option that

would allow a customer to purchase fungible merchandise at one store, but elect to

pick-up the merchandise at an alternative store location in an effort to save

customers money on sales tax. Id. at 637. The focus of the disagreement was

when the sale was actually executed; either when the customer placed and paid for

their order, or when the customer actually received physical possession of the

merchandise where the company was accepting payment in one state for

merchandise located in another state, while simultaneously “reserving” the

merchandise with understanding that the customer would take possession at his/her

convenience. Id. at 639–40. The court examined the Massachusetts Commercial

Code and held that the sale was executed, and title to the merchandise was

transferred to the customer, when payment occurred, and not when physical

possession of the goods was taken by the customer. Id. at 642. The court found

that the relevant inquiry centered not on the transfer of goods themselves, but


37

instead whether the goods were placed within the actual or constructive possession

of another and provided, “[h]ere, Circuit City performed its obligations with

respect to delivery when the sale was entered as an alternative location sale into

Circuit City’s DPS system and the purchased merchandise was ‘reserved’ for the

customer at the designated location.” Id.

The Appellants’ business model operates in like-manner to that in the Circuit

City Stores case. While the issues before this Court and the Circuit City Stores

court are different from one another, the “delivery” concept is the same. After a

Retail Dealer places an order with the Appellants, an entry is recorded on the

books of the Appellants and the amount of metal that was purchased by the Retail

Dealer is transferred to the Retail Dealer’s account held with the Appellants.

Among other accounting documentation, a “Transfer of Commodity” document is

issued for every transaction that occurs, which details the amount and value of the

metal that was moved into (or out from) the account. Furthermore, in situations

where the customer purchased metal, the “Transfer of Precious and Industrial

Metal” (which form replaced the industry historical form “Transfer of

Commodity” notice after July 2012) evidences the proof that the customer can, at

any time, take physical possession of the metal, assuming the customer has paid-

off any financed portions of the purchase.


38

Moreover, the Appellants’ transactions are in accord with Section 2-308 of

the U.C.C. Section 2-308(b) provides that, unless otherwise agreed upon by the

parties, in a contract for sale of identified goods that, at the time of contracting, are

in some other place than in the possession of the seller, that location is the place for

the delivery of such goods. U.C.C. § 2-308(b). See also Haken v. Scheffler, 180

N.W.2d 206, 207 (Mich. Ct. App. 1970) (holding that where the location of the

brick, stone, and mill irons were located on the seller’s farm, there was a delivery

of such “bulky goods” without the necessity of the buyer’s removal of the goods

from their original site). Furthermore, Official Comment 2 to this Section 2-308

provides the following:

Under paragraph (b) when the identified goods contracted for

are known to both parties to be in some location other than the

seller’s place of business or residence, the parties are presumed

to have intended that place to be the place of delivery. This

paragraph also applies . . . to a bulk of goods in the possession of

a bailee. In such a case, however, the seller has the additional

obligation to procure the acknowledgment by the bailee of the

buyer’s right to possession.

U.C.C. § 2-308, cmt. 2. Both the Appellants and its buyers are aware that the

metal (which is being purchased/sold) is securely located in one of the depositories

from which the Appellants purchase their supply of metal. There is no definitive

agreement between the parties as to a specific place for delivery, only that if the


39

customer so chooses to have the metal physically delivered to a specified location,

the customer has that right (on the condition that the purchase price is paid in-full

prior to the metal being physically delivered).24

Consequently, the Appellants’

transactions satisfy the standards of the U.C.C. Article 2, and the CFTC has failed

to establish its jurisdiction over the Appellants in regards to the State law (e.g., the

U.C.C.) specifically preserved under the Dodd-Frank Act via Section 743. Compl.

¶¶ 7–9, 27, 31, 46, 50–52 [DE 1].

B. The CFTC’s Interpretation of “Actual Delivery” is Directly Contrary

to Congress’s Intent

The CFTC makes the bold assertion that its interpretative approach best

accomplishes Congress’s intent when it enacted Section 742(a) of the Dodd-Frank

Act, but cites no authority whatsoever in support of equating the words “actual”

and “physical.” See 76 Fed. Reg. 77670-02. In fact, the legislative history of the

Dodd-Frank Act indicates that Congress intended for the transactions executed by

the Appellants (and all transactions similar to those of the Appellants) to be

exempted from CFTC regulation. On May 20, 2010, the U.S. Senate passed H.R.

4173, and within the Senate’s version of Section 742(a) was the then (soon to be

rejected) subsection:

24

Also, the U.C.C. Article 2 states that “[s]ubject to these provisions and to the

provisions of Article 9, title to goods passes from the seller to the buyer in any

manner and on any conditions explicitly agreed on by the parties.” U.C.C. § 2-

401(1).


40

(v) ACTUAL DELIVERY – For purposes of clause (ii)(III), the

term ‘actual delivery’ does not include delivery to a third party

in a financed transaction in which the commodity is held as

collateral.

Dodd-Frank Wall Street Reform and Consumer Protection Act, S. 4173, 111th

Cong., § 742(a)(2)(D)(v) (2010).25

This version of the bill was rejected by the

Conference Committee, which recommended the U.S. House version that did not

contain the spurious limitation on “actual delivery.” The accepted version by the

U.S. House accurately describes the exact transactions in which the Appellants

engage (i.e., the Appellants’ market transactions would be permitted in accordance

with the Conference Committee enactment which terminated the limitation upon

“actual delivery” within clause (v) of the U.S. Senate version of the bill).

The CFTC’s interpretation attempts to re-establish the rejected pre-

conference committee rule. See Morrison Enter., LLC v. Dravo Corp., 638 F.3d

594, 609 (8th Cir. 2011) (stating that the courts must “avoid interpreting a statute

in a manner that renders any section of the statute superfluous or fails to give effect

to all of the words used by Congress”). Consequently, the Appellants’ transactions

satisfy the definition of “actual delivery” under Section 2(c)(2)(D)(ii)(III)(aa) of

25

The Senate’s subpart “(v),” which was rejected, attempted to define the “actual

delivery” term in precisely the same manner the CFTC now attempts to define

“actual delivery” through its “guidance” statement in 76 Fed. Reg. 77670-02. The

CFTC should not be permitted to use a definition of actual delivery that was

specifically rejected by Congress. Food and Drug Admin. v. Brown & Williamson

Tobacco Corp., 529 U.S. 120, 132-133, 161, 120 S.Ct. 1291, 1299, 1315–16

(2000).


41

the CEA; thus, the CFTC lacks jurisdiction over the Appellants because the

Appellants are exempt from Section 2(c)(2)(D)(i) of the CEA. Compl. ¶¶ 27, 31,

46, 50–52 [DE 1].

Moreover, we need to look no further than the Colorado Commodity Code,

one of the first states to adopt the Model State Commodity Code, as an example of

a legislative action which involved the explicit decision to differentiate between

“actual delivery” and “physical delivery.” The Colorado Commodity Code makes

use of the term “physical delivery” rather than the term “actual delivery.” See

COLO. REV. STAT. § 11-53-105 (2012). For example, the statute lists as an

exemption from the ban on all commodity transactions:26

A commodity contract for the purchase of one or more precious

metals which requires, and under which the purchaser receives,

within twenty-eight calendar days from the payment in good

funds of any portion of the purchase price, physical delivery of

the quantity of the precious metals purchased by such payment;

except that, for purposes of this paragraph (b), physical delivery

shall be deemed to have occurred if, within such twenty-eight-

day period: Such quantity of precious metals purchased by such

payment is delivered (whether in specifically segregated or

fungible bulk form) into the possession of a depository (other

than the seller). . . .

26

The ban on commodity transactions states that “[e]xcept as otherwise provided

in section 11-53-104 [exempt person transactions] or 11-53-105 [exempt

transactions], no person shall sell or purchase or offer to sell or purchase any

commodity under any commodity contract or under any commodity option or offer

to enter into or enter into as seller or purchaser any commodity contract or any

commodity option.” COLO. REV. STAT. § 11-53-103.


42

COLO. REV. STAT. § 11-53-105(b) (emphasis added). Given the explicit language

of this exemption, under the Colorado Commodity Code, it is apparent that

Congress created its exemption under Section 2(c)(2)(D)(ii)(III)(aa) of the CEA

because it acknowledged the Model State Commodity Code. Congress could have

used the term “physical delivery,” but instead decided to use the term “actual

delivery” because “actual delivery” carries a different meaning than “physical

delivery.” Thus, the CFTC’s interpretation of “actual delivery,” to be the

equivalent of “physical delivery,” is contrary to Congress’s unambiguous statutory

intent. See Robinson v. Shell Oil Co. , 519 U.S. 337, 340 –41, 117 S.Ct. 843, 846

(1997) (finding “[t]he plainness or ambiguity of statutory language is determined

by reference to the language itself, the specific context in which that language is

used, and the broader context of the statute as a whole. [citation omitted]”);

Morrison Enter., LLC, 638 F.3d at 609; Williams, 553 U.S. at 294–95, 128 S.Ct. at

1839 - 40 (2008) (stating that it is “the precept of statutory construction that effect

should be given to every clause and word of the statute”).

C. The District Court Erred in its Determination Regarding the

Application of Section 2(c)(2)(D)(ii)(III)(aa) of the CEA

The district court addressed the Appellants’ arguments regarding the “actual

delivery” exception stated within Section 2(c)(2)(D)(ii)(III)(aa) of the CEA in one

short paragraph within the Injunctive Order. Injunctive Order 20 [DE 79]. The

district court attempts to avoid the Appellants’ arguments by stating that the focus


43

of the issue should be placed upon the transactions with the retail public investors

and not those transactions between the Appellants and its Retail Dealers. Id. This

statement is nonsensical because the Appellants do not hold privity of contract

with the retail public investors. The Appellants deal solely with other business

entities, such as with their Suppliers and the Retail Dealers (the only parties

holding privity of contract with the retail customers). Additionally, and regardless

of whether the transactions involve the retail public investors, the determination of

the “actual delivery” exception under Section 2(c)(2)(D)(ii)(III)(aa) of the CEA

does not depend upon (in any manner) which individuals or entities are the parties

to the transactions.

Additionally, the district court states that “actual delivery cannot occur

where [the Appellants] have no metals to deliver.” Id. Each declarant asserts that

although its representative institution sold metals to the HW Entity Defendants,

because their sales were financed, title never passed to the HW Entity Defendants.

Thor Gjerdrum Decl. ¶¶ 5–8, 14 [DE 4-17]; Albertus Maartens Decl. ¶ 14 [DE 4-

17]. This statement ignores the fact that the Appellants have contractual

obligations with its Suppliers for the purchase/sale of the metals. The district court

reached its conclusion (that the Appellants have no metal which they can deliver)


44

based solely upon two affidavits.27

These affidavits are from two individuals

employed by two of the Appellants’ Suppliers. Despite the affidavits, the contracts

between the Appellants and their Suppliers contemplate the actual purchase/sale of

physical metals; yet, the district court failed to address this evidence, which stands

in sharp contrast to the CFTC’s claims.

The Appellants do not fall under the jurisdiction of Section 2(c)(2)(D) of the

CEA because the Appellants’ transactions are exempted by the “actual delivery”

exception within Section 742(a) of the Dodd-Frank Act. See 7 U.S.C. §

2(c)(2)(D)(ii)(III)(aa). The Appellants respectfully request this Court to reverse

the Injunctive Order because the CFTC has failed to demonstrate a “reasonable

probability of ultimate success upon the question of jurisdiction when the action is

tried on the merits.” ETS Payphones, 408 F.3d at 731.

III. The “Enforceable Obligation to Deliver” Exception

Another exemption under Section 742(a) of the Dodd-Frank Act states that

the requirements of Section 2(c)(2)(D) do not apply to a “contract of sale that

creates an enforceable obligation to deliver between a seller and a buyer that have

27

The district court calls the two affidavits “testimony.” Injunctive Order 20 n.30

[DE 79]. The term “testimony” is inaccurate because these two individuals were

not subject to any form of cross-examination by the Appellants, whether in formal

court proceeding or in deposition before the district court rendered its Injunctive

Order. As will be demonstrated later within this Initial Brief, these two affidavits

suffer from serious inconsistencies and are highly inaccurate and misleading.


45

the ability to deliver and accept delivery, respectively, in connection with the line

of business of the seller and buyer.” Dodd-Frank Act, § 742(a)(ii)(III)(bb); 7

U.S.C. § 2(c)(2)(D)(ii)(III)(bb) (emphasis added). There are four elements to this

exception and the Appellants satisfy all four. See 7 U.S.C. §

2(c)(2)(D)(ii)(III)(bb).

First, the Appellants enter into a Dealer Purchase & Sale Agreement which

governs all sales between them and any Retail Dealer with whom they transact

business. Second, the Dealer Purchase & Sale Agreement creates an enforceable

obligation for the Appellants to deliver metals to the Retail Dealers. Riggio Decl.

Exh. B [DE 35-2]. Third, both the Appellants and the Retail Dealers are business

entities with the means to make and accept deliveries of precious and industrial

metals (i.e., monetary resources, logistics, and facilities). Fourth and lastly, the

Appellants only contract with, and sell to, the Retail Dealers (as opposed to

individual retail consumers in the public); and thus, the Appellants and the Retail

Dealers are purchase/sale counterparties to all the metal transactions originating

from each party’s line of business (i.e., the purchase and sale of metals).

The Appellants and dealers are in the line of business of buying and selling

precious metals. The dealers were not mere “intermediaries” or agents for the

Appellants and the parties had enforceable obligations against one another as

purchasers and sellers of metal for the payment and delivery of that metal. Martin


46

Decl. ¶¶ 6–9, 24 [DE 38-1]; see also Martin Decl. Exh. 1, 3 [DE 39-1]. Indeed,

Lloyds Commodities, LLC (a dealer that transacted business with the Appellants)

described itself as “a wholesale precious metals dealer, offering clients two way

access to precious and industrial metals.” Martin Decl. ¶ 23 [DE 38-1]; see also

Martin Decl. Ex. 11 [DE 40-1]. The dealers were not authorized to enter, and did

not enter, into any agreements with their customers, or any other entity, on behalf

of any of the Appellants. Martin Decl. ¶ 24 [DE 38-1]. Any monies the dealers

earned from the purchase or sale of metal, including interest and fees related to any

credit the dealers extended, was the property of the dealers alone. Id. None of the

Appellants paid any commissions, salaries, or other compensation to the dealers or

their principals. Id.

The CFTC disputes the existence of any actual metal, claiming that the

Appellants simply manage their “exposure to retail customer trading positions by

trading derivatives in its own over-the-counter margin trading accounts.” Pl.’s Mot.

for Prelim. Inj. 6 [DE 4]. None of these statements are accurate. The Appellants

have contracted with various companies (e.g., FideliTrade Incorporated, A-Mark

Precious Metals, Inc., Standard Bank, and Natixis Commodity Markets Limited) to

obtain sufficient metal to cover obligations to the dealers. Martin Decl. ¶¶15–17

[DE 38-1]. The Appellants did maintain futures trading accounts with R.J.

O’Brien and OANDA; however, the purpose of those accounts was to hedge


47

against any intra-day, or overnight, price risk exposure from purchases that the

Appellants elected to hold rather than sell. Id. ¶ 14.

Similar to the Dealer Purchase & Sale Agreement, the A-Mark Agreement

provides for the purchase and sale of metal “for immediate physical delivery at the

full cash price of the [m]etal” or with physical possession of the metal deferrable

“for up to two years after the purchase of the [m]etals.” Id. ¶ 16; see also Martin

Decl. Exh. 4 ¶¶ 2.A and 2.B [DE 39-1]. Financing is provided by A-Mark and

requires a “down payment” and the payment of interest on a monthly basis on the

outstanding loan balance. Id. The CFTC submits a declaration from Mr. Thor

Gjerdrum, A-Mark’s CFO, to bolster its theory that the Appellants never actually

purchase metal. Gjerdrum Decl. [DE 4-17]. Mr. Gjerdrum’s declaration, however,

is directly contradicted by the terms of the A-Mark agreement and therefore this

parol document offered by the CFTC should not be given any evidentiary weight.

See, e.g., St. Paul Mercury Ins. Co. v. Mountain West Farm Bureau Mut. Ins. Co.,

210 Cal.App.4th 645, 658 (Cal. App. 2d Dist. 2012) (holding that under California

law, the parol evidence rule prohibits the use of extrinsic evidence to establish the

meaning of an agreement where the agreement is unambiguous.). For example,

notwithstanding the clear language of Paragraph 2 of the A-Mark Agreement, that

the purchase transaction occurs at the time of down payment, Mr. Gjerdrum insists

that the Appellants “do not own any metals as a result of its margin trades with A-


48

Mark” and that the Appellants “have the right to purchase the quantity of metals

associated with any individual margin trade at the trade price, but only after it

makes full payment.” Compare Martin Decl. Exh. 4 ¶ 2.B [DE 39-1], with

Gjerdrum Decl. ¶ 14 [DE 4-17] (emphasis added).

Mr. Gjerdrum also denies that the Appellants acquire an ownership interest

in the metal even though he makes an earlier reference to the minimum “equity”

level the Appellants must maintain at any given time in connection with these

financed transactions. Gjerdrum Decl. ¶¶ 11, 14 [DE 4-17]. The term “equity”

infers an ownership interest. Likewise, while he claims that A-Mark does not store

any metals for the Appellants in connection with its so-called margin trades, he

states earlier that “A-Mark maintains sufficient inventory of physical metals to

meet its obligations to HW Commodities and A-Mark’s other customers.” Id. ¶¶ 8,

14. Because purchases accompanied by full payment result in the immediate

physical delivery of the metal to the purchaser, Mr. Gjerdrum’s reference to the

storage of metal to meet its obligations to the Appellants can only be a reference to

Appellants’ financed metal purchases and A-Mark’s need to have sufficient metal

on-hand to meet its obligation to make immediate physical delivery to the

Appellants should they pay the unpaid loan balance on those transactions.

Mr. Gjerdrum’s most enlightening statement is that “only after Hunter Wise

pays in full will A-Mark allocate, segregate and deliver any metals to Hunter


49

Wise.” Id. ¶14 (emphasis added). While it may well be true that A-Mark does not

“allocate” specific metal for the Appellants prior to full payment, Mr. Gerjdrum’s

statement does not deny that metals purchased on a financed basis are kept in

storage as part of an unallocated, fungible mass of metal sufficient to meet A-

Mark’s obligations to the Appellants and its other customers — exactly the

methodology used by the Appellants in connection with the dealers’ metal

purchases financed through the Appellants.

The agreements between the Appellants and FideliTrade, Natixis, and

Standard Bank likewise reflect the terms under which the Appellants may purchase

and sell metal. Martin Decl. ¶ 17 [DE 38-1]; see also Martin Decl. Exh. 5–7 [DE

39-1]. Account statements from A-Mark and Natixis show purchases and sales of

metal on a financed basis with interest charged on the unpaid loan balance. Martin

Decl. ¶¶ 19–20 [DE 38-1]; see also Martin Decl. Exh. 8–9 [DE 39-1, DE 40-1].

The Natixis statement further indicates that it was holding stocks of gold and silver

bullion in a vault at JP Morgan Chase Bank. Martin Decl. ¶ 19 [DE 38-1]; see also

Martin Decl. Exh. 8 [DE 39-1]. The CFTC’s summary of a phone conversation

with Natixis representatives in which Natixis allegedly stated that no metal is

stored for the Appellants is hearsay and directly contravened by this account

statement. Johnson Decl. ¶ 50 [DE 4-2]. The “Metal Ledger Statement” from


50

Standard Bank also shows holdings of platinum, palladium, gold, and silver.

Martin Decl. ¶ 21 [DE 39-1]; see also Martin Decl. Exh. 10 [DE 40-1].

The Appellants plainly hold physical metal, or have enforceable obligations

with its Suppliers for the physical delivery of metal. Thus, the Appellants certainly

have the ability to make and take delivery of precious metals in connection with

any purchases made by dealers. Therefore, the Appellants are exempt from the

CFTC’s jurisdiction via Section 2(c)(2)(D)(ii)(III)(bb) of the CEA because the

transactions in which the Appellants engage meet all four elements of the

exemption. Compl. at ¶¶ 8, 27, 31, 40, 41, 45–46, 48, 50–52 [DE 1]; 7 U.S.C. §

2(c)(2)(D)(ii)(III)(bb).

A. The District Court Erred in its Determination Regarding the

Application of Section 2(c)(2)(D)(ii)(III)(bb) of the CEA

The district court addressed the Appellants’ arguments regarding the

“enforceable obligation to deliver” exception stated within Section

2(c)(2)(D)(ii)(III)(bb) of the CEA in one short paragraph within the Injunctive

Order. Injunctive Order 19–20 [DE 79]. The district court states that the

“enforceable obligation to deliver” exception does not apply to “transactions

between the [Retail Dealers] and the retail customers.” Id. 20. The Appellants did

not deal with retail customers, nor did they contract with any retail customers. The

district court casts this fact aside and states that because the Appellants allegedly


51

had a “leading role in the scheme”28

they cannot satisfy the elements of the

exception. Id.

The Appellants do not fall under the jurisdiction of Section 2(c)(2)(D) of the

CEA because the Appellants’ transactions are exempted by the “enforceable

obligation to deliver” exception within Section 742(a) of the Dodd-Frank Act. See

7 U.S.C. § 2(c)(2)(D)(ii)(III)(bb). The Appellants respectfully request this Court to

reverse the Injunctive Order because the CFTC has failed to demonstrate a

“reasonable probability of ultimate success upon the question of jurisdiction when

the action is tried on the merits.” ETS Payphones, 408 F.3d at 731.

CONCLUSION

The district court abused its discretion in granting a preliminary injunction

against the Appellants because the district court failed to appropriately (and

28

The district court makes the statement that the Appellants are the “leading role

in the scheme” but does not make any findings of fact that the Appellants

controlled, ordered, directed, or held an agency relationship with the Retail Dealers

(i.e., the persons who contacted and solicited orders from the retail public

investors). Also, it is not possible for the district court to have relied upon the

aiding and abetting provision of the CEA because the district court did not make a

determination of law that the Appellants had violated a provision of the CEA. See

7 U.S.C. § 13c(a); CFTC v. Matrix Trading Group, Inc., 2002 WL 31936799, at

**8–9 (S.D. Fla. 2002) (stating that claim for aiding and abetting under the CEA

involves three elements: (1) the CEA was violated; (2) the defendant had

knowledge of the wrongdoing underlying the CEA violation; and (3) the defendant

intentionally assisted the primary wrongdoer). Consequently, the district court

erred in holding that the “enforceable obligation to deliver” exception under

Section 2(c)(2)(D)(ii)(III)(bb) of the CEA cannot apply to the Appellants merely

because the Retail Dealers entered into metals transaction with the retail public

investors.


52

competently) address the Appellants’ jurisdictional arguments prior to issuing the

Interlocutory Order granting a Preliminary Injunction. ETS Payphones, 408 F.3d

at 731. For the aforementioned reasons, the Interlocutory Order granting a

Preliminary Injunction issued by the U.S. District Court for the Southern District

of Florida against the Appellants should be reversed.



csimpson

Typewritten Text

13,541

CERTIFICATE OF SERVICE

I hereby certify that on June 17, 2013, one originally signed brief and 6

copies, along with one original and one copy of the record excerpts, were

dispatched for delivery to the Clerk’s Office of the United States Court of Appeals

for the Eleventh Circuit by third-party commercial carrier for overnight delivery at

the following address:

John Ley, Clerk

U.S. Court of Appeals for the 11th

Circuit

56 Forsyth Street N.W.

Atlanta, Georgia 30303

On this same date one copy of the brief and one copy of the record excerpt

were sent to the following, by third-party commercial carrier, for delivery within

three calendar days:

Anne Stukes

U.S. Commodity Futures Trading

Commission

1155 21st St NW

Washington, DC 20581-0001

202-418-5000

Carlin Ray Metzger

US Commodity Futures Trading

Commission

525 W Monroe Street, Ste 1100

Chicago, IL 60661

312-596-0536

Filing and Service were performed by Direction of Counsel

Counsel Press, LLC

1011 East Main Street

Richmond, VA 23219

(804) 648-3664


appellants' opening brief 061413

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