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UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

COMMODITY FUTURES TRADING

COMMISSION

Plaintiff,

Case No. 17-cv-06416

v.

MONEX DEPOSIT COMPANY, MONEX

CREDIT COMPANY, NEWPORT SERVICE

CORPORATION, LOUIS CARABINI, and

MICHAEL CARABINI,

Defendants.

Hon. Sharon Johnson Coleman

DEFENDANTS’ MEMORANDUM OF LAW IN SUPPORT OF

MOTION TO DISMISS COMPLAINT FOR FAILURE TO STATE A CLAIM

Attorneys for Defendants Monex Deposit Company,

Monex Credit Company, Newport Services Corporation,

Louis Carabini, and Michael Carabini

October 3, 2017

DENTONS US LLP

Stephen J. Senderowitz

Steven L. Merouse

Jacqueline A. Giannini

233 South Wacker Drive – Suite 5900

Chicago, Illinois 60606

+1 312 876 8000

KOBRE & KIM LLP

Michael S. Kim

Andrew C. Lourie

Matthew I. Menchel

Benjamin J.A. Sauter

111 W. Jackson Blvd. – 17th Floor


+1 312 429 5100

Case: 1:17-cv-06416 Document #: 41-1 Filed: 10/03/17 of 42 PageID #:2810

i

TABLE OF CONTENTS

PRELIMINARY STATEMENT .................................................................................................... 1

RELEVANT BACKGROUND ...................................................................................................... 2

A. Regulatory Background ....................................................................................................... 2

B. Factual Background ............................................................................................................. 3

1. Monex’s Atlas Account .................................................................................................... 3

2. The CFTC’s Regulatory Allegations................................................................................ 5

3. The CFTC’s Fraud Allegations ........................................................................................ 5

4. The CFTC’s Allegations Against The Individual Defendants ....................................... 10

5. The CFTC’s Requested Relief ....................................................................................... 10

ARGUMENT ................................................................................................................................ 10

A. The CFTC Has Not Sufficiently Alleged A Claim For Fraud (Counts 2 and 3) ............... 11

1. The Website Statements Are Insufficient To Establish Fraud ....................................... 14

2. The Brochure Statements Are Insufficient To Establish Fraud ..................................... 16

3. The Training Materials Are Insufficient to Establish Fraud .......................................... 17

4. The Statements To Five Monex Customers Are Insufficient ......................................... 19

B. The CFTC Has Failed To Plead That It Has Jurisdiction Over The Transactions At Issue

(All Counts) ....................................................................................................................... 20

1. “Actual Delivery” Occurs Upon Physical Transfer Of Metals To A Depository And

Title Transfer To The Customer .................................................................................... 20

2. The CFTC Has Failed To Plead That The Transactions At Issue Fall Outside The

Actual Delivery Exclusion ............................................................................................. 23

3. Jurisdictional Limitations Govern All Counts in the Complaint and Warrant Dismissal

of the Complaint in its Entirety ...................................................................................... 25

4. Defendants Lacked Fair Warning That Their Conduct Could Be Construed As Unlawful

………………………………………………………………………………………….27

C. The CFTC Has Failed To State A Claim For Controlling Person Liability ...................... 33

1. Counts 2 and 3 Should Be Dismissed as to the Individual Defendants ......................... 34

2. Counts 1 And 4 Should Be Dismissed As To The Individual Defendants .................... 35

CONCLUSION ............................................................................................................................. 36


ii

TABLE OF AUTHORITIESCases

Gen. Elec. Co. v. U.S. E.P.A., 53 F.3d 1324 (D.C. Cir. 1995) .................................................................... 28

Stoller v. C.F.T.C., 834 F.2d 262 (2d Cir. 1987) .................................................................................. 28, 33

United States v. Chrysler Corp., 158 F.3d 1350, 1356 (D.C. Cir. 1998) .................................................... 28

Upton v. SEC, 75 F.3d 92, 98 (2d Cir. 1996) .............................................................................................. 28

Other Authorities

United States ex rel. Hixson v. Health Mgmt. Sys., Inc., 613 F.3d 1186 (8th Cir. 2010) ................ 15, 20, 36

766347 Ontario Ltd. v. Zurich Capital Markets, Inc., 249 F. Supp. 2d 974 (N.D. Ill. 2003) ............... 11, 34

Anderson v. Abbott Labs., 140 F. Supp. 2d 894 (N.D. Ill. 2001) ................................................................ 12

Bowman v. Hartig, 334 F. Supp. 1323 (S.D.N.Y. 1971) ..................................................................... 14, 18

Bragg v. Price, 1998 WL 171419, Comm. Fut. L. Rep. ¶ 27,298 (April 13, 1998). ............................ 13, 14

CFTC v. Hunter Wise Commodities, LLC, 749 F.3d 967 (11th Cir. 2014). ......................................... passim

CFTC v. Kraft Foods, 153 F. Supp. 3d 996 (N.D. Ill. 2015) ...................................................................... 11

CFTC v. M25 Investments Inc., No. 3:09-cv-1831, 2010 WL 769367 (N.D. Tex. March 6, 2010) ........... 11

CFTC v. Monex, 824 F.3d 690 (7th. Cir. 2016) .......................................................................................... 22

CFTC v. Worth Bullion Group, Inc., No. 12-C-2431, 2012 WL 4097725 (N.D. Ill. Sept. 17, 2012) ....... 23

CFTC v. Worth Group, Inc., No. 13-80796-CIV, 2014 WL 11350233 (S.D. Fla. Oct. 27, 2014). ...... 31, 32

CFTC v. Worth Group, Inc., No. 13-cv-80796 (S.D. Fla.) (filed on August 13, 2013) ........................ passim

Davis v. SPSS, Inc., 431 F. Supp. 2d 823 (N.D. Ill. 2006) .......................................................................... 17

Eisenstadt v. Centel Corp., 113 F.3d 738 (7th Cir. 1997) ........................................................................... 12

Equal Empl. Opportunity Comm’n v. The Chicago Club, 86 F.3d 1423 (7th Cir. 1996) ........................... 23

Gallagher v. Abbott Labs., 269 F.3d 806 (7th Cir. 2001) ........................................................................... 12

Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d Cir. 1973) ................................................................ 32

Grayned v. City of Rockland, 408 U.S. 104 (1972) .................................................................................... 27

Henson v. CSC Credit Servs., 29 F.3d 280 (7th Cir. 1994) ........................................................................ 29

Howard v. Haddad, 962 F.2d 328 (4th Cir. 1992) ...................................................................................... 13

In re Int’l Business Machines Corp. Sec. Litig., 163 F.3d 102 (2d Cir. 1998) ........................................... 12

In re JP Morgan Chase Sec. Litig., No. 02 Civ. 1282, 2007 WL 950132 (S.D.N.Y. March 29, 2007) ..... 13

In re Town & Country Home Nursing Servs., Inc., 963 F.2d 1146 (9th Cir. 1991) .................................... 25

Indemnified Capital Invs., SA v. R.J. O’Brien & Assocs., Inc., 12 F.3d 1406 (7th Cir. 1993). ............ 12, 14

Jama v. Immigration & Customs Enforcement, 543 U.S. 335 (2005) ........................................................ 25

Jennings v. First Commodity Corp. of Boston, 1987 WL 103546, Comm. Put. L. Rep. (CCH) ¶ 23,727

(Initial Decision July 15, 1987)............................................................................................................... 14

Johnson v. Don Charles & Co., 1991 WL 83511, Comm. Fut. L. Rep. (CCH) ¶ 24,986 (Jan. 16, 1991) . 13,

18

Kropp Forge Co. v. Sec. of Labor, 657 F.2d 119 (7th Cir. 1981) ............................................................... 28

Magill v. Int’l Trading Grp. Ltd., 1988 WL 232514, Comm. Fut. L. Rep. (CCH) ¶ 24,095 (Initial Decision

Jan. 6, 1988) ............................................................................................................................................ 13

Marchese v. Nelson, 809 F. Supp. 880 (C.D. Utah 1993) ........................................................................... 13

Monieson v. CFTC, 996 F.2d 852 (7th Cir. 1993) ...................................................................................... 33

Motzek v. Monex Int’l, Ltd., 1993 WL 176296, Comm. Fut. L. Rep. (CCH) P25 (May 24, 1993) ............. 2

Murlas Commodities, Inc., CFTC No. 85-29, 1995 WL 523563, Comm. Fut. L. Rep. ¶ 26,485 (Sept. 1,

1995) ....................................................................................................................................................... 34


iii

Nanlawala v. Jack Carl Assocs., Inc., 669 F. Supp. 204 (N.D. Ill. 1987) .................................................. 14

Newman v. L.F. Rothschild, 651 F. Supp. 160 (S.D.N.Y. 1986) .......................................................... 14, 18

Pub. Citizen v. U.S. Dep’t of Justice, 491 U.S. 440 (1989) ........................................................................ 27

Raab v. Gen. Physics Corp., 4 F.3d 286 (4th Cir. 1993) ............................................................................ 13

Radzanower v. Touche Ross & Co., 426 U.S. 148 (1976) .......................................................................... 26

RedLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 132 S. Ct. 2065 (2012) ................... 26

Retail Commodity Transactions Under Commodity Exch. Act, 76 Fed. Reg. 77670 (Dec. 14, 2011) 21, 24,

28

San Leandro Emergency Med. Plan v. Philip Morris Co., 75 F.3d 801 (2d Cir. 1996) ............................. 13

Satellite Broad. Co. v. FCC, 824 F.2d 1 (D.C. Cir. 1987) .................................................................... 27, 33

Searls v. Glasser, 64 F.3d 1061 (7th Cir. 1995) ................................................................................... 12, 13

See Carr v. CIGNA Secs., Inc., 95 F.3d 544 (7th Cir. 1996) ................................................................ 17, 18

Stransky v. Cummins Engine Co., 51 F.3d 1329 (7th Cir. 1995) .......................................................... 12, 15

Udiskey v. Commodity Research Corp., Comm. Fut. L. Rep. (CCH) ¶ 27,599 (Apr. 2, 1999), ................. 14

Udiskey v. Commodity Research Corp., Comm. Fut. L. Rep. (CCH) ¶ 29,255 (Dec. 16, 2002) ............... 14

United States ex rel. Ketroser v. Mayo Found., 729 F.3d 825 (8th Cir. 2013) ............................... 15, 20, 36

United States v. Hoyts Cinemas Corp., 256 F. Supp. 2d 73 (D. Mass. 2003) ............................................. 32

United States v. Hoyts Cinemas Corp., 380 F.3d 558 (1st Cir. 2004) ........................................................ 33

United States v. Lanier, 520 U.S. 259 (1997) ............................................................................................. 26

Van Noppen v. InnerWorkings, Inc., 136 F. Supp. 3d 922 (N.D. Ill. 2015 ................................................. 12

Wright v. Associated Ins. Cos. Inc., 29 F.3d 1244 (7th Cir. 1994) ............................................................... 8

Yuknis v. Atherton, 668 F. Supp. 1173 (N.D. Ill. 1987) ................................................................................ 9

Zerman v. Ball, 735 F.2d 15 (2d Cir. 1984) ................................................................................................ 13

Zucker v. Katz, 708 F. Supp. 525 (S.D.N.Y. 1989) .................................................................................... 19

Regulations

7 U.S.C. § (c)(2)(D)(i)(II) ........................................................................................................................... 26

7 U.S.C. § (c)(2)(D)(ii)(III)(aa) .................................................................................................................. 26

7 U.S.C. § 13c(b) .................................................................................................................................. 10, 33

7 U.S.C. § 1a(9) .......................................................................................................................................... 27

7 U.S.C. § 2(a)(1) .................................................................................................................................. 25, 26

7 U.S.C. § 2(a)(1)(A) .................................................................................................................................. 26

7 U.S.C. § 2(c)(2)(D) .................................................................................................................................. 23

7 U.S.C. § 2(c)(2)(D)(i) ................................................................................................................................ 3

7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa) .................................................................................................................. 3

7 U.S.C. § 6b(a)(2) .................................................................................................................................. 5, 11

7 U.S.C. § 9(1) .................................................................................................................................. 5, 11, 25

Cal. Corp. Code § 29531(b) .......................................................................................................................... 3

CEA § 4b(a)(2)(A) ...................................................................................................................................... 11

CEA § 4b(a)(2)(C) ...................................................................................................................................... 11

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd- Frank”), Pub. L. No.

111-203, 124 Stat. 1376 ................................................................................................................ 3, 10, 24

Fed. R. C. P. 9(b) ........................................................................................................................................ 34

Fed. R. Civ. P. 12(b)(6) ................................................................................................................................. 1


iv

12

Final Rules, Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive

Devices and Prohibition on Price Manipulation, 76 Fed. Reg. 41398 (July 14, 2011) ..................... 11, 12


1

Pursuant to Federal Rule of Civil Procedure 12(b)(6), Defendants Monex Deposit

Company, Monex Credit Company, Newport Services Corporation (collectively, “Monex”),

Louis Carabini, and Michael Carabini (the “Individual Defendants,” and, together with Monex,

“Defendants”1) submit this memorandum of law in support of their motion to dismiss the

Complaint for Injunctive and Equitable Relief and Penalties Under the Commodity Exchange

Act (“Complaint”) (Dkt. No. 1) for failure to state a claim.

PRELIMINARY STATEMENT

The jurisdictional predicate for this action — the contention that the Commodity Futures

Trading Commission (“CFTC”) has regulatory authority over leveraged metals transactions even

when those metals are physically delivered to an independent depository and title to the metals

passes to the purchaser within 28 days — is unprecedented. The last time the CFTC tried to

assert this position in federal court in CFTC v. Worth Group, the court not only denied the

attempt but further ruled that such a “change” in the standards governing leveraged metals

transactions would violate the defendants’ constitutional rights. Nothing has changed since then

that would warrant a different result here. To the contrary, the defendant in the Worth case

continues to do business in an analogous way to the Defendants here pursuant to a court-

approved and CFTC-approved consent order.

The Complaint should be dismissed for several reasons:

First, Counts 2 and 3 should be dismissed as to all Defendants because the Complaint

does not allege sufficient facts to sustain the CFTC’s fraud claims. These claims are premised

on statements that are factually true and/or, at most, garden-variety puffery. As such, these

statements are not actionable as a matter of law.

1 The Individual Defendants are not included within the Complaint’s definition of “Monex.” (See

Dkt. No. 1 ¶ 1.)


2

Second, all Counts should be dismissed as to all Defendants because the CFTC does not

have jurisdiction to pursue this action. The Complaint affirmatively alleges that Monex transfers

physical possession of leveraged precious metals to a depository and passes title to its customers.

As such, Monex is beyond the CFTC’s reach according to the CFTC’s statutory mandate, its own

industry guidance, and its own prior litigation statements. Should the CFTC seek to depart from

its own prior guidance and statements, the Complaint (similar to the proposed amended

complaint in Worth) should be dismissed for failure to provide Monex with fair warning in

violation of the Defendants’ right to due process.

Third, all Counts should be dismissed as to the Individual Defendants because the

Complaint does not allege sufficient facts to sustain a claim for “controlling person” liability.

The Complaint barely even mentions the Individual Defendants, much less makes a showing that

they acted in bad faith or knowingly induced any violation of law, an essential element of the

CFTC’s claim.

RELEVANT BACKGROUND2

A. Regulatory Background

Since 1987, Monex has continuously complied with the Model State Commodity Code

(the “Model Code”) that has been adopted by many states.3 The Model Code, in part, provides

that a retail precious metals transaction is exempt from regulation if, within a specified period of

time, the purchased metals are delivered to the customer or an independent depository and title is

2 For the purposes of Defendants’ motion to dismiss, the Court must accept the allegations as true

and, accordingly, they are presented as such herein. The Defendants, however, reserve their right to

contest the veracity of any and all of the allegations should the litigation proceed beyond the instant

motion practice.

3 Cf. Motzek v. Monex Int’l, Ltd., 1993 WL 176296, at *3-5, Comm. Fut. L. Rep. (CCH) P25, 728

(May 24, 1993) (CFTC administrative decision finding that Monex’s delivery method was exempt from

regulation).


3

transferred to the customer. See, e.g., Cal. Corp. Code § 29531(b) (California’s enactment of the

Model Code).4

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-

Frank”), Pub. L. No. 111-203, 124 Stat. 1376, signed into law on July 21, 2010 and effective

July 16, 2011, added a new provision to the Commodity Exchange Act (“CEA”) that essentially

adopted this provision of the Model Code. Specifically, Dodd-Frank expanded the CFTC’s

authority over “any agreement, contract, or transaction in any commodity that is [. . .] entered

into [. . .] on a leveraged or margined basis,” 7 U.S.C. § 2(c)(2)(D)(i) (the “Retail Commodity

Transaction Provision”), but specifically excluded from the CFTC’s new authority leveraged or

margined transactions “that result[] in actual delivery within 28 days,” id.

§ 2(c)(2)(D)(ii)(III)(aa) (the “Actual Delivery Exclusion”).

B. Factual Background

Stripped of labels and conclusions, the Complaint makes the following factual

allegations.

1. Monex’s Atlas Account

For over thirty years, Monex has been in business buying and selling precious metals

with its customers. (Dkt. No. 1 ¶¶ 14-15.) In essence, Monex gives its customers the

opportunity to speculate on price movements in these metals. (Id. ¶ 25.)

One long-standing component of Monex’s business, the “Atlas” account, offers

customers the opportunity to buy or sell metals on a leveraged basis. (Id. ¶¶ 15, 24-25, 28.) As

part of the Atlas account, Monex makes loans to customers who wish to purchase metals on a

4 Additionally, the Model Code provides that actual delivery within the meaning of the Code

occurs even if the title is encumbered by a lien, so long as such lien is “agreed to by the purchaser” or, in

the case of liens by the depository for fees and expenses, if such fees and expenses “have previously been

disclosed to the purchaser.” Cal. Corp. Code § 29531(b).


4

financed basis (a “long” position, betting that prices will rise) or leases metals to customers who

wish to sell metals on a leveraged basis (a “short” position, betting prices will fall). (Id. ¶ 29.)

With respect to a long position, Monex requires financed purchasers to make a down payment of

at least 25% of the purchase. (Id. ¶ 28.) Monex gives its customers the opportunity to place stop

or limit orders to manage the risk of their open positions. (Id. ¶ 29.)

There is a “spread” between the price at which Monex is willing to buy and sell metals.

(Id. ¶¶ 34-35.) At a given time, Monex is willing to buy metals at a price (its bid) that is lower

than the price at which it is willing to sell (its ask). (Id.) Monex charges its Atlas customers

purchase and sales commissions, interest on loans, and certain administrative fees, as applicable.

(Id. ¶ 36.) There is no allegation that Monex did not disclose its price spread, commissions,

interest rates, or administrative fees to its customers, or that it was unlawful for Monex to charge

these fees or amounts.

If the equity in a customer’s account (i.e., the total value of a customer’s metal less their

loan balance) substantially declines, Monex retains the right to issue an equity call to reduce the

customer’s loan or increase the collateral to bring the equity back up, similar to trading stocks on

margin. (Id. ¶ 31.) In addition, if the customer’s equity falls below 7% of the overall position,

Monex may automatically liquidate all or a portion of the remaining position. (Id. ¶ 32.) There

is no allegation that Monex did not disclose these features of the Atlas account to its customers.

Monex keeps track of customers’ account and transaction information, including the

value of open metals positions, available cash, customer realized profits and losses, and

transaction volumes. (Id. ¶¶ 53-55.) Reports from Monex’s database, including the number of

margin calls and liquidations, are circulated to management on a monthly basis. (Id. ¶ 58.)


5

Notably, the Complaint is silent as to what happened to the overall prices of gold, silver,

and other precious metals between July 16, 2011 and March 31, 2017, the time period at issue in

the Complaint. (They fell.) During the period at issue, some Atlas accounts were subject to

margin calls and liquidations, but, based on the percentages alleged in the Complaint, the vast

majority were not. (Id. ¶ 33.)

2. The CFTC’s Regulatory Allegations

Counts 1 and 4 claim that the Monex Atlas account should have been either conducted on

a CFTC-registered exchange or else registered with the CFTC. According to the CFTC,

registration was required because Monex allegedly did not “actually deliver” metals to its

customers that purchased on a leveraged basis. However, the Complaint affirmatively alleges

that the metals purchased by Atlas customers were physically delivered to a depository and that

Monex “claims to transfer to its customers ownership of all of the metals underlying a position,

including the financed portion of the position.” (Id. ¶¶ 39-41.) The CFTC also acknowledges

that Atlas customers could gain physical possession of their metals once they paid off any loan

amounts due. (Id. ¶ 40.) The Complaint does not allege that Monex in fact took control of the

metals while the customer was in compliance with the loan agreement. Tellingly, the Complaint

does not allege that Monex’s Atlas account contravened the CFTC’s own published guidance as

to when actual delivery would be deemed to have occurred.

3. The CFTC’s Fraud Allegations

Counts 2 and 3 of the Complaint claim that Monex engaged in a scheme to defraud and

cheat its Atlas customers in violation of CEA Sections 4b(a)(2)5 and 6(c)(1).

6 While the CFTC

appears to be styling its fraud claims as sounding in manipulative or deceptive practices, the

5 7 U.S.C. § 6b(a)(2).

6 7 U.S.C. § 9(1).


6

factual allegations put forward in support of these claims are undeniably predicated on alleged

misstatements and omissions. (See, e.g., Dkt. No. 1 ¶¶ 2-3, 45-69.) There are no allegations in

the Complaint remotely suggesting that Monex engaged in any improper trading practices such

as market manipulation of metals prices.

After conducting a three-and-a-half year investigation of Monex, the CFTC has identified

the following statements as purportedly supportive of its fraud claims:

a. Statements On Monex’s Website

The CFTC alleges that Monex’s website promotes the benefits of investing in precious

metals “as an asset class.” (Dkt. No. 1 ¶ 47.) In particular, the Complaint alleges that the

following statements appeared on Monex’s website (the “Website Statements”):

“[P]recious metals can offer outstanding price appreciation and profit potential.”

“What’s more, in recent years, precious metals have also proven to be outstanding

short-term trading vehicles, offering traders periods of outstanding profit potential as

metals prices fluctuate, sometimes dramatically, on world markets.”

The Atlas account is “a way to purchase precious metals using up to 4-to-1

investment leverage.”

The Atlas account is a “powerful short-term trading vehicle during periods of rapidly

changing precious metals prices.”

(Dkt. No. 1 ¶¶ 47-48, 51.)

b. Statements In A Marketing Brochure

The CFTC further alleges that the following statements appeared in a Monex marketing

brochure (the “Brochure Statements”):

The Atlas account provides a “unique and powerful way to acquire precious metals

with the strength of investment leverage combined with the safekeeping security of

independent depository storage.”

By investing in precious metals through the Atlas account, you can “protect yourself

from further declines in the value of the U.S. dollar.”


7

The Atlas account is a way to “shield your wealth against the ravaging effects of

inflation, deflation and other economic calamities.”

“[R]ight now may be an ideal time to invest in precious metals with the power and

built-in security of the Atlas Account.”

“The depository custodian will maintain the safekeeping of your precious metals until

you decide to sell them or take personal possession.”

“Your metals are your sole assets.”

“You are the sole owner of your metals and the sole decision maker on when to buy

and sell them.”

(Dkt. No. 1 ¶¶ 50-51, 56.)

The Complaint neglects to mention various other disclosures included in the same

marketing brochure and accompanying account agreements that were disseminated to potential

customers as a package, including:

“Prices on stock and bond markets, and on currency and commodity exchanges, can

and do change throughout each trading day. Periodically, these changes are quite

dramatic, resulting in volatile and unpredictable market conditions.”

“Investors who finance their purchases should understand the risks and benefits of

leveraged investments and that losses as well as gains are amplified relative to the

amount invested.”

“For credit purchases your metal will be delivered, free of charge, to an independent

depository. The depository will send you a Commodity Title Transfer Notice

confirming receipt of your metals and that they will be held in safekeeping on your

behalf.”

“At any time you wish to take personal possession of your stored precious metals,

you can either have them shipped to your home or made available for pickup,

provided, of course, you have no existing loans against them.”

“No person has been authorized to give any information or to make any

representations other than those contained herein and in other official sales

literature of Monex and, if given or made, such other information or representations

must not be relied upon as having been authorized by Monex.”


8

“Because of the volatile nature of the commodities markets, the purchase and sale of

commodities involve a high degree of risk and are not suitable for all persons.”

“Investments in precious metals (commodities) involve substantial risk. Historically,

there have been periods of varying length during which prices of commodities have

moved adversely to customers’ interests. Market prices are volatile and

unpredictable and may be affected by a variety of factors [. . . .] It is impossible for

forecast accurately how or to what degree these or other factors will affect prices.”

“When purchasing commodities with funds borrowed from [Monex], you must also

carefully determine your ability to accept, among other things, that you may be

required to provide substantial additional funds to reduce your loan with [Monex]

and that some or all of your collateral may be foreclosed upon without advance

notice.”

Monex “and its account representatives are not your agents and owe no fiduciary

duty to you.”

“Neither [Monex] nor its representatives guarantee, assure or promise future

market movement, prices, coin premiums, bid/ask spreads or profits.”

“In purchases of commodities on credit or borrowing commodities, it is possible for

the Borrower to lose substantially more than the amount of the payments or

deposits Borrower has made.”

(emphasis added). The complete marketing brochure, selectively referenced and quoted in the

CFTC’s complaint, but not attached to it, is attached as Exhibit A to the concurrently filed

Declaration of Benjamin J.A. Sauter, dated October 3, 2017 (“Sauter Decl.”) (attached as Exhibit

1). The Atlas account agreements, which are also selectively referenced in the CFTC’s

complaint, but not attached to it, are attached as Exhibit B to the Sauter Declaration.7

c. Statements In Internal Training Materials

The CFTC further alleges that the following statements appeared in Monex employee

training materials at an unspecified time:

7 The materials also include disclosures concerning Monex’s price spread, rate of interest, and

monthly storage fees. Monex’s customers are “invited to compare prices.” (Sauter Decl. Ex. A.) The

Court may consider this brochure and the account agreements on a motion to dismiss because they are

referred to in the CFTC’s complaint and are central to its claim. See Wright v. Associated Ins. Cos. Inc.,

29 F.3d 1244, 1248 (7th Cir. 1994).


9

“If gold were to increase in value by $100 per ounce in the next year, and you had a

30% to 40% net gain, you’d feel pretty good, wouldn’t you?”

“I’d like to show you some ways that you might earn a very positive return on

investments in precious metals today.”

“Discover an opportunity to invest with defined risk, while enjoying the possibility of

unlimited upside potential.”

“Would you like the potential to earn an annualized rate of return of 20% or more on

your money?”

“Since you’re looking for short term profit, but with defined risk, I think you’re going

to love the proposal I have for you.”

(Dkt. No. 1 ¶¶ 59, 62.)

The CFTC further alleges that representatives were instructed that:

They have a fiduciary relationship to act in their customers’ best interest;

A “key to success” is “to build a large book of clients that trade metals.”

“Raise Money!”; “Have a sense of URGENCY”; “Ask for the order on every call.”

(Dkt. No. 1 ¶¶ 64, 66.) Collectively, these statements are referred to herein as the “Internal

Training Materials.”

d. Statements To Five Individual Customers

Finally, the CFTC alleges that Monex representatives made various false or misleading

statements to five anonymous customers. (Id. ¶ 68.)8 The CFTC generally alleges that

unidentified representatives overstated the potential benefits of the Atlas account, understated the

risks, and told customers that they would help them manage and protect their investments. It

8 Monex acknowledges that the CFTC has apparently included declarations from these customers

in its pending motion for preliminary injunction, but this is no substitute for a well-pled complaint, and a

litigant cannot amend a complaint with subsequent briefing. See, e.g., Yuknis v. Atherton, 668 F. Supp.

1173, 1175 (N.D. Ill. 1987).


10

appears from the Complaint that all of the alleged false or misleading statements were made

sometime between 2011 and 2013.9

4. The CFTC’s Allegations Against The Individual Defendants

The CFTC claims that the Individual Defendants should be held liable as “controlling

persons” under each Count of the Complaint pursuant to 7 U.S.C. § 13c(b). The sum total of the

CFTC’s factual allegations against the Individual Defendants are that: (i) they reside in

California; (ii) they own and maintain operational oversight over Monex, including the authority

to sign bank accounts, execute contracts, and hire and fire employees on Monex’s behalf; (iii)

they received monthly reports summarizing customer data, including the number of margin calls

and liquidations; (iv) Michael Carabini is primarily responsible for Monex’s advertisements and

marketing, including the content of the Monex website; and (v) the Individual Defendants are not

registered with the CFTC. (Dkt. No. 1 ¶¶ 14, 16, 55, 58.)

5. The CFTC’s Requested Relief

Based on the allegations above, the CFTC not only seeks to end Monex’s 30-year

business model with a permanent injunction, but also seeks to effectively end the Individual

Defendants’ careers by way of an industry ban as well as fines, disgorgement, and restitution

obligations for virtually every Atlas transaction conducted since July 2011. (See Dkt. No. 1 at

29, “Relief Requested.”)

ARGUMENT

The CFTC’s Complaint should be dismissed in its entirety. First, as to all Defendants,

the CFTC has failed to sufficiently allege a claim for fraud or deception under the CEA. Second,

as to all Defendants, the CFTC has failed to state a claim because the alleged conduct is outside

9 Customer B allegedly relied on statements by a Monex representative in 2009, long before the

period at issue in the CFTC’s complaint, the applicable limitations period, or the effective date of the

Dodd-Frank Act.


11

the scope of the CFTC’s authority under the CEA, and imposing liability in this case would

otherwise violate the Defendants’ constitutional due process rights. Third, the CFTC has failed

to sufficiently allege a claim for controlling person liability against the Individual Defendants.

A. The CFTC Has Not Sufficiently Alleged A Claim For Fraud (Counts 2 and 3)

The CFTC has failed to allege sufficient facts to sustain its fraud claims. To state a claim

for fraud under Counts 2 and 3, the CFTC must allege at least (1) a misrepresentation (or

omission), (2) materiality, and (3) scienter. CFTC v. Kraft Foods, 153 F. Supp. 3d 996, 1008-09

(N.D. Ill. 2015); CFTC v. M25 Investments Inc., No. 3:09-cv-1831, 2010 WL 769367, at *2

(N.D. Tex. March 6, 2010).10, 11

These claims are subject to a heightened pleading standard. See

id. For these claims, the CFTC must allege the “who, what, when, where, and how” of the

purported fraud with the particularity required by Federal Rule of Civil Procedure 9(b). See id.;

766347 Ontario Ltd. v. Zurich Capital Markets, Inc., 249 F. Supp. 2d 974, 983 (N.D. Ill. 2003).

In interpreting and applying these requirements, courts routinely look to precedent interpreting

Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and SEC Rule 10b-5.12

To meet the applicable standards, an alleged misstatement or omission must amount to an

“extreme departure” from the standards of ordinary care. Kraft Foods, 153 F. Supp. 3d at 1015;

10

In Count 3, the CFTC alleges a violation of CEA Section 6(c), which prohibits the use of

“manipulative or deceptive device[s] or contrivance[s].” 7 U.S.C. § 9(1). In Count 2, the CFTC alleges a

violation of CEA § 4b(a)(2)(A) and (C), but not subsection (B). (See Dkt. No. 1 ¶¶ 7, 85.) Subsection

(A) and (C) prohibit “cheat[ing] or defraud[ing]” or “willfully deceiv[ing]” customers, whereas

subsection (B) specifically prohibits making “false report[s] or statement[s].” 7 U.S.C. § 6b(a)(2). That

the CFTC is distancing itself from the CEA’s express prohibition on false statements would appear to

suggest an acknowledgement that the alleged misstatements do not actually rise to the level of being false. 11

All unreported legal authority is attached collectively as Exhibit 2. 12

“[G]iven that new CEA section 6(c)(1) and Exchange Act Section 10(b) include virtually

identical prohibitions against ‘any manipulative or deceptive device or contrivance,’” the CFTC

specifically modeled Rule 180.1 on SEC Rule 10b-5. Final Rules, Prohibition on the Employment, or

Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation,

76 Fed. Reg. 41398, 41399 n.11 (July 14, 2011). In doing so, the Commission sought to take “an

important step toward harmonization of regulation of the commodities, commodities futures, swaps and

securities markets.” Id.


12

Final Rules, 76 Fed. Reg. at 41404 (recognizing that recklessness means an act or omission that

“departs so far from the standards of ordinary care that it is very difficult to believe the actor was

not aware of what he or she was doing”). “Hindsight is not the test” for fraud, and it is not

unlawful to put “a rosy face on an inherently uncertain process.” Eisenstadt v. Centel Corp., 113

F.3d 738, 746-47 (7th Cir. 1997). A statement that was “true when made does not become

fraudulent because things unexpectedly go wrong.” Stransky v. Cummins Engine Co., 51 F.3d

1329, 1332 (7th Cir. 1995); see also In re Int’l Business Machines Corp. Sec. Litig., 163 F.3d

102, 109 (2d Cir. 1998). There is no duty to update such statements in light of subsequent

developments. Stransky, 51 F.3d at 1332; Anderson v. Abbott Labs., 140 F. Supp. 2d 894, 904

(N.D. Ill. 2001), aff’d sub nom. Gallagher v. Abbott Labs., 269 F.3d 806, 810 (7th Cir. 2001).

The securities (and commodities) laws “do not act as a Monday Morning Quarterback.”

Stransky, 51 F.3d at 1332.

Furthermore, mere “puffery” is not enough to state a claim. Puffery can take multiple

forms, including “(1) indefinite predictions of growth; (2) optimistic rhetoric and hype; (3)

subjective statements; and (4) vague statements.” Van Noppen v. InnerWorkings, Inc., 136 F.

Supp. 3d 922, 940 (N.D. Ill. 2015). “[P]redictions and forecasts which are not of the type subject

to objective verification are rarely actionable.” Searls v. Glasser, 64 F.3d 1061, 1066 (7th Cir.

1995). This is because “[i]f actions for fraud could be successfully maintained every time

someone optimistically represents his or her abilities, then our courts would be hopelessly

deluged with fraud suits.” Indemnified Capital Invs., SA v. R.J. O’Brien & Assocs., Inc., 12 F.3d

1406, 1413 (7th Cir. 1993).

Examples of puffery previously held to be non-actionable include the following

statements:


13

Investment Opportunities

Investment was “recession-resistant;”13

Price of oil and gold would drop;14

Bond was a “marvelous” investment;15

Security “was a good investment” and “a good opportunity;”16

Stock was just as good as another stock, was “hot on the market,” and could do just as

well as the money market;17

Company projected annual growth in the range of “10% to 30%;”18

Company was “optimistic” about its earnings and “expected” to perform well;19

Company was low-risk with adequate financial discipline to manage risks;20

Investments were “foolproof” and subject to “stop gap measures.”21

Trading Abilities

Account representative was a “professional experienced in commodities, would look

out for [the customer’s] investment, and would know how to get [them] out of a bad

trade so that [they] would not lose their investment;”22

“I’m the best in the business;” “I’ll make money for you;” the customer would

“make good money;”23

13

Searls, 64 F.3d at 1066-67.

14 Magill v. Int’l Trading Grp. Ltd., 1988 WL 232514, at *2, Comm. Fut. L. Rep. (CCH) ¶ 24,095

(Initial Decision Jan. 6, 1988).

15 Zerman v. Ball, 735 F.2d 15, 21 (2d Cir. 1984).

16 Howard v. Haddad, 962 F.2d 328, 331 (4th Cir. 1992).

17 Marchese v. Nelson, 809 F. Supp. 880, 888 (C.D. Utah 1993).

18 Raab v. Gen. Physics Corp., 4 F.3d 286, 289-90 (4th Cir. 1993).

19 San Leandro Emergency Med. Plan v. Philip Morris Co., 75 F.3d 801, 811 (2d Cir. 1996).

20 In re JP Morgan Chase Sec. Litig., No. 02 Civ. 1282, 2007 WL 950132, at *4 (S.D.N.Y. March

29, 2007).

21 Bragg v. Price, 1998 WL 171419, at *5, Comm. Fut. L. Rep. ¶ 27,298 (April 13, 1998).

22 Johnson v. Don Charles & Co., 1991 WL 83511, at *4, Comm. Fut. L. Rep. (CCH) ¶ 24,986 (Jan.

16, 1991).


https://1.next.westlaw.com/Link/Document/FullText?findType=Y&serNum=0346382329&pubNum=0003567&originatingDoc=Ib252c1e0b89111de9b8c850332338889&refType=DE&originationContext=document&transitionType=DocumentItem&contextData=(sc.Search)

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14

Broker’s primary purpose was to make money for the customer, and the customer

would make “substantial profits without extraordinary speculative risk;”24

Broker could make customer money and enough money to change her lifestyle;25

Trader had “expertise” and would “pick good trades;”26

Trader was pursuing a “conservative” strategy, “low risk” trading methods, and

“appealing” business opportunity;27

Trader had “highly successful trading ability;”28

Broker had “certain strategies” and was “optimistic about profit.”29

In light of these standards and legal precedent, the statements identified by the CFTC in

its Complaint do not state an actionable claim for fraud as a matter of law.

1. The Website Statements Are Insufficient To Establish Fraud

The Website Statements (see supra at 6) do not support the CFTC’s fraud claims. First,

all of the Website Statements were true when made. It cannot reasonably be disputed that

precious metals can offer outstanding price appreciation and profit potential. Precious metals

have proven to be outstanding short-term trading vehicles and offered traders periods of

outstanding profit potential. The Atlas account is a way to purchase metals on a leveraged basis.

Leveraged trading is a powerful short-term trading vehicle. There is simply no basis to challenge

these statements as false from an ex ante perspective, and there is no legal duty to correct such

23

Newman v. L.F. Rothschild, 651 F. Supp. 160, 163 (S.D.N.Y. 1986).

24 Bowman v. Hartig, 334 F. Supp. 1323, 1328 (S.D.N.Y. 1971).

25 Jennings v. First Commodity Corp. of Boston, 1987 WL 103546, at *2, Comm. Put. L. Rep.

(CCH) ¶ 23,727 (Initial Decision July 15, 1987).

26 Nanlawala v. Jack Carl Assocs., Inc., 669 F. Supp. 204, 207 (N.D. Ill. 1987).

27 Udiskey v. Commodity Research Corp., Comm. Fut. L. Rep. (CCH) ¶ 27,599 (Apr. 2, 1999),

aff’d, Comm. Fut. L. Rep. (CCH) ¶ 29,255 (Dec. 16, 2002).

28 Indemnified Capital Invs., 12 F.3d at 1413.

29 Bragg, 1998 WL 171419, at *7.





15

truthful statements even if it were possible for them to become untrue later based on movement

of metals prices. See Stransky, 51 F.3d at 1332.

Second, putting aside their truthful nature, the Website Statements are at most immaterial

puffery. To the extent the CFTC takes issue with characterizations of the Atlas account as a

“powerful” trading vehicle offering “outstanding” profit potential, these adjectives are exactly

the type of “optimistic” and “subjective” rhetoric that courts and even the CFTC itself have

repeatedly rejected as a basis for a fraud claim. Furthermore, given that courts have repeatedly

found these types of statements to be lawful, they do not reflect any “extreme departure” from

the standards of ordinary care and therefore also fail to support an inference of scienter. See,

e.g., United States ex rel. Ketroser v. Mayo Found., 729 F.3d 825, 832 (8th Cir. 2013) (finding

no scienter under knowing or reckless standard when “the defendant’s interpretation of the

applicable law is a reasonable interpretation” (internal quotation marks and citation

omitted)); United States ex rel. Hixson v. Health Mgmt. Sys., Inc., 613 F.3d 1186, 1190 (8th Cir.

2010) (determining that defendants could not have acted with scienter when “the relevant legal

question was unresolved”).

The CFTC seems to suggest in the Complaint that Monex should have disclosed to

investors that “approximately 90% of its leveraged Atlas customers lost money” between July

16, 2011 and March 31, 2017, although the Complaint does not go so far as to allege that a duty

to do so existed. (Dkt. No. 1 ¶ 52; accord id. ¶¶ 2, 43.) Not only is there no statutory or other

obligation to disclose such information,30

but there is no allegation a customer asked or that

Monex made positive statements about recent past performance. Moreover, historical metals

prices are a matter of public record, are easily accessible, and in fact were even included in the

30

See, e.g., Steckler v. Atl. Mercantile Grp., Inc., 1992 WL 110923, at *3, Comm. Fut. L. Rep. ¶

25,289 (May 18, 1992) (finding that account executives “were under no obligation to disclose to the

complainants the percentage of their customers who come out ahead in futures and options trading”).


16

Atlas brochure that is referenced in and quoted throughout the Complaint. (See Sauter Decl. Ex.

A at 3.) Monex could not have known in advance how the prices of precious metals would

change — and therefore how its customers’ accounts would perform — over the course of any

six year period.

2. The Brochure Statements Are Insufficient To Establish Fraud

The Brochure Statements (see supra at 6-7) do not support the CFTC’s fraud claims for

essentially the same reasons. First, the statements are literally true. The Atlas account is a way

to acquire precious metals with leverage. The metals are safeguarded in independent depository

storage. Buying (or shorting) metals is a way to shield wealth from inflation, deflation, and

declines in the value of the dollar. The Complaint does not actually allege that these statements

are factually false, but instead takes issue with adjectives such as “unique,” “powerful,” and

“strength.” (See Dkt. No. 1 ¶¶ 50-51, 55.) Again, even if they were untrue, it would

nevertheless be puffery, which is not a basis for a fraud claim as a matter of law. (See supra at

12.)

The CFTC asserts that Monex improperly suggested to customers that they “acquired” or

“owned” the metals they bought from Monex. (See Dkt. No. 1 ¶ 52, 56-57.) Putting aside the

parties’ legal dispute over this issue (see infra at 20-22), there is no allegation that Monex did not

expressly tell its customers exactly what the status of their metals was. Indeed, in the same

marketing brochure the CFTC invokes as evidence of fraud, Monex told potential customers,

among other things, that their metals would be delivered “to an independent depository” for

safekeeping and could be personally possessed once they had “no existing loans against them.”

(See Sauter Decl. Ex. A.) Customers were also specifically warned that, among other things,

prices could be “volatile and unpredictable,” that the investments involved a “high degree of

risk,” that any losses would be “amplified” with leveraged investments, and that it was possible


17

to lose “substantially more” than the customer’s initial deposit. (Id. Exs. A, B.) There is no

allegation that customers were not told by Monex that their accounts might be subject to margin

calls or even liquidation in the event of such losses, nor could there be. (See id. Ex. B (“When

purchasing commodities with funds borrowed from [Monex], you must also carefully determine

your ability to accept, among other things, that you may be required to provide substantial

additional funds to reduce your loan with [Monex] and that some or all of your collateral may be

foreclosed upon without advance notice.”).) Under these circumstances, there was no reasonable

confusion, much less any material misstatement or omission, with respect to the customers’

ownership rights over the metals they purchased. See Carr v. CIGNA Secs., Inc., 95 F.3d 544,

548 (7th Cir. 1996) (recognizing that investor “has a duty to read,” and stating that “[i]f a literate,

competent adult is given a document that in readable and comprehensible prose says X (X might

be, ‘this is a risky investment’), and the person who hands it to him tells him, orally, not-X (‘this

is a safe investment’), our literate, competent adult cannot maintain an action for fraud against

the issuer of the document”)); Davis v. SPSS, Inc., 431 F. Supp. 2d 823, 830 (N.D. Ill. 2006)

(holding that alleged misstatement did not “pass the materiality hurdle” in light of other

disclosures in the same document).

3. The Training Materials Are Insufficient to Establish Fraud

Even assuming the alleged Internal Training Materials (see supra at 8-9) were actually

communicated to customers, they still would not support a fraud claim. Once again, the

statements are factually true or, at most, inactionable puffery. For example, there is no allegation

that customers would not have realized a 30% to 40% net gain if the value of gold increased by

$100 per ounce. The Atlas account did have defined risk. It did offer the possibility of unlimited

upside potential. The Complaint does not allege that these statements were factually false.


18

Furthermore, the sales practices promoted in the Internal Training Materials do not

suggest fraudulent activity. Encouraging representatives to “build a large book of clients that

trade metals” is not fraudulent. (See Dkt. No. 1 ¶ 66.) Nor is encouraging representatives to

“Raise Money!,” “Have a sense of URGENCY,” or “Ask for the order on every call.” (Id.) Nor

is compensating representatives based on account values or transaction volumes.

While the CFTC alleges that training videos told sales representatives that they had a

“fiduciary relationship” with their customers, the CFTC does not actually allege that

representatives were trained to make that representation to their customers. (See Dkt. No. 1 ¶

64.) To the contrary, the Atlas account agreements referenced in the Complaint specifically state

that Monex’s representatives owe no fiduciary duty to customers. (Sauter Decl. Ex. B.) To the

extent the Complaint alleges that representatives actually told customers that they had a fiduciary

relationship or would always act in their “best interests” — the Complaint is ambiguous on this

(see Dkt. No. 1 ¶¶ 2, 3) — courts (and the CFTC itself) have rejected similar statements as the

basis for a fraud claim. See, e.g., Johnson, Comm. Fut. L. Rep. (CCH) ¶ 24,986, at *1, 4

(statement that account representative was “professional” who would “look out for [the

customer’s] investment” insufficient); Newman, 651 F. Supp. at 163 (statements that “I’m the

best in the business” and “I’ll make money for you” insufficient); Bowman, 334 F. Supp. at 1328

(statement that broker’s primary purposes was “to make profits for the customer” insufficient);

see also Carr, 95 F.3d at 548 (finding that there can be no cause of action for fraud where oral

statements made by representatives contradicted the risks specifically disclosed in written

materials, stating that there is a “duty to read”).


19

4. The Statements To Five Monex Customers Are Insufficient

The CFTC also makes allegations about five individuals who lost money investing

through Monex’s Atlas account. (See Dkt. No. 1 ¶ 68.) Their stories may be sympathetic, but

that does not establish a fraud.

As an initial matter, the allegations in the Complaint are not sufficiently specific to pass

muster under Rule 9(b). The allegations do not reasonably specify “who” the responsible

account representatives were and “when” the offending statements were made. Simply alleging

that the statements were made sometime over the course of a month or year is insufficient as a

matter of law. See Zucker v. Katz, 708 F. Supp. 525, 530 (S.D.N.Y. 1989) (finding the complaint

deficient because the “specification of a misrepresentation by its approximate year fails to

provide the defendant with fair notice of the grounds for the fraud-based claims”). Furthermore,

most of the allegations appear to reflect mere generalizations of what was said or what the

customers’ general understandings were, rather than what was actually said by Monex

representatives. To this extent, they would not sufficiently allege the “what” of the fraud.

To the extent the individual stories purport to identify specific statements that were made

by Monex representatives to customers, the Complaint still fails to sufficiently allege material

misstatements and scienter. For example, Customer A was allegedly told that buying metals was

a safe and secure investment, and that the representative was an expert in the metals market and

handling her investment in the safest and best way possible. (Dkt. No. 1 ¶ 68(A).) Customer B

was allegedly told that he could not lose his investment. (Id. ¶ 68(B).) Customer C was

allegedly told that investing with Monex was “[a]s safe as having [her] money in a savings

account.” (Id. ¶ 68(C).) Customer D was allegedly told that her investment would be safe and

that investing in Monex was low-risk. (Id. ¶ 68(D).) Customer E was allegedly told that an

Atlas account was a fairly safe way to speculate in the metals market. (Id. ¶ 68(E).) Similar


20

statements have all been found to be non-actionable puffery by the courts and the CFTC itself.

(See supra at 13-14.) In light of this existing law, the alleged misstatements in the Complaint do

not reflect an “extreme departure” by Monex representatives from the standards of ordinary care

and therefore do not establish scienter. See Ketroser, 729 F.3d at 832; Hixson, 613 F.3d at 1190.

B. The CFTC Has Failed To Plead That It Has Jurisdiction Over The Transactions

At Issue (All Counts)

All of the CFTC’s claims should be dismissed for the additional reason that the CFTC

lacks regulatory jurisdiction over this case pursuant to the CEA’s Actual Delivery Exclusion. A

key issue in this case is the statutory meaning of “actual delivery.” The Complaint appears to be

premised on a theory that actual delivery did not occur — even though Monex transferred

physical possession of metals to an independent depository and passed title to purchasing

customers — because Monex’s security interest in the customers’ metals continued to encumber

the customers’ ability to physically possess or control their metals. (See Dkt. No. 1 ¶¶ 38-42.)

For the reasons set forth below, such a conception of “actual delivery” is incorrect as a matter of

law. Further, the Complaint fails to affirmatively plead that actual delivery did not occur, but

rather affirmatively alleges facts showing that actual delivery did occur under the operative

definition. In the alternative, even if the CFTC’s current interpretation of actual delivery might

be a theoretically valid construction of the statutory language, its application to the Defendants in

this case would result in a violation of their right to due process because the CFTC has not put

the Defendants on notice that it would interpret “delivery” under the CEA as it does here.

1. “Actual Delivery” Occurs Upon Physical Transfer Of Metals To A

Depository And Title Transfer To The Customer

Neither the Retail Commodity Transaction Provision nor the balance of the CEA define

what “actual delivery” means in the context of the Actual Delivery Exclusion. However, the

CFTC, following notice and comment, has given specific guidance to the industry that it believes


21

that “actual delivery” occurs when the entire quantity of the commodity is physically delivered

into the possession of a depository and title to that quantity is transferred to the customer.

On December 14, 2011, five months after the effective date of the Actual Delivery

Exclusion, the CFTC issued an interpretation and request for public comments regarding the

meaning of “actual delivery.” See Retail Commodity Transactions Under Commodity Exch.

Act, 76 Fed. Reg. 77670 (Dec. 14, 2011). The CFTC’s interpretation included examples of

circumstances when “actual delivery” would or would not occur. As relevant here, the CFTC

stated that “actual delivery” occurs when “the seller has physically delivered the entire quantity

of the commodity purchased by the buyer, including the portion of the purchase made using

leverage, margin, or financing, whether in specifically segregated or fungible bulk form, into the

possession of a depository other than the seller and its parent company, partners, agents, and

other affiliates [. . .] and has transferred title to that quantity of the commodity to the buyer.” Id.

at 77672 (Example 2). This example was incorporated by the CFTC into its final interpretation,

issued on August 23, 2013. See Retail Commodity Transactions Under Commodity Exch. Act,

78 Fed. Reg. 52426, 52428-29 (Aug. 23, 2013) (the “Final Interpretation”). This aspect of the

CFTC’s guidance is consistent with the statutory text of the Actual Delivery Exception, which

requires only “actual delivery,” not necessarily physical delivery to a customer.

The CFTC’s Final Interpretation on “actual delivery” was applied by the Eleventh Circuit

in CFTC v. Hunter Wise Commodities, LLC, 749 F.3d 967 (11th Cir. 2014). In that case,

customers would buy precious metals from the defendants by making a down payment (typically

of 25%) and receiving a loan for the balance of the purchase price. Id. at 972. Upon receiving

the down payment, the defendants would issue the customers a “Transfer of Commodity Notice,”

which “purported to transfer precious metals into or out of customers’ accounts.” Id. Critically,


22

the defendants “owned no metals” and thus “had no metals to deliver.” Id. at 973, 978. Because

the defendants did not own or otherwise possess any precious metals, they did not and could not

transfer purchased metals to a depository, nor could they transfer title to customers of something

they did not have, even with a title transfer document.

The CFTC in Hunter Wise filed an enforcement action alleging that it had authority over

the leveraged transactions because they did not result in “actual delivery.” The Eleventh Circuit

agreed, defining “actual delivery” to include the “real” and “immediate” “physical transfer” of

the commodity, and further finding that there could be no such delivery when the defendants did

not possess, control, or otherwise have title to an inventory of metals from which it could deliver

to its customers. Hunter Wise, 749 F.3d at 979-80. In other words, the defendants’ “Transfer of

Commodity Notices” were nothing more than a sham because there were no metals to transfer.

The Circuit noted that its holding — that mere book entries do not constitute actual delivery —

comported with the CFTC’s interpretation of “actual delivery” as articulated in its Final

Interpretation. Id. at 980. In discussing the Hunter Wise case in the subpoena enforcement

proceeding brought by the CFTC against Monex, the Seventh Circuit noted that, unlike here, the

Eleventh Circuit’s decision applied “to a metals-trading program in which no metals change

hands” because the defendants had none. CFTC v. Monex Deposit Company, 824 F.3d 690, 694

(7th. Cir. 2016) (emphasis added). Thus, the court found that the program in Hunter Wise was

“considerably different” than the one at issue here. Id.; cf. Hunter Wise, 749 F.3d at 979

(limiting its holding to the facts at issue, stating that “[w]e need not define the precise boundaries

of ‘actual delivery’ here, as we can say with confidence that the exception does not cover the sort

of constructive delivery [the defendants] insist occurred”).


23

Thus, under the Actual Delivery Exclusion — as explained by the CFTC in its Final

Interpretation and interpreted by the Eleventh Circuit in Hunter Wise — leveraged precious

metals transactions fall outside of the scope of the CFTC’s authority if: (1) they result in the

physical delivery of the purchased metals to an independent depository; and (2) the seller has

transferred title to all purchased metals (including leveraged metals) to the customer.

2. The CFTC Has Failed To Plead That The Transactions At Issue Fall

Outside The Actual Delivery Exclusion

The CFTC has the burden of alleging and establishing its jurisdiction, including that the

Actual Delivery Exclusion does not apply. See Equal Empl. Opportunity Comm’n v. The

Chicago Club, 86 F.3d 1423, 1429-30 (7th Cir. 1996) (recognizing that a party does not have the

burden of proving compliance with a statutory exclusion where it must be shown that the party’s

conduct fell within “the definition of” transactions that are “covered by a statute” and “defined as

within the reach of a statutory regime”); cf. CFTC v. Worth Bullion Group, Inc., No. 12-C-2431,

2012 WL 4097725, at *2 (N.D. Ill. Sept. 17, 2012) (noting that 7 U.S.C. § 2(c)(2)(D) “gives the

CFTC jurisdiction over financed commodity transactions where the metals are not delivered

within 28 days”).

The CFTC has failed to plead that the Actual Delivery Exclusion does not apply. In fact,

the CFTC’s allegations affirmatively show that the Actual Delivery Exclusion does apply and

that there was actual delivery under the applicable standard. The Complaint specifically alleges

that, after a financed transaction, Monex delivers purchased metals to a depository and claims to

transfer title of the metals to the customer. (Dkt. No. 1 ¶¶ 39, 41.) This is precisely what the

CFTC said was sufficient in its Final Interpretation: actual delivery occurs when there is


24

“physical[] deliver[y] [. . .] into the possession of a depository other than the seller”31

and

“transfer [of] title” to the buyer. Retail Commodity Transactions Under Commodity Exch. Act,

78 Fed. Reg. at 52428.

The CFTC now appears to be suggesting (for the first time) in the Complaint that actual

delivery occurs only when leveraged metals are free from encumbrance by Monex and a

customer takes physical possession of them at their home or their own bank or depository. (See,

e.g., Dkt. No. 1 ¶ 39 (alleging that Atlas customers with open trading positions do not take

physical delivery of precious metals” that collateralize their loan obligations); id. ¶ 40 (“The only

way for an Atlas customer to get possession of metal from Monex is to make full payment for the

metals, request actual delivery of specific physical metals, and have Monex ship the metals to

them, to a pick-up location, or to the customer’s agent.”); id. ¶ 32 (describing Monex’s right

under the account agreements to liquidate positions).) However, the CFTC’s position that the

customer must have complete freedom to do what it wants with metals that are collateral for a

loan, and that Monex must relinquish its ability to foreclose on that collateral, finds no support in

the CFTC’s prior guidance (which specifically contemplates physical delivery of all the metal

being made to a depository accompanied by title transfer to the customer), the plain text of the

Actual Delivery Exclusion (which does not require actual delivery to any particular person or

entity), or the legislative history of the Actual Delivery Exclusion (which confirms that

encumbrances on property pledged as collateral would not defeat actual delivery).32

Nor does

31

There is no allegation in the Complaint that the depository to which Monex transferred purchased

metals was Monex-owned, or otherwise Monex’s “parent company, partner[], agent[], [or] other

affiliate.” See Retail Commodity Transactions Under Commodity Exch. Act, 76 Fed. Reg. at 77672

(Example 2).

32 An earlier draft of the Actual Delivery Exclusion included a definition of “actual delivery” that

specifically excluded “delivery to a third party in a financed transaction where the commodity is held as

collateral.” H.R. 4173, 111th Cong., 2nd Sess. § 742 (May 20, 2010). Congress, however, ultimately

rejected this exclusion from the definition of actual delivery when it passed Dodd-Frank. Because “the


25

the CFTC’s position make sense. A customer may remove Monex’s encumbrance and take

physical possession (or leave his metal in storage) at any time simply by paying off the

outstanding loan. Prior to that time, the interests of both the customer and the secured lender

(Monex) are protected while the metals sit in something similar to escrow and any change in

value belongs solely to the customer. It would be unmanageable to have the CFTC’s jurisdiction

hinge on whether a customer, in its sole discretion, decides to exercise the right to pay off the

loan and move the metal to another location.

3. Jurisdictional Limitations Govern All Counts in the Complaint and

Warrant Dismissal of the Complaint in its Entirety

The Actual Delivery Exclusion divests the CFTC of jurisdiction over all of the claims in

the Complaint: The CFTC concedes in the Complaint that the Actual Delivery Exclusion applies

to Counts 1, 2 and 4, see Compl. ¶ 17, and, for the reasons that follow, it applies to Count 3 as

well.

Count 3 is governed by Section 6(c) of the CEA, which makes it unlawful to use or

employ any manipulative or deceptive device or contrivance in connection with “a contract of

sale of any commodity in interstate commerce.” 7 U.S.C. § 9(1). Because this language could

be construed to cover “any commodity,” the CFTC will no doubt argue that it has broad

jurisdiction to pursue this Count regardless of whether the Actual Delivery Exclusion is

satisfied. The CFTC’s interpretation is unprecedented and incorrect as a matter of law.

First, the Actual Delivery Exclusion falls under the section of the CEA that creates the

CFTC and defines its jurisdiction. 7 U.S.C. § 2(a)(1) (titled “Jurisdiction of Commission.”).

final version of [the] statute delete[d] language contained in an earlier draft, [the] court may presume that

the earlier draft is inconsistent with ultimate congressional intention.” In re Town & Country Home

Nursing Servs., Inc., 963 F.2d 1146, 1151 (9th Cir. 1991); accord Jama v. Immigration & Customs

Enforcement, 543 U.S. 335, 341 (2005) (“We do not lightly assume that Congress has omitted from its

adopted text requirements that it nonetheless intends to apply.”).


26

This section vests the CFTC with jurisdiction over certain types of transactions, “except to the

extent otherwise provided in [. . .] subsections (c) and (f). Id. § 2(a)(1)(A). In turn, subsection

(c) grants the CFTC jurisdiction over certain “leveraged or margined” retail commodity

transactions, except as provided in the Actual Delivery Exclusion. Id. §

(c)(2)(D)(i)(II), (c)(2)(D)(ii)(III)(aa). The ultimate effect is that the CFTC’s jurisdictional

mandate does not extend to leveraged transactions that fall within the Actual Delivery Exclusion.

There is no exception to this framework for fraud claims asserted under CEA Section 6(c).

Second, this limitation on the CFTC’s authority is supported by basic canons of statutory

construction. The CFTC affirmatively argues that the specific jurisdictional provision governing

retail commodity transactions applies to this case. (See, e.g., Dkt. No. 1 ¶ 17.) The CFTC

cannot circumvent this jurisdictional boundary simply by invoking a more general substantive

prohibition. Reading these provisions together and as a whole dictates that the CFTC’s

jurisdictional mandate with respect to retail commodity transactions qualifies and limits its

ability to enforce the substantive prohibition in CEA Section 6(c). See RedLAX Gateway Hotel,

LLC v. Amalgamated Bank, 566 U.S. 639, 132 S. Ct. 2065, 2071 (2012) (recognizing principles

of statutory construction dictate that “the specific governs the general”); see also Radzanower v.

Touche Ross & Co., 426 U.S. 148, 153 (1976) (finding that the more specific provisions of the

National Bank Act prevailed over the broader, more generally applicable venue provisions of the

Securities Exchange Act because “[w]here there is no clear intention otherwise, a specific statute

will not be controlled or nullified by a general one”). Furthermore, a narrow reading of the

CFTC’s authority is supported in this case by another canon of statutory interpretation: the rule

of lenity. See, e.g., United States v. Lanier, 520 U.S. 259, 266 (1997) (“[T]he canon of strict


27

construction of criminal statutes, or the rule of lenity, ensures fair warning by so resolving

ambiguity in a criminal statute as to apply it only to conduct clearly covered”).

Third, the CFTC’s expansive interpretation of its authority under Section 6(c) — that it

has unlimited anti-fraud jurisdiction under CEA § 6(c)(1) irrespective of the Actual Delivery

Exclusion and other limitations imposed in Section 2 — would lead to absurd and unintended

results. In the CFTC’s view, Section 6(c) provides it with roving anti-fraud jurisdiction over

virtually the entire economy, regardless of whether a particular “commodity” transaction has any

impact on the derivatives markets traditionally understood to be the CFTC’s sole province. See,

e.g., 7 U.S.C. § 1a(9) (providing expansive definition of “commodity”). Such an unchecked

interpretation of Section 6(c) would be unprecedented. Cf. Pub. Citizen v. U.S. Dep’t of Justice,

491 U.S. 440, 455 (1989) (“Looking beyond the naked text for guidance is perfectly proper when

the result it apparently decrees is difficult to fathom or where it seems inconsistent with

Congress’ intention”).

Accordingly, the Actual Delivery Exclusion applies to all Counts and its applications

warrants dismissal of the Complaint in its entirety.

4. Defendants Lacked Fair Warning That Their Conduct Could Be

Construed As Unlawful

If the Court adopts the CFTC’s new definition of actual delivery, the continued

prosecution of the Defendants under this new, altered standard would violate their due process

right to adequate warning of the legal consequences of their actions. As the Supreme Court has

held, due process requires that “laws give the person of ordinary intelligence a reasonable

opportunity to know what is prohibited.” Grayned v. City of Rockland, 408 U.S. 104, 108

(1972); see also Satellite Broad. Co. v. FCC, 824 F.2d 1, 3 (D.C. Cir. 1987). Courts consistently

vacate agency orders and dismiss complaints that are based on a “substantial change in [an]


28

enforcement policy that was not reasonably communicated to the public.” Upton v. SEC, 75

F.3d 92, 98 (2d Cir. 1996) (vacating SEC’s order because “there was substantial uncertainty in

the Commission’s interpretation of [the Rule, and the defendant] was not on reasonable notice

that [the at-issue] conduct might violate the Rule”); see also, e.g., United States v. Chrysler

Corp., 158 F.3d 1350, 1355-56 (D.C. Cir. 1998); Kropp Forge Co. v. Sec. of Labor, 657 F.2d

119, 122 (7th Cir. 1981).

In analyzing whether due process has been violated, courts must “review[] the regulations

and other public statements issued by the agency” to determine whether “a regulated party acting

in good faith would be able to identify, with ‘ascertainable certainty,’ the standards with which

the agency expects parties to conform.” Gen. Elec. Co. v. U.S. E.P.A., 53 F.3d 1324, 1329 (D.C.

Cir. 1995); see also Stoller v. CFTC, 834 F.2d 262, 265-67 (2d Cir. 1987). Here, a reasonable

person acting in good faith would not view the CFTC’s public statements regarding what

constitutes actual delivery to require more than physical delivery of the metal purchased to a

depository and title transfer to the customer — exactly what the CFTC has pled that Monex did.

First, as explained in detail above, the CFTC, in its Final Interpretation of the Actual

Delivery Exclusion, stated that “[a]ctual delivery will have occurred if, within 28 days, the seller

has: (1) Physically delivered the entire quantity of the commodity purchased by the buyer [. . .]

into the possession of a depository other than the seller [. . .] and (2) has transferred title to that

quantity of the commodity to the buyer.” Retail Commodity Transactions Under Commodity

Exch. Act, 78 Fed. Reg. at 52428 (emphasis added). The example is definitive and unqualified

— “[a]ctual delivery will have occurred” — not actual delivery may occur or is likely to occur.

Second, the CFTC repeatedly adopted and reinforced this definition of actual delivery in

its recent enforcement action against Worth Group, Inc. (“Worth”) in CFTC v. Worth Group,


29

Inc., No. 13-cv-80796 (S.D. Fla.) (filed on August 13, 2013). In that case, the CFTC alleged that

Worth delivered metal by: (1) instructing the depository to move the metals from a master

account in Worth’s name to a subaccount in the customer’s name; and (2) issuing to the customer

a “Commodity Title Transfer Notice” that confirmed that title to the metal had been transferred.

(Sauter Decl. Ex. C; Compl. ¶¶ 66-68, CFTC v. Worth Group, Inc., No. 13-80796 (S.D. Fla.

Aug. 13, 2013), ECF No. 1; cf. id. ¶ 53 (noting that, although metals were physically transferred

to a depository and title was transferred to the customers, Worth retained the ability to liquidate

customer accounts under certain circumstances).)33

Unlike here, however, the CFTC in Worth

did not claim that this method of delivery — physical delivery to a depository plus transferring

title — failed to accomplish actual delivery. Rather, the complaint alleged that Worth simply

“failed to make timely actual delivery to its financed customers because it [d]id not allocate

sufficient metal to subaccounts at [the depository]” within twenty eight days. (Id. ¶ 74.) A

reasonable observer of this complaint would have concluded in good faith that Worth’s delivery

process would have resulted in actual delivery.

Furthermore, over the course of the Worth action, the CFTC made or adopted numerous

other statements confirming that Worth’s delivery process was adequate:

In connection with the appointment of the Worth corporate monitor agreed to by the

parties in that case: The parties in Worth agreed to the appointment of a corporate monitor,

among other things, to “perform an assessment of Worth’s current procedures and practices for

actual delivery of precious metals to its retail customers.” (Sauter Decl. Ex. D, Consent Order of

Prelim. Inj. ¶ 4, CFTC v. Worth Group, Inc., No. 13-80796 (S.D. Fla. Jan. 23, 2014), ECF No.

33

The Court may take judicial notice of matters of public record, including public court documents,

in determining the adequacy of a complaint under Rule 12(b)(6). See Henson v. CSC Credit Servs., 29

F.3d 280, 284 (7th Cir. 1994).


30

61.) The monitor ultimately determined that “Worth’s procedures [as outlined in the complaint]

effectively accomplish the actual delivery of sufficient precious metals to fulfill end customer

purchases on a timely basis and within the twenty-eight days required by the CEA,” and that

“Worth [wa]s complying and should be able to comply with the CEA on an ongoing basis with

respect to its metals delivery obligations to its end customers.” (Sauter Decl. Ex. E, Corporate

Monitor’s Report at 2, CFTC v. Worth Group, Inc., No. 13-80796 (S.D. Fla. March 10, 2014),

ECF No. 75.) The CFTC never refuted or corrected these statements.

In opposition to Worth’s motion to dismiss: The CFTC had a section of its brief titled,

“There is No Dispute in this Case Regarding the Meaning of ‘Actual Delivery,’” in which it

explained that there was nothing “violative with Worth’s practice of making ‘actual delivery’ by

physically delivering metal to a depository and allocating it into an account held in the

customer’s name.” (Sauter Decl. Ex. F, CFTC Opp. to Defs.’ Mot. to Dismiss at 16, CFTC v.

Worth Group, Inc., No. 13-80796 (S.D. Fla. Dec. 16, 2013), ECF No. 48.)

In connection with its motion to amend: After Worth moved to have the monitor

discharged, the CFTC moved to amend its complaint to plead, similar to its claims against

Monex, that Worth’s delivery method no longer accomplished actual delivery in light of the

Eleventh Circuit’s decision in Hunter Wise. At oral argument on Worth’s motion to discharge

the monitor on, the CFTC engaged in the following exchange with the court:

THE COURT: Is the amended complaint based upon this new decision?

MR. CHU: That’s correct, Your Honor.

THE COURT: So what you’re saying is all of the rules have changed in the middle of

this thing?

MR. CHU: Your Honor, yes, essentially the Eleventh Circuit decision which was

rendered, yes.


31

(Sauter Decl. Ex. G, Oral Arg. Tr. at 24-25, CFTC v. Worth Group, Inc., No. 13-80796 (S.D. Fla.

Sept. 11, 2014), ECF No. 124.) In other words, the CFTC conceded that, in its view, the

definition of actual delivery had “changed.” As explained above, however, Hunter Wise did not,

in fact, change the definition of actual delivery, and the CFTC had no basis therefore to change

its view.

The district court in Worth ultimately denied the CFTC’s motion to amend, finding,

among other things, that “[t]he proposed amendment would violate the Defendants’

constitutional rights to fair notice under Supreme Court precedent and would therefore be subject

to dismissal.” CFTC v. Worth Group, Inc., No. 13-80796, 2014 WL 11350233, at *3 (S.D. Fla.

Oct. 27, 2014). In effect, applying the CFTC’s new theory of “actual delivery” would have

meant that, regardless of Worth’s allocation procedures and recordkeeping, each and every

financed transaction would violate the CEA. Notably, after Worth, the CFTC did not issue new

guidance changing or clarifying what it thinks “actual delivery” means. And, as set forth below,

the CFTC’s unsuccessful effort to amend in Worth does not constitute such guidance as a matter

of law.

In the final Consent Order of Permanent Injunction: Despite its earlier articulation of its

interpretation of Hunter Wise and how that case purported to change the definition of actual

delivery, the CFTC again reversed course and entered into a consent order of preliminary

injunction, pursuant to which Worth could continue its operations so long as it “actual[ly]

deliver[ed] to the customer or the customer’s depository” within twenty eight days. The Order

stated that this would “bring [Worth’s] business into compliance with the law of this Circuit

regarding actual delivery as articulated in [Hunter Wise].” (Sauter Decl. Ex. H, Consent Order


32

of Permanent Inj. ¶¶ 28-29, CFTC v. Worth Group, Inc., No. 13-80796 (S.D. Fla. Feb. 1, 2016),

ECF No. 194.)

The relevant due process standard for purposes of this case is what a reasonable person,

acting in good faith, would have understood actual delivery to mean in light of the above

guidance and principles. In Worth, prior to the motion to amend, both the monitor and, more

importantly, the court understood the CFTC’s position to be that Worth’s delivery method

(which is, for all intents and purposes, identical to Monex’s delivery method as pled in the

Complaint) satisfied the requirements of actual delivery under the CEA.34

As the court held, the

CFTC cannot claim that anyone had “fair notice” of its new, “chang[ed]” interpretation of actual

delivery, Worth, 2014 WL 11350233, at *3. Indeed, no new guidance was issued by the CFTC

on this issue after Worth, and a reasonable person would expect there to be new guidance if the

CFTC was making a change.

Furthermore, any argument by the CFTC that its unsuccessful attempt to amend the

complaint in Worth provided fair warning is without merit. First, courts have held that an agency

articulating a change in its interpretation of its regulations in a court filing does not provide fair

warning or notice. See, e.g., Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1294 & n.13 (2d

Cir. 1973) (the circuit was “loath to impose huge liability” on the basis of a substantial

modification of the SEC’s position “by way of its amicus brief,” finding that “the Commission

should proceed by a rule or a statement of policy that would receive wider public attention than

an amicus brief in a private suit”). This is particularly true when, as in Worth, the CFTC lost its

motion. See, e.g., United States v. Hoyts Cinemas Corp., 256 F. Supp. 2d 73, 91 (D. Mass. 2003)

34

Both the court and the monitor came to the conclusion that this delivery method resulted in

“actual delivery,” despite the fact that Worth, similar to Monex, could (and did) liquidate a customer

position if the equity in the account fell below a certain percentage. (See Sauter Decl. Ex. B; Dkt. No. 1 ¶

53.)


33

(finding it “hard to consider the brief” in support of a motion that the government lost “as

providing fair warning or ‘notice’”), vacated on other grounds, 380 F.3d 558 (1st Cir. 2004).

Second, any notice, however insufficient, that the failed motion may have provided to the public

about the CFTC’s new interpretation of actual delivery was nullified by the final Consent Order

of Permanent Injunction, in which the CFTC reverted back to its original interpretation of actual

delivery. To the extent the CFTC has decided to change its mind, yet again, on the appropriate

definition of actual delivery, “the public may not be held accountable under this construction

without some appropriate notice.” Stoller, 834 F.2d at 267; see also Satellite Broad. Co., 824

F.2d at 4 . (“The agency’s interpretation is entitled to deference, but if it wishes to use that

interpretation to cut off a party’s right, it must give full notice of its interpretation.”).

C. The CFTC Has Failed To State A Claim For Controlling Person Liability

Aside from the CFTC’s failure to allege an underlying CEA violation, the CFTC’s claims

against the Individual Defendants should be dismissed for the additional reason that they do not

adequately allege controlling person liability.

The CFTC alleges that the Individual Defendants are personally liable under each count

of the Complaint as “controlling persons.” (See Dkt. No. 1 ¶¶ 77, 86, 92, 100.) To state a claim

for controlling person liability under the CEA, the CFTC must allege facts showing “that the

controlling person did not act in good faith or knowingly induced, directly or indirectly, the act

or acts constituting the violation.” 7 U.S.C. § 13c(b).35

To meet this standard, the CFTC’s

allegations must show that the Individual Defendants acted “recklessly; negligence alone is

insufficient.” Monieson v. CFTC, 996 F.2d 852, 860 (7th Cir. 1993). Furthermore, because two

35

The standards for controlling person liability under the CEA and the Exchange Act differ in an

important respect. Unlike under the Exchange Act, it is the CFTC’s burden to prove bad faith or

knowing inducement under the express language of the CEA. 7 U.S.C. § 13c(b).


34

of the CFTC’s claims (Counts 2 and 3) are predicated on averments of fraud, those claims must

be alleged with the particularity required by Rule 9(b). See 766347 Ontario Ltd., 249 F. Supp.

2d at 983 (recognizing that because controlling person liability claim under Securities Exchange

Act of 1934 “is one of fraud, Plaintiffs must meet the heightened pleading requirements of

Federal Rule of Civil Procedures 9(b)“).

The CFTC’s controlling person liability claims do not meet these standards and therefore

should be dismissed.

1. Counts 2 and 3 Should Be Dismissed as to the Individual Defendants

Even if the Court were to find that the CFTC has stated an underlying claim for fraud,

nothing in the Complaint plausibly suggests — much less alleges with the particularity required

by Rule 9 — that the Individual Defendants themselves failed to act in good faith or knowingly

induced the alleged fraud. There are only two allegations in the Complaint that remotely link the

Individual Defendants to the alleged misstatements, and neither is sufficient to state a claim.

First, the Complaint alleges that “Michael Carabini is primarily responsible for Monex’s

advertisements and marketing, including the content of the Monex website located at

www.monex.com.” (Dkt. No. 1 ¶ 16.) Since this allegation is directed only at Michael Carabini,

it does not support in any way the CFTC’s claim against Louis Carabini. As to Michael

Carabini, a bald allegation of primary responsibility is not sufficient because it does not push

legitimate or negligent conduct (which are not actionable) over the line to bad faith. See Murlas

Commodities, Inc., CFTC No. 85-29, 1995 WL 523563, at *7, Comm. Fut. L. Rep. ¶ 26,485

(Sept. 1, 1995) (finding that co-owners’ day-to-day roles as “active planners and participants” in

the company’s operations not sufficient to establish controlling person liability). If the CFTC’s

mere allegation of “responsibility” were sufficient, the heightened statutory burden of proving


35

recklessness or knowing inducement would be meaningless and strict liability could be imposed

on virtually any executive of any company. That is not the applicable standard.

Moreover, the CFTC has not alleged anything at all about Monex’s system of internal

supervision and control. Without such allegations, the CFTC cannot sustain a plausible theory

that Michael Carabini failed to maintain or enforce a reasonably adequate system. See id. at *8-

9.

Second, the Complaint alleges that the Individual Defendants received “reports” on “the

number of forced liquidations and margin calls issued during a month.” (Dkt. No. 1 ¶¶ 55, 58.)

However, there is no allegation that these margin calls or forced liquidations were themselves

unlawful, so the Individual Defendants’ alleged knowledge of them does not suggest bad faith or

knowing inducement of any fraud.

There are no other allegations in the Complaint that could be construed as suggesting the

Individual Defendants acted in bad faith or knowingly induced fraud. Accordingly, the

controlling person liability claims in Counts 2 and 3 should be dismissed as to the Individual

Defendants.

2. Counts 1 And 4 Should Be Dismissed As To The Individual Defendants

Counts 1 and 4 of the Complaint also fail to state a plausible claim of controlling person

liability. These Counts claim that Defendants were required to register Monex’s Atlas account

with the CFTC or conduct it on a registered exchange. (See Dkt. No. 1 ¶¶ 75, 78, 97-98.)

Regardless of how this Court ultimately resolves the question of “actual delivery,” the

Individual Defendants cannot be held liable as controlling persons unless they acted recklessly.

There is simply nothing in the Complaint that plausibly suggests they did. To the contrary, as

the discussion in Section B above establishes, the Atlas account has been operated in accordance

with available industry guidance on the meaning of the term “actual delivery.” While the CFTC


36

now appears to be changing its position on the issue (albeit without modifying its Final

Interpretation, which remains in effect), that does not convert an arcane legal dispute into the bad

faith conduct necessary to establish personal liability on controlling persons. Indeed, the very

existence of the legal dispute itself establishes that the Individual Defendants did not act in bad

faith or knowingly violate any law. See Ketroser, 729 F.3d at 932; Hixson, 613 F.3d at 1190.

Because the CFTC has not made any allegations giving rise to a plausible inference that the

Individual Defendants acted in bad faith or knowingly induced a violation of the CEA

registration requirements, the claims asserted against them in Counts 1 and 4 should be

dismissed. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 567 (2007) (holding that an inference of

unlawful conduct must be plausible in light of “obvious alternative explanation[s]”).

CONCLUSION

For the reasons stated, the CFTC’s Complaint should be dismissed in its entirety.

Dated: October 3, 2017 Respectfully submitted,

MONEX DEPOSIT COMPANY, MONEX

CREDIT COMPANY, NEWPORT SERVICE

CORPORATION, LOUIS CARABINI, AND

MICHAEL CARABINI

By: /s/ Steven L. Merouse

One of their Attorneys

Stephen J. Senderowitz

Steven L. Merouse

Jacqueline A. Giannini

Marilyn B. Rosen

Geoffrey M. Miller

DENTONS US LLP

233 S. Wacker Drive, Suite 5900


Tel: +1 312 876 8000

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]


mailto:[email protected]





37

Michael S. Kim

Andrew C. Lourie

Matthew I. Menchel (pro hac vice)

Benjamin J.A. Sauter (pro hac vice)

KOBRE & KIM LLP

111 W. Jackson Blvd., 17th Floor


Tel: +1 312 429 5100

[email protected]

[email protected]

[email protected]

[email protected]





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