[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
HEARING TO REVIEW IMPLICATIONS
OF THE CFTC V. ZELENER CASE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
GENERAL FARM COMMODITIES
AND RISK MANAGEMENT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
June 4, 2009
__________
Serial No. 111-17
Printed for the use of the Committee on Agriculture
agriculture.house.gov
----------
U.S. GOVERNMENT PRINTING OFFICE
52-664 PDF WASHINGTON : 2009
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP,
Washington, DC 20402-0001
COMMITTEE ON AGRICULTURE
COLLIN C. PETERSON, Minnesota, Chairman
TIM HOLDEN, Pennsylvania, FRANK D. LUCAS, Oklahoma,
Vice Chairman Ranking Minority Member
MIKE McINTYRE, North Carolina BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa JERRY MORAN, Kansas
JOE BACA, California TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California SAM GRAVES, Missouri
DAVID SCOTT, Georgia MIKE ROGERS, Alabama
JIM MARSHALL, Georgia STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, RANDY NEUGEBAUER, Texas
South Dakota K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas JEFF FORTENBERRY, Nebraska
JIM COSTA, California JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER, BILL CASSIDY, Louisiana
Pennsylvania CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho
______
Professional Staff
Robert L. Larew, Chief of Staff
Andrew W. Baker, Chief Counsel
April Slayton, Communications Director
Nicole Scott, Minority Staff Director
Subcommittee on General Farm Commodities and Risk Management
LEONARD L. BOSWELL, Iowa, Chairman
JIM MARSHALL, Georgia JERRY MORAN, Kansas,
BRAD ELLSWORTH, Indiana Ranking Minority Member
TIMOTHY J. WALZ, Minnesota TIMOTHY V. JOHNSON, Illinois
KURT SCHRADER, Oregon SAM GRAVES, Missouri
STEPHANIE HERSETH SANDLIN, STEVE KING, Iowa
South Dakota K. MICHAEL CONAWAY, Texas
BETSY MARKEY, Colorado ROBERT E. LATTA, Ohio
LARRY KISSELL, North Carolina BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
Clark Ogilvie, Subcommittee Staff Director
(ii)
C O N T E N T S
----------
Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa,
opening statement.............................................. 1
Prepared statement........................................... 2
Moran, Hon. Jerry, a Representative in Congress from Kansas,
opening statement.............................................. 2
Peterson, Hon. Collin C., a Representative in Congress from
Minnesota, prepared statement.................................. 3
Walz, Hon. Timothy J., a Representative in Congress from
Minnesota, prepared statement.................................. 3
Witnesses
Obie, Stephen J., Acting Director, Division on Enforcement,
Commodity Futures Trading Commission, Washington, D.C.......... 4
Prepared statement........................................... 5
Roth, Daniel, President and Chief Executive Officer, National
Futures Association, Chicago, Illinois......................... 7
Prepared statement........................................... 9
Feigin, Philip A., Attorney, Rothgerber Johnson & Lyons, on
behalf of Monex Deposit Company, Denver, Colorado.............. 11
Prepared statement........................................... 13
HEARING TO REVIEW IMPLICATIONS OF THE CFTC V. ZELENER CASE
----------
WEDNESDAY, June 4, 2009
House of Representatives,
Subcommittee on General Farm
Commodities and Risk Management
Committee on Agriculture
Washington, D.C.
The Subcommittee met, pursuant to call, at 10:07 a.m., in
Room 1300 of the Longworth House Office Building, Hon. Leonard
L. Boswell [Chairman of the Subcommittee] presiding.
Members present: Representatives Boswell, Marshall, Walz,
Schrader, Markey, Kissell, Pomeroy, Peterson (ex officio),
Moran, Conaway, Latta, and Luetkemeyer.
Staff present: Claiborn Crain, Adam Durand, John Konya,
Scott Kuschmider, Robert L. Larew, Clark Ogilvie, John Riley,
Rebekah Solem, Kevin Kramp, and Jamie Mitchell.
OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF IOWA
The Chairman. Good morning. The hearing of the Subcommittee
on General Farm Commodities and Risk Management to review
implication of the CFTC v. Zelener case will come to order. I
will make an opening statement and invite Mr. Moran to do the
same and then ask if the rest of the members follow the normal
procedure and not make opening statements and submit whatever
they would like for the record, and, of course, participate in
the question and answer period. So that would be the order of
how we would like to go. First, I would like to thank all of
you for joining us here today as we take this examination of
the implication of CFTC v. Zelener. I would like to give
special thanks to our witnesses for testifying before the
committee and to offer their insight into the current issues
facing the futures market. I very much look forward to hearing
all your testimony.
In 2004 the Seventh Circuit Court made a decision in the
CFTC v. Zelener. It adopted a narrow definition of the term
``transactions for future delivery.'' What is held is that a 3-
day contract offered to retail customers for foreign currency
that on its face promised delivery was not a futures contract
and was, therefore, outside the CFTC's jurisdiction. This was
even though the contracts operated in practice as futures
contracts. Following the Zelener decision, many frontsters were
given a roadmap to evade CFTC jurisdiction and to scam
customers or consumers. During the 2008 Farm Bill, Congress
narrowly fixed the Zelener problem as it pertains to foreign
exchange, forex.
Today, I am interested in hearing--we are interested in
hearing if this problem had shifted to other commodities such
as metals or energy products, as many said it might if Congress
merely didn't address the problem. To the extent fraudulent
activity is taking place and hard-working Americans are getting
taken to the cleaners by shysters, we need to find out if
Federal regulators have the tools necessary to protect
consumers. So at this time, I would like to turn it over to my
good friend and colleague, Congressman Moran from Kansas for
any remarks he would choose to make.
[The prepared statement of Mr. Boswell follows:]
Submitted Prepared Statement of Hon. Leonard L. Boswell, a
Representative in Congress from Iowa
I would like to thank everyone for joining me here today as we take
a thorough examination of the implications of CFTC v.Zelener. I would
like to give a special thanks to our witnesses for testifying before
the Committee and to offer their insight into the current issues facing
the future markets. I very much look forward to hearing all the
witnesses' testimony.
In 2004, the 7th Circuit Court made a decision in the CFTC vs.
Zelener. It adopted a very narrow definition of the term `transactions
for future delivery.' What it held is that a three-day contract offered
to retail customers for foreign currency that, on its face promised
delivery, was not a futures contract and was therefore outside the
CFTC's jurisdiction. This was even though the contracts operated, in
practice, as futures contracts.
Following the Zelener decision many fraudsters were given a roadmap
to evade CFTC jurisdiction and to scam consumers.
During the 2008 Farm Bill Congress narrowly fixed the Zelener
problem as it pertains to foreign exchange (forex). Today, I am
interested in hearing if this problem has shifted to other commodities
such as metals or energy products as many said it might if Congress
narrowly addressed the problem. To the extent fraudulent activity is
taking place and hard-working Americans are getting taken to the
cleaners by shysters, we need to find out if federal regulators have
the tools necessary to protect consumers.
At this time I would like to turn it over to my good friend and
colleague, Jerry Moran from Kansas for any opening remarks he would
like to make.
STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF KANSAS
Mr. Moran. Mr. Chairman, thank you very much. Thank you for
the consideration of opening this hearing just a few minutes
late to adjust to my arrival. As a Kansan, I never take into
account enough time to get any place in Washington, D.C. I
thank you for having this hearing. As you said, in 2004 we had
the Zelener case. We responded. We tried to create CFTC
jurisdiction for anti-fraud over retail forex transactions that
were Zelener like. We are here, I think, to determine the
success of that fix, and I hope we learn that from the CFTC. We
also are interested in knowing, as you said, whether there is
an expansion of fraud challenges that the CFTC cannot address.
I would say that we need to be cautious in addressing what
could be a small problem. We don't want to excessively regulate
legitimate market participants that are not causing any harm,
and I hope that today's witnesses reveal the extent to which
fraud and futures look alike contracts have moved into other
commodity markets and potential solutions if that is occurring.
So it seems like we have been dealing with Zelener for a
long time. We have been. And I am looking forward to hearing
whether we are having any success and what more might need to
be done, and I thank you, Mr. Chairman, for conducting this
hearing.
Mr. Boswell. Thank you for your comments. And I have driven
up and down the streets, so I understand this trying to predict
how long it takes to get anywhere.
The chair would request that other Members submit their
opening statements for the record.
[The prepared statements of Mr. Peterson and Mr. Walz
follow:]
Prepared Statement of Hon. Collin C. Peterson, a Representative in
Congress from Minnesota
Thank you, Chairman Boswell, for calling this hearing today.
Policing fraud in retail foreign currency trading, or forex for
short, has at times been very difficult for the Commodity Futures
Trading Commission.
In 1974, Congress included in the Commodity Exchange Act an
exemption for contracts based on foreign exchange and Treasury
securities from CFTC regulation. The idea was that common interbank
transactions in currency would not get swept up in the web of futures
regulation.
While this worked well for a time, a 9th Circuit Court ruling in
1996 held that the law also protected forex boiler rooms, bucket shops,
and other scammers that preyed on retail customers.
The CFTC and Congress addressed this question in 2000 with passage
of the Commodity Futures Modernization Act, with provisions giving the
Commission clear authority to police the sales of forex contracts to
small investors. However, a 2004 court case, CFTC v. Zelener, held that
certain retail foreign exchange contracts were outside the Commission's
legal authority. That case involved a boiler room selling off-exchange
forex contracts with the CFTC powerless to stop them because the
contracts in question were not futures despite the CFTC's contention.
Even worse, scam artists used the Zelener decision as a blueprint to
thread the regulatory loophole and go after unsuspecting retail
customers with no real risk of being shut down.
When Congress reauthorized CFTC as part of the Food, Conservation,
and Energy Act of 2008, we sought to stem the unintended consequences
of Zelener by clarifying the CFTC's anti-fraud authority over retail
agreements and contracts in foreign currency.
Retail foreign exchange dealers now must register with the CFTC and
are subject to commission rules and anti-fraud authority along with
Futures Commission Merchants that engage in retail forex transactions.
Congress also strengthened qualifications and minimum capital
requirements for FCMs and retail foreign exchange dealers.
However, because the scope of the Zelener fix was limited to
foreign exchange contracts, we need to be aware that similar problems
could arise in other product areas like metals, energy, or any other
commodity that can be sold to the public without effective regulation.
The work we did in the Farm Bill restored the CFTC's ability to
stop unscrupulous persons who write and market contracts in foreign
currencies that are nothing more than scams to defraud the public.
However, we are here to learn if there are still problems that exist
today from the Zelener decision.
I welcome our witnesses and I hope that they can give us some
perspective on problem areas that may exist outside of the CFTC's
enforcement reach.
I welcome today's witnesses and I look forward to their testimony.
I yield back my time.
Submitted Statement of Hon. Timothy J. Walz, a Representative in
Congress from Minnesota
Mr. Chairman, thank you for holding this hearing today review
implications of the Zelener case and how that will effect future
commodity regulation.Since 1974, when the CFTC began to oversee trading
in derivatives, it has been necessary for the CFTC to strike an
appropriate balance to find the "sweet spot" of regulation that would
protect investors but not stifle the industry.
Three years ago, the Zelener case limited the CFTC's ability to
address foreign currency fraud and the question of what type of
authority the CFTC should possess in this area is an important issue
for many in the forex market. I have met with some of the stakeholders
who are involved in the forex market and I believe I can speak to the
perspective of many of them. They do not fear government regulation,
they welcome it.
Forex traders realize that there is a role for the government to
play in creating a level playing field and making sure everyone plays
by the rules. But what they do not want is heavy-handed regulation that
will impede development of a new market that is widely used by many
investors overseas but is just getting its footing in the United
States.
I think it is very important that Congress get this question right.
It should not be our goal to treat every commodity the same when it
comes to regulation. It should not be our goal to interfere with a
market that is operating fairly and efficiently.
Mr. Chairman, I look forward to the opportunity to hear the
testimony of our witnesses today and the chance to ask them questions
about how they believe commodity regulation should be addressed.
We welcome the panel, and we will go from my left to right,
and ask you to make your 5-minute statement and then be
available for questions, if you would, so we will start off
with Mr. Stephen Obie, Acting Director, Division on
Enforcement, Commodity Futures Trading Commission, Washington,
D.C. Mr. Obie.
STATEMENT OF STEPHEN J. OBIE, ACTING DIRECTOR, DIVISION ON
ENFORCEMENT, COMMODITY FUTURES TRADING COMMISSION, WASHINGTON,
D.C.
Mr. Obie. Good morning, Chairman Boswell and Members of
this distinguished subcommittee. I am Stephen Obie, the Acting
Director of the Division of Enforcement of the United States
Commodity Futures Trading Commission. My remarks today
represent my views in my capacity as the Acting Director, and I
am not testifying on behalf of the Commission. In 2003, the
CFTC filed what came to be known as the Zelener. The CFTC
complaint alleged that Michael Zelener operated a foreign
currency boiler room. Mr. Zelener fraudulently solicited
millions of dollars from over 200 unsuspecting customers. The
contracts that Zelener peddled claimed to require delivery of
currency within 2 days. In reality, the contracts were
repeatedly rolled over and no delivery of currency was ever
made.
Unfortunately, the trial court ruled that the CFTC lacked
jurisdiction over these rolling spot contracts at issue and the
Seventh Circuit Court of Appeals upheld that ruling in 2004.
Recently, Michael Zelener pled guilty to criminal fraud
charges. Zelener admitted to operating a forex boiler room
which caused substantial customer harm. Justice will soon be
served when Zelener is sentenced for his crimes in August.
Following the Zelener rulings, another Circuit Court of Appeals
and other trial courts also handed down adverse decisions on
CFTC jurisdiction. The lasting effect of these decisions set
the CFTC's Division of Enforcement forex program back half a
decade. Fortunately, Congress clarified the CFTC's jurisdiction
over the types of forex contracts sold by Zelener and other
boiler room operators like him with the passage of the CFTC
Reauthorization Act of 2008. Since that time, the CFTC has
aggressively used its clarified anti-fraud authority.
The CFTC's Enforcement Division has opened 84
investigations involving foreign currency frauds and has
already filed nine Federal Court enforcement actions alleging
that more than $134 million was misappropriated from customers.
Because the Zelener fix was limited to contracts in foreign
currency, swindlers have moved on. Fraud schemes through
marketing of Zelener type rolling spot contracts, which
actually look like futures contracts, are now occurring in
other commodities, especially precious metals like gold, silver
and platinum, thus, the investing public is now being defrauded
arguably beyond the CFTC's enforcement jurisdiction. Even
worse, Zelener and the cases that followed provided a roadmap
to these fraudsters on how to draft their contracts to escape
prosecution by the CFTC. From my perspective, it appears that
these Zelener type contracts are proliferated and mailer
fraudsters are offering these contracts, which they believe are
out of the CFTC's anti-fraud jurisdiction.
Since the enactment of the farm bill, the CFTC has received
more than 50 complaints from the public relating to potential
boiler room frauds involving commodities other than foreign
currency. In addition, the National Futures Association has
identified approximately 30 farms offering potentially too good
to be true investments and purportedly spot metals and energy
contracts. Unfortunately, the Zelener decision remains a
profound impediment to the CFTC's ability to prosecute these
firms and protect the public from alleged wrongdoing. I also
know from the NFA which handles the registration of forex firms
that there has been an increase of registered forex dealer
members who have begun to sell non-forex Zelener-type contracts
to retail customers. Currently, seven such firms have been
identified.
Protecting the public from commodity fraud and preserving
the integrity of the commodity markets through swift and
decisive action are critical missions of the CFTC's enforcement
program. The farm bill has made that job easier in the forex
area and I applaud this Subcommittee's work in that regard. The
CFTC will continue to root out these fraudulent enterprises and
other Ponzi schemers who prey on innocent Americans. Thank you,
Chairman Boswell, and Members of the distinguished
Subcommittee. I look forward to answering any questions you may
have.
[The prepared statement of Mr. Obie follows:]
Prepared Statement of Mr. Stephen J. Obie, Acting Director, Division on
Enforcement, Commodity Futures Trading Commission, Washington, D.C.
Good morning, Chairman Boswell and Members of this distinguished
subcommittee. Thank you for the opportunity to appear before you today
to testify regarding the continuing implications of the CFTC v. Zelener
case. I am Stephen Obie, the Acting Director of the Division of
Enforcement of the United States Commodity Futures Trading Commission.
My remarks today represent my views in my capacity as the Acting
Director, and I am not testifying on behalf of the Commission.
As Acting Director, I oversee 120 attorneys and investigators in
four offices who investigate and litigate enforcement cases in
administrative forums and in federal district courts. The Division of
Enforcement investigates and brings cases in a wide range of areas
including trade practice violations, manipulations, and fraud. Until a
few years ago, a sizeable number of the Division's matters involved
retail fraud in the area of foreign currency (also called "forex"),
many of them involving boiler room operations. ``Boiler rooms'' are
operations that use high-pressure sales tactics, usually including
false or misleading information, to solicit generally unsophisticated
customers.
In 2003, the CFTC filed what came to be known as the Zelener case.
The CFTC complaint alleged that over a two-year period, Michael Zelener
operated a foreign currency boiler room that fraudulently solicited
millions of dollars from over 200 unsuspecting customers in violation
of the Commodity Exchange Act. Although the contracts that Zelener was
peddling purported to require delivery of currency within two days, in
reality, the contracts were repeatedly rolled over and no delivery of
currency was ever made. The CFTC contended that these contracts were,
therefore, futures contracts, but the trial court ruled that the CFTC
lacked jurisdiction over the contracts because Zelener's ``customers
were not trading in futures contracts; rather they were speculating in
spot contracts.'' \1\ The trial court's ruling that the CFTC lacked
jurisdiction over the ``rolling spot'' contracts at issue in the
Zelener case was upheld by an appellate court in 2004. \2\
---------------------------------------------------------------------------
\1\ CFTC v. Zelener, [2003-2004 Transfer Binder] Comm. Fut. L.
Rep. (CCH) para. 29,621 (D. N.D. Ill. Oct. 3, 2003); No. 1:03CV04346,
2003 WL 22284295 at *5; 2003 U.S. Dist. LEXIS 17660 at *14.
\2\ CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004).
---------------------------------------------------------------------------
Recently, Michael Zelener pled guilty to criminal fraud charges
based on the same facts that were alleged in the CFTC civil complaint.
In his plea agreement, Zelener admitted that he lied when he told
potential customers that they could earn 120% annual returns with
almost no risk even after he knew that almost every one of his
customers had lost money; he was paid a total of $ 1.4 million in mark
ups and he used false account statements to conceal these mark ups; and
he operated a forex boiler room for two years causing customers to
suffer losses totaling $2 million. Justice will soon be served when
Zelener is sentenced for his crimes in August.
After the appellate ruling in the Zelener case, the CFTC brought
other cases and received similar adverse rulings from another Circuit
Court of Appeals \3\ and other trial courts. The case law spawned by
the Zelener decision appeared to narrow the CFTC's reach in the area of
foreign currency and created uncertainty as to the CFTC's antifraud
jurisdiction over contracts in related areas where the line between
futures contracts and spot contracts could be blurred. As a result of
these adverse court decisions, the Division of Enforcement's case load
in the area of foreign currency diminished, as we could not justify the
expenditure of scarce resources to fight jurisdictional battles rather
than pursuing wrongdoers in other areas where our jurisdiction was
clear. But the lasting effect of the Zelener decision, putting this
specific activity out of our jurisdictional reach, set the CFTC's
Division of Enforcement forex program back a half a decade.
---------------------------------------------------------------------------
\3\ CFTC v. Erskine, 512 F.3d 309 (6th Cir. 2008).
---------------------------------------------------------------------------
Fortunately, Congress clarified the CFTC's jurisdiction over the
types of forex contracts sold by Zelener and other boiler room
operators like him with the passage of the CFTC Reauthorization Act of
2008 (Title 13 of the farm bill). I applaud this subcommittee's efforts
in drafting that much-needed legislation in the forex area. Since that
time, the CFTC has aggressively used its clarified antifraud authority.
I am proud to report to this subcommittee that the CFTC's Enforcement
Division has opened 84 investigations involving foreign currency
frauds, which are pending, and has already filed 9 federal court
enforcement actions alleging that more than $134 million was
misappropriated from customers.
The changes in the Farm Bill have been extremely helpful to the
Enforcement Division in policing the forex markets. However, because
the Zelener-fix was limited to contracts in foreign currency, swindlers
have moved on to perpetuate their fraud and are marketing Zelener-type
``rolling spot'' contracts in other commodities, especially precious
metals like gold, silver, and platinum, and, thus, are defrauding
customers beyond the CFTC's antifraud jurisdiction. Even worse, Zelener
and the cases that followed provided a road map to these fraudsters on
how to draft their contracts to escape prosecution by the CFTC.
Customer agreements appear to have been drafted specifically with the
Zelener decision in mind and language chosen so that, under the
analysis in those decisions, the contracts at issue are argued to be
spot contracts outside of CFTC jurisdiction and not futures contracts
covered by the Commodity Exchange Act.
From my perspective, it appears that these Zelener-type contracts
have proliferated and more fraudsters are offering these contracts,
believed to be out of the reach of the CFTC's antifraud jurisdiction.
Since the enactment of the Farm Bill, the CFTC has received more than
50 complaints from the public relating to potential boiler room frauds
involving commodities other than foreign currency. In addition, the
National Futures Association has identified approximately 30 firms
offering potentially ``too-good-to-be-true'' investments in purportedly
spot metals and energy contracts. Unfortunately, the Zelener decision
remains a profound impediment to the CFTC's ability to prosecute these
firms and protect the public from alleged wrongdoing. Consequently, the
CFTC has had to refer these matters to state law enforcement
authorities and other federal agencies.
I also know from the NFA, which handles the registration of forex
firms, that there has been an increase in registered forex dealer
members who have begun to sell non-forex Zelener-type contracts to
retail customers. Currently, seven such firms have been identified.
Protecting the public from commodity fraud and preserving the
integrity of the commodity markets through swift and decisive action
are critical missions of the CFTC's enforcement program. The Farm Bill
has made that job easier in the forex area. Should Congress see fit to
expand the CFTC's authority over boiler rooms offering metal, energy,
and other commodity contracts to retail customers, we will utilize that
authority -- as we have with the Zelener-fix provided by the Farm Bill
for foreign currency -- to shutter those boiler rooms and protect the
American public. With new authority, I can assure this subcommittee
that the CFTC will continue to root out these fraudulent enterprises
and other Ponzi schemers who prey on innocent Americans.
Thank you Chairman Boswell and Members of this distinguished
subcommittee. I look forward to answering your questions.
Mr. Boswell. Thank you. I would now like to recognize Mr.
Roth, President and Chief Executive Officer, National Futures
Association, Chicago, Illinois. Welcome.
STATEMENT OF DANIEL ROTH, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, NATIONAL FUTURES ASSOCIATION, CHICAGO,
ILLINOIS
Mr. Roth. Thank you, Mr. Chairman. My name is Dan Roth, and
I am the President of NFA, and thanks very much for the
opportunity to appear here today to talk about Zelener once
again. Over the last year, obviously this Committee has spent
an awful lot of time and energy focusing on OTC derivatives.
Particularly OTC derivatives that are aimed at sophisticated
institutional type customers, and that is a commendable offer
and it is entirely appropriate given the systemic risk issues
that those types of instruments compose. We just wanted the
Committee to be aware that there is a burgeoning OTC
derivatives market, completely unregulated markets, aimed at
retail customers. And although these markets don't pose the
sorts of systemic risk issues that credit default swaps and
other OTC instruments do, it is a growing area of customer
concern.
What I would like to take a minute to talk about a little
bit of the history of how we got where we are, describe the
nature of the problem, and describe what we think we can do
about it. Back in 1974 when Congress was about to create the
CFTC and expand Federal regulation of futures markets, the
Treasury Department came forward and pointed out that there was
a thriving interbank market involving foreign currencies and
that those banks were all regulated, and that we didn't need
the CFTC to insert itself into that arena. So Congress adopted
the Treasury Amendment which provided in part that nothing in
the Act applies to transactions in foreign currencies. Well,
predictably enough, boiler rooms started popping up trying to
take advantage of that loophole, and the CFTC was very
successful in going to court and shutting down these retail
bucket shops that were selling foreign currency products.
The CFTC argued that the Treasury Amendment was never
intended to apply to transactions involving retail customers,
and that worked just fine until 1996 when the Circuit Court of
Appeals in the Frankel Bullion case ruled that the Treasury
Amendment means what it says and that the Commodity Exchange
Act doesn't apply even if the transaction involves foreign
currencies. Well, that is why Congress in 2000 with the CFMA
attempted to address that issue. Congress basically stated
that, yes, the Commodity Exchange Act does apply to foreign
currency futures transactions with retail customers unless the
counter party is an otherwise regulated entity. No sooner had
we fixed that problem than another one popped up and that is
the Zelener decision.
In the Zelener case, just as Steve said, the court there
said we don't even have to worry about the Treasury Amendment
because these things aren't futures contracts to begin with.
Prior to Zelener, what the courts had always said was that in
determining whether a contract offered to a retail customer is
a futures contract, the court said what you have to do is look
at the underlying purpose of the transaction and if the
underlying purpose is to speculate price swings and that there
is no expectation of delivery then it is a futures contract
regardless of what the parties call it.
The Zelener court just went away from that approach
completely and said no, no, no, no, what you have to look at is
the written agreement between the scammer in this case and the
customer. And if that written agreement calls the contractor
rolling spot and if that written agreement in its fine print
does not guarantee a right of offset, well, then it is not a
futures contract and I don't care whether it looks like a
futures contract, is sold like a futures contract, or acts like
a future contract. It is not a futures contract, and the CFTC
has no jurisdiction. Well, this was a huge blow. This was worse
than Frankel Bullion because this affected the CFTC's ability
to protect retail customers from off exchange unregulated
futures contracts, not just for foreign currencies but for
everything. It was a real blow.
So in the last reauthorization process, as Steve mentioned
and as the Chairman mentioned, Congress debated how best to
address Zelener, and we advocated what was called a broad fix
so that it would affect all commodities. Congress basically
decided that the current problem was foreign currency so they
focused on foreign currency and adopted the narrow fix. Since
then, just as Steve mentioned, we have seen this proliferation.
Just in our routine day-to-day auditing or surveillance of the
Internet we have become aware of dozens of these web sites,
dozens of these Zelener type markets that are offering retail
customers completely unregulated futures look-alikes. So with
these contracts there is no registration requirement for
anybody, so we have got people that we have booted out of the
futures industry for fraud that cross the street and start
selling Zelener contracts. We have seen familiar names. Guys
that we have tossed are now selling this things because in this
unregulated world there is no registration requirement, there
is no capital requirement, there are no sales practice
standards, there is no risk disclosure -- there is no nothing.
And customers are getting hurt. We get customer complaints
at NFA from people that have lost their life savings in these
different types of scams. It is not right. We have to do
something about it. These customers, some of them are subject
to high pressure sales, some of them don't understand the
nature of the transaction, they don't understand the fees that
they are paying. There is no adequate disclosure. So I am
almost over my time, but the point, I guess, is that I think it
is time to do something with a broad Zelener fix, and in our
view that fix has to accomplish three things. Number one, it
has to make sure that scammers can't sell off exchange futures
contracts simply by disguising it to look like something else.
Number two, the fix should not in any way impair or
interfere with the legitimate spot market. If there is actual
delivery of the contract, we don't want to deal with it. If the
customer is a commercial interest, he has a commercial interest
in the product and might take delivery, we don't want to deal
with it. We don't want to interfere with the spot market. And,
number three, I think it is important to bear in mind that it
is not enough just to give the CFTC anti-fraud authority over
these contracts. Anti-fraud authority is no substitute for
regulation. It is not good enough to come in after the fraud
occurred. All the things I have talked about, the registration,
the capital, the risk disclosure, the audits, all those things
are designed to protect customers to prevent fraud rather than
prosecute it.
Giving the CFTC simply anti-fraud authority is no
substitute for the regulatory protections under the Act, and
neither, by the way, is the Model State Commodity Code. If some
state regulator has the authority to close one of these bucket
shops, well, God bless. however, the authority to close it down
after the fraud has occurred is no substitute for the
regulatory protections of the Commodity Exchange Act which is
why the Model Code expressly excludes transactions covered by
this Act. So, Mr. Chairman, I am way over my time and I will be
quiet now. But we have talked about this for a long time and we
look forward to working with the Committee and the staff and
look forward to this possibly being the last time I have to
testify about Zelener, which would be nice for all of you too.
[The prepared statement of Mr. Roth follows:]
Submitted Statement of Mr. Daniel Roth, President and Chief Executive
Officer, National Futures Association, Chicago, Illinois
My name is Daniel Roth, and I am President and Chief Executive
Officer of National Futures Association. Thank you Chairman Boswell and
members of the Subcommittee for this opportunity to appear here today
to present our views on closing a regulatory gap that allows fraudsters
to sell unregulated OTC derivatives to retail customers.
Since 1982, NFA has been the industry-wide self-regulatory
organization for the U.S. futures industry, and in 2002 it extended its
regulatory programs to include retail over-the-counter forex contracts.
NFA is first and foremost a customer protection organization, and we
take our mission very seriously.
Congress is currently expending significant time and resources to
deal with systemic risk and to create greater transparency in the OTC
derivatives markets. Those are important economic issues, and we
support Congress' efforts to address them. Understandably, most of the
debate centers around instruments offered to and traded by large,
sophisticated institutions. However, there is a burgeoning OTC
derivatives market aimed at unsophisticated retail customers, who are
being victimized in a completely unregulated environment.
For years, retail customers that invested in futures had all of the
regulatory protections of the Commodity Exchange Act. Their trades were
executed on transparent exchanges and cleared by centralized clearing
organizations, their brokers had to meet the fitness standards set
forth in the Act, and their brokers were regulated by the CFTC and NFA.
Today, for too many customers, none of those protections apply. A
number of bad court decisions have created loopholes a mile wide, and
retail customers are on their own in unregulated, non-transparent OTC
futures-type markets.
The main problem stems from a Seventh Circuit Court of Appeals
decision in a forex fraud case brought by the CFTC. In the Zelener
case, the District court found that retail customers had, in fact, been
defrauded but that the CFTC had no jurisdiction because the contracts
at issue were not futures, and the Seventh Circuit affirmed that
decision. The "rolling spot" contracts in Zelener were marketed to
retail customers for purposes of speculation; they were sold on margin;
they were routinely rolled over and over and held for long periods of
time; and they were regularly offset so that delivery rarely, if ever,
occurred. In Zelener, though, the Seventh Circuit ignored these
characteristics and based its decision on the terms of the written
contract between the dealer and its customers. Because the written
contract in Zelener did not include a guaranteed right of offset, the
Seventh Circuit ruled that the contracts at issue were not futures. As
a result, the CFTC was unable to stop the fraud.
Zelener created the distinct possibility that, through clever
draftsmanship, completely unregulated firms and individuals could sell
retail customers forex contracts that looked like futures, acted like
futures, and were sold like futures and could do so outside the CFTC's
jurisdiction. For a short period of time, Zelener was just a single
case addressing this issue. Since 2004, however, various Courts have
continued to follow the Seventh Circuit's approach in Zelener, which
caused the CFTC to lose enforcement cases relating to forex fraud.
A year ago, Congress closed the loophole for forex contracts.
Unfortunately, the rationale of the Zelener decision is not limited to
foreign currency products. Customers trading other commodities-such as
gold and silver-are still stuck in an unregulated mine field. It's time
to restore regulatory protections to all retail customers.
In testimony before this Subcommittee in 2007, I predicted that if
Congress plugged the Zelener loophole for forex but left it open for
other products, the fraudsters would simply move to Zelener-type
contracts in other commodities. That's just what has happened. We
cannot give you exact numbers, of course, because these firms are not
registered. Nobody knows how widespread the fraud is, but we are aware
of dozens of firms that offer Zelener contracts in metals or energy.
Recently, we received a call from a man who had lost over $600,000,
substantially all of his savings, investing with one of these firms. We
have seen a sharp increase in customer complaints and mounting customer
losses involving these products since Congress closed the loophole for
forex.
NFA and the exchanges have previously proposed a fix that would
close the Zelener loophole for these non-forex products. Our proposal
codifies the approach the Ninth Circuit took in CFTC v. Co-Petro, which
was the accepted and workable state of the law until Zelener. In
particular, our approach would create a statutory presumption that
leveraged or margined transactions offered to retail customers are
futures contracts unless delivery is made within seven days or the
retail customer has a commercial use for the commodity. This
presumption is flexible and could be overcome by showing that delivery
actually occurred or that the transactions were not primarily marketed
to retail customers or were not marketed to those customers as a way to
speculate on price movements in the underlying commodity.
This statutory presumption would not affect the interbank currency
market dominated by institutional players, nor would it affect
regulated instruments like securities and banking products. It would
also not apply to those retail forex contracts that are already covered
(or exempt) under Section 2(c). It would, however, effectively prohibit
leveraged non-forex OTC contracts with retail customers when those
contracts are used for price speculation and do not result in delivery.
I should note that NFA's proposal does not invalidate the 1985
interpretive letter issued by the CFTC's Office of General Counsel,
which Monex International and similar entities rely on when selling
gold and silver to their customers. That letter responded to a factual
situation where the dealer purchased the physical metals from an
unaffiliated bank for the full purchase price and left the metals in
the bank's vault. The dealer then turned around and sold the gold or
silver to a customer, who financed the purchase by borrowing money from
the bank. Within two to seven days the dealer received the full
purchase price and the customer received title to the metals. In these
circumstances the metals were actually delivered within seven days, so
the transactions would not be futures contracts under NFA's proposal.
In conclusion, while NFA supports Congress' efforts to deal with
systemic risk and create greater transparency in the OTC markets,
Congress should not lose sight of the very real threat to retail
customers participating in another segment of these markets. This
Subcommittee can play a leading role in protecting customers from the
unregulated boiler rooms that are currently taking advantage of the
Zelener loophole for metals and energy products. We look forward to
further reviewing our proposal with Subcommittee members and staff and
working with you in this important endeavor.
Mr. Boswell. We are not going to require you to be quiet.
We are just going to penalize you. Thank you, Mr. Roth. I
appreciate your comments. And now we would like to call on Mr.
Feigin, Attorney, Rothgerber Johnson & Lyons, on behalf of
Monex Deposit Company, Denver, Colorado. Mr. Feigin, welcome.
STATEMENT OF PHILIP A. FEIGIN, ATTORNEY, ROTHGERBER JOHNSON &
LYONS, ON BEHALF OF MONEX DEPOSIT
COMPANY, DENVER, COLORADO
Mr. Feigin. Good morning, Mr. Chairman, and Members. My
name is Philip Feigin. I am an attorney in private practice in
Denver and appear today on behalf of Monex Deposit Company, the
largest vendor of precious metals to retail customers in the
United States. Before starting my current practice, I was
Executive Director of the North American Securities
Administrator's Association and before that I spent 10 years as
Securities Commissioner for the State of Colorado. While
commissioner, I also served as NASAA's President in 1994 and
1995 though I obviously speak today for Monex, not my former
regulatory colleagues. My regulatory career is focused on
enforcement and investor protection. I played an active role in
drafting various investor protection statutes, including the
Uniform Securities Act, and the Model State Commodity Code back
in 1985, which I will discuss in my testimony today.
I believe my background puts me in an excellent position to
provide the Subcommittee with perspective on whether a Federal
fix is necessary for the retail spot precious metals
transactions discussed. I believe the state regulation through
the Model Code is the best way to address that market, a spot
market that Congress has historically not placed under CFTC
jurisdiction. The Model Code has been in effect in 22 states
for the better part of 20 years. Monex Deposit Company operates
a cash market which customers take physical delivery of gold,
silver, and other precious metals. Buyers may wish to hold gold
or other precious metals as a store of value, a hedge against
inflation, or an avenue to generate positive investment
returns. Monex is located in Newport Beach, California and has
been in business more than 20 years. Monex and its affiliates
has over 200 employees. On average, the company buys and sells
more than 2 billion in physical precious metals with over
10,000 customers each year.
When a customer purchases gold from Monex, the full amount
of the gold purchased is delivered either to the customer
itself or a depository. Under the Model Code delivery must
occur in no more than 28 days. The customers either pay cash or
finance their purchase through a Monex affiliate with at least
a 20 percent down payment. About 20 percent of Monex's
customers use this financing. Like any business dealing with
the retail public, Monex has received some complaints over the
years. Most are resolved with an explanation or simple
logistical solution. Of the more than 100,000 customers that
Monex has dealt with over the past 20 years only 82 brought
claims against Monex in court or arbitration and of those Monex
has lost only one case for a total award of $270.
My written testimony provides a short history of the
development of the Model State Commodity Code that also
reflects my experiences in enforcing investor protection laws
at the state level. In 1975, as Mr. Roth discussed, a
significant increase in commodities trading was accompanied by
a rise in bucket shops and other abusive companies. The newly
created CFTC was understaffed and overwhelmed and the states
were frustrated in going after many of these scam operators
because they were pre-empted by Federal law. Eventually
Congress changed the law to allow states a greater enforcement
role. However, this did not mean the states had the law on
their books to take advantage of the new authority. The need
for a model statute was apparent, and we state regulators spent
2 years working with the CFTC and the NFA studying the problems
and drafting what eventually became the Model Code in 1985.
This is the statute under which Monex operates under the
supervision of the California Department of Corporations, and
it has been enacted by 21 other states. The code has many
provisions, but among the most important is its concept of a
commodity contract, an arrangement that cannot be sold unless
it meets standards set out in the code. One of those, which I
mentioned earlier, is the requirement that the purchaser
receive the physical delivery of his purchase within 28 days of
payment of any part of the purchase price. The code was
designed as a modern bucket shop law. It allows regulators and
prosecutors, and I want to emphasize this, to analyze a
contract or transaction quickly to determine if it is lawful.
They avoid the often complicated and uncertain task of
attempting to establish the presence of futures contract under
current law.
In my written statement, I quoted the NFA's and the CFTC's
testimony in support of the code. I have also cited several
examples of the code's use against scam artists in which states
such as Missouri, Maine, and Colorado used it very well. The
code is an efficient and effective law enforcement tool. In
order to operate lawfully under the code, the purchaser or his
recognized depository must receive delivery of his commodities
within 28 days of the payment of any part of the purchase
price. This is a significant deterrent and it is at the heart
of the code. There is a case to be made for additional Federal
regulation at both on exchange futures markets and off exchange
slot markets where we have seen exaggerated commodity price
movement and where over the counter trading may have
contributed to systemic risk in the world economy.
This committee passed H.R. 977 to deal with these issues
but no one to my knowledge has argued that the retail metals
trading poses a systemic financial risk or distorts market
prices. Customer protection is the focus of the proposed
Zelener fix, but we suggest the Model Code has served that
purpose for precious metals investors for well over 20 years.
If it is the decision of the Congress that Federal action is
necessary, we are more than willing to participate on the
development of the approach and share our experience in dealing
with both the underlying premises and applications of our
approach to policing the off exchange spot market transactions.
Thanks for the opportunity to testify. I will be happy to
respond to any questions.
[The prepared statement of Mr. Feigin follows:]
Prepared Statement of Mr. Philip A. Feigin, Attorney, Rothgerber
Johnson & Lyons, on behalf of Monex Deposit Company, Denver, Colorado
Good morning, Mr. Chairman and committee Members. My name is Philip
A. Feigin. I am an attorney in private practice with the law firm of
Rothgerber Johnson & Lyons in Denver, Colorado. Prior to joining the
firm, I served as Executive Director of the North American Securities
Administrators Association (``NASAA'') in 1998 and 1999. NASAA
represents the state and provincial securities agencies of the 50
states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands,
the provinces and territories of Canada, and the Republic of Mexico. It
is the oldest international organization devoted to investor
protection. Prior to my time in Washington, I served as the Securities
Commissioner for the State of Colorado for 10 years, Deputy
Commissioner for seven and Chief Enforcement Attorney for the Wisconsin
Securities Commissioner for almost four years before that. While
Colorado Securities Commissioner, I served as the President of NASAA in
1994-95, and as a member of NASAA's board of directors for seven years.
I also served as Chair of NASAA's Enforcement Section and its
Commodities Committee for several years.
My regulatory career was focused on enforcement and investor
protection. I chaired or participated in multistate enforcement efforts
involving Lloyds of London, securities day trading abuses, the Moser
case at Salomon Brothers, precious metals boiler rooms in South Florida
and Orange County and penny stock swindlers in Denver. I pioneered the
development of NASAA's coordination of multistate enforcement projects.
I also spearheaded the creation and funding of a permanent Securities
Fraud Prosecution Unit at the Colorado Attorney General's office.I was
active in crafting a new regulatory regime for Colorado. I participated
in the drafting and led enactment of the Colorado's Securities Act,
Commodity Code, Municipal Bond Supervision Act, local government
investment pool trust fund regulation, and provisions under which the
state's investment advisers and investment adviser representatives are
regulated. I was also actively involved in the drafting of the national
Uniform Securities Act (2002) as a model for all state securities
regulation.
I was privileged to serve for several years on the Commodity
Futures Trading Commission's (``CFTC'') Advisory Committee on Federal-
State Cooperation. I have testified on numerous occasions before
committees of both the U.S. House of Representatives and the Senate on
securities, banking, commodities regulation and investor protection
issues as well as various committees of the Colorado General Assembly
and other state legislatures. I have also served as an expert witness
for the U.S. Attorney, the Securities and Exchange Commission
(``SEC''), states attorneys general and district attorneys in several
states in many federal and state criminal investment fraud cases.
I have gone through my background in detail in an effort to
establish my credentials as one who has spent virtually his entire
career in investment law enforcement and investor protection. I am here
today to speak on behalf of Monex Deposit Company, specifically with
regard to the issues presented by the holding in CFTC v. Zelener and
whether a federal ``fix'' is needed with regard to the sort of retail
spot precious metals transactions in which Monex engages. I submit to
you that current regulatory standards provide all necessary customer
protections. I also suggest that Congress has historically chosen not
to regulate spot commodity markets for good reasons, and that no case
has been made that spot metals trading poses the type of systemic risk
that might justify the application of a broad new regulatory scheme.
MONEX
Monex Deposit Company is the largest vendor of precious metals to
retail customers in the United States. Purchasers may wish to hold gold
or other metals as a store of value or hedge against inflation or
against changes in the value of the dollar or other assets that may
have negative correlation with precious metals. They may also wish to
trade the value of precious metals in hopes of attaining positive
returns.
Monex Deposit Company is located in Newport Beach, California, and,
together with several affiliated companies, has over 200 employees.
Monex routinely buys and sells in excess of $2 billion in physical
precious metals with over 10,000 customers annually. Customers may pay
in full and take personal delivery or store their goods through Monex
in an independent depository. They may also finance their purchases
through Monex's affiliate, Monex Credit Company, with a minimum down
payment of 20%. The maximum loan is 80% of the purchase price. The
precious metals owned by the customer is the collateral for the loan.
Historically, the average loan is about 50% of the collateral value.
In all transactions, title to the full amount of the metals
purchased passes to the customer and delivery is made, either to the
customer or his designated depository, within 28 days, or such shorter
period as may otherwise be required by law, upon receipt of full or
partial payment of the purchase price, as applicable. Monex Credit
Company also lends precious metals to customers who wish to take a
short position in the market. All transactions with the Monex companies
are self-directed by the customer. There are no managed accounts.
Approximately 20% of Monex customers finance their purchases.
Monex Deposit Company and Monex Credit Company have been in
business for over 20 years and conduct their business in compliance
with the requirements of the Model State Commodity Code, as adopted in
22 states, including California, where the Monex companies are located.
The companies' principals have been in the retail precious metals
investment business since 1967.
Monex Deposit Company and Monex Credit Company are registered with
the California Department of Corporations, respectively, as a
telephonic seller and finance lender. The risk disclosures included in
the Monex account agreements are the most extensive available to retail
commodity investors.
The number of customer complaints received by Monex is very low,
generally no more than two or three per month, compared to the
thousands of customers and transactions that we handle annually. Most
complaints are of a minor nature and are resolved by an explanation or
a logistical solution. Serious complaints result in reimbursement or
are settled if they appear meritorious. In the last 20 years, Monex has
been involved in 82 customer litigation and arbitration matters. Ten
are still pending. Of those resolved, Monex has lost only one case,
which resulted in an award of $270.
BRIEF HISTORY
In 1974, Congress enacted the Commodity Futures Trading Commission
Act. In so doing, Congress created the CFTC. In addition to instituting
the first meaningful federal comprehensive regulatory scheme for the
commodity futures industry, Congress preempted the states (primarily
state securities regulators) from applying their laws to persons and
transactions within the jurisdiction of the Commodity Exchange Act
(CEA).
The creation of the CFTC coincided with an enormous increase in
commodities trading as the Vietnam era inflationary cycle, the oil
crunch and many other factors caused upheavals in the economy. In
addition, the early 1970s marked the first time since World War I that
Americans could own gold bullion. As is all too often the case,
expansion of legitimate markets was accompanied by expansion of illegal
activity as well.
Commodity-theme boiler rooms proliferated around the country,
mostly in Boston, New York and South Florida, purportedly selling
contracts involving everything from gasoline stored in tankers moored
in Maracaibo Bay, to gold and silver, to aluminum stored in caverns
beneath the Isle of Jersey and coal in the hills of Tennessee. The CFTC
was grossly understaffed to deal with off-exchange commodities fraud.
The entire Enforcement Division had less than 125 people. The CEA was
crafted to regulate the established exchange-based commodity futures
market, but was extremely complicated and ill-suited to deal with off-
exchange problems. Hundreds of millions of dollars were lost by
unsuspecting victims. The states were virtually powerless to attack the
scams. Even if a state had the resources and evidence to proceed, the
CEA preempted state intervention. In fact, in one infamous case arising
in Arkansas, the Arkansas Securities Commissioner took action against a
commodities boiler room under the Arkansas Securities Act in defiance
of the preemption. The CFTC actually intervened on behalf of the boiler
room to assert the position that Arkansas was preempted from acting,
but took no action of its own against the fraudster. This was the low
point in relations between the states and the CFTC.
By 1978, it was clear that something was very wrong. Millions of
dollars had been lost to scammers. The CFTC proved out-gunned in its
efforts to address the problem. Congress determined that the states
should be allowed into the enforcement effort, and enacted Section 6d
of the CEA providing the states with the authority to enforce state
laws "of general criminal application" (not securities laws) against
violators, and allowing states to enforce the CEA in federal court
themselves. Although a move in the right direction, Section 6d was not
particularly well received by the states or successful in achieving the
desired goal. States were unfamiliar with the CEA and the federal
forum, not many cases were brought in cooperation with the CFTC and
none were brought by states acting alone.
Matters came to a head in 1983. An outfit in Fort Lauderdale called
International Gold Bullion Exchange had been advertising in the Wall
Street Journal for over a year, offering to sell gold at below the spot
price if purchasers would agree to store the metal at IGBE for a year.
The company would pay them 5% interest a year. Over 425,000 investors
across the country, including many in Colorado, sent IGBE a total of
more than $140 million to buy gold. When authorities entered the vault
in 1983, they found 50 pieces of wood painted gold. The money was all
gone and there was no gold. \1\
---------------------------------------------------------------------------
\1\ Coloradans Caught in Gold Scandal, Bruce Wilkinson, Denver
Post, August 18, 1983
---------------------------------------------------------------------------
Just as IGBE's fraudulent operations neared their peak, in 1982,
Congress enacted the so-called "open season" provision of the CEA,
Section 12(e). Under this new provision, the states were authorized to
enforce any applicable law against any person who had to be registered
with the CFTC to engage in particular conduct but failed to do so, and
any transaction that had to be effected on a contract market or
exchange under the CEA but was not.
Enactment of the ``open season'' provision did not mean that states
had applicable laws on their books providing jurisdiction to take
advantage of it. This led to the initiation of a multi-jurisdictional
project to draft a model statute that states could enact to utilize
against off-exchange commodity-theme frauds. State securities
regulators, the CFTC and the National Futures Association (``NFA'')
joined forces to create the Model State Commodity Code (``Model Code''
or ``Code''). It took two years of drafting, including public releases,
comment periods, review of responses, meetings with industry and a
public hearing before the New York Commodities Bar. In testimony
presented to the Washington State legislature in support of its Code
legislation in 1985, CFTC Commissioner Fowler C. West described the
working group's efforts.
Two drafts were circulated for public comment. The working group
received and assessed a great number of comments on these
drafts and held meetings with representatives of the
commodities industry in order to assure that the Code did not
unnecessarily curb legitimate business interests. Those efforts
culminated in a final version of the Model Code, finalized in
April 1985. . . \2\
\2\ Testimony of The Honorable Fowler C. West, Commissioner, U.S.
Commodity Futures Trading Commission, In Support of Senate Bill 4527
Before the Senate Financial Institutions Committee, The Honorable Ray
Moore, Chairman, February 4, 1986, at p. 3.
---------------------------------------------------------------------------
With Monex's support and assistance, the Model Code was adopted in
California and Colorado. It has also been enacted in Georgia, Idaho,
Indiana, Iowa, Kansas, Maine, Mississippi, Missouri, Nebraska, Nevada,
New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, South
Carolina and Washington, and its substantive provisions were
incorporated into the state securities laws of Arizona, Montana, and
Utah. Florida enacted provisions dealing with the problem using a
different but effective approach.
WHAT THE CODE DOES
The preamble to the Model Code begins by stating that the Code is a
``modern bucket shop law.'' It is essential to understand that the Code
is not meant to regulate commerce; it is an enforcement statute.
In its deliberations, the Code's drafters examined existing state
laws to determine if any other law provided the jurisdiction necessary
to take action against the schemes and frauds being perpetrated under
the generic commodities theme. Traditional securities laws were deemed
to be inadequate; it proved very difficult to establish that the
agreements were "investment contract" securities, as would be required
under those statutes. In order to make such a case, we needed vast
amounts of documentary evidence and analysis, and the firms were most
often located in another jurisdiction beyond the reach of state
administrative subpoenas. Even if we could acquire such data, by the
time a case was prepared, the boiler room was long gone.
There were two fundamental fraudulent patterns of conduct that
showed up most frequently: (i) consumers were being sold commodities on
a down-payment basis for speculative purposes-delivery was not required
for many months (there were no commodities and the company vanished
with the money that the customer had paid); and (ii) consumers were
buying precious metals from out-of-state companies promising to store
the metal for them, but the companies never bought the metal and
squandered the cash. Proving jurisdiction under the CEA in off-exchange
cases often was (and remains) less a legal enforcement action and more
all but metaphysical exercise in quantum economics and semantics,
requiring reams of evidence, expert testimony from economists, and even
then a measure of luck. Back then and to this day, enforcement
authorities charged with protecting customers from fraud need a quick
recognition, simple litmus test to give them the basis to take prompt
action in response to a newspaper ad or an infomercial. Months, even
years later is far too late. We needed a new approach.
Under the Code, we prohibited both of those fraud themes, on sight.
We created a new concept, the "commodity contract," defined as a
contract for the purchase or sale of commodities, primarily for
speculative or investment purposes, and not for use or consumption by
the offeree or purchaser. We crafted a presumption that, in the absence
of evidence to the contrary, such contracts are for speculative or
investment purposes. Under the Code, the offer or sale of such
"commodity contracts" is strictly prohibited. Excluded from this
prohibition-and therefore unaffected by the Code-are contracts or
transactions:
under which is required, and where the purchaser actually
receives, within 28 days [or other period determined by a state] of the
payment in good funds of any portion of the purchase price, physical
delivery of the total amount of each commodity purchased;
offered, sold or purchased by CFTC, SEC or state
registrants, and financial institutions;
within the exclusive jurisdiction of the CFTC; or
involving the purchase of precious metals, under which it
is required and where the purchaser or his/her designated and
authorized depository receives, within 28 days of payment by the
purchaser in good funds of any portion of the purchase price, physical
delivery of the precious metals purchased-and the depository (or
another approved depository) delivers a document to the purchaser
confirming that the metals are being held by the depository on the
purchaser's behalf.
Given this new formulation, we could examine a contract or
transaction and determine quickly whether it was lawful under the Code.
That was the key element. If delivery was not required or did not
actually occur within 28 days of any payment, it was illegal and we had
the grounds to proceed immediately under the Code, with cease and
desist orders, injunctions or even referrals for criminal action. No
experts, no reams of documentation, no six months to work up the case
while our citizens were defrauded. All we needed was a look at the ad
or contract and a calendar.
In 1989 written testimony on the Model Code presented to the
Colorado General Assembly, the NFA stated:
There should be no question as to NFA's support of the Model State
Commodity Code now--or in the future.
The thrust of the Model Commodity Code is really to act as a modern
bucket shop law, and goes straight to the heart of this
regulatory problem--it will prohibit the very type of
transactions which have been fraught with customer abuses.
These are contracts which fall into a regulatory abyss.
Commodity futures contracts traded on exchanges by registered
professionals are already regulated. Commodity option
contracts, as allowed to be traded pursuant to the Acts and
Regulations promulgated thereunder, are not the problem.
Leverage contracts traded pursuant to CFTC regulations are not
the type of problem you are being asked to address. Regulatory
mechanisms exist which can deal with those aspects of the
industry. The real problems are the lookalikes, the tag-alongs-
-contracts which should be designated by the CFTC but are not;
contracts which should be regulated but are not; contracts
which are non-futures, non-options, non-leverage; commodity
contracts in which the dealer says he's got it (maybe in a
warehouse in Mozambique) but is usually gone when the customer
wants to get it. If states, such as Colorado, outlaw this type
of activity, that activity which requires registration but is
not registered, swift, effective enforcement action can be
taken at the State level much more efficiently than has been
done in the past. \3\
---------------------------------------------------------------------------
\3\ Statement of National Futures Association In Support of
Pending Legislation H.B. 1130 Colorado Commodity Code, In the State of
Colorado, at p. 8, January 20, 1989
The Code has worked very well in the many states where it has been
adopted. The jurisdictional hurdles confronting state regulatory
authorities attempting to classify commodity-theme frauds as selling
securities are no longer of concern in Code states. They can react
quickly and effectively to protect their citizens. For example,
Missouri used the Code in a criminal case involving a multi-million
dollar platinum fraud that might have been difficult to pursue under
traditional securities theories. In a commodities boiler room raided by
New Jersey officials, warnings were discovered that salespeople should
not call into Maine (presumably because Maine has the Code). Colorado
had a similar experience in another case.
The Code approach works. I would be remiss if I did not add that,
given my understanding of the facts in Zelener, the rolling Forex
contracts were illegal ``commodity contracts'' under the Code. Although
the contracts called for delivery within 28 days, in this case, 48
hours, actual delivery of the currency was not made to the investors.
Purchases and sales were netted out. The Code was also strongly
endorsed by the Futures Industry Association. Real commerce between
real merchants, investments offered and sold by regulated entities and
transactions lawful under the CEA are in no way prohibited under the
Code.
Again, in its Colorado testimony, the NFA stated:
The Model Commodity Code will not outlaw legitimate commodity
activity, it will not outlaw or impede in any way transactions
between commercial interests nor will it outlaw or in any way
inhibit cash sales transactions. If delivery is made within the
specified period, FINE! But this will proscribe the activity
wherein your citizens have purportedly purchased such things as
gold bullion for delivery in 9 months from an unregistered
firm, only to find out 6 months later that their ``gold
bullion'' was merely a vault full of two-by-fours painted gold.
\4\
---------------------------------------------------------------------------
\4\ NFA Testimony, id. at p. 9.
Further, in Commissioner West's Washington testimony, he went on as
follows:
Let me briefly state what the Model Code does and does not do.
While the Code bans [the] types of transactions that have been
fraught with abuse, the Code does not interfere with legitimate
business. \5\
---------------------------------------------------------------------------
\5\ West Testimony, id. at p. 3.
Since 1985, the CFTC has scrutinized Monex's products on at least
two occasions, determining in each instance that no futures, commodity
options or leverage transactions were involved and took no enforcement
action of any kind against the Monex companies. Monex Deposit Company
and Monex Credit Company have never been the subject of any
governmental sanction relating to their business dealings with
customers.
THE ISSUE TODAY
There is a long history of not regulating spot markets under the
CEA. To subject spot metals markets to CFTC oversight would set a
precedent for also regulating other spot markets. Such an expansion of
the CFTC's role would prove impracticable and would have undesirable
market impacts. The CEA has always been intended to apply to futures
contracts and related instruments. It does not and never has controlled
cash market transactions unrelated to futures activities. In 1985, the
CFTC acknowledged its lack of jurisdiction over retail precious metals
transactions in which delivery is effected to purchasers by the prompt
transfer of title to metals stored in a depository (See Interpretive
Letter 85-2, CFTC Office of General Counsel, ['84-'86 Binder] CCH Comm.
Fut. L. Rep. para. 22,673 (August 6, 1985). The Code was drafted to
complement the Federal commodities laws and permit public investment in
legitimate off-exchange commodity transactions, most specifically in
cash market precious metals.
One reason that Congress is considering additional regulation of
financial markets and instruments is the systemic economic and
financial risk posed by some products and market structures that became
prevalent over the past two decades. In retrospect, it has become clear
that even if transactions are limited to large, well-capitalized
counterparties, they can-and did-create unanticipated risks that
threaten all American citizens. No one has alleged that to be the case
here: it has not been charged or demonstrated that off-exchange spot
precious metals transactions pose a systemic risk. Retail metals
trading involves individual investors, not large institutions whose
failure could create systemic financial risk. Moreover, prices of
metals are largely determined by the much-larger exchange futures
markets, so any potential for price manipulation in retail markets is
minimal.
Concerns have also been raised about the use of leverage, but the
mere fact that a seller extends credit to a buyer does not
automatically mean that the transaction should be regulated under the
CEA. By this logic, any product purchased with a down payment and the
use of credit would be considered ``leveraged'' and ripe for CFTC
regulation.
In H.R. 977, passed earlier this year by the Committee on
Agriculture, Congress is in the process of giving CFTC major new
responsibilities to establish agricultural and energy speculative
position limits; re-visit earlier hedging exemptions in many
commodities; collect and interpret large volumes of previously
undisclosed and unreported information about the swaps market; and
establish and enforce a new regulatory regime for clearing swaps. The
Committee has ably made the case for these new responsibilities, but I
would suggest that this is not the time to add even more tasks to an
already-overburdened agency in the absence of a clear and compelling
case for the need to do so. Nor should major market participants on
futures exchanges and in the off-exchange swap markets be allowed to
divert attention from last year's huge commodity bubble and the damage
it did to our economy by trying to divert Congress's focus to a few
retail metals dealers.
CONCLUSION
Congress' focus should remain fixed on last year's huge commodity
bubble and the damage done to our economy by major market participants
on futures exchanges and in the off-exchange swap markets. The retail
metals market is in fine shape.
The Model State Commodity Code was born of the need for an
effective state investor protection tool in the absence of federal
oversight. It has served its purpose well, nationwide, as a stand-alone
statute. There have been no unintended consequences. If problems arise
in states that have not yet adopted the Code, one must presume they
will address them under some other statutory approach or adopt the Code
as have their sister states. As it is, the presence of the Code in 22
states suppresses fraud in all. There has been no resurgence of
precious metals fraud since the adoption of the Code, even with the
recent run-up in the price of gold. To attempt to contort the CEA to
provide jurisdiction to any already overtaxed CFTC would risk
unintended consequences of futures-style regulation of spot market
commerce. I believe this approach is ill-conceived and unwarranted.
Thank you.
Mr. Boswell. Well, thank you. We will start the questions.
I will just be very brief. But since this narrow Zelener fix in
the 2008 Farm Bill, should this be extended to other
commodities besides foreign currency? I think you have
addressed that a little bit, but I will let you respond first,
Mr. Feigin, then the rest of you may make a comment. Mr.
Feigin.
Mr. Feigin. I harken back to the late 1980's after the
states had become very active in attacking precious metals
frauds. As soon as gold and silver went out of favor, the
scammers turned to strategic metals. Some metals I had never
heard of harkening back to high school chemistry. They were
selling chromium because it was being used in catalytic
converters. And there were also scams that I am sure my
colleagues remember regarding coal, aluminum, all sorts of
things, and the scammers will go to the path of least
resistance, so this has to be a broad-based remedy that is not
a rifle shot, but more a shotgun approach.
Mr. Boswell. Mr. Roth or Mr. Obie, either one.
Mr. Roth. I do think further action is required, Mr.
Chairman, for the reasons that I outlined, and to just repeat
them briefly. We have seen the migration of abusive practices
away from the foreign currency trade to the unregulated, right
now it is precious metals, tomorrow it might be something else.
But we have seen these web sites, 30 of them, that have this
unregulated; futures market even though they call it something
else. So the point that I made earlier was that anti-fraud
authority is not enough. The whole point of the Commodity
Exchange Act is that retail customers need regulatory
protection when they are trading futures contracts, and that
goes beyond anti-fraud authority. We are trying to prevent the
fraud, not just prosecute it.
And that is why under the Act when a retail customer is
doing a futures contract it has to be on a transparent, open
and regulated exchange. The customer has to have a risk
disclosure. There are regular audits of the member to make sure
that they have the financial capital to meet their obligations.
None of those protections apply in the current, unregulated
environment. Like I said, it is distressing to work hard to
throw a guy out of the futures industry and then get a customer
complaint 2 weeks later from someone who says the same guy is
now selling Zelener gold. The customer doesn't say Zelener gold
but that is what it is. So if the question is do we need
further action to address Zelener my answer is most certainly,
yes, because the migration that we feared would happen has
happened. We have got retail customers in an unregulated
futures market, and the fact that the scammer calls it
something else shouldn't be enough to defeat CFTC jurisdiction.
Mr. Boswell. Mr. Obie.
Mr. Obie. And equally frustrating, Chairman, is to bring
actions in the foreign currency area and then see folks think
that they can sell the same exact contracts and gold, precious
metals, and other commodities, and so, you know, from the CFTC
standpoint customers who have been harmed here in these Zelener
futures look-alikes and other commodities reach out to us to
complain, and we know that we are not able to help them. We are
not able to bring actions. We are not able to use the
enforcement powers that we have in this area, and so I think it
is important for the Committee to know that we are seeing an
increase in this area and that this is an opportunity to really
nip this fraud in the bud.
Mr. Boswell. Thank you. Mr. Moran.
Mr. Moran. Mr. Chairman, thank you. Mr. Roth, what Mr.
Feigin is saying, you disagree with, and is the disagreement
what you just described in that it is only anti-fraud
provisions that are covered by the state statutes so we are
responding after the fact under the Uniform Act? Is that the
distinction between what is not happening today and what you
would like to see happen? Mr. Feigin's argument is this ought
to be taken care of, as I understand your argument, it should
be taken care of at the state level. We have a Uniform Model
Act in place. Twenty-two states have that. But your concern is
that it is after the fact?
Mr. Roth. Right. The Model Commodity Code specifically
excludes from this coverage anything that is covered by the
Commodity Exchange Act. It doesn't cover futures contracts,
which is what these are. And my point is that the Model State
Commodity Code or CFTC anti-fraud authority is not a substitute
for the network of regulatory protections that the Commodity
Exchange Act has historically provided to retail customers
trading futures.
Mr. Boswell. Mr. Feigin, your response?
Mr. Feigin. Pointing to the Zelener case, the court with
respect said that they were not futures contracts, so I think a
different fix is required, and the Model Code poses an easily
identifiable tool to allow the regulators and law enforcement
to shut these things down on site. We found that they were
inherently fraudulent, that there was no retail participation
in the spot market. Some people wanted to buy gold, yes, and we
provided for that and protected them by setting a 28-day
physical actual delivery requirement, but in other ways we
found there was no retail, honest retail, participation in the
spot markets, and, therefore, we didn't want to regulate it. We
wanted to stop it. We wanted to find an easy way to simply shut
it off. If they are futures contracts certainly they ought to
be regulated under the Commodity Exchange Act. But if they try
to escape, try to sell off exchange the Model Code mechanism
provides a way for law enforcement to simply close them down on
site, not requiring further analysis.
Mr. Moran. What would be the consequences to Monex's
business if Congress adopted the suggestion of a broad Zelener
fix?
Mr. Feigin. Well, obviously it would depend what it is but
Monex has been working under and operating under the Model Code
precepts for 20 years. And I want to make clear we are not in
dispute with the NFA, and I don't think the NFA is seeking here
to shut Monex down. I think we have a common ground in that we
both want to see these off exchange scams shut down as fast as
possible.
Mr. Moran. Mr. Roth, let me ask you a question before my
time expires, and then you can respond to Mr. Feigin. But we
have been through this a long time. We have had a long
conversation and discussion in Congress about a broad Zelener
fix. A conclusion was reached in the 2008 Farm Bill for a
narrow fix. Describe to me why that was the conclusion. What
are the forces at work out here that prevented what I think
many of us thought was an important direction to go.
Mr. Roth. I can tell you what I think was going on, and
that before when Zelener always came up, it always came up in
the context of reauthorization, and when you are talking about
reauthorization, you are talking about roughly 2,000 other
issues that come up. And there is necessary compromise. You
need to move the legislation forward. We need to get the CFTC
reauthorized. I feel silly telling you about the political
process but compromises are reached, and we were always
frustrated that we couldn't prevail in our position but we
understood the necessity of moving the legislation. So from my
perspective, it was largely a political sort of process and the
President's working group and Mr. Greenspan felt that we should
really focus on the problem at hand and that was foreign
currency.
Mr. Moran. Did you have something you wanted to respond to
other than my question?
Mr. Roth. Mr. Feigin's point that the Zelener court ruled
that these weren't futures contracts, well, that is the
problem. That is the point. That in reaching that decision this
court decided to exalt form over substance and say we are going
to look at the four corners of the written agreement and if
that customer got trapped by clever draftsmanship, well, that
is just too bad. And I recognize that the Model Code gives the
states a vehicle to approach and attack that type of problem,
and that is great. But, as I said, it is no substitute for the
regulatory protections designed to prevent fraud, and that is
what we are looking for.
Mr. Moran. Mr. Obie.
Mr. Obie. Looking forward giving the markets and the state
that they are in at this moment, I think gold, silver and other
precious metal frauds are attractive at this time. Previously,
I think foreign currency was the fraud de jeur, and now given
the state of the economy and the state of the markets, I think
you are seeing this increase in gold and precious metals for a
reason. But not just in those commodities. We are also seeing
it in energy commodities, and I am aware of at least a couple
orange juice potential fraud boiler rooms.
Mr. Moran. Thank you very much. Thank you, Mr. Chairman.
Mr. Roth. Mr. Chairman, if I could add one more thing with
respect to Mr. Moran's question about how our approach would
effect----
Mr. Boswell. We will get to that in just a minute.
Mr. Roth. Thank you, sir.
Mr. Boswell. Mr. Marshall.
Mr. Marshall. Thank you, Mr. Chairman. Just continuing this
line of discussion here, the Model Commodity Act, is that what
it is called?
Mr. Feigin. The Model State Commodity Code.
Mr. Marshall. Model State Commodity Code is in 22 states
now?
Mr. Feigin. Yes, sir.
Mr. Marshall. So does that mean that somebody can locate in
another state that doesn't have the code and effectively
proceed to engage--because a bucket shop can be anywhere. It is
just a telephone and the Internet communication. And
effectively proceed to conduct the scam operation and be fairly
safe from anybody coming after them?
Mr. Feigin. Certainly a boiler room could locate, for
instance, in Pennsylvania, and sell into Idaho or Montana. Of
course, they have the code so they would have to pick another
state, South Dakota, perhaps. But, more importantly, bucket
shops have tended to locate in southern California, south
Florida, Scottsdale, Arizona, and some in New York.
Mr. Marshall. Is that because those are places where people
are instinctively fraudulent kind of characters?
Mr. Feigin. If you are making a million dollars a month, I
guess it is more fun to be in South Beach than Bismarck with
all due respect to North Dakota. But I think that has been the
reason, and so that seemed to be very effective when those
states took action. It seemed to stem the tide of the problem
back in the 1980's.
Mr. Marshall. Mr. Roth, Monex representatives and I had a
discussion yesterday about their operation, and they sound like
they are pretty straightforward and that you wouldn't have a
problem with what they do, is that correct?
Mr. Roth. Well, the fix that we have been proposing would
not affect any contracts in which there is actual delivery. We
are not trying to regulate the spot market. We are just trying
to prevent people from disguising futures contracts by calling
them spot contracts, so I don't think we would have any--from
our point of view, the proposal that we have been advocating
would not affect Monex.
Mr. Marshall. Let us say we stay with just the state
regulatory scheme, you say that that is no substitute for the
Federal scheme, the way the CFTC and NFA goes about protecting
people from these kinds of scams. Could you elaborate a little
bit about that or, Mr. Obie, could you elaborate how do you
all--after the fact, closing down a Ponzi operation scheme
after the fact really doesn't help a whole lot of people out
because typically they don't have any money. It may be that you
go back and try and collect from individuals who benefited from
the scheme and then trying to distribute money, but that is
very difficult to do. And largely there is no remedy at that
point except the satisfaction of seeing somebody go to jail.
Mr. Roth. Closing down a Ponzi scheme has a positive
benefit if you close it early because you close it before all
the other people get taken in. Your ability to close a Ponzi
scheme early is greatly enhanced if you have the authority to
conduct regular on-site examination of the person conducting
the Ponzi scheme. If they are on your radar screen----
Mr. Marshall. So the basic idea here is we expand the class
of transactions that are covered by the CFTC's authority and
individuals selling those kinds of products have to register
and consequently they are subject to regular oversight, review,
et cetera, so that their little Ponzi operation can't grow to a
large----
Mr. Roth. Correct. And the only quibble I would have with
you would be that in my view we are not expanding the CFTC's
authority or jurisdiction. We are restoring it.
Mr. Marshall. We are correcting an aberration, what you
would say is an improper reading of what congressional intent
was in the statute. Mr. Feigin, your response? How is it that
Mr. Roth and Mr. Obie suggest to us that a lot of people will
be protected from Ponzi schemes if this authority is given and
Monex won't be hurt at all, so why not go ahead and permit it
so that we fill this gap and protect these folks and you all
aren't harmed?
Mr. Feigin. We have not quibbled with the idea that futures
contracts and futures trading ought to be regulated and----
Mr. Marshall. What we are talking about here though is
expanding the--well, correcting would be the argument the
Zelener interpretation of what a futures contract is. If in
substance it is a futures contract, it is going to be
regulated. It doesn't matter how clever your draftsmanship is.
That is all they are saying.
Mr. Feigin. But we don't believe these off exchange futures
contracts have any validity at all. We think they ought to be
banned, and, therefore, we found not regulated, banned.
Mr. Marshall. Well, but they are not at the moment and
isn't that just a decision that the CFTC and NFA should make
themselves?
Mr. Feigin. So at that point if a Federal fix is warranted,
we heartily recommend a quick trigger mechanism to shut them
down, not to regulate them and allow them to continue to
operate and develop. We think they should be shut down
immediately.
Mr. Marshall. I am out of time, but you want to respond,
Mr. Roth.
Mr. Roth. That mechanism already exists in the act. The act
prohibits off exchange futures contracts for retail customers,
so when you make the determination that these things are
futures contracts, they are per se illegal.
Mr. Feigin. That is the problem. It is almost a Talmudic
decision as to whether something is a futures contract as is
seen in Zelener. You often need an economist to try to testify
that something is a futures contract. To prove something is a
commodity contract and therefore banned under the Model Code--
--
Mr. Marshall. If we simply say it is to be delivered and
then the pattern is that there is delivery, doesn't that take
care of your worries? Would it matter what the writing said?
Mr. Feigin. All you need is the contract and a calendar and
then the evidence whether the commodity was delivered in 28
days or not. If the contract didn't call for delivery, require
it, and delivery wasn't in fact made within 28 days, it is
simply illegal.
Mr. Boswell. I am letting you have a little extra time
here, Mr. Marshall, because this, I think, pertains to what we
are talking about. So, Mr. Roth, I will give you one last
moment here.
Mr. Roth. With respect to the decision about whether--I
think it was referred to as a Talmudic decision as to whether
something is or isn't a futures contract. Well, from 1974 to
the Zelener case it wasn't a problem. Courts dealt with this
just fine by looking at the underlying purpose of the
transaction when it was a retail customer. It wasn't until 2004
that the Zelener court said that we should just look at the
four corners of the written agreement, so I know it is at times
a complex issue but really things worked just fine from 1974 to
2004, and all we are trying to do is sort of restore that rule
of law.
Mr. Boswell. Mr. Feigin, last remark on Mr. Marshall's
point.
Mr. Feigin. I think it is a question of an enforcement
tool. I think the Model State Commodity Code and I think the
three of us work together to formulate this response it is much
easier to determine something is an illegal commodity contract
under the code than it is, and I submit, there were other very
complex decisions and analyses of whether something is or isn't
a futures contract. And it is a lot easier to prove something
under the code than it is under the Commodity Exchange Act.
Mr. Marshall. If we adopted a definition, which essentially
broadened, you know, got rid of the Zelener decision and sort
of went back to the pre-Zelener era where the CFTC and NFA
could step in there and try and stop these Ponzi schemes that
are operated on a retail level and admittedly all three of you
acknowledge hurting the hell out of people who just are suckers
and they get caught up in this, and we simply said if your
operation is one that is designed to comply with the Commodity
Code and delivery does occur, two things, in fact, delivery is
occurring in your operation, and that is accepted, would that
work? Wouldn't that fill the gap right there, and you would be
able to--CFTC, NFA would be able to go after the Ponzi schemes
that are now popping up all over the place in these different
commodities and Monex and others who are operating underneath
and actually delivering would be okay and they wouldn't have to
fool with you guys.
Mr. Roth. I think that is right, Congressman. We are
looking to effect leverage contracts offered to retail
customers where there is no expectation of delivery, and that
is what we are trying to reach and that restores the law to, I
think, its pre-Zelener state.
Mr. Marshall. It sort of sounds to me like the three of you
could get together and come up with something that would guide
us that would protect the legitimate commodity traders at the
retail level who do deliver their spot contracts, they do
deliver, and at the same time expand the jurisdiction so we get
rid of these Ponzi schemes.
Mr. Boswell. This has been a good discussion. Thank you. I
only gave you double time there, Mr. Marshall, but it was a
good discussion, and Mr. Moran and I agreed on that. So Mr.
Luetkemeyer.
Mr. Luetkemeyer. Thank you, Mr. Chairman. I certainly
appreciate you allowing Mr. Marshall to continue there. That
was an interesting discussion and quite educational for me. Mr.
Feigin, you made a statement a while ago and made a comment
about a bucket shop. Can you explain or define what that is for
me?
Mr. Feigin. Bucketing is the idea of selling something to a
speculator and then taking an offsetting transaction in that
alleged good but you never have it so it is naked speculation.
Mr. Luetkemeyer. That is an empty bucket, isn't it?
Mr. Feigin. That is the idea. And they evolved along with
telephones and the like where you could just bet with somebody
although they didn't know they were betting. They could own
something for a while, sell it, but you never owned it. So the
term evolved as bucketing, and there were a lot of anti-
bucketing laws in the 1960's, but they were very limited.
Mr. Luetkemeyer. Okay. Thank you. Mr. Roth, you made a
couple comments with regards to the development of some of the
rules and laws. I was very interested in the exchange with Mr.
Marshall. I think you made a comment one time about something
about not just enforcement but we also need to do something
prior so that we define what a contract is and set up some
rules as to how it be framed, and you said something about the
four corners of an agreement. Can you explain what that is for
me, please?
Mr. Roth. The Zelener court basically said that in
determining whether a contract with a retail customer is a
futures contract, you have to look at the four corners of the
document and only the four corners of the document.
Mr. Luetkemeyer. What are the four corners, I guess is the
question.
Mr. Roth. The written document itself, just the written
page.
Mr. Luetkemeyer. Okay.
Mr. Roth. And that if certain language was included
notwithstanding the substance of the transaction it would be
considered not a futures contract and therefore beyond the
Commodity Exchange Act.
Mr. Luetkemeyer. Okay. So when you say four corners, it is
not four tenets of a contract that you have to have in order to
be able to be judged a futures contract. It is just the
definition of a written contract.
Mr. Roth. It is the written contract itself.
Mr. Luetkemeyer. Okay. Very good. Thank you. Mr. Obie, you
made a comment also about enforcement. What are the tools that
you need to be able to do your job? I know we talked about a
number of things here. What other things do you see that you
need to be able to broaden your scope to be able to prevent
some of these things from happening?
Mr. Obie. Obviously, we have to get over this
jurisdictional hurdle. We have the ability to move quickly to
freeze funds. We work very closely with criminal authorities.
We have trading bans. We got registration bans. And we put
these folks down and we try to help the American public.
Mr. Luetkemeyer. You don't have the ability to do those
things right now?
Mr. Obie. Not in this area.
Mr. Luetkemeyer. Not in this area. Okay. Very good. Thank
you. Mr. Chairman, I yield back the balance of my time. Thank
you.
Mr. Boswell. Thank you. Mr. Walz.
Mr. Walz. Thank you, Mr. Chairman, and thank you all for
being here today and help us understand this issue. I am going
to ask you be somewhat subjective here. Did the Seventh Circuit
rule wrong on Zelener, can I ask each of you in your opinion?
Mr. Roth. Dead bang.
Mr. Feigin. Absolutely.
Mr. Obie. And we obviously are litigating that. We were
telling the court how to rule and it ruled against us.
Mr. Walz. Is that the proper fix then to go back and appeal
that decision that way or is the proper--it is done, so there
is nothing else that can be done that way, that is why you come
this way?
Mr. Obie. That is right. And other circuit courts look
towards Zelener in reaching decisions, so we have lost a line
of progeny there.
Mr. Walz. Okay. Did we make the right fix, albeit narrow,
in the Farm Bill fix on that?
Mr. Obie. In bringing the nine cases that we brought so
far, we have not seen jurisdictional obstacles, and so in
foreign currency we believe we have the tools to aggressively
prosecute these bucket shops and Ponzi schemes.
Mr. Roth. With respect to foreign currencies, the farm bill
extended the commission's anti-fraud authority to these type
contracts for foreign currencies. What I stated before is that
anti-fraud authority is no substitute for regulatory
protections. At the same time, I recognize, and this is why I
went into it in my testimony, foreign currencies have been
treated differently since 1974, so I understand why Congress
may have taken this act in the farm bill and just extended the
anti-fraud authority with respect to foreign currencies. I
would hate to see that carried further into other commodities
where it was only anti-fraud authority because I don't think
that is a substitute for regulatory protections.
Mr. Feigin. Unless I am wrong, I think that the idea that
forex had to be traded through an SCM creates a fairly quick
trigger identification mechanism so that if you see somebody
trading in forex instruments, and they are not registered as an
SCM that provides a quick trigger. As to whether they are doing
it lawfully after being registered as an SCM, that is another
question. I want to point to this distinction, this anomaly
that was created with the Treasury Amendment. There should not
be any off exchange futures trading. It just should not be. It
should be banned. And to the extent that jurisdictional
anomalies have allowed it to proceed in one way or another, we
have to accommodate. But we should not give rise or accommodate
the development of off exchange futures trading, so what we are
offering, what we are suggesting, is that this quick fix gives
everybody a chance to just shut it down, not to develop. That
is why I make the distinction between this should not be
regulated. This should be shut down.
Mr. Walz. And I would ask, and Mr. Feigin had brought it up
to the next question on this that I am interested in but I know
I may not have the right people here. Maybe, Mr. Obie, you are
the best to engage this. What has happened on legitimate forex
trading? I know you said there has been 84 investigations or
whatever. Can you speak to anything what happened in that
regard?
Mr. Obie. It is very hard to say legitimate forex trading
because historically off exchange futures contracts were
illegal. We have this special animal that retail forex
contracts have been allowed through off exchange model but we
have tried to--Congress has tried to come with a new regime by
having registered forex dealer members, but historically these
leveraged contracts which harm the economy were never allowed
to be marketed to the retail public, and so that is where we
have seen the greatest fraud. And in the exchange area, we see
much fewer complaints in the forex area or anything else, so if
I had to compare we have many more frauds off exchange, very
few frauds on exchange.
Mr. Walz. Okay. Thank you, and I yield back, Mr. Chairman.
Mr. Boswell. Thank you. We will recognize Mr. Schrader.
Mr. Schrader. Thank you, Mr. Chairman. I am again still
trying to get clarity on the differences of opinion if there
are any here, Mr. Feigin, I guess the bottom line is at this
point your contention is that the metals trades that are
referred to by Mr. Roth and Mr. Obie are not really futures
contracts, would that be correct?
Mr. Feigin. They may be, they may not be. I think that the
identification of a futures contract has proven to be a more
problematic issue in court than has the more physical
identification mechanism that has been used under the Model
Code. So I don't think we disagree. I think Mr. Obie would be
thrilled if there was an easier way to identify these and
eliminate legal issues to be able to shut the off exchange
things down. They may be futures contracts, but they may not,
but they are certainly off exchange and in the fact that they
are off exchange they ought to be shut down unless they end all
forex and a few precious metals dealers who deliver.
Mr. Schrader. Mr. Roth, I assume you believe they are
futures contracts? Mr. Feigin is not sure.
Mr. Roth. I certainly believe that the contracts that were
at issue in the Zelener case were futures contracts. I believe
that the 30 or so web sites that are offering these contracts
to retail customers for precious metals are futures contracts.
I think most of the problematic issues that have come up in
defining a futures contract involve where there is a commercial
user or an institutional user and not as much in the retail
sector. And Steve can speak to this better than I, but I think
from 1974 until the Zelener decision the commission seldom lost
on jurisdictional grounds when fighting retail bucket shops.
Mr. Obie. And Mr. Roth is absolutely right in that regard,
and we don't see an issue where delivery is occurring. Our
middle name is futures. What we are saying is that these 2 day
rolling spot contracts and other crafty arguments that are used
to defeat the futures jurisdiction has impeded our ability to
stop fraudsters and Ponzi schemers.
Mr. Schrader. And I assume, Mr. Feigin, you would rather
have the states deal with these issues under the Model Code
that you have referenced?
Mr. Feigin. Yes, sir.
Mr. Schrader. Is it a fair statement, Mr. Feigin, that you
believe that it is better to deal with these as fraud issues
rather than prevention regulation issues as asked for by Mr.
Roth?
Mr. Feigin. I believe all three organizations back in the
1980's made the determination that there was no lawful or
legitimate reason for these contracts to be permitted nor was
there any useful purpose, that they were inherently fraudulent
and ought to be prohibited, and then we looked very carefully
and determined whether we were stepping on any legitimate toes
and carved out those few issues where there were legitimate
companies operating. We made sure there were consumer
protections there. So we were very careful, and I think it is
important not to try to create a new market. If they are
futures contracts, they ought to be shut down because they are
off exchange.
Mr. Schrader. But if we are not sure they are futures
contracts, you are not sure, then we ban them?
Mr. Feigin. Then, in essence, as we are all agreeing, the
requirement for delivery, for actual delivery of the commodity
that you are purchasing within a brief period of time is the
trigger mechanism. The bucket shops don't have the stuff to
deliver nor do they actually deliver it, so delivery is the key
and was the key in the operation of the----
Mr. Schrader. So in your testimony, you have talked about
the 28 deliveries that currently exist, and I think it was Mr.
Roth in his testimony referenced that is a little too long in
the rolling contracts, and perhaps a 7 day period would be
better. And I assume you object to that and I would like Mr.
Roth to respond too.
Mr. Feigin. The Model Code started with the 7 day delivery
period and after some testimony from an outfit that I don't
think is around anymore called the Industry Council for
Tangible Assets the NASAA people were convinced to extend it to
28 days for various circumstances. That number, it is in there.
That is less of a problem than the concept in itself.
Mr. Roth. Congressman, we have no problem with 28 days. We
picked 7 days. If it was 28 days, I think it would achieve the
same effect what we are trying to achieve. If I could just draw
one distinction. I think why I say anti-fraud is no substitute
for regulatory protection, and then we get into the distinction
that should we ban off exchange futures or regulate them. There
is no real disagreement here. My point is that if it is an off
exchange futures contract, it is banned, and if they are going
to offer futures contracts, they have to become a contract
market, and once they are a contract market then they are fully
regulated and we have all the regulatory protections. So I
certainly don't mean to suggest that we should regular off
exchange futures contracts for things other than foreign
currency. They should all be on exchange. I agree with that.
Mr. Schrader. So trying to get a handle, which I have not
yet, is that apparently the bottom line difference would be
defining what a futures contract is. Obviously, some
misunderstanding, disagreement, whatever, on what a futures
contract is because if you could do that then we would just all
agree happily that we should ban those.
Mr. Roth. And I think the uncertainly that we are talking
about in the definition of futures contract was injected and
created by the Zelener decision, and so the legislation that we
are trying to craft that we are drafting is hopefully to
restore the law to its pre-Zelener state.
Mr. Schrader. Mr. Feigin, last comment.
Mr. Feigin. The pre-Zelener state dealt with issues of
whether it was for speculative or investment purposes. I think
that goes to the mental state of the parties as opposed to
whether or not you have to deliver in 28 days. Like I said, all
you need is the contract and a calendar as opposed to delving
into the mental state of the parties or the intent. That is
subjective. Twenty-eight days is not----
Mr. Schrader. Thank you. Thank you, Mr. Chairman.
Mr. Boswell. Thank you. Mr. Kissell.
Mr. Kissell. Thank you, Mr. Chairman. I would like to yield
time to begin with to Mr. Walz for a question.
Mr. Walz. I thank the gentleman, and this is, Mr. Obie, I
am still trying to get a handle on this. Can you tell me from
CFTC's perspective--I could have had my legal scholar, Mr.
Marshall, help me. He was gone here in just a minute. What
happened in the appeal to the Supreme Court on this because it
is a palatable feeling here that this was a bad, bad decision?
Can you tell me the history from CFTC what happened there just
for my background? And I thank the gentleman for yielding me a
minute.
Mr. Obie. We consulted with the solicitor general and there
was no appeal to the Supreme Court from the Zelener decision.
Mr. Walz. Do you have any idea why that was?
Mr. Obie. I do not. I can get you that information.
Mr. Walz. That is fine. We can do the research too. But,
thank you. Thank you, Mr. Kissell.
Mr. Kissell. And that is kind of a question I had too. Mr.
Obie, if things worked well from 1974 to 2004, and all of a
sudden the courts say within the four corners it is no longer
going to work, what do we need to change within those four
corners to make it work because it seems like to me that if we
try to do it with regulations these guys are always going to
figure out a way to get ahead of us and look for the loopholes.
So what within those four corners needs to be changed?
Mr. Obie. I think this committee has already done that with
regard to foreign currency. We know that these rolling spot
contracts are look-alike futures contracts, and what has
happened is foreign currency is just not as attractive to have
a fraud in, so those contracts that were right on the web site
have just been picked up and foreign currency has been changed,
and now you see orange juice, you see precious metals, and you
see other commodities entered in, and those are arguably
outside our jurisdiction. The Zelener fix gives us the roadmap
to extending that to other commodities.
Mr. Kissell. So we could follow this same premise of the
narrow fix and broaden it and you feel like that would take
care of it?
Mr. Obie. And once you do that what happens is that there
are other provisions under the Commodity Exchange Act that
would apply and say that off exchange futures contracts are
illegal, so that we wouldn't have an off exchange market in
orange juice dealing with futures contracts. We wouldn't have
off exchange orange juice. It would be up to the commission in
that regard, but the operative effect of the law would be that,
and I think we are all in agreement, that we wouldn't have off
exchange futures as a result.
Mr. Kissell. Thank you, sir. Mr. Roth, you mentioned
something about 30 Internet sites that advertise this type of
transaction. Of those 30, how many do you think are not
legitimate in terms of fraudulence that may exist?
Mr. Roth. I can tell you that virtually none of them are
registered with the CFTC. Some of them, when you look at them
and you can look at the web site and see some misleading
information, but one of the things that happens with these
electronic trading platforms is sometimes you can only see the
fraud by looking at the actual trading on the trading platform
and see how the trading platform can be manipulated by the
owner of the platform to put customers at a huge disadvantage.
And you can't see that without getting in to do an audit and an
examination, and because these firms aren't registered and they
are not members they are escaping that sort of scrutiny. So
just looking at the web site, certainly some of them are very
troubling as far as their sales practices, but where the real
heart of the fraud might be is something you would only get
into and know the full extent of it after you do an
examination. And right now we can't do that examination because
we don't have jurisdiction.
Mr. Kissell. And, Mr. Obie, that brings me back to another,
just curiosity. The people that the fraudulence is being
imposed upon, is there a generality as to how these people get
in touch with them? What makes them subject themselves to
fraudulence? Is there a commonality there that, gee, I should
know better. What is the pattern there? What are the people
that are getting caught up in this like?
Mr. Obie. I have seen it in several instances. One category
is affinity fraud, and that is where you know someone who tells
you, hey, I have an investment and it has been doing really
well, and you usually find that from a fraudster who either has
the same ethnic background or is a member of your church, or
recently we had someone who was a school board member and was
well respected in the community and was operating a Ponzi
scheme of many millions of dollars in Philadelphia. We also see
it though with regard to folks who know with the stock market
collapsing that they need to save for retirement, and so they
are looking for other alternative investments. And the Ponzi
schemers just prey on these folks. They are average Americans,
many of whom are blue collar who are just looking to find an
investment that will enable them to retire and have a
comfortable living.
The poor folks that we have to deal with, I can tell you
about the Agape case that was up in Long Island. It had
thousands of victims and involved hundreds of millions of
dollars that were defrauded. And the folks there were average
Americans who lost substantially all of their investment.
Mr. Kissell. Thank you, Mr. Chairman.
Mr. Boswell. Thank you. I see Mr. Pomeroy has joined us.
Mr. Pomeroy, I hate to bother you at this crucial moment here.
Did you have a question or should we come back to you in just a
moment?
Mr. Pomeroy. If there is someone else to inquire, I will be
happy to defer to them.
Mr. Marshall. This is not your time, Mr. Pomeroy. The Chair
is going to yield----
Mr. Boswell. No, I will make that decision.
Mr. Marshall. We might infer that this be your time. The
fix that we initially proposed in 2005 and then stuck into the
2008 act, we are not necessarily wed to that as the concept for
moving forward, it seems to me. And it also seems to me based
on the conversation that we had here today as I mentioned
earlier that you all should be able to get together and give us
some guidance how to move forward in a way that will close the
gaps in regulation so that these folks, you know, as soon as
they pop up on your web site you are able to call them up and
say, hey, what are you doing? By the way, either one, you can't
do it at all or, two, you are going to have to do an exchange,
or, three, I don't know what the three is, frankly, because the
way it works right now you are either doing it on exchange as
retail or you don't do it at all.
And so I think that satisfies your need, Mr. Feigin, and at
the same time we ought to be able to figure out some way to not
have you burdened, your operations burdened by excessive
regulations. Certainly, the regulation would be pretty minimal
in your case. So I am hoping that you can come up with
something, and I am just suggesting that we are not necessarily
wed to what we have done in 2008. If there is a better way to
describe this to accomplish the objective, we are all ears. And
I could yield back. I could keep on and then you would just
have less and less time.
Mr. Boswell. Mr. Pomeroy.
Mr. Pomeroy. Thank you, Mr. Chairman. I have never seen
Brother Marshall run out of words before so quickly so this has
been a stunning development. I apologize for missing this
hearing, which I looked forward to, but I do have--the question
I wanted to bring to this hearing involves the issue of, I
guess, functional versus identify a specifically identified
item for regulation. And it looks to me like some of the
discussion between Mr. Feigin and Mr. Obie involves this issue.
Specifically, what I mean is it has been suggested that a State
securities regulatory type approach that would identify a
particular practice, prohibit it very clearly, very clean, but
it would allow just some other instrument, some other product
to be gamed in a way that wouldn't be addressed by the State
prohibition. Mr. Feigin, can you explain how your approach
would be sufficiently encompassing so that we wouldn't have to
chase the scam with new rules every time?
Mr. Feigin. Sure. I am going to start by saying that I
believe the Zelener--I wasn't involved in it obviously, but I
believe the Zelener contract violated the Model Code, and would
have been illegal on site. The Model Code applies to anything
in commerce. It could be sweaters. It could be bars of gold. It
could be rolls of aluminum. It could be anything. If you sell
it, it is presumed to be for investment purposes and if the
contract doesn't require delivery, and if, in fact, delivery is
not made within 28 days it is illegal. And so it would apply to
all commodities, and I strenuously urge, I think, with my
fellow panel members that whatever you do this fix not be
limited to precious metals. If you proceed with it, that has no
meaning. They will just go do something else.
So the Model Code applies to everything just as the
Commodity Exchange Act applies to any commerce except onions. I
am waiting for the next onion scam to come up, but at least for
both statutes its coverage is universal.
Mr. Pomeroy. An onion scam brings tears to my eyes. Mr.
Roth, would you care to comment?
Mr. Roth. The point that we made earlier was that what we
are looking for is a fix which--the Model State Commodity Code
doesn't apply to futures contracts that are regulated under the
Commodity Exchange Act. We are concerned that people under the
Zelener decision, people can simply cosmetically disguise
futures contracts as something else to try to evade the
jurisdiction of the CFTC. The fact that the Model Code may
allow a state's securities regulator to close the firm down in
our view is not a substitute for preventing the fraud in the
first place by requiring these entities to be on exchange. I
would note that of the 30 web sites that we cited in our
Internet surveillance, we have made referrals on all 30 of them
to the appropriate states, and not a single case has been
brought, and the states have plenty to do. And historically it
has been a tough sell.
Maybe Steve can discuss this further, but make more
referrals to states and getting states to take an affirmative
prosecutorial stand in these cases hasn't been the easiest
thing in the world to do, and these futures contracts typically
lie within the expertise of the futures regulators, and that is
where I think they ought to be dealt with.
Mr. Obie. We do have expertise in this area, and we have
lent our assistance wherever we are needed, but clearly this is
a complex area, and that is where the Division of Enforcement
has the expertise and we have been able to prosecute the
foreign currency scammers that we have seen. We have 84 active
investigations. We have already brought nine cases. That is 25
percent of our current litigation so far this year with that
perspective. We have already filed approximately 36 cases this
year. All of fiscal year 2008, we filed a total of 40. So we
are on pace to use the clarified authority that you have given
us.
Mr. Pomeroy. So is it your position if something for
delivery within 28 days, physical delivery, is some kind of
loophole if that is regulated under----
Mr. Obie. No. The proposals, I think we are in agreement.
We are hearing as a panel that is in agreement here that
regulating the spot market is not something we are interested
in. We are looking at the look-alike paper contracts. These
have been crafty contracts that were drafted by high-powered
lawyers to evade jurisdiction. We are not looking at where
tangible products are delivered.
Mr. Pomeroy. Thank you. My question is probably a little
out of left field given my missing the testimony in the first
place, but thank you very much. It has been clarified somewhat
for me. Thank you, Mr. Chairman.
Mr. Boswell. Thank you very much. Mr. Moran.
Mr. Moran. Mr. Chairman, thank you. What seems to be
developing, and, in fact, we have talked here among ourselves
that if we put the three of you in a room we would have a
broader Zelener fix. My question goes back to one I raised with
Mr. Roth earlier. We had this opportunity for a broader Zelener
fix in the Farm Bill and previous to that. We have debated
fixing Zelener for a long time. Who are we missing a the table
this morning that if we put them in the room with you would
cause the deal to fall apart? What is the argument against this
broader fix other than, I guess, Mr. Roth was telling us the
Treasury Department said that we don't need to focus on it at
the moment. But within the industry there is not unanimity of
agreement that seems like something is missing here in this
morning's discussion?
Mr. Roth. Well, if you want to know who objects to what we
are proposing besides the people we are trying to reach, the
concern I always heard from certain aspects of the regulated
industry was a concern that anything that appeared to give the
CFTC jurisdiction over anything that is called an OTC
instrument caused tremors and made people nervous, and it was
the old camel's nose type of an argument that my God, anything
that gets into OTC is bad. And our counter was but these are
futures contracts aimed at retail customers, but I think there
was just such concern about CFTC jurisdiction extending to OTC
instruments that people got very, very nervous.
Mr. Moran. Let me make sure, Mr. Roth, you said there is no
real disagreement between 7 and 28 days.
Mr. Roth. Yes.
Mr. Moran. Okay. We also did the fix as it related to
foreign currency exchange, and you all, particularly you, Mr.
Roth, in your history have described the uniqueness of the
regulatory framework toward foreign currency. It reminded me of
the history of that. Why is it treated uniquely, and is there
something unique about it that again suggests that we ought to
have a narrow fix?
Mr. Roth. And the reason foreign currencies are treated
differently under the Act, foreign currency and onions, I
guess, but focusing on foreign currencies, again I think it
stems from the fact that just as the CFTC was being created the
Treasury Department was concerned that if this interbank
foreign currency market that they were involved in the
regulation of, that they didn't want the CFTC interfering with
that interbank market. And that is why the Treasury Amendment
was created in 1974, and where it becomes difficult is when you
start having foreign currency transactions involving not the
interbank market but retail customers.
Mr. Moran. Thank you for the reminder. I remember you
saying that now, and so there is no fundamental difference
other than bank regulation, the treasury regulation of
commercial banks, for example, in comparison to metals. The
consequence to the consumer, to the participant in the market
is the same.
Mr. Roth. Exactly.
Mr. Moran. Okay. Thank you, Mr. Chairman.
Mr. Boswell. I think that brings us to a point unless
somebody has something they want to ask. You know, Mr. Moran
and I have been talking about it, and Mr. Marshall as well, I
think the three of you, if you had the time to do it and would
do it could sit down and work out something that would be
workable. I am going to ask you to consider that, and I am
going to instruct Mr. Ogilvie, to contact you and see if there
is a time you could come together and sit down and give us a
draft that we could take a serious look at. I appreciate what
you have done this morning. I don't think there is any point in
us dragging this out any further. Do you have any closing
remarks you want to make?
Mr. Moran. I do not, Mr. Chairman. Thank you for allowing
me a second round of questions.
Mr. Boswell. You are welcome. I think we have learned
something here this morning. I think you have made a
contribution. We appreciate it. I also think there is a
solution, and I think I am looking at the people who can put it
together if you will sit together and give and take a little
bit and let Clark with you. We can either decide to do
something or leave it alone. That is where we are going to stop
at that point right there unless somebody else has anything
else they want to say. I thank you very much for your
participation today, and the usual applies, and this hearing
has come to a close. Thank you.
[Whereupon, at 11:20 a.m., the Subcommittee was adjourned.]