Citations
- 551 F. Supp. 2d 513
Full opinion text
MEMORANDUM RULING
DOHERTY, District Judge.
Pending before this Court is a motion to convert a previously filed motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) (lack of subject matter jurisdiction), into a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) (failure to state a claim upon which relief can be granted), or alternatively, to convert the 12(b)(1) motion into a motion for summary judgment. The motion was filed by defendants UForex Consulting, LLC (“UForex”) and Paulo R. Correa.
I. Introduction
Plaintiff, the Commodity Futures Trading Commission (“CFTC” or “the agency”), brought this action under the Commodity Exchange Act (“CEA” or “the Act”), 7 U.S.C. § 1 et seq., alleging defendants solicited investments in and operated a fraudulent scheme for the purported purpose of trading over-the-counter foreign currency futures contracts. As a jurisdictional prerequisite, the CFTC asserts (as it must) that the alleged scheme involved the buying and selling of “contracts of sale of a commodity for future delivery” (commonly referred to as “futures contracts” or “futures”), and futures contracts are regulated by the CEA. Specifically, the CFTC argues defendants, in the course of conducting their futures trading scheme, violated the CEA by: (1) committing “fraud by misrepresentation and misappropriation”; and (2) “making false reports.” [Rec. Doc. 1, pp. 18, 20]
Defendants take the position that “[because the transactions entered into by the customers of Uforex are not contracts in foreign currency for future delivery and therefore not futures contracts, the CFTC acted outside of its jurisdictional bounds under the Act.” [Doc. 21, p. 1 (emphasis in original) ] In other words, defendants argue the CEA does not cover the type of transactions defendants engaged in which, according to defendants, are off-exchange spot transactions, and therefore the CFTC is without jurisdiction over this matter, as its jurisdiction extends only to futures contracts. Consequently, defendants argue, this matter must be dismissed for failure to state a claim upon which relief can be granted.
Thus, as a threshold matter to jurisdiction, this Court must determine whether or not the transactions at issue are “contracts of sale of a commodity for future delivery’ — a term which the statute does not define. If the transactions indeed are “futures contracts,” they are subject to CFTC jurisdiction; if the transactions are not “futures contracts,” they are beyond the scope of the CFTC’s jurisdiction and regulatory authority, and this matter must be dismissed. 7 U.S.C. § 2(a)(1)(A).
II. Procedural History
The CFTC filed its complaint against UForex Consulting, LLC, Paul o R. Correa and Mario Garcia on January 9, 2007. In addition to the complaint, the agency also filed a Motion for an Ex Parte Statutory Restraining Order pursuant to 7 U.S.C. § 13a-l, a Motion for Preliminary Injunction and a Motion for Expedited Discovery. [Rec. Docs. 3, 4 and 5] In support of its motion for an ex parte statutory restraining order, the agency filed excerpts from the deposition testimony of defendant Mario Garcia, taken on July 6, 2005, the declarations of nine UForex customers, and the declaration of Judith McCorkle, “Senior Futures Trading Investigator with the Commission’s Division of Enforcement.” The following day, an ex parte hearing was held, and the Court granted plaintiffs ex parte motion for a statutory restraining order. [Rec. Doc. 10] The order froze the assets of all defendants, and ordered defendants to preserve and provide the CFTC access to all relevant records, documents, etc. The Court deferred ruling on the motion for preliminary injunction and the motion for expedited discovery at that time.
On January 12, 2007, a telephone conference was held with counsel for the CFTC, counsel for UForex and Paulo Correa, and defendant Mario Garcia, who appeared pro se. At the conference, counsel for UForex and Mr. Correa advised the Court he was of the opinion the CFTC might lack jurisdiction over this matter, but he had not yet had enough time to review the file materials. Counsel indicated he would file a motion to dismiss if he found his initial opinion to be correct. The parties agreed to extend the statutory restraining order, with some alterations, for thirty days. At the close of the conference, the Court ordered the CFTC to submit a revised restraining order, it set a briefing scheduling for defendant to challenge jurisdiction, and it denied the motion for expedited discovery as premature. On January 22, 2007, another telephone conference was held in response to an inquiry as to the scope of the Court’s restraining order. The Court clarified its order granted the CFTC access to and inspection of defendants’ books and records, but did not allow for other types of discovery not listed in the order (specifically, depositions). [Rec. Doc. 22] The following day, January 23, 2007, plaintiff submitted an amended statutory restraining order which the Court granted. [Rec. Doc. 19]
On January 29, 2007, UForex and Paulo Correa, filed a motion to dismiss the complaint pursuant to Fed. R. Civ. Pro. 12(b)(1), arguing the CFTC “acted outside of its jurisdictional bounds under the act,” and therefore this matter must be dismissed. [Rec. Doc. 21] On January 31, 2007, defendant Mario Garcia filed an answer to the CFTC’s complaint. [Rec. Doc. 24] On February 13, 2007, plaintiff filed a memorandum in opposition to the motion to dismiss. On April 13, 2007, a telephone status conference was held with all counsel. [Rec. Doc. 29] At the conference, the Court advised the parties of its preliminary ruling on the motion to dismiss. Specifically, the Court advised the parties it was of the opinion the “UForex Foreign Exchange Master Agreement: Customer Agreement” (referred to as “the contract” or “the Customer Agreement”), upon which the CFTC bases its jurisdiction, indicates the transactions in question were “spot transactions,” not “futures contracts,” and therefore the Court intended to grant defendant’s motion to dismiss this matter. However, the Court informed counsel that due to its docket at that time, a written ruling would take some time to issue, and the Court was concerned about the hardship imposed upon defendants by the freezing of their assets, particularly when the Court had preliminarily determined this matter must be dismissed. [Rec. Doc. 29]
On April 18, 2007, another telephone status conference was held with all counsel and Mario Garcia. At that conference, the Court instructed the parties that “in light of its preliminary ruling ..., should defendants choose to do so, the Court will entertain a motion to dissolve the statutory restraining order previously entered in this matter.” [Rec. Doc. 31] On April 23, 2007, UForex and Correa filed such a motion, and that motion was granted on May 4, 2007.
On July 12, 2007, the Court held another telephone conference to discuss the pending motion to dismiss. At that conference, the Court advised the parties that upon further research and reflection, it was still of the opinion the CFTC lacked jurisdiction to regulate the transactions at issue in this matter, but the Court had found the motion to be procedurally defective. Specifically, the Court stated it was of the opinion subject matter jurisdiction does exist in this matter pursuant to 28 U.S.C. § 1345 (“United States as plaintiff’) and 28 U.S.C. § 1331 (federal question jurisdiction). Rather, the Court advised it was of the opinion the relief which defendants sought was more appropriately brought pursuant to a 12(b)(6) motion (failure to state a claim upon which relief can be granted), as plaintiff has no regulatory authority over spot transactions or forward contracts. The Court declined to sua sponte convert the motion to dismiss pursuant to 12(b)(1) into a motion to dismiss pursuant to 12(b)(6), and thus advised the parties the motion would be denied. [Rec. Doc. 41] On August 11, 2007, a memorandum ruling and order issued in conformity with the discussion at the July 12, 2007 telephone conference. [Rec. Docs. 42 and 43]
On August 21, 2007, UForex and Paulo Correa filed the motion now pending before this Court — the motion to convert the 12(b)(1) motion into a 12(b)(6) motion, or alternatively, into a motion for summary judgment. [Rec. Doc. 44] On October 5, 2007, pro se defendant Mario Garcia filed a document which appears to be his attempt to adopt the motion to convert filed by the other defendants. [Rec. Doc. 52] All briefing has now been completed, and the motion has been taken under advisement by the Court.
A. Motion to Convert
In the present motion, defendants move to convert their previously filed motion to dismiss pursuant to Rule 12(b)(1), into a motion to dismiss pursuant to Rule 12(b)(6), or alternatively, a motion for summary judgment pursuant to Rule 56. In response, plaintiff argues under either standard the motion should be denied, but ultimately argues summary judgment is the appropriate procedural vehicle in this matter. [Rec. Doc. 46, p. 3] Plaintiff then paraphrases the sections of the CEA which grant the CFTC jurisdiction over certain commodity futures contracts, and concludes as follows:
Given that the Defendants actually misappropriated customer funds rather than invest them in legitimate trading activity, the focus of the jurisdictional analysis is on what types of contracts were offered to — as opposed to executed by — Uforex’s customer.
Here, there are genuine issues of material fact. For example, there is a factual/legal dispute, which requires further discovery, on the questions of whether certain transactions at issue were futures contracts, and, consequently, whether the activities of the Defendants concerning those transactions are subject to Commission jurisdiction with respect to the UForex contract, there are genuine issues of material fact concerning fungibility or right of offset, and whether delivery ever actually occurred.
Additionally, there is a factual dispute as to whether Defendants defrauded the public. The CFTC has not taken Cor-rea’s deposition or received confirmation that all documents relevant to an investigative subpoena issued to him for documents and testimony on October 21, 2004 or all documents required by the Statutory Restraining Order have been produced. (See subpoena attached as Ex. A).
Specifically, other than account closing statements prepared by defendants that were provided to customers in October 2004, the CFTC has not received any documentation of commissions, fees or other trading costs. Further, other than the Customer Agreement, Defendants have not produced any documentation regarding the delivery of foreign currency, namely, their ability to make or take delivery, as required by the CFTC’s subpoena. Finally, Defendants have not produced any documents from ActForex or Forex Direct Dealers, which Defendants claimed acted as clearing facilities for UForex’s trading orders. (See Declaration of Judith McCorkle (“McCorkle”) ¶ 24 filed on January 9, 2007). Applying this standard to this case there are genuine issues of material fact. Whether the transactions at issue here are futures contracts, and whether Defendants defrauded the public. Therefore, defendants’ motion to dismiss should be denied in its entirety.
[Id. at 5-6]
Defendants replied, arguing this matter can and should be decided pursuant to the standard for Rule 12(b)(6), because the factual allegations contained in the complaint (as opposed to the conclusory allegations), even if true, are insufficient to grant the CFTC jurisdiction over this matter, particularly when one also looks to the UForex Customer Agreement. Alternatively, defendants argue should the Court convert the motion to a motion for summary judgment, the CFTC’s plea for more discovery is unjustified and unwarranted. Defendants point out:
On or about September, 2004, the CFTC embarked on an extensive investigation of Uforex and Correa’s business dealings, detailed in its Senior Futures Trading Investigator, Judith McCorkle’s Declaration dated January 4, 2007 and referenced in the Plaintiffs Brief in Support of its Motion for Injunctive and Other Equitable Relief and for Civil Monetary Penalties under the Commodity Exchange Act. The plaintiff compiled volumes of documents from Uforex responsive to their October 21, 2004 Subpoena. The plaintiff further extracted additional substantive information from co-defendant Mario Garcia’s testimony taken on July 6, 2005 and the declarations of multiple Uforex customers. Every document, which the CFTC believed would support its position that the contracts in play were “futures contract” [sic] undoubtably, have been furnished to the Court and are part of the record.
Yet despite its three-year head start, the CFTC still complains it needs more (Response p. 6). This strategy is only designed to drag out this costly litigation interminably. The defendants have produced what they have in response to the Order for expedited discovery (not to mention the production during the investigation), with no complaint from the plaintiff that it did not receive all that the defendants had to give. When added to the three years of intensive investigatory discovery that preceded this action, it is hard to digest the need for more.
Plaintiffs attempt to bootstap [sic] its contention that the contracts in question were futures by incessant references to the alleged fraud cannot convert this litigation to a matter for which the CFTC can sustain a claim. This continues to be irrelevant as the viability of the Plaintiffs Complaint depends on whether the contracts between Uforex and its many customers were futures contracts and not on whether Uforex committed fraud. There are no remaining issues of fact to be decided. The matter of whether the contracts in question are futures or spot contacts, is ripe for determination. The Court preliminary conclusion should not change. All the information is in. The transactions in question were “spot” and not “futures” contracts.
[Id. at 2-3]
As plaintiff does not object to the procedural aspect of defendants’ motion in its brief (i.e. the “conversion” of the previous motion into either a 12(b)(1) motion or a motion for summary judgment), but rather only the substance, and because the Court finds good cause exists to convert the previously filed 12(b)(1) motion, the Court hereby GRANTS defendants’ motion to convert. [Rec. Doc. 44] As such, the previously filed motion to dismiss pursuant to Rule 12(b)(1) is hereby CONVERTED to a motion to dismiss pursuant to Rule 12(b)(6), or alternatively, a motion for summary judgment. Additionally, this Court’s previous Order, which denied defendants’ Motion for Leave to File a Reply Memorandum (in connection with the 12(b)(1) motion) [Rec. Doc. 28] is hereby RESCINDED, and leave is hereby GRANTED.
1. Standard for Motion to Dismiss Pursuant to Rule 12(b)(6)
A motion to dismiss an action for failure to state a claim upon which relief can be granted “admits the facts alleged in the complaint, but challenges plaintiffs rights to relief based upon those facts.” Tel-Phonic Services, Inc. v. TBS International, Inc., 975 F.2d 1134, 1137 (5th Cir.1992). “[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief’ Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). “The plaintiffs complaint is to be construed in a light most favorable to the plaintiff, and the allegations contained therein are to be taken as true.” Oppenheimer v. Prudential Securities, Inc., 94 F.3d 189, 194 (5th Cir.1996). “At the same time, a plaintiff must plead specific facts, not mere conclusional allegations, to avoid dismissal for failure to state a claim.” Kane Enterprises v. MacGregor (USA), Inc., 322 F.3d 371, 374 (5th Cir.2003)(citing Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498 (5th Cir. 2000)). “We will thus not accept as true conclusory allegations or unwarranted deductions of fact.” Id. (internal quotations omitted)
The general rule when deciding a Rule 12(b)(6) motion is that if matters outside of the pleadings are presented and not excluded by the court, the motion must be treated as one for summary judgment pursuant to Rule 56. Fed.R.Civ.P. 12(b); see also Clark v. Tarrant County, Texas, 798 F.2d 736, 745 (5th Cir.1986). One exception to the general rule is that “the Court may review the documents attached to the motion to dismiss ... where the complaint refers to the document and they are central to the claim.” Kane Enter prises at 374. If matters outside the pleadings are presented but not excluded by the Court, all parties must be given notice and a reasonable opportunity to respond as provided for in Rule 56. Clark at 745. Rule 56(c) requires the nonmovant have 10 days within which to respond to the summary judgment motion. That requirement has been interpreted by the Fifth Circuit as follows:
“Under Rule 56 it is not necessary that the district court give ten days’ notice after it decides to treat a Rule 12(b)(6) motion as one for summary judgment, but rather after the parties receive notice that the court could properly treat such a motion as one for summary judgment because it has accepted for consideration on the motion matters outside the pleadings, the parties must have at least ten days before judgment is rendered in which to submit additional evidence.” The proper question, therefore, is whether Washington had ten days’ notice after the court accepted for consideration matters outside the pleadings.
... At least from the date Washington himself submitted to the court matters outside the pleadings, June 10, Washington was on notice that the trial court could treat the motion to dismiss as a motion for summary judgment. As the Isquith court noted, the notice required is only that the district court could treat the motion as one for summary judgment, not that the court would in fact do so. 847 F.2d at 195. The Supreme Court has recently observed that “district courts are widely acknowledged to possess the power to enter summary judgment sua sponte, so long as the losing party was on notice that she had to come forward with all of her evidence.” Celótex Corp. v. Catrett, 477 U.S. 317, 326, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986). The notice provisions of Rule 12(b) and Rule 56 were not violated.
Washington v. Allstate Ins. Co., 901 F.2d 1281, 1284 (5th Cir.1990)(internal edits omitted).
2. Standard for Motion for Summary Judgment Pursuant to Rule 56
“A party against whom a claim, counterclaim, or cross-claim is asserted or a declaratory judgment is sought may, at any time, move with or without supporting affidavits for a summary judgment in the party’s favor as to all or any part thereof.” Fed. R. Civ. Proc. 56(b). Summary judgment is appropriate if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Crv. Proc. 56(c).
When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party’s pleading, but the adverse party’s response by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.
Fed. R. Civ. Proc. 56(e)(emphasis added).
As summarized by the Fifth Circuit in Lindsey v. Sears Roebuck and Co., 16 F.3d 616, 618 (5th Cir.1994)(emphasis added):
When seeking summary judgment, the movant bears the initial responsibility of demonstrating the absence of an issue of material fact with respect to those issues on which the movant bears the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). However, where the non-movant bears the burden of proof at trial, the movant may merely point to an absence of evidence, thus shifting to the non-movant the burden of demonstrating by competent summary judgment proof that there is an issue of material fact warranting trial. Id. at 322, 106 S.Ct. 2548; see also, Moody v. Jefferson Parish School Board, 2 F.3d 604, 606 (5th Cir.1993); Duplantis v. Shell Offshore, Inc., 948 F.2d 187, 190 (5th Cir.1991). Only when “there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party” is a full trial on the merits warranted. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The Supreme Court has instructed:
The plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial. Where no such showing is made, “[t]he moving party is ‘entitled to a judgment as a matter of law’ because the nonmoving party has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof.”
... In ruling upon a Rule 56 motion, “a District Court must resolve any factual issues of controversy in favor of the non-moving party” only in the sense that, where the facts specifically averred by that party contradict facts specifically averred by the movant, the motion must be denied. That is a world apart from “assuming” that general averments embrace the “specific facts” needed to sustain the complaint. As set forth above, Rule 56(e) provides that judgment “shall be entered” against the nonmoving party unless affidavits or other evidence “set forth specific facts showing that there is a genuine issue for trial.” The object of this provision is not to replace conclusory allegations of the complaint or answer with conclusory allegations of an affidavit. Rather, the purpose of Rule 56 is to enable a party who believes there is no genuine dispute as to a specific fact essential to the other side’s case to demand at least one sworn averment of that fact before the lengthy process of litigation continues.
Lujan v. National Wildlife Federation, 497 U.S. 871, 884, 888-89, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990)(quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)).
The Fifth Circuit has further elaborated: [The parties’] burden is not satisfied with ‘some metaphysical doubt as to the material facts,’ by ‘conclusory allegations,’ by ‘unsubstantiated assertions,’ or by only a ‘scintilla’ of evidence. We resolve factual controversies in favor of the nonmoving party, but only when there is an actual controversy, that is, when both parties have submitted evidence of contradictory facts. We do not, however, in the absence of any proof, assume that the nonmoving party could or would prove the necessary facts.... [S]ummary judgment is appropriate in any case where critical evidence is so weak or tenuous on an essential fact that it could not support a judgment in favor of the nonmovant.
Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994) (en banc) (citations and internal quotations omitted).
Finally, in evaluating evidence to determine whether a factual dispute exists, “credibility determinations are not part of the summary judgment analysis.” Id. To the contrary, “in reviewing all the evidence, the court must disregard all evidence favorable to the moving party that the jury is not required to believe, and should give credence to the evidence favoring the nonmoving party, as well as that evidence supporting the moving party that is uncontradicted and unimpeached.” Roberts v. Cardinal Servs., 266 F.3d 368, 373 (5th Cir.2001).
3. Applicable Standard in this Matter
In this matter, interpretation of the Customer Agreement is crucial to each parties’ respective argument. Although not explicitly referenced by name in the complaint, the Customer Agreement is the bases for plaintiffs allegation that the transactions involved herein were futures transactions. It would seem this fact alone would be sufficient to treat the motion as a motion to dismiss pursuant to 12(b)(6). However, in connection with the pending motion, the Court reviewed (again) the evidence provided in support of plaintiffs motion for an ex parte statutory restraining order. Therefore, out of an abundance of caution, the Court will treat the pending motion as a motion for summary judgment.,
The CFTC suggests in its opposition memoranda that “further discovery” is warranted. [Rec. Doc. 46, pp. 5-6; Rec. Doc. 25, p. 7] The Court finds that argument to be without merit. Plaintiff has never moved for a continuance in order to conduct additional discovery, as required by Fed.R.Civ.P. 56(f). As noted in Potter v. Delta Air Lines, Inc., “Rule 56 does not require that any discovery take place before a motion for summary judgment can be granted; if a party cannot adequately defend such a motion, Rule 56(f) is his remedy.” Potter, 98 F.3d 881, 887 (5th Cir.1996)(internal quotations and edits omitted). As noted by another court:
The protection afforded by Rule 56(f) is an alternative to a response in opposition to summary judgment under Rule 56(e) and is designed to safeguard against a premature or improvident grant of summary judgment.
To obtain a Rule 56(f) continuance, the nonmovant must present specific facts explaining his inability to make a substantive response as required by Rule 56(e) and by specifically demonstrating how postponement of a ruling on the motion will enable him, by discovery or other means, to rebut the mov-ant’s showing of the absence of a genuine issue of fact. The nonmovant may not simply rely on vague assertions that discovery will produce needed, but unspecified, facts.
Assuming, without deciding, that Washington’s request for discovery in his supplemental memorandum constituted a request for a Rule 56(f) continuance, we find that the trial judge did not abuse his discretion in denying the request. Rule 56(f) may not be invoked by the mere assertion that discovery is incomplete; the opposing party must demonstrate how the additional time will enable him to rebut the movant’s allegations of no genuine issue of fact.
Washington v. Allstate Ins. Co. 901 F.2d 1281, 1285 (5th Cir.1990)(internal quotations and citations omitted).
As already stated, in this matter, the CFTC has not sought a continuance pursuant to Rule 56(f). Even were this Court to assume plaintiffs statements in its memo-randa that additional discovery is warranted constitute a request for a Rule 56(f) continuance, that request would still be denied. The CFTC has set forth no genuine issues of material fact, which can only properly be resolved at trial; nor has it set forth “how the additional time will enable [it] to rebut the movant’s allegations of no genuine issue of fact.” Id. Instead, the CFTC merely makes vague allegations in its brief that because defendants “challenge the facts as presented by the Commission in its Complaint,” there now exists the need to conduct additional discovery. [Rec. Doc. 25, p. 10; see also Rec. Doc. 46, pp. 5-6] Although plaintiff labels various statements from defendants brief as “challenging” the facts presented in the Complaint, that simply is not the case; rather, defendants assume the truthfulness of plaintiff s factual allegations, but challenge plaintiffs legal interpretation of those facts. Again, plaintiff must always be cognizant of its burden: “where the non-mov-ant bears the burden of proof at trial, the movant may merely point to an absence of evidence, thus shifting to the non-movant the burden of demonstrating by competent summary judgment proof that there is an issue of material fact warranting trial.” Celotex at 322, 106 S.Ct. 2548. Plaintiff has failed to carry that burden.
Moreover, in spite of the “technical” reasons for denying additional discovery noted above, plaintiffs are not entitled to “further discovery” due to the enormous amount of discovery already conducted. Plaintiff began administratively investigating this matter as early as October 2004, as evidenced by a certified letter from Judith McCorkle (“Senior Futures Trading Investigator” with the agency’s Division of Enforcement) to counsel for UForex and Mr. Correa. [See Rec. Doc. 46, Ex. A] The letter states in pertinent part:
Enclosed is a subpoena with attachment, requiring UForex, LLC to produce to the Commodity Futures Trading Commission the information specified in the attachment to the subpoena, at or before 4:00 p.m. on November 10, 2004.
If your client elects to mail the subpoenaed material rather than deliver them [sic] in person ... the production must be accompanied by a sworn affidavit authenticating the materials and certifying that the production is complete .... If the affidavit is incomplete, or additional information is needed, UForex, LLC may be required to produce a representative to appear and testify.
[Id. (emphasis in original) ] The enclosed subpoena ordered defendants to produce the following:
1. All customer agreements, opening account documents and account statements for all UForex, LLC customers.
2. A list of company officers, directors and managers and all individuals involved in the solicitation, acceptance of orders, servicing and supervision of each UForex, LLC customer account since January 2002.
3. Ail document describing or relating to UForex, LLC’s foreign currency trading customer qualification standards.
4. All documents describing or relating to the foreign currency price spread, mark-up, point or PIP applied or charged to each UForex, LLC customer.
5. All documents describing the value in dollars of one point, or one PIP.
6. All documents reflecting or relating to all accounts UForex, LLC uses or has established to hedge or cover any exposure it assumes in its business as a foreign currency counter-party.
7. All documents describing or relating to, the lot size, price of a lot size, of foreign currencies or other commodities offered under UForex, LLC’s foreign currency trading programs.
8. All promotional material UForex, LLC has published or disseminated to customers or potential customers.
9. All ledgers, summaries or reports used by UForex, LLC to determine its foreign currency exposure and hedge needs.
10. All ledgers or check registers and bank statements for UForex, LLC’s customer funds segregation aceount(s) or operating account(s).
11. Any and all correspondence between UForex, LLC and any customer, client, or prospective customer or client, including but not limited to, any and all customer complaints.
12. Any and all bank records and/or other documents reflecting or relating to any active or inactive bank account name(s) and bank account number(s) owned or controlled by UForex, LLC.
13. Any and all documents reflecting or relating to commissions or other fees that UForex, LLC charges or has charged its customers or receives from any third parties in connection with customer foreign currency trading.
14. All documents describing or relating to the rights and obligations of UForex, LLC and its customers in connection with foreign currency trading.
15. All documents reflecting or relating to UForex, LLC’s delivery of foreign currency to any customer or its ability to make such delivery to customers.
16. All documents reflecting or relating to any customer making delivery of foreign currency to UForex, LLC or any customer’s ability to make such delivery to UForex, LLC.
The Court additionally notes that in connection with the CFTC’s ex parte motion for a statutory restraining order, it submitted two rather large volumes of exhibits to the Court, which included the declaration of Judith McCorkle, excerpts of the deposition testimony of Mario Garcia taken on July 6, 2005, and the declarations of nine UForex customers. The agency was then granted additional access to defendants’ documents by this Court, pursuant to the statutory restraining order. After all of the discovery completed to date, if more truly were required, plaintiff certainly should have been able to make specific, assertions of material facts in dispute. Consequently, plaintiffs request for additional discovery is DENIED.
III. Plaintiff’s Allegations
The CFTC alleges that from approximately January 2002 until November 2004 defendants, Paulo Correa (“individually, doing business as, and as the controlling person of UForex Consulting, LLC”) and Mario Garcia, “fraudulently solicited and accepted over $3.7 million from at least 127 retail customers for the purported purpose of trading over-the-counter foreign currency futures contracts” that purportedly cleared through Aroz International, Inc. (“Aroz”), a company controlled by Correa. [Rec. Doc. 1, ¶ 1] UForex’ customers incurred approximately $2,900,000 in losses on their investments. [Id.] According to plaintiff, Mr. Correa misappropriated at least $2,000,000 of his customers’ funds for his personal use and transferred $188,857 to Mr. Garcia. [Id. at ¶¶ 1, 25, 26]
Of the $3.7 million solicited from customers, the CFTC alleges only $570,000 was actually used by defendants to speculate in and trade foreign currency. The CFTC states the trading occurred during a two month period, wherein Mr. Correa lost $225,083 prior to reappropriating the balance for his personal use. [Id. at ¶ 29] The CFTC also alleges that from “at least January 2002 through September 2004, UForex issued monthly statements to its customers which falsely reported that their funds were actively traded and earning between 7% and 35% per month.” [Id. at ¶ 31] The CFTC additionally asserts that defendants did not disclose Mr. Garcia’s fee arrangement, whereby he would “receive 20% of a customer’s initial principal and 10% of any additional funds the customer entrusted to UForex.” [Id.]
. On October 21, 2004, the CFTC issued an administrative subpoena to defendants and Aroz. [Id.] According to plaintiff, shortly thereafter, Mr. Correa and UForex issued letters to their customers, stating in part:
UForex’s management has determined to close down the trading account [because] the trading has, by and large, not been profitable and we were under the belief that currency trading was not regulated by any government agency. As of late, however, certain government agencies appear to be asserting regulatory authority over this type of business.
[Id. at 31]
Because defendants (according to plaintiff) “engaged in acts and practices cheating, defrauding or deceiving,” the CFTC asserts defendants have violated 7 U.S.C. § 6b(a)(2)(i) and (iii). [Id. at ¶ 2] Additionally, because defendants “made or caused to be made false statements in connection with the confirmation of the execution of foreign currency futures transactions,” they violated § 6b(a)(ii) of the Act. [Id.] The CFTC states none of the defendants have ever been registered with the CFTC in any capacity, nor has UForex been designated by the CFTC as a contract market for the trading of foreign currency futures, both of which are required under the CEA. [Id. at ¶¶ 7-9; see also 7 U.S.C. § 6]
IV. Development of Commodities Market
The Commodity Exchange Act “has been aptly characterized as ‘a comprehensive regulatory structure to oversee the volatile and esoteric futures trading complex.’ ” Dunn v. Commodity Futures Trading Com’n, 519 U.S. 465, 468-69, 117 S.Ct. 913, 137 L.Ed.2d 93 (1997)(citing Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 356, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982)). As explained in Merrill Lynch:
Prior to the advent of futures trading, agricultural products generally were sold at central markets. When an entire crop was harvested and marketed within a short time-span, dramatic price fluctuations sometimes created severe hardship for farmers or for processors. Some of these risks were alleviated by the adoption of quality standards, improvements in storage and transportation facilities, and the practice of “forward contracting” — the use of executory contracts fixing the terms of sale in advance of the time of delivery.
When buyers and sellers entered into contracts for the future delivery of an agricultural product, they arrived at an agreed price on the basis of their judgment about expected market conditions at the time of delivery. Because the weather and other imponderables affected supply and demand, normally the market price would fluctuate before the contract was performed. A declining market meant that the executory agreement was more valuable to the seller than the commodity covered by the contract; conversely, in a rising market the executory contract had a special value for the buyer, who not only was assured of delivery of the commodity but also could derive a profit from the price increase. -
The opportunity to make a profit as a result of fluctuations in the market price of commodities covered by contracts for future delivery motivated speculators to engage in the practice of buying and selling “futures contracts.” A speculator who owned no present interest in a commodity but anticipated a price decline might agree to a future sale at the current market price, intending to purchase the commodity at a reduced price on or before the delivery date. A “short” sale of that kind would result in a loss if the price went up instead of down. On the other hand, a price increase would produce a gain for a “long” speculator who had acquired a contract to purchase the same commodity with no intent to take delivery but merely for the purpose of reselling the futures contract at an enhanced price.
In the 19th century the practice of trading in futures contracts led to the development of recognized exchanges or boards of trade. At such exchanges standardized agreements covering specific quantities of graded agricultural commodities to be delivered during specified months in the future were bought and sold pursuant to rules developed by the traders themselves. Necessarily the commodities subject to such contracts were fungible. For an active market in the contracts to develop, it also was essential that the contracts themselves be fungible. The exchanges therefore developed standard terms describing the quantity and quality of the commodity, the time and place of delivery, and the method of payment; the only variable was price. The purchase or sale of a futures contract on an exchange is therefore motivated by a single factor-the opportunity to make a profit (or to minimize the risk of loss) from a change in the market price.
Merrill Lynch at 357-58, 102 S.Ct. 1825 (emphasis added; footnotes omitted).
Recognizing “the potential hazards as well as the benefits of futures trading,” Congress began regulation of commodity futures exchanges in 1921, when it enacted the Future Trading Act. Id. at 361, 102 S.Ct. 1825. The statute’s name and scope changed on more than one occasion, eventually becoming the Commodities Exchange Act in 1936. Id. In 1974, Congress broadened the CEA’s coverage to include non-agricultural commodities, and created the CFTC “to assume the powers previously exercised by the Secretary of Agriculture, as well as certain additional powers,” Merrill Lynch at 366, 102 S.Ct. 1825. When Congress amended the Act in 1974, it also enacted an exemption, referred to as the “Treasury Amendment,” which excluded from CFTC regulation all off-exchange trading in foreign currency — that is, no transactions were covered by the CEA unless conducted on a board of trade. 7 U.S.C. § 2(ii) (1974); Dunn at 469, 117 S.Ct. 913.
Following Dunn, the CEA was again amended, as part of the Commodity Futures Modernization Act of 2000, to expand the CFTC’s jurisdiction. As amended, the Act now gives the CFTC jurisdiction over off-exchange “futures contracts.” The statute’s scope of jurisdiction currently provides:
The Commission shall have exclusive jurisdiction ... with respect to accounts, agreements (including any transaction which is of the character of, or is commonly known to the trade as, an “option”, “privilege”, “indemnity”, “bid”, “offer”, “put”, “call”, “advance guaranty”, or “decline guaranty”), and transactions involving contracts of sale of a commodity for future delivery----
7 U.S.C. § 2(a)(1)(A). The same section of the Act later provides “... the Commission shall have jurisdiction over, an agreement, contract, or transaction in foreign currency that is a contract of sale of a commodity for future delivery ...” but only if: (1) the agreement, contract or transaction is “offered to, or entered into with, a person that is not an eligible contract participant,” and (2) “the counter-party, or person offering to be the counter-party” is not one of the regulated entities enumerated in the Act. 7 U.S.C. § 2(c)(2)(B).
V. Futures Contract Defined
Because the Act does not define “futures contract,” yet this Court’s jurisdiction is dependent on whether or not the agreements and transactions herein were futures contracts, this Court must first define precisely what constitutes a “futures contract.” As already noted, the CEA grants the CFTC regulatory jurisdiction over “transactions involving contracts of sale of a commodity for future delivery.” 7 U.S.C. § 2(a)(1)(A). Although the Act does not define “futures contract,” it does state “the term ‘future delivery’ does not include any sale of any cash commodity for deferred shipment or delivery.” In other words, the Act does not purport to grant the CFTC jurisdiction over what are commonly referred to as “forward contracts.” 7 U.S.C. § la(19); see also Elizabeth D. Lauzon, Annotation, What are “Contracts of Sale of a Commodity for Future Delivery” Within Meaning of Commodity Exchange Act (7 U.S.C.A. §§ 1 et seq.), 182 A.L.R. Fed. 559 (2002).
Very recently the Sixth Circuit, in a case factually similar to the case before this Court, conducted an exhaustive examination of the jurisprudence in its quest to define the term “futures contract.” The Sixth Circuit ultimately concluded “a ‘futures contract’ is a contract for a future transaction, while a ‘forward contract’ is a contract for a present transaction with future delivery.” Commodity Futures Trading Com’n v. Erskine, 512 F.3d 309, 315 (6th Cir.2008). The Erskine Court (like this Court) began its examination with a careful review of Commodity Futures Trading Com’n v. Co Petro, 680 F.2d 573 (9th Cir.1982), a case which the CFTC vehemently argues should control in this matter.
In Co Petro, the Ninth Circuit considered a claim by the CFTC that a company named Co Petro was unlawfully engaging in the sale of “futures contracts,” whereby Co Petro sold petroleum “at a fixed price for delivery at an agreed future date,” but “did not require its customer to take delivery of the fuel.” Co Petro at 576.
Instead, at a later specified date the customer could appoint Co Petro to sell the fuel on his behalf. If the cash price had risen in the interim Co Petro was to (1) remit the difference between the original purchase price and the subsequent sale price, and (2) refund any remaining deposit. If the cash price had decreased, Co Petro was to (1) deduct from the deposit the difference between the purchase price and the subsequent sale price, and (2) remit the balance of the deposit to the customer.
Id. Co Petro argued that the CFTC lacked jurisdiction over these transactions, because they were forward contracts (not futures contracts), which are expressly excluded from CEA regulation. Id. at 576-77. The court explained:
While [CEA] section 2(a)(1) provides the [CFTC] with regulatory jurisdiction over ‘contracts of sale of a commodity for future delivery,’ it further provides that the term future delivery ‘shall not include any sale of any cash commodity for deferred shipment or delivery.’ Cash commodity contracts for deferred shipment or delivery are commonly known as ‘cash forward’ contracts, while contracts of sale of a commodity for future delivery are called ‘futures contracts.’ The [CEA], however, sets forth no further definitions of the term ‘future delivery’ or of the phrase ‘cash commodity for deferred shipment or delivery.’ The statutory language, therefore, provides little guidance as to the distinctions between regulated futures contracts and excluded cash forward contracts and, to our knowledge, no other court has dealt with this question. Where the statute is, as here, ambiguous on its face, it is necessary to look to legislative history to ascertain the intent of Congress.
Id. (citations and footnote omitted).
The Co Petro court concluded that Congress intended “that a cash forward contract is one in which the parties contemplate physical transfer of the actual commodity.” Co Petro at 578. The Court looked to the parties’ subjective intent, rather than the objective language in the contract, which allowed for actual delivery, and held the forward contract “exclusion is unavailable to contracts of sale for commodities which are sold merely for speculative purposes and which are not predicated upon the expectation that delivery of the actual commodity by the seller to the original contracting buyer will occur in the future.” Id. at 579. The Co Petro court additionally found the contracts at issue were uniform, standardized agreements, which facilitated trade in those agreements (as opposed to trade in the commodity) and offsets of the agreements, all of which is “characteristic” of a futures contract. Id. at 580. Co Petro would unilaterally set the prices according to the prevailing market rates, which also facilitated trade and offsets in the agreements. Id. at 580-81. Ultimately, the court held:
In determining whether a particular contract is a contract of sale of a commodity for future delivery over which the [CFTC] has regulatory jurisdiction by virtue of 7 U.S.C. § 2 (1976), no bright-line definition or list of characterizing elements is determinative. The transaction must be viewed as a whole with a critical eye toward its underlying purpose. The contracts here represent speculative ventures in commodity futures which were marketed to those for whom delivery was not an expectation.
Id. at 581.
In 1998, the Sixth Circuit considered claims by private parties, which turned on the question of whether certain grain contracts were futures contracts (and therefore covered by the CEA), or whether the contracts were cash forward contracts (and therefore excluded from CEA coverage). Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308 (6th Cir.1998). The Andersons court, which heavily relied on the Co Petro decision, explained:
The purpose of this ‘cash forward’ exception [7 U.S.C. § la(19) ] is to permit those parties who contemplate physical transfer of the commodity to set up contracts that (1) defer shipment but guarantee to sellers that they will have buyers and visa versa, and (2) reduce the risk of price fluctuations, without subjecting the parties to burdensome regulations. These contracts are not subject to the CFTC regulations because those regulations are intended to govern only speculative markets; they are not meant to cover contracts wherein the commodity in question has an ‘inherent value’ to the transacting parties. We hold that in determining whether a particular commodities contract falls within the cash forward exception, courts must focus on whether there is a legitimate expectation that physical delivery of the actual commodity by the seller to the original contracting buyer will occur in the future.
Later, after further examination of other types of contracts (which are not relevant for our purposes), the Andersons Court restated its holding as follows:
[C]ontracts which contemplate actual physical delivery of a commodity are cash forward contracts and are therefore excluded from coverage by the CEA and CFTC regulations. “Self-serving labels” that a party may choose to give its contracts, however, are not themselves dispositive of the futures/cash-forward question: the ultimate focus is on whether the contracts in question contemplated actual, physical delivery of the commodity.
Andersons at 319-20 (citations and footnote omitted).
Following Co Petro and Andersons, Congress enacted the Commodity Futures Modernization Act of 2000, which, as noted above, added certain commodities to the CFTC’s jurisdiction, including (under certain conditions) foreign currency. As aptly noted in Erskine:
While this new law, at least on the surface, renders the preceding cases distinguishable, the amendment’s language about futures/forwards is the same as the pre-existing CEA language, so the reasoning of those prior cases remains pertinent. Indeed, it was not the CEA amendment that shifted the futures/forwards pedestal off its foundation, but rather the Seventh Circuit’s fresh look at it in 2004 [in a matter entitled Commodity Futures Trading Com’n v. Zel-ener, 373 F.3d 861, 862 (7th Cir.2004) ].
In Zelener, the Seventh Circuit considered a claim by the CFTC (with facts quite similar to those in this matter) that defendant Michael Zelener was unlawfully engaging in the sale of “futures contracts,” whereby Zelener sold foreign currency to casual speculators who had no intent to ever receive possession of the foreign currency. Zelener at 862. The CFTC alleged Zelener, like defendants in this matter, had violated the anti-fraud provisions of the CEA. In support of the CFTC’s position that the transactions constituted the sale of “futures contracts” (over which the CFTC has jurisdiction), it argued:
The CFTC believes that three principal features make these arrangements ‘contracts of sale of a commodity for future delivery’: first, the positions were held open indefinitely, so that the customers’ gains and losses depended on price movements in the future; second, the customers were amateurs who did not need foreign currency for business endeavors; third, none of the customers took delivery of any currency, so the sales could not be called forward contracts, which are exempt from regulation under 7 U.S.C. § la(19). This subsection reads: “The term ‘future delivery’ [in § 2(a)(1)(A) ] does not include any sale of any cash commodity for deferred shipment or delivery.” Delivery never made cannot be described as ‘deferred,’ the Commission submits. The district court agreed with this understanding of the exemption but held that the transactions nonetheless were spot sales rather than “contracts ... for future delivery.” Customers were entitled to immediate delivery. They could have engaged in the same price speculation by taking delivery and holding the foreign currency in bank accounts; the district judge thought that permitting the customer to roll over the delivery obligation (and thus avoid the costs of wire transfers and any other bank fees) did not convert the arrangements to futures contracts.
Id. at 863-64 (edits in original). Rejecting the CFTC’s argument, the Zelener court repeated the definition of a “futures contract,” as provided by that court in an earlier decision:
“A futures contract, roughly speaking, is a fungible promise to buy or sell a particular commodity at a fixed date in the future. Futures contracts are fungible because they have standard terms and each side’s obligations are guaranteed by a clearing house. Contracts are entered into without prepayment, although the markets and clearing house will set margin to protect their own interests. Trading occurs in ‘the contract,’ not in the commodity. Most futures contracts may be performed by delivery of the commodity (wheat, silver, oil, etc.). Some (those based on financial instruments such as T-bills or on the value of an index of stocks) do not allow delivery. Unless the parties cancel their obligations by buying or selling offsetting positions, the long must pay the price stated in the contract (e.g., $1.00 per gallon for 1,000 gallons of orange juice) and the short must deliver; usually, however, they settle in cash, with the payment based on changes in the market. If the market price, say, rose to $1.50 per gallon, the short would pay $500 (500 per gallon); if the price fell, the long would pay. The extent to which the settlement price of a commodity futures contract tracks changes in the price of the cash commodity depends on the size and balance of the open positions in ‘the contract’ near the settlement date.”
Id. at 864 (emphasis added)(quoting Chicago Mercantile Exchange v. SEC, 883 F.2d 537, 542 (7th Cir.1989)). Applying the above definition to the facts in Zelener, the Zelener court concluded:
These transactions could not be futures contracts under that definition, because the customer buys foreign currency immediately rather than as of a defined future date, and because the deals lack standard terms. AlaronFX buys and sells as a principal; transactions differ in size, price, and settlement date. The contracts are not fungible and thus could not be traded on an exchange.
Zelener at 864.
In reply, the CFTC attempted to argue that because AlaronFX rolled forward the settlement times in practice (though not in form), the transactions were for future delivery, and therefore, fixed expiration dates and fungibility were irrelevant. Id. As in this matter, the CFTC urged a multi-factor inquiry (or, “totality of the circumstances” test) with emphasis on “whether the customer is financially sophisticated, able to bear risk, and intended to take or make delivery of the commodity.” Id. [See also Doc. 25, pp. 6-7] (“risk transference, futurity ..., and the opportunity for offset or delivery, as well as the totality of the circumstances” are the “characteristics that create a futures contract....”) However, the Seventh Circuit refuted this argument, explaining:
Yet such an approach ignores the statutory text. Treating absence of “delivery” (actual or intended) as a defining characteristic of a futures contract is implausible. Recall the statutory language: a “contract of sale of a commodity for future delivery.” Every commodity futures contract traded on the Chicago Board of Trade calls for delivery. Every trader has the right to hold the contract through expiration and to deliver or receive the cash commodity. Financial futures, by contrast, are cash settled and do not entail “delivery” to any participant. Using “delivery” to differentiate between forward and futures contracts yields indeterminacy, because it treats as the dividing line something the two forms of contract have in common for commodities and that both forms lack for financial futures.
It may help to recall the text of § la(19): “The term ‘future delivery’ does not include any sale of any cash commodity for deferred shipment or delivery.” This language departs from the definition of a futures contract by emphasizing sale for deferred delivery. A futures contract, by contrast, does not involve a sale of the commodity at all. It involves a sale of the contract. In a futures market, trade is “in the contract.” See Chicago Board of Trade v. SEC, 187 F.3d 713, 715 (7th Cir.1999); Robert W. Kolb, Understanding Futures Markets (5th ed.1997); Jerry W. Markham, The History of Commodity Futures Trading and its Regulation (1986); Louis Vitale, Interest Rate Swaps under the Commodity Exchange Act, 51 Case W. Res. L.Rev. 539 (2001).
In organized futures markets, people buy and sell contracts, not commodities. Terms are standardized, and each party’s obligation runs to an intermediary, the clearing corporation. Clearing houses eliminate counterparty credit risk. Standard terms and an absence of coun-terparty-specific risk make the contracts fungible, which in turn makes it possible to close a position by buying an offsetting contract. All contracts that expire in a given month are identical; each calls for delivery of the same commodity in the same place at the same time. Forward and spot contracts, by contrast, call for sale of the commodity; no one deals “in the contract”; it is not possible to close a position by buying a traded offset, because promises are not fungible; delivery is idiosyncratic rather than centralized. Co Petro, the case that invented the multi-factor approach, dealt with a fungible contract, see 680 F.2d at 579-81, and trading did occur “in the contract.” That should have been enough to resolve the case.
Id. at 865-66 (emphases added). The Court then stated the policy decision behind its reasoning:
It is essential to know beforehand whether a contract is a futures or a forward. The answer determines who, if anyone, may enter into such a contract, and where trading may occur. Contracts allocate price risk, and they fail in that office if it can’t be known until years after the fact whether a given contract was lawful. Nothing is worse than an approach that asks what the parties “intended” or that scrutinizes the percentage of contracts that led to delivery ex post. What sense would it make-either business sense, or statutory — interpretation sense — to say that the same contract is either a future or not depending on whether the person obliged to deliver keeps his promise? That would leave people adrift and make it difficult, if not impossible, for dealers (technically, futures commission merchants) to know their legal duties in advance. But reading “contract of sale of a commodity for future delivery” with an emphasis on “contract,” and “sale of any cash commodity for deferred shipment or delivery” with an emphasis on “sale” nicely separates the domains of futures from other transactions.
Id. at 866. Thus, the Seventh Circuit— without expressly stating so-refuted the “anticipation of delivery” theory espoused by Co Petro, Andersons, and other prior decisions.
Citing with approval the Zelener rejection of the “anticipation of delivery” theory, the Erskine court stated the following:
First, the purported difference— whether or not delivery was actually anticipated — is, in reality, no difference at all because delivery is always (at least facially) promised for tangible commodities and never for intangibles, regardless of whether it is a future or a forward. Second, this approach relies on a subjective theory of contracts, in which a court must look to the parties’ subjective expectations and anticipations (e.g., whether delivery is actually desired) and ignore the objective language of the contract (e.g., where delivery is expressly provided for).
The Seventh Circuit [in Zelener ] instead offered a different distinction. “A futures contract ... does not involve a sale of the commodity at all. It involves a sale of the contract. In a futures market, trade is ‘in the contract.’ ” Id. at 865 (citations omitted). Thus, the Zel-ener court explained:
In organized futures markets, people buy and sell contracts, not commodities. Terms are standardized, and each party’s obligation runs to an intermediary, the clearing corporation. Clearing houses eliminate coun-terparty credit risk. Standard terms and an absence of counterparty-specific risk make the contracts fungible, which in turn makes it possible to close a position by buying an offsetting contract.
All contracts that expire in a given month are identical; each calls for delivery of the same commodity in the same place at the same time. Forward and spot contracts, by contrast, call for sale of the commodity; no one deals ‘in the contract’; it is not possible to close a position by buying a traded offset, because promises are not fungible; delivery is idiosyncratic rather than centralized. Co Petro, the case that invented the multi-factor approach, dealt with a fungible contract a